The Truth About Cars » Trade War Watch The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. Sun, 27 Jul 2014 14:03:49 +0000 en-US hourly 1 The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. The Truth About Cars no The Truth About Cars (The Truth About Cars) 2006-2009 The Truth About Cars The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. The Truth About Cars » Trade War Watch Weakened By Obama’s Union Coddling, Cooper Tires Is Sold To The Indians Wed, 12 Jun 2013 14:34:10 +0000 Cooper Girls - Picture courtesy

Cooper tires is becoming another victim of President Obama’s much too cozy relationship with the union machine. Cooper Tires was bought by an Indian company.

After President Obama sent a thank you to the Steelworkers Union and slapped an absolutely brain-dead punitive tariff of tires coming from China, a few things happened:

  • Imports of low-cost tires did not stop. They came from other countries, at tariffs even lower than the old ones on Chinese tires.
  • Not a single new job was created in America, but more than a few jobs at tire importers were destroyed.
  • Americans paid more for tires.
  • A trade war erupted. Retaliatory tariffs did hurt exports of big displacement cars made by Chrysler, Ford and General Motors.
  • American companies that had tire production in China were hurt, most of all Cooper tires.

Today, “Indian tire manufacturer Apollo Tyres Ltd said it would buy Cooper Tire & Rubber Co for about $2.5 billion,” Reuters writes.

Currently, Apollo does not operate in the United States. “The acquisition of Cooper, the world’s 11th biggest tire company by sales, will give Apollo access to the U.S. market for replacement tires for cars and light and medium trucks,” Reuters writes.

Cheap Chinese tires are being replaced by cheap Indian tires. And another American company is being outsourced.

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Zetsche Not Scared Of Chinese Trade War Wed, 12 Jun 2013 13:49:48 +0000 Dieter Zetsche - Picture courtesy

In a bout of severe wishful thinking,  Daimler CEO Dieter Zetsche told Reuters  that “Daimler does not expect the current spat between the European Union and China will escalate to include cars,”

Last week, news from China said  the Middle Kingdom could slap punitive tariffs on luxury cars imported from the EU, after the  EU slapped punitive tariffs on solar panels imported from China.

Today, China specialist Michael Dunne writes in the Wall Street Journal:

China, already angry about new EU tariffs on solar panels, will no doubt counter punch with an investigation into Europe’s lucrative luxury car exports to China.”

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Trade War Watch 23: EU, Deaf To Obama’s Tire Defeat, About To Lose Car Exports In Trade War With China Fri, 07 Jun 2013 11:09:23 +0000 S-Class China

Nice car you’ve got here

After newly elected President Barack Obama slapped a punitive tariff on made-in-China tires, China looked for a good tit-for-tat and quickly found one: The US imported $1.8b worth of Chinese tires in 2009, while China imported $1.1b worth of US-built cars in 2008. A retaliatory tariff was slapped on Escalades et al. Now, the same is about to happen to BMWs and Benzes coming from Europe.

“China is considering imposing import duties on high-end European cars following complaints over subsidies that enable EU carmakers to sell in China at a loss,” Reuters reports. That, of course, is only half of the story. The EU slapped a punitive tariff on made-in-China solar modules, despite opposition from a majority of EU countries, most notably Germany. Not surprisingly, China fights back.Trade tensions between the EU and China have been brewing for a while. In retaliation for the solar module tariff, “China opened an anti-dumping and anti-subsidy inquiry this week into sales of European wine,” says Reuters. That would hurt mainly France and Spain.

Today, Europe’s auto manufacturer assosciation ACEA told Reuters that an unknown person or persons filed an anti-dumping complaint with China’s Ministry of Commerce that focuses on cars with engine displacements of 2 liters and more built in the EU and exported to the People’s Republic. “If there is not an improvement in the political climate, if it becomes a real trade war (…) if that is going to be the position and the strategy of the EU, then I think the Chinese will retaliate for sure,” said an ACEA spokesperson.

Trade action against luxury cars would hit Germany like a bomb. Higher end BMWs, Mercedes-Benz, and Audi cars are imported to China, while lower rungs are made locally. All Porsches are imported. Volkswagen’s Phaeton, a tough sell elsewhere, is popular in China, and it is imported. The Volkswagen Touareg and its sibling, the Porsche Cayenne, are imported to China.

China’s People’s Daily said yesterday that China has “has ample cards in hand” to play in the poker with Brussels, and a tariff on imported luxury card looks like a royal pain, or a royal flush, depending who’s side you are on. And if tariffs don’t do it, there could always be a few spontaneous demonstrations in Chinese streets, along with a ritual torching of an S-Class Benz and a Siebener. German automakers can ask their Japanese colleagues what that did to the sales. In 2011, EU car exports to China amounted to roughly $24 billion.

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Protectionism Kills Jobs. As Demonstrated In Chattanooga Wed, 24 Oct 2012 13:06:15 +0000

There is a shiny new car factory in Chattanooga, Tennessee. People enjoy working at this Volkswagen factory. The factory is airy, there is a lot of space inside and outside the factory for expansion. However, it will be a while until it will make more than the Passat. The people in Tennessee had hopes for Audi moving in here. Instead, Audi decided on going to Mexico. When the new Golf MkVII comes to America, it will be made in Mexico. There is no other car in sight for Chattanooga. Why is the factory, one of the best specimens in Volkswagen’s vast global collection, losing out on new jobs? The Chattanooga Times Free Press thinks it knows the reason: Lack of free trade agreements.

“A lack of free trade pacts between the United States and other nations may steer future VW production to Mexico rather than Tennessee, according to industry experts and others.”

Mexico has free trade agreements with 44 countries. The U.S. has 19.  Most recent FTAs were spearheaded by Republican presidents. Under the Obama administration, only three FTAs were added, two insignificant (with Panama and Colombia). The significant agreement with Korea was signed by G.W. Bush in 2007, it was renegotiated by the Obama administration, a watered-down version was signed in 2010. At least 17 new unfinished FTAs, among those an agreement with the EU, and the Trans-Pacific Partnership (TPP), are treading water.  Japan is not even included in the TPP, also because of shrill and often perplexing opposition by a Japan-bashing alliance between the UAW and the Detroit 3.

A lot is said about FTAs making imports cheaper. What is often forgotten is that FTAs make exports competitive. With the low dollar, America could be an export machine, and FTAs could be the motors. Why is this engine stalled? Cars shipped from Chattanooga to Hamburg (no FTA) cost 10 percent duty. Cars shipped from Puebla to Hamburg (FTA) cost none. No wonder the jobs go to Mexico. The wages are not the reason. Wages amount to approximately 10 percent of a car’s cost … the saved customs duty can finance the whole payroll. While Mexico turns into an export powerhouse, the unemployed north of the border pay higher prices, driven up by a trade war flamed by union interests.

