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Don’t Impose Quotas on Chinese Tires

The Obama administration is on the verge of a major trade dust-up with China — just as Washington, D.C., is trying to work with Beijing on shoring up the global economy and combating climate change.

[IMGCAP(1)]The International Trade Commission is set to rule whether Chinese automotive tire imports are costing American jobs by forcing U.S. manufacturers to exit the industry. That’s the allegation by the United Steel Workers. As a remedy, the union is seeking a quota on Chinese tires imported into the U.S. that would cut imports by more than half.

The ITC case is noteworthy for several reasons:

• First and foremost, the complaint under investigation by the ITC lacks merit. The union neglects huge swaths of facts, key among them the business decisions made many years ago by U.S. manufacturers to relinquish domestic production of the low-end tire market. More on that later.

• Second, this represents the first so-called section 421 trade case that the ITC has taken up under the Obama administration. Section 421 was added in 2000 to the Trade Act of 1974 and established a special “safeguard— aimed at Chinese imports. While President George W. Bush rejected all section 421 petitions that crossed his desk, it is unclear what President Barack Obama will do if the ITC rules in the union’s favor — will he deny or agree to quotas or other import barriers? During his campaign for the White House, Obama promised a harder line with Beijing over trade issues.

• Third, if the ITC sides with the union and Obama agrees, the implications for U.S.-China trade in general are serious. For one thing, it will ignite other such complaints, whether real or imagined, like the tire complaint. The aggregate effect would be to threaten two-way trade between the U.S. and China, the value of which exceeds $300 billion.

As Chen Deming, China’s minister of commerce, warned recently in the Wall Street Journal, recent trends in the U.S. are worrisome.

“American industries have petitioned the U.S. government for anti-dumping investigations and for investigations under the World Trade Organization’s special safeguard provision,’ which could restrict imports of Chinese products. This will seriously test China-U.S. economic and trade relations,— Chen said.

No one disputes that there has been an increase in imported Chinese-made tires. According to government data, U.S. consumers bought $1.7 billion worth of Chinese-made tires in 2008, up from $453 million in 2004. But to understand what underpins the increase and why the union complaint is far off the mark, it is necessary to dissect the U.S. tire market.

The market is segmented into three tiers. The top tier is occupied by marquee brands like Michelin, Bridgestone and Goodyear. The second tier includes secondary brands that either used to be major brands in the U.S. (such as Firestone, BF Goodrich, Uniroyal, General) or foreign brands that are major brands in their country of origin but have not yet become a major brand here (such as Continental, Pirelli and Yokohama).

The third tier includes brands that address the needs of many Americans, the mass-market segment, by focusing on value. These consumers do not have vast amounts of disposable income and are price conscious. In tier three, the profits are less than on tiers one and two. Most, if not all, of the tire imports that are the subject of the ITC investigation are sold in the third tier and don’t compete directly with tires in the other tiers.

So back to the question at hand and the crux of the ITC investigation: Why the influx of Chinese tires into the U.S.?

The answer is that in the last five to 10 years, the U.S. tire industry made strategic corporate decisions to forego production of third-tier tires in the U.S. and instead concentrate on production of the higher-profit tiers. In many cases, these same companies started importing third-tier tires and selling them under their own labels or as exclusive brands.

So, for example, Bridgestone-Firestone imports third-tier tires manufactured in China under the brand “Primewell,— and it sells them through its controlled network with exclusive distribution rights. Goodyear supplies third-tier tires to Wal-Mart under the “Douglas— label. These tires are manufactured in Venezuela and Poland. Riken, Michelin’s third-tier brand, is manufactured in Indonesia.

In short, many of the tires that the ITC is investigating are being “pulled— into the U.S. by the domestic industry itself — filling a void created by the domestic industry’s own decision to exit the third-tier market segment.

To the extent that job losses are occurring domestically in the tire business, they are the result of the slowdown in the U.S. auto industry and the cost of gasoline. Thus, in explaining why it shuttered a BF Goodrich facility last April in Alabama, Michelin said in a statement that it was due to an “unprecedented drop in market demand.—

“The decision comes in the wake of the continuing economic crisis as consumers are driving fewer miles, purchasing fewer vehicles and delaying tire replacement purchases,— the company said.

Should Obama ultimately agree to impose quotas, his actions won’t resurrect U.S.-based third-tier tire manufacturers; they actively chose to exit the low-cost tire market. So other foreign third-tier manufacturers (Venezuela among them) would seek to fill the void, leaving the administration in the curious position of bolstering the regime of Hugo Chavez while risking a diplomatic showdown with China.

Then there is the consumer safety concern. Remember the justifiable outrage a few years ago when unsafe tires were exploding on our highways? Quotas will raise prices for tier-three tires. It is axiomatic that higher prices will force some cash-strapped consumers (particularly in the middle of a recession) to wait too long to replace worn out tires, endangering themselves and others on the road.

As the Obama administration assesses the tire complaint, government officials would be best served if they hewed to an observation made by President Abraham Lincoln.

“How many legs does a dog have if you call the tail a leg? Four. Calling a tail a leg doesn’t make it a leg,’’ the 16th president quipped.

Chinese tire imports are not costing American jobs. Saying it doesn’t make it so.

Duane Layton, a former senior counsel at the Department of Commerce, is head of Mayer Brown’s Government and Global Trade group in Washington, Europe and Asia. He represents GITI Tire, a Chinese tire manufacturer.

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