Commentary

A Defining Moment?

White House’s decision to impose prohibitive tariffs on Chinese tires puts Sino-U.S. relations to the test

Despite all of the stress points, both real and imagined, Sino-U.S. trade relations have held up remarkably well. Indeed, there have been pork bans, poultry bans, antidumping and countervailing duty investigations, World Trade Organization (WTO) dispute settlement decisions, accusations of currency manipulation, U.S. objections to China’s export-led growth and complaints from Beijing about the impact on its U.S. debt holdings of uncontrolled spending in Washington.

Indeed, that these disputes have not erupted into bigger problems signals a growing maturity to the bilateral relations.

But even mature relationships have their breaking points. And President Barack Obama’s woefully shortsighted decision to impose duties of 35 percent on Chinese-produced tires under Section 421 of the Trade Act of 1974, as amended — the so-called “China-Specific Safeguard” — is one of them.

In fact, it presents the most serious test yet. Even though imposition of the tariffs does not violate any trade agreements — and even though the Chinese Government has no recourse to retaliation within WTO rules — there should be no question that the possibility of an escalating trade war is real.

The tire decision marks the first time since well before China joined the WTO in 2001 that a U.S. president has personally ordered restrictions on imports from China. Of course there have been duties imposed under U.S. antidumping and countervailing duty laws on numerous occasions, and there have been quantitative restraints imposed on Chinese textiles and apparel.

But none of those outcomes required the participation of the U.S. president — and none were perceived as reflecting his personal wishes.

The edict to impose duties on Chinese tires, by contrast, came directly from President Obama himself, after he had two months to weigh the impact of the decision.

That he chose to levy a prohibitive duty of 35 percent is being perceived as a sign of disrespect by the Chinese Government and the people it represents — particularly when juxtaposed against former President George W. Bush. The previous president rejected trade restrictions on all four occasions when such recommendations from the U.S. International Trade Commission (ITC) reached his desk.

Under the law, which became effective as a condition of China’s entry into the WTO, U.S. industries can seek temporary trade restrictions in cases where imports from China are increasing and causing market disruption. The evident threshold in these cases is fairly mild — as compared with the standard applied in anti-dumping, countervailing duty, and general safeguard cases.

Thus, the U.S. president is granted the discretion to reject the ITC’s remedy recommendation if he determines that import restrictions would have an adverse impact on the U.S. economy that is clearly greater than its benefits, or if he determines that such relief would cause serious harm to the national security of the United States.

The cost of protectionism to the broader economy always exceeds the concentrated benefits accruing to the narrow interest groups seeking protection and a trade war could well compromise U.S. national security. So restrictions under this statute should always be rejected.

But President Obama’s decision was guided strictly by selfish, political considerations: He felt he owed American unions for their previous and continuing support, regardless of the economic and diplomatic fallout.

Just one day after Obama’s tire decision, the Chinese Government announced new trade remedy investigations of U.S. exports of automobiles and poultry. Whether those cases are based on evidence of dumping or subsidization that withstands formal evaluation is beside the point. The Chinese Government can always harass U.S. exporters with the threat of new investigations and throw other obstacles in their paths.

But the mere prospect of heightened trade tensions — let alone actual protectionist measures — breeds the kind of uncertainty that undermines trade and investment, and retards economic growth.

Those costs are felt most profoundly in the country imposing restrictions, thus China should do its best to avoid retaliation.

Of course exercising restraint could prove challenging for the Chinese authorities. The U.S. barriers could well lead to restrictions on Chinese tires in other countries — to “protect” their own producers from the diversion of supply from the U.S. market.

Furthermore, Obama’s tire decision represents a blatant disavowal of the U.S. pledge at April’s G20 summit in London to avoid new protectionist measures through 2010. The temptation of other G20 governments to indulge similar protectionist pressures at home for political gain might prove irresistible — especially now that the United States has abdicated its leadership role in the trade sphere.

And then there is the very real danger that other U.S. industries, encouraged by the outcome in tires case, will file their own Section 421 cases, leading to new restrictions on new products, and creating similar pressures abroad to follow suit — while igniting calls within China for retaliation.

It is not a pretty picture, but the Chinese Government could heroically forestall a trade war by taking the moral high ground, and doing its best to avoid ratcheting up the dispute with its own provocative measures.

Sino-U.S. cooperation on trade and investment has been too fruitful and too promising to allow a few problematic areas to define the broader relationship.

Daniel J. Ikenson is associate director of the Center for Trade Policy Studies at the Cato Institute in Washington, D.C.