And it’s not just Mexico… thanks to strong trade relations with the EU, Brazil is benefitting as well, gaining $4.4b in new VW investment.

America’s inability or unwillingness to secure more FTAs is killing America’s transplant auto industry, and preventing Obama from achieving his stated goal to grow jobs by doubling exports. This is particularly ironic considering that Obama has touted the bailout, the Korean FTA and a loan guarantee program as aimed at boosting America’s exports. FTAs boost exports. Protectionism kills jobs and causes inflation.

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Trade War Watch 22: Obama Wags The Dog, Drags China In Front Of WTO Again In Ohio – Again Mon, 17 Sep 2012 13:31:43 +0000

President Barack Obama will carry a familiar gift to election rallies in Ohio today.

“The Obama administration will announce a trade complaint against China today as President Barack Obama campaigns in Ohio, alleging impermissible subsidies of auto- and auto-parts exports that encourage outsourcing to China from the U.S.” an administration official told Bloomberg.    

According to the report, the U.S. will accuse China of $1 billion in illegal subsidies between 2009-11.

This wag the dog trade war has a rich tradition. In July, the United States reported China to the WTO over extra duties on more than $3 billion worth of cars imported from the U.S. This also coincided with Obama campaigning in Ohio.

While UAW members will love to hear the new salvos in a trade war with China, car-makers will flinch. Their profitability, and large parts of the viability of U.S. production, hinge on the importation of cheap Chinese parts. It was Detroit that spearheaded outsourcing to China, often to factories owned by Detroit car companies. Especially the viability of GM depends on good relations with its largest market China .

The industry believes and hopes that this is mostly pre-election theater. Would the Obama administration be serious, it could easily slap a punitive tariff on Chinese parts instead of going the long and winded WTO route.

According to  Liu Li-Gang, a Hong Kong-based economist at Australia & New Zealand Banking Group  and former World Bank employee, the “rhetoric will likely be toned down following the polls, as the competitiveness of the U.S. auto industry will suffer should they impose sanctions on imports of relatively cheap Chinese parts.” Also, the Chinese will point out that the bailout of GM alone was more than 50 times bigger than their alleged illegal subsidies.

What is discouraging is how readily this nonsense is consumed. Raising tariffs would raise the price of U.S. made cars, hitting consumers in the wallet.  To compete, cars would have to be made in  Canada and Mexico, which don’t have these tariffs. More jobs would get lost. Eventually, production of Asian car parts would migrate to other low cost countries.

Today, China files a  counter complaint abolut close to 30 products that have previously been targeted by U.S. duties. According to the WTO, the products include steel, tires, magnets, chemicals, kitchen appliances, wood flooring and wind towers.

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Trade War Watch 21: America Drags China In Front Of WTO As Obama Campaigns In Ohio Thu, 05 Jul 2012 12:25:58 +0000

The United States will report China to the WTO tomorrow, Reuters says. The contention: China’s decision to impose extra duties on more than $3 billion worth of cars imported from the U.S. According to Reuters, “the complaint comes as President Barack Obama campaigns in Ohio, where auto plants have been affected by the duties.” The Prez goes on a “Betting on America” bus tour.

In April 2011, China enacted punitive tariffs against cars imported from America.
The tariffs were heavily skewed against GM and Chrysler. China’s argument was that both were the recipient of government subsidies. The U.S. had used the same argument for imposing tariffs against Chinese products.

Said a U.S. trade official in an email to Reuters:

“The duties disproportionately fall on General Motors and Chrysler products precisely because of the actions that President Obama took to support the U.S. auto industry during the financial crisis. The president’s re-election campaign has sought to tie his Republican opponent, Mitt Romney, to the outsourcing of American jobs to China, tapping into public worry over high U.S. unemployment that will be a key factor in the Nov. 6 ballot. “

The dog wagging is the latest chapter in the drawn out trade war. It was started by America in 2009 when the U.S. enacted punitive tariffs against low priced made-in-China tires. Production of low cost tires moved to Thailand, from where they were imported duty free until that loophole was closed.

PS: Today, WTO spokesman Keith Rockwell told Reuters: “We have now received formal notification from the U.S.,”

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Trade War Watch 20: China Slaps Tariffs On American-Built Large Cars And SUVs Fri, 16 Dec 2011 00:32:07 +0000

When we last checked in on the low-level trade war between China and the US, which was sparked by President Obama’s 35% tariff on Chinese tires, the Chinese government had ruled that American large cars and SUVs were being “dumped” on the Chinese market, but wasn’t doing anything about it. Now, Reuters reports that China is doing something about it, namely saying that it plans to impose tariffs of up to 22% on imports of American-built large cars and SUVs. And the “up to” is key: GM and Chrysler are being hit hardest (unsurprisingly), while American-made BMW, Mercedes and Acuras are receiving considerably lower tariffs.

Still, China only imports $1.1b worth of vehicles in this category, whereas the US imported some $1.8b worth of Chinese tires prior to the Obama tariffs.  Like most of the news around Chinese-American relations, this is more saber-rattling than substance. But with economic conditions still shaky in the US, and a Presidential election getting into full swing, small spats can escalate into larger confrontations. And with China surpassing the US as the largest market for cars in the world, it’s probably no coincidence that this simmering conflict largely involves cars and car-related products.

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Trade War Watch 19: Brazil Hits The Brakes Of Imports Sun, 15 May 2011 15:01:47 +0000

As you’ve read here many times, the drums against imports have been beating in Brasília for a long time. Now, the government is acting. It has opened up its little tragic bag of dirty tricks and is pulling the first, as it were, rabbit out. It also promises to dip into that bag again if this first rodent fails to bite. Moneyed (and not so moneyed Brazilian import buyers of Chinese cars) Brazilian consumers should run to the dealerships to get ‘em while they can. They should also put some money aside as the measure will also affect parts makers and consequently prices.

The measure (according to Brazilian car enthusiast site Quatro-Rodas) is legal within the scope of the WTO. Brazil will now not automatically license import orders. Rather, it will take up to 60 days of time analyzing said orders. In this way, the guv hopes to make importers life more difficult.

Welcome to the netherworld of non-tariff trade barriers. Brazil is not alone in this. The United States (and by extension Canada) have built a wall around their markets that can only be scaled by the most determined importers: FMVSS and EPA regulations are insidiously different from the rest of the world. Europe built its own wall called European Whole Vehicle Type Approval for cars and ECE for parts. China doesn’t let anything in that is not CCC approved – it’s pretty much like ECE, but with Chinese characteristics. And that’s just the obvious ones. There can be foot-dragging in customs, demands for additional documentation, it’s a game that everybody loves and no-one admits.

