Are the Chinese Safeguard Duties Just an Obama Political Play?

Yesterday the OECD, the UNCTAD and the WTO issued a joint report on G-20 trade and investment measures under the headline G20 governments refrain from extensive use of restrictive measures, but some slippage evident. The slippages were not where you would expect them.

New antidumping investigations for 2009 remained at the same level as in the first half of 2008. But they only remained at the same level because of a sharp decline in new antidumping investigations by the US, Brazil, and the EU member countries. Making up for the decline? India, Canada and Argentina had an increase in the number of new antidumping investigations. But China's increase in new antidumping investigations from 3 to 14 was greater than the increase in those three countries combined.

Safeguard investigations were a whole other story. New safeguard investigations increased from 2 in the first half of 2008 to 16 in 2009. China had no new safeguard investigations, the US had 1 new investigation, and India had 14 of the 16. FYI, Turkey had the other. I have no idea why India has so many new investigations. Let me know if you do.

If you've only been half paying attention you probably noticed that this post has been written in the past tense. If you're actually reading this blog, you probably have more than an inkling that my tense has to do with both last week's decision to impose countervailing duties (CVDs) on imports of Chinese steel pipe at a weighted average of 21% and with Obama's announcement at 9:45 pm last Saturday in response to the conclusions of the ITC's single safeguard investigation to impose an initial tariff of 35% on imports of Chinese tires. Interesting fun fact: recommendations on CVDs are fully out of the hands of the President; safeguard duties are solely at the discretion of the President.

These decisions, particularly the tire decision, have caused quite the hullabaloo in the blogosphere. Section 421(e) of the 1974 Trade Act gives the US special power to implement safeguards against Chinese imports that cause market disruption. Market disruption is defined as existing "whenever imports of an article like or directly competitive with an article produced by a domestic industry are increasing rapidly, either absolutely or relatively, so as to be a significant cause of material injury, or threat of material injury, to the domestic industry." This marks the first time the US has ever used section 421. The derision of the safeguard is twofold: 1) it is not supported by economics; and 2) it could set the precedent for further safeguard actions against China.

The Economist's Free Exchange suspects that Obama is trying to earn political points on a minor product, but that even this might be dangerous in a recession:

Mr Obama appears to be betting that because the products involved constitute a very small percentage of trade between the two economies, it is safe to earn some domestic political points on the matter without excessively angering Chinese officials or citizens. But this is a dangerous gamble, particularly amid a deep global recession.

Supporting Free Exchange's position is that the 35% initial tariff is well below the ITC's recommended tariff of 55%. China, unsurprisingly, filed a challenge to the complaint. We can say one reason that China challenged the complaint is obvious, and the other is speculation. The obvious reason is that China estimates that the tariffs could cost Chinese tire manufacturers $1.7 billion. The speculative reason is that China does not want the US to set an easy precedent for imposing safeguard duties against countries dominated or controlled by Communism (the wording of 421).

The political reaction was predictable. Democrats think the tire tariff is a great move towards getting those 4,000-5,000 American tire manufacturing jobs back, and that it sets a good example of strong trade enforcement. The Republicans said that the tariffs amount to a tire tax on struggling consumers enacted by a Democrat bowing to the pressure of unions. Yawn.

Now if you really want to read why this whole tire thing is either about scoring political points and/or establishing roadblocks to free trade with China, head over to one of Foreign Policy's blogs:

Here's the problem. The China safeguard is a bilateral policy in a multilateral world. The Chinese are often the lowest-cost suppliers of a good, but they're not the only suppliers. In the Bush cases, importers testified credibly that if Chinese imports were blocked, other countries would undersell U.S. manufacturers in these particular products.

So if you're not dominated or controlled by Communism, and you sell tires cheaper than a US manufacturer, then you can cause market disruption in the US.

The tire situation appears to be similar. U.S. tire producers did not even support the case; they said they were more interested in producing high-end tires. The petition was filed by the United Steel Workers. If U.S. tire producers are uninterested, then there is little prospect of gains for American workers. The tires will just be sourced from other countries at somewhat higher cost.

So the USW is using tires as a pawn in their trade disputes with China? Is there a less appropriate venue for the upcoming G-20 Meeting than Pittsburgh?

So where does this all leave us? New American jobs appear unlikely. Prices should rise a bit for U.S. consumers. Some lucky third country will gain new American orders, redirected away from China. And there is real concern that other countries will follow the U.S. lead. China is exploring ways to block U.S. cars and poultry. Later this month, Pittsburgh G20 discussions of how to pursue open markets together should be particularly awkward. But at least Obama retains the support of organized labor.

Ugh... The notion that this is a political play in health care reform to garner wider Democratic support and get them to stop their internal bickering over a health care plan is growing stronger. Could Obama have chosen some token other than free trade with China to throw under the bus?