The Brazilian measure has been taken against a backdrop in which imports have risen 49.65 percent compared to the same time period as last year. As I reported earlier, last year was a record one. Both for import and so-called “national” cars. These records BTW have been piling up year after year for the last three years. “Brazil’s currency is near its strongest level in a decade, placing pressure on President Dilma Rousseff to shield local factories,” says Reuters.

In a nasty little twist (for the “local” makers) Brazil is rubbing its thumb against the car makers strategy of building only the more basic and lowly cars in Brazil. You see, the so-called national makers (the Big 4-Fiat, VW, GM and Ford- plus some of the newcomers, specially Renault-Nissan) have been following a line of producing their more sophisticated cars in Argentina and Mexico and then importing them into Brazil as both countries benefit from free trade agreements (in cars) with Brazil. Now the government hopes to nudge those companies into investing and producing these more upscale cars in Brazil. BTW, quite a few little birds have told me that the biggest lobbyists for this new scenario were some of the Big 4. However, they hadn’t bargained that the government would lash out against Argentine and Mexican cars. So, the whole “be careful of what you wish for”-thing applies here, triple-fold!

This policy has lead to a curious situation. Striking out against imports, the government has mainly landed a hit against the national makers. ABEIVA, which represents importers without factories in Brazil (some 30 makers from the likes of Ferrari and BMW to the likes of Mahindra and Hafei, yeah, never heard of them either) has issued a statement against this policy. In it, they stress that the government’s strategy is only legal against imports from Mexico and Argentina since these countries agreed to the possibility of this measure in their bi-lateral free trade agreements with Brazil. According to ABEIVA, the measure is illegal against imports from elsewhere (mainly Germany, South Korea, Japan, China and the US, among some other places). They also defend car importing by pointing out that the makers they represent employ Brazilians in over 700 dealerships nationwide. They further point out that they bring in more than 5 billion reais in taxes per year. Yet they only import 21.15 percent of the total of imported cars (the rest are imported by members of ANFAVEA – the association of those makers with Brazilian plants). ABEIVA members collectively hold a market share of just 4.92 percent of the whole market (all these numbers taken from another post at Quatro-Rodas).

Ironically, the whole thing supposedly is a little trade-war between Brazil and Argentina. Brazilian officials have privately accused Argentina of intentionally delaying imports by revoking automatic licenses for Brazilian farm equipment and other products. Some 2,500 Brazilian tractors are languishing at the border with Argentina, Brazilian media reports.

But where does Argentina come in with imports to Brazil? In a big way: Argentina is the source of roughly half the vehicles imported into Brazil. But the barriers, unless selectively applied, will affect auto producers from Japan, South, Korea, Mexico and the United States as well.

So what to expect? Against all the legalese and surely some lawsuits that will arise, the government has taken a stand. They are defending production in Brazil. They are blissfully (or don’t care) unaware of the consequence to Brazilian buyers. Yes, prices will go up as the competition lessens. They probably think this doesn’t matter and is a good thing as they have stated many times they think the economy is overheating. Inflation is back. Knocking some people out of the brand-new car market, they hope to attack this problem via the demand route. This as ever hides the fact that inflation is a consequence of the supply side. Namely, the government is the biggest taker of cash from the market as it struggles to scrap money enough to keep going. No word on government shoring up its excessive (and badly thought out) spending.

Anyway, this will save some jobs at local plants. Fiat is the big winner as they only import the 500 from Mexico in low numbers. Some imported cars which have found great success like the Ford Fusion, VW SpaceFox, Chevy Agile and all Korean models will suffer. The makers will resist a while, but will soon adopt a different strategy. After all, the market is expected to grow from 3.5 million to over 5 in the next couple of years. Will this measure (and possibly others like it) affect this target?

Time will tell. With this about face in policy Brazil will go on dreaming its delusional dreams. It will be less competitive, more isolated (in other words, more of the same old same old). Brazilians will continue having the privilege of paying through the nose for small, bare-bones transportation. Ah! The sleeping giant will slumber on in its warm, full of unrealized potential, precariously improvised, making it up as it goes along, and tropical crib.

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Trade War Watch 17: China Rules U.S. Dumping Subsidized Cars On Chinese Market, Does Nothing Thu, 05 May 2011 18:28:23 +0000

Beijing closed the book on the tit-for-tat saga that had started with the U.S. slapping punitive tariffs on Chinese tires. China’s Ministry of Commerce (MOC) issued a final ruling today, declaring that the United States has dumped subsidized sedans and sport utility vehicles with engine displacement of 2.5 liters or bigger on the Chinese market, writes China’s state-owned new agency Xinhua. According top the MOC, this has harmed China’s domestic auto manufacturing industries. Then, China did nothing.

In a surprise move, the statement continued to say that China would not take anti-dumping and countervailing measures on these vehicles until further notice.

China had launched the anti-dumping and anti-subsidy investigation into auto imports from the U.S. on November 6, 2009, two months after President Obama signed the edict to slap a 35 percent punitive tariff on Chinese car and light truck tires. The move seriously disrupted the Chinese auto industry, it raised tire prices in the U.S., it hurt American companies such as Cooper Tire that have extensive production in China, and finally ended up moving low cost tire production from China to Thailand, a country that had duty free status with the U.S.

Realizing this, the U.S. raised the Thai tire tariff to the 4 percent harmonized tariff allowed by the WTO. The same tariff the U.S.A. had charged on Chinese tires before the additional 35 percent were slapped on. Not a single job was created in the U.S. Thailand was grateful. Chinese and U.S. tire companies were miffed.


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Trade War Watch 16: US Doesn’t Understand China’s EV Policy, Rattles Saber Anyway Sun, 01 May 2011 22:12:37 +0000

George Orwell’s warning, that “the first victim of war is the truth,” apparently applies equally to trade wars. On Friday, Senators Carl Levin and Debbie Stabenow (both D-MI) wrote the United States Trade Representative to express their concern over “reported draft regulations” of China’s New Energy Vehicle plan, noting

We are concerned that these draft regulations continue China’s long history of breaking international trade rules.

Given that the ongoing low-level trade war between the US and China, this was a predictable bit of saber-rattling. But if Levin and Stabenow’s political motivations are easy to understand, the logic that leads them to believe China’s New Energy Vehicle plan is a violation of international trade rules is not. Meanwhile, neither the Senators nor the USTR appear not to have heard about another, more serious possible trade issue arising from China’s headlong dash towards electric vehicles. Sounds like a job for The Truth About Cars…

The Stabenow/Levin letter is long on button-pushing and short on facts, telling the USTR that

In its latest National Trade Estimate (NTE), your office highlighted a new Chinese trade barrier that is designed to prevent U.S. automakers from accessing the Chinese market. According to the NTE, China is in the process of drafting new regulations as part of its New Energy Vehicles (NEV) plan, which seeks to advance hybrid and battery electric vehicle production in China.

So, what does the 2011 NTE say about China’s automotive trade barriers? Precisely two paragraphs, as it turns out, only one of which deals directly with this alleged new barrier to EV business. Still, the entire passage is relevant to the dispute, so we have reproduced it below:

In May 2004, China issued a new automobile industrial policy, the Policy on Development of the Automotive Industry, and subsequently it issued implementing regulations that unfairly discriminated against imported automotive parts and discouraged automobile manufacturers in China from using imported automotive parts in the assembly of vehicles. In 2006, the United States, the EU and Canada initiated dispute settlement proceedings against China at the WTO. The WTO ultimately ruled in favor of the United States. In September 2009, China repealed the challenged measures.

Various U.S. industries are concerned about Chinese policies that may discriminate against foreign products. For example, the U.S. automotive industry is concerned that foreign-invested producers of New Energy Vehicles (NEVs) and NEV parts in China may begin to face discrimination. China is developing new regulations as part of its NEV plan, which encompasses hybrid and battery electric vehicles. Current drafts reportedly specify that automakers that intend to manufacture electric vehicles in China must demonstrate a “mastery” level of proficiency in key parts such as electric vehicle batteries, motors or control systems before receiving a license to produce and sell electric vehicles. In addition, according to reports on current drafts, the Chinese entity that manufacturers the vehicle, either a domestic manufacturer or joint venture operation, must demonstrate clear ownership of intellectual property rights to the technologies that enable the “mastery.” U.S. industry is concerned that China may implement these proposed requirements by requiring that production of key NEV parts take place in China. These proposed requirements also give rise to concerns that foreign manufacturers of NEVs and NEV parts will be compelled to contribute their intellectual property to their Chinese joint venture operations in order to fully participate in the NEV market.

This is the complete basis for the Stabenow/Levin letter, which in turn has already led to several highly misleading media reports. And no wonder: not only is the USTR’s analysis shockingly vague, but its sourcing also leaves much to be desired, referencing only “reports” of “current drafts” of China’s NEV plan. Moreover, its conclusions serve far better as a way to ratchet up anti-China rhetoric than as a way to reflect the reality of China’s proposed EV development plan.

Because the paragraphs quoted from the NTE above contain no direct reference to which “reports” of “current drafts” of the NEV it is concerned with, TTAC has had to dig around quite a bit for those “reports.” An initial survey of media reports uncovers stories like this one, from ChinaAutoReview, which cites First Financial Daily (a paper affiliated with several Chinese Communist party organizations) and quotes a multinational auto parts executive as saying

This policy may force a large group of foreign-invested companies in China to adjust their stake

But this is not the whole story, as the FFD has its (pro-party) biases and CAR (owned by China Business Update) has separate pro-Western business biases. The paper’s “About Us” section notes

Our clients include Fortune 500 OEMs and suppliers, investment banks, accounting firms, consulting firms, government agencies and trade associations. With our extensive networks in China and the world, we make sure that our clients get the best possible services available to help them tap into the Chinese automobile and components market.

Still, if all the sources on the matter agreed with CAR/FFD’s findings, we might agree that this draft legislation is troubling. However, a little more research turns up a month-old report from the law firm of Vinson & Elkins [PDF here] which both clarifies the proposed laws and (not coincidentally) provides a less worrying interpretation of it. The report notes

In 2010, the MIIT circulated two drafts of the New Energy Auto Industry Development Plan among the major automobile manufacturers in the PRC for comment. The plan seeks to meet the State Council’s Energy Savings and Emission Reduction requirements, as well as the State Council’s strategy for Strategic Development of New Industry. If promulgated, the plan will govern foreign investments in the electric vehicle industry. While the official version of this new plan has not been issued yet, comparison of the two released drafts yields an interesting change of language regarding equity participation under the New Energy Auto Industry Development Plan.

As provided in the first draft, the Chinese party to a joint venture must hold at least 51 percent of the shares, regardless of whether the joint venture is for the production of automobiles or for only the production of critical auto components. However, such language was deleted in the second draft issued on 9 September 2010, such that the 2007 Investment Catalogue becomes controlling for investments in the electric vehicle industry. Under the 2007 Investment Catalogue, only automobile final assembly requires the Chinese partner to hold a majority ownership interest, as noted above. The production of automotive parts is therefore not subject to a restriction on foreign majority ownership (although certain investments require either an equity joint venture or a cooperative joint venture of which the Chinese partner must own at least a non- controlling interest, as also noted). Moreover, pending the implementation of the New Energy Auto Industry Development Plan, the 2007 Investment Catalogue currently remains controlling over foreign investment in this area.

Here we find that an initial draft of the NEV plan did require that non-final-assembly producers of key NEV components be majority owned by a Chinese partner, but we also learn that this draft has since been superseded by language that maintains the law as it currently exists. In other words, the concerns of the USTR and Senators Stabenow and Levin were recognized and alleviated by the Chinese as early as September of last year. Somehow, the US concerns managed to be both premature (appearing before final approval of the plan) and woefully out-of-date (criticizing a draft that has since been superseded by language which does not change the basic realities of investing in China’s EV industry).

The Vinson &  Elkins report goes on to explain, in some detail, the finer points of China’s NEV investment policy, including the issue of “mastery” which so concerned both the USTR and Senators Stabenow and Levin. There are, it turns out, three categories of EV business qualifications: the “starting,” “developing,” and “mature” phases (one assumes this final category refers to the “mastery” requirement criticized by the American saber-rattlers). It is important to note that none of these phases require any technology transfers beyond requiring that products “not violate any third-party intellectual property rights.” Even if the earlier draft NEV plan were to pass, and manufacturers of key EV components were forced to create joint ventures, they would simply operate as all Chinese (and, it should be noted, Indian) joint ventures do: through the licensing of technology from the foreign partner. In fact, many Western “automotive experts” do not realize that much of the profit earned by foreign automakers with Chinese JVs comes from technology licensing rather than profits on sales, which are notoriously difficult to repatriate.

In short, through just a little research we’ve learned that the draft proposal which so frightened the USTR and Senators Stabenow and Levin has since been superseded by a version which does not appear to make the changes that drew such an angry response. Furthermore, the details provided in the V&E report indicate that, even if the initial draft were passed, it would not fundamentally change the rules of doing business in China, or coerce foreign firms to “sign over” technology or build components in China in an anticompetitive manner.

Of course, if that initial draft were passed, it could require suppliers to take on Chinese partners where they might not have otherwise. And though it seems that draft will not be approved, it’s worth understanding why that might be a natural development from the current JV system. One of the key issues in the shift from ICE vehicles to battery-powered vehicles is a concentration of value into the battery and associated systems. The since-rejected measure makes sense for any joint-venture-based market, as it prevents the final assembly partnership from being relegated to the smallest possible slice of the value chain. But since no new coercive technology transfer is called for in any of the drafts of the NEV plan, foreign partners will be able to replace any profit  they might have accrued by building the batteries as a wholly foreign-owned enterprise (WFOE) and selling them at a profit to the joint venture by licensing their battery technology to the joint venture instead.

Meanwhile, the USTR and its friends in the US Senate could learn a thing or two from the companies who are actually facing these possible (but again, unlikely) changes in Chinese policy. A Reuters piece filed from the Shanghai Auto Show quotes executives from several foreign supplier companies who are active in the NEV “key components” manufacturing business, and their response to the “proposed drafts” was the exact opposite of the American saber-rattlers. An analyst expresses concern at the proposal, but Robin Choi, director of commercial business development for the Asia-Pacific division of Johnson Controls is more pragmatic, telling Reuters

We are kind of surprised that they limited it at 50 percent. It’s a little bit of a concern for us. To be honest, we don’t know what the result will be, but we are continuing the dialogue with the government. It’s not official yet. If it is, we might have to follow the rules.

Hans-Peter Kunze, Valeo’s senior executive vice president of sales and business development adds

It’s still a draft and how many drafts have we seen in our lives?

Perhaps Herr Kunze has already read the V&E report? Finally Wolfgang Dangel, president of Schaeffler’s Asia-Pacific division strikes the note that seems to define the response of the suppliers who would be affected by any change to these laws, saying

We just have to be alert to watch very carefully about what will happen. No matter what the final outcome will be, we can contribute one way or the other. At the end of the day, we are still confident as we have enough technology and expertise on our hands.

Unless the Chinese government were actively eyeing ways to directly coerce that technology out of the hands of these suppliers, a perception that the USTR and Senators Stabenow and Levin are clearly anxious to fuel despite a total lack of evidence for it, these firms will be just fine. Sure they might have to set up JVs (again, this seems unlikely given the revisions noted in the V&E report) but as long as they can license their technology, they still have their major source of Chinese profits.

By now it should be fairly clear that the USTR and its allies in the US Senate are in a tizzy about something that might not happen, and wouldn’t bother the industry it directly affects much even if it did happen. I’m no WTO expert, but the idea that there are US-based producers of batteries and other key EV systems who are desperate to export them to China for CKD assembly rather than licensing technology for low-cost Chinese production isn’t wildly credible. After all, there’s only one “knock-down”-style EV currently in production… and that’s the CODA EV, which is “assembled” in the US by a US company, out of batteries and a sedan which are both built in China. Imagine that business model working in the opposite direction… not easy, is it?

And while US Senators and trade officials fret over a phantom menace, another real issue is emerging from China’s rush to push EV production and consumption that has completely escaped their notice. As Bertel has documented in considerable depth, a combination of municipal and Central Government subsidies will give Chinese consumers over $18,000 for every EV purchased… and according to rumors we’re hearing out of China (which we will, of course, confirm as soon as humanly possible), those credits are available only to buyers of Chinese-made vehicles made by Chinese brands. If true, this subsidy would certainly constitute an anti-competitive policy (imagine how the White House might have structured Cash-for-Clunkers, or how Japan might have structured its own efficiency-oriented subsidies).

Moreover, if Beijing’s decision to exempt EVs from its registration lottery and traffic restrictions similarly applies only to EVs made in China by Chinese brands, these two policies would create a powerful barrier to what is likely to become the first major Chinese EV market (which happens to be about the size of the Australian market). And since subsidies will be spreading to cities across China, the even more powerful registration lottery and traffic restrictions could too, potentially banning even joint ventures from China’s EV market. This, not an unlikely and ineffectual policy shift on the supplier side, is what America’s trade representatives and concerned Senators should be looking at. After all, if it’s enough to make Bertel Schmitt an EV believer…










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Trade Peace Watch: US-Korean Trade Pact: Korea (And U.S. Customers) In Deep Kimchi Sat, 04 Dec 2010 13:04:41 +0000

It looks like North Korea’s artillery barrage on a small South Korean island had one of those famous unintended consequences: South Korea, faced by a belligerent enemy, decided to let bygones be bygones. A shell-shocked South Korea and a proud America “completed a free-trade agreement that will eliminate most tariffs on exports and solidify one of the nation’s most significant alliances in Asia,” as the New York Times praises the deal. South Korea stared down the barrels of North Korean guns, and America won the war that never was.

Don’t run down to your Hyundai dealer just yet and expect dramatic price reductions. The deal has major hurdles to pass. And at closer inspection, it looks like an oinking pig in a poke.

First, the hurdles: The deal isn’t done yet. There are still beef issues, and the devil is in the details. Once done, the deal must be approved by the legislatures of the two countries. Easier said than done. There already had been a free trade pact, hammered out in 2007. It was never ratified.

Now, for the pig in the poke. The U.S. auto industry, led by Ford, had protested loudly against the deal. The UAW agreed with the bosses. The argument was that the bad Koreans keep good American cars out of their market. Bunk. Even if South Korea would drop its import duty to zero (as the Japanese did,) there won’t be mass importation of U.S. cars to South Korea. U.S. cars are as popular in Korea as they are in Japan and Europe. As in not. The export story is a red herring to distract from the urge to stem the flood of Korean cars coming into the U.S. – and that goes especially for Korean trucks. The 2007 agreement would have required the United States to start reducing the 25 percent chicken tax on Korean trucks immediately and phase it out completely after ten years. Horrors!

The infamous chicken tax protects a huge segment of  the U.S. market – light trucks – from nasty importers. Truck-heavy Ford lobbied heavily against the agreement. They should know. Ford is an expert when it comes to the chicken tax.

Ford currently imports all of its Transit Connect models from Turkey as passenger vehicles with the requisite items, such as rear windows, rear seats and rear seatbelts. Once off the boat, rear windows are smashed and replaced with metal panels. Rear seats and seatbelts are removed. The removed parts are not even shipped back to Turkey. Too expensive. They are tossed. The process costs Ford hundreds of dollars per van, but saves thousands in taxes. Taxes that protect Ford’s domestic business.

That will remain as is for quite some time. According to a fact sheet put out by the Whitehouse, not much will change fast if the pact will ever be approved.

  • Car tariffs: The 2007 agreement would have immediately eliminated U.S. tariffs on an estimated 90 percent of Korea’s auto exports, with remaining tariffs phased out by the third year of implementation. The new deal keeps the 2.5 percent tariff on Korean cars in place until the fifth year. At the same time, Korea will immediately cut its tariff on U.S. auto imports in half (from 8 percent to 4 percent), and will also ditch it in year five. U.S. 1 -  Korea nil.
  • Chicken tax: The 2007 agreement would have required the United States to start reducing the 25 percent tariff on Korean trucks immediately and to get rid of it by year ten. The new deal keeps the chicken tax in place for another eight years, then it will be phased out by the tenth year. In return, South Korea must eliminate its 10 percent tariff on U.S. trucks immediately. U.S. 3 -  Korea nil.
  • EVs: According to the 2007 agreement, the United States and Korea would have eliminated tariffs on electric cars and plug-in hybrids by the tenth year. The new deal requires Korea to immediately reduce its electric car tariffs from 8 percent to 4 percent. Both countries will then phase out their tariffs by the fifth year. U.S. nil -  Korea nil.
  • Safety standards: According to the Whitehouse paper, „safety standards have effectively operated as a non-tariff barrier to U.S. auto exports.” Under the new deal, 25,000 cars per U.S. automaker can be imported per year to Korea, “provided they meet U.S. federal safety standards, which are among the most stringent in the world.” Apparently, U.S. safety is not as stringent as in South Korea. Safety conscious Korean customers will have to wait until late in the year and hope that the unsafe quota is exhausted. No need to worry: The United States exported a total of 7,663 cars and light trucks to South Korea in 2009, while it imported 476,857 from automakers there, according to U.S. Commerce Department figures. With 25,000 units per manufacturer coming in unmolested, that quota is a non-issue. Try pulling the same stunt when importing cars to the U.S.: “It’s up to Korean regs. That should be good enough for you.” If you want to do car business in the U.S., you need to comply with U.S. rules. Making cars compliant, and the adjunct testing and certification is expensive. The new agreement simply saves U.S. automakers certification costs. If they would truly expect to export a lot, these costs could be spread over many units. Now, the entry ticket is free. U.S. 1 -  Korea nil.
  • The environment: The Whitehouse fact sheet mumbles that all U.S. autos will be considered compliant with new Korean environmental standards on fuel economy and greenhouse gas emissions, “if they achieve 119 percent of the targets in these regulations.” Huh? The DetN provides the required translation: “Obama and congressional staffers highlighted the fact that the agreement would allow all U.S. autos to be considered in compliance with new South Korean environmental standards.” The pig in the poke allows U.S. greenhouse oinkers to be sold in countries with much tougher rules. U.S. 1 -  Korea nil.
  • Special Motor Vehicle Safeguard: Under the 2010 supplemental agreement, Korea has committed to add a special safeguard for motor vehicles that protects the American auto industry “from any harmful surges in Korean auto imports due to this trade agreement.”  The special auto safeguard will remain in place for 10 years beyond the full elimination of tariffs for each Korean auto product. Even more ominously, “fewer procedural steps are required to speed up the application of the safeguard when workers need faster relief.” This clause, generally overlooked by the main stream media, allows the U.S. to roll back major parts of the agreement when anyone complains.  Refer to the infamous tire vs. chickenfeet spat between the U.S. and China to see how these safeguards work. By the way, not a single additional tire was produced in the U.S. after safeguard was applied and the cheap tire business simply moved to Thailand. From there, the tires could be imported duty free until the U.S. government said “ooops” and dropped the duty free status on July 1. Thai tires are now subject to the 4 percent harmonized tariff allowed by the WTO. The same tariff the U.S.A. had charged on Chinese tires before the additional 35 percent were slapped on. Dumb and dumber. U.S. 5 -  Korea nil.
  • Bad boys: The 2007 agreement  had a rule that allowed the U.S. to “snap-back” tariffs to pre-agreement levels ”if  U.S. auto business in Korea is materially affected by Korean violations of the agreement.” That was not enough. “The 2010 supplemental agreement substantially increases Korea’s obligations in a number of areas subject to this strong enforcement mechanism.” So if the slant-eyed Koreans just look askew at the U.S. auto business: Snap! U.S. 1 -  Korea nil.

From Caterpillar to The Miami Herald, all hail the trade agreement as the biggest deal since NAFTA, and as something that could bring “up to $11 billion in overall American exports and 70,000 jobs.”

Some are not as cheerful. A letter to the Wall Street Journal, dispatched by blogger Don Boudreaux, puts it best:

“Reporting on the U.S.-Korea free-trade pact, you write that “South Korea agreed to give the U.S. five years to phase out a 2.5% tariff it levies on Korean-built cars, rather than cutting the tariff immediately” (“U.S., Korea Agree on Free-Trade Pact,” Dec. 3).

In other words, South Korea agreed to allow Uncle Sam to continue to impose additional financial burdens on Americans who buy automobiles made in South Korea, for no reason other than to make life easier for Detroit.

So much for the Obama administration’s courageous refusal to allow special-interest groups (in this case, U.S. automakers and the UAW) to dictate policy – so much for our leader’s eagerness to get the policy right even if doing so means getting the politics wrong – and so much for all the ballyhoo, out of Detroit and Washington, about U.S. automakers again being world-class producers who can compete successfully with foreign automakers.“

PS: Where’s the beef? It suddenly sounds like that was also a trumped-up issue. Says Reuters:

”U.S. beef exporters have already recovered much of their lost market share in South Korea under a voluntary industry agreement to address lingering concerns about several cases of mad cow disease found in the U.S. cattle herd.

Much of the beef industry is eager to have the pact approved because it phases out a 40 percent South Korean tariff on U.S. beef and because a major competitor, Australia, is negotiating its own free trade pact with South Korea.”

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Trade War Watch 15: Thai Tires Trump Chinese Thu, 22 Jul 2010 11:33:23 +0000

After President Obama paid his outstanding union dues and slapped a 35 percent punitive tariff on Chinese car and light truck tires exported to the USA, we predicted two outcomes:

1.)    It will start a trade war, and China will drag the U.S.A. in front of the WTO. Sure did. The WTO accepted China’s complaint, and the trade war turned into a major conflagration.
2.)    We said that not a single new job will be created in the U.S.A., and “what the boneheaded decision does is simply shift tire production from China to other low cost producing countries.” Sure does.

The Nikkei [sub] reports that Thailand is becoming the country of choice for low cost tire production. Not a single job moved back to the U.S.A. Jobs simply move from China south to the Land of Smiles.

According to the Nikkei, Bridgestone, Sumitomo and Yokohama Rubber “are rapidly expanding their Thai factories for passenger car tires, defining the Southeast Asian nation as their key export base.” All three are ratcheting up their Thai production as if there’s no tomorrow.

Bridgestone’s Thai facility will become the group’s second-largest passenger car tire factory in the world. In the job department, Bridgestone has shut down plants in Australia and New Zealand. Sumitomo Rubber is expanding their plant in Thailand’s Rayong Province, with the aim of making the Thai factory one of the largest in the world. Yokohama Rubber plans to raise its annual production capacity in Thailand by 50 percent.  Goodyear, Michelin and other have tire plants in Thailand. Others will follow.

The financial crisis had caused global tire demand to plunge. Now, driven by red hot car sales in China and Southeast Asia, companies can’t make tires fast enough. As far as WTO rules go, there is no special safeguard clause between the U.S.A. and Thailand.

Actually, tires imported from Thailand to the U.S.A. used to be duty free. The U.S. government said “ooops” and dropped the duty free status on July 1. (While they were at it, the duty free status of wood flooring from Brazil, and gold rope necklaces from India was also eliminated, what’s fair is fair.)  The new Thai tire tariff? The 4 percent harmonized tariff allowed by the WTO. The same tariff the U.S.A. had charged on Chinese tires before the additional 35 percent were slapped on.

So where did this get us? Instead of cheap tires from China, we now get cheap tires from that epitome of political and financial stability, called Thailand.

If you associate Thailand with other uses of rubbers, it’s time to rearrange your associations. Not what you think, silly.  Burning tires is a Thai tradition when battling the police – we recycle!

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Trade War Watch 14: Hot Wheels Wed, 12 May 2010 10:39:21 +0000

Now that the Conservatives (with the help of the Liberal Democrats) have come to power in the UK, the Conservatives are going to push forward their plans for a reduction in the UK deficit (i.e savage cuts). Now, while I agree in the long term, this will be good for the UK, in the short term, it will cause higher unemployment and severe “belt tightening”. The UK isn’t the only country with this frame of thinking. Only today, the Spanish government has announced deep budget cuts in order to reduce their deficit and to prevent markets from thinking of them as the next “Greece”. So, with the UK and Spain making these budget cuts, the Euro looking unsteady and Greece still not convincing markets, what else could make Europe stare at another recession? That’s right, a possible trade war.

Reuters reports that The European Union (EU) has imposed provisional anti dumping duties of of up to 20.6 percent on aluminum wheels from China. The EU did this after complaints from domestic competition arose.

Who will be hurt first? European companies like Renault and BMW. The use these Chinese wheels on their cars. Lots of other EU car manufacturers source their alloy rims in China. It needs a strong technological regimen to make them pass stringent ECE rules.

Naturally, the Chinese Ministry of Commerce denies any dumping charges and said that the investigation was not in line with World Trade Organization rules. In other words, “Stop picking on us”. The Chinese officials then tried to appeal to the good nature of the EU by saying that these duties could raise the cost of repairs for customers (concern for the European customer? How sweet!), slow the recovery of the European auto sector (Actually, Opel is probably doing more for that cause than some aluminum wheels) and hurt the interests of both China & Europe (Ah! That’s more like it!).

I don’t speak fluent “bureaucrat”, but after watching many episodes of “Yes, Minister” and “Yes, Prime Minister”, I’m pretty sure that “hurt the interests of” usually means “trade war” or such like. Mind you, to play Lucifer’s Advocate for a second, China aren’t exactly clean in this exchange of barbs. In December, they imposed a 24.6 percent anti dumping duty on steel fasteners from Europe and last month, launched an investigation into a type of optical fibre imported from the United States and Europe.

With trade between the EU and China (as of 2008) worth €326 billion, this is an area which both countries will need to tread carefully. The EU is the largest trading partner with China and if the EU annoys China, maybe some of that trade will go to China’s other large trading partner, the United States. Or on second thoughts, maybe not…..?

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Trade War Watch 13: Pedal Politics Thu, 11 Feb 2010 09:25:23 +0000

Yesterday, a strange love-fest between U.S. Ambassador to Japan John Roos and Japan’s transport minister Seiji Maehara ensued. After their meeting in Tokyo, as reported by the Nikkei, the ambassador and the minister said that everything is hunky-dory, and that Toyota’s recent recalls won’t undermine relations between the U.S.A. and Japan. Which is odd in itself: Since when does a $15 gas pedal get a leading role on the world stage of international politics?

Ambassador Roos effusively told reporters that the recall issue ”in no way has any kind of direct or indirect impact on the strength of the bilateral relationship between the United States and Japan.” Who said it would?

Japan’s transport minister Seiji Maehara likewise said that Toyota’s troubles mean no harm to Japan’s relationship with the U.S.: “The issue shouldn’t damage the two countries’ relationship and shouldn’t hurt free and fair market competition.” Again, why should it?

Strange answers to questions nobody raised.

Kyodo News reiterated this morning in Japan that Toyota’s President Akio Toyoda will travel to the United States in March. Toyota spokeswoman Martha Voss said Toyoda ”would look forward” to the opportunity to meet with members of Congress when he visits the United States. The travel plans of the CEO of a car maker get more attention than a state visit.

There has been an odd amount of highest level governmental involvement with this issue recently, far beyond the regular regulatory ratcheting and the habitual grandstanding. The posturing is solely between the U.S.A, and Japan. Nobody in Europe, or China, which are just as affected by the recalls, turns Toyota into a political issue.

China’s state-owned news agency Xinhua couldn’t help but noticing today: “In a sharp contrast to media reports out of the US, voices of leniency and softened tones have emerged in China on the issue, with some people going as far as highlighting the massive safety recalls as a sign of ‘responsible business operations.’” China is Toyota’s second largest foreign market.

In Europe, where Toyota recalls 1.8m cars, the reaction is even more subdued. The German newspaper Die Welt yesterday cited a spokesperson of the powerful ADAC, Germany’s equivalent of the AAA: “The club does not have any complaints or claims from its members. There is no reason for panic.”

As commentator L’Avventura said: “It seems to me that a lot things are going to happen behind closed doors before the congressional hearings. The question is how it’s going to play out and how much of it is going to be predetermined and politically orchestrated.”

Out of the many possible explanations for the strange behavior, here is one of them:

Prime Minister Yukio Hatoyama had campaigned on a platform that contained moving all U.S. bases off Okinawa, or even out of Japan. The Okinawa issue had received a lot of play in Japan. In the last weeks, it turned quiet.

When U.S. Secretary of State Hillary Clinton complained with her Japanese counterpart Katsuya Okada about alleged discrimination of the Japanese cash for clunker program against American cars, it sounded oddly out of proportion. The number of cars affected wasn’t enough to fill a ship.

Now, the U.S.A. seems to have found a powerful pivot point, and Japan’s undivided attention.

As long as the U.S.A. sits on Okinawa, it doesn’t have to dump a lot of arms into Taiwan, a move that would make China increasingly grumpy. China already threatened to cut Boeing et al out of the Chinese market, after $6.4b of American arms made their way to Taiwan. China is estimated to need more than 3000 airliners worth $400 billion in the 20 years from 2009. Airbus already has the inside track in China and would be more than happy to fill the void.

Nobody claims Toyota doesn’t have problems. As many have said, they have had problems for years.  Their problem management is a mess. However, the timing and intensity of the diplomatic activity should give reason for thought.

Implications of a $15 gas pedal …

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Trade War Watch 12: “Nationalist assault on a foreign corporation, an economic war” Sat, 06 Feb 2010 13:05:24 +0000

Recently, there have been voices that mentioned that the attacks on Toyota could be politically motivated. Let’s face it: Toyota has problems. So have other auto makers. There are marked differences in reaction to and treatment of these problems.

One of the tenets of warfare is that you never attack the innocent. You wait until your opponent bumbles. Tricking an “enemy” into doing something really stupid, and exploiting this to declare a “righteous” war, is as old as Julius Caesar. Being the “defender” makes you a winner in the war of  public opinion. You need the public on your side to win a war.

Using an outside scapegoat to deflect criticism is the oldest trick in the book. Time and again, people fall for it.

The Japanese were docile, polite, and cautious when in came to Toyota’s troubles. The more surprising is today’s piece in the Nikkei [sub]. Usually, we don’t copy and republish whole pieces. But in the name of authenticity, and because the Nikkei is only available on-line as paid subscription, we make the whole piece available.

„Toyota’s Woes Seen As Warning Sign For Foreign Firms In U.S.

WASHINGTON (Nikkei)–The midterm elections this coming November may be one reason why the U.S. government and Congress have taken a hard-line stance on Toyota Motor Corp. (7203) over vehicle defects.

Toyota itself undeniably compounded the problem by bungling its response. But the fact that the Japanese auto giant has sharply increased its market share in the U.S., while General Motors and Chrysler headed for bankruptcy, provoked a strong reaction to its vehicle problems.

Another likely reason for the government’s tough response now is that the Department of Transportation was criticized by some consumers as too lenient.

Last month, U.S. President Barack Obama used his State of the Union address to put forth his vision of reviving American manufacturing and doubling exports — a move seen as an attempt to reverse his sinking approval rating ahead of the midterm elections.

With unemployment stuck at high levels and public anger over the Wall Street bailout still strong, the government and Congress are looking for a scapegoat to channel voter frustration away from themselves.

These circumstances prompt some U.S. watchers to warn that Toyota’s experience may be just a harbinger of a growing backlash against foreign firms.

Canada’s Financial Post made a similar assessment in a commentary titled “The war on Toyota” in its Feb. 3 online edition.

“The attack on Toyota, at this time of U.S. economic weakness and populist excess, is fast turning into a great American nationalist assault on a foreign corporation,” the piece read.

With the Japanese government also having bumpy relations with Washington right now over the relocation of the U.S. military’s Futenma base in Okinawa Prefecture, Toyota could be put into a very difficult corner over the quality problems.”

The Nikkei is not the only publication that takes this stance, in carefully chosen words. Publications on this side of the Pacific are more outspoken.

Canada’s Financial Post says:

“There can be little doubt that Toyota, the world’s greatest auto maker in recent years, has become the victim of much more than another typical out-of-control All-American media frenzy. When top-line political gamesman such as U.S. Transport Secretary Ray LaHood, Congressional pit bull Henry Waxman, and conniving United Auto Workers executives start piling on, this is clearly much bigger sport that the usual ritual public lynching of auto executives, a routine occurrence in Washington. The attack on Toyota, at this time of U.S. economic weakness and populist excess, is fast turning into a great American nationalist assault on a foreign corporation, an economic war.”

The Washington Examiner uses even harsher language:

“What is it about the automotive industry that inspires such thuggish attitudes in the Obama administration? The Examiner’s Michael Barone coined the term “gangster government” to describe threats by the White House last spring against Chrysler creditors who had the temerity to insist that bankruptcy laws be followed in the bailout of the perennially ailing third member of the once-fabled Detroit Big Three. Now along comes Transportation Secretary Ray LaHood muttering darkly that “we’re not finished with Toyota” in the controversy over sticking gas pedals in vehicles made and sold in America by the Japanese automaker… Keep the controversy going and odds are good that Toyota sales will continue to drop. The biggest losers besides American consumers will be the men and women who own and work at Toyota’s 1,200 U.S. dealerships and the 30,000 Americans who build Toyotas in its five factories here. LaHood might as well have said “Nice car company ya got there, be a shame if anything happened to it.”

Investors Business Daily says:

“Is it just us, or is there something off about regulators’ big public show against Toyota over a safety issue? Might that be a conflict of interest between Government Motors’ owners and a foreign rival?… LaHood’s targeting of Toyota is creepily reminiscent of the Japan-bashing of the 1980s. But it won’t work as long as Uncle Sam acts as both owner and regulator.”

You will find more, if you just take the time to sort through the chaff.  Toyota is not the only target. Toyota is the most opportunistic target. The Obama administration has been on the trade war path ever since they took power. History tells that trade wars during recessions are suicide. Some trade wars turned into shooting wars.

Today, the world is too interconnected to survive a trade war. The first victims of Obama’s moronic tire war were American companies and American jobs.

Who will suffer most from trade wars?


You pay for trade wars with higher prices. You pay for trade wars with inflation. You pay for trade wars by being forced to give up your freedom to pick the product you want. Don’t end up as collateral damage.

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Trade War Watch 11: Tire Tax Costs U.S. Jobs Fri, 22 Jan 2010 10:33:05 +0000

Representatives Kevin Brady (R-Texas) and Dan Boren (D- Oklahoma) are tired of Obama’s punitive tariff on Chinese tires. They called for a government report on the economy-wide effects of the measure, Reuters reports.

“I am concerned that the administration’s tire tax will cost us jobs in the United States and raise prices for tires for hardworking Americans,” Brady said. And it burns, burns, burns. Picture courtesy

In September 2009, incoming President Barak Obama slapped a 35 percent punitive tariff on Chinese car and light truck tires exported to the USA. That, in addition to an existing 4 percent duty. No American tire manufacturer had requested the boneheaded move. It was a thank-you to the steelworkers union. Cooper tires openly opposed the action. Ironically, US tire companies were hardest hit by the measure, because they had moved most if not all of their budget segment tire production to low labor cost overseas sites. No job was created in the US. Many were lost. Low cost tire manufacturing simply moved to other overseas countries, which were the only beneficiaries of the useless war.

TTAC warned of a trade war, predicted that China will drag the USA in front of the WTO, and that China would take tit-for-tat measures. All of it became true.

In the trade war dept., China slapped import tariffs or restrictions on imports of U.S. nylon, industrial acid, chicken and other products. It also has initiated an investigation into whether U.S. automakers are selling below cost, or “dumping”, cars in China. The U.S.  retaliated, looking into allegations of dumping in other products, amongst those arcane items such as carbon magnesia brick. Last month, the U.S. slapped punitive tariffs on imports of Chinese steel pipes, a $2.8-billion market. Google is making on-again, off-again threats of leaving China. The trade war is escalating.

As predicted, China dragged the USA in front of the WTO. As reported by Reuters, the WTO accepted China’s complaint and agreed to convene a panel. WTO will formalize the panel at a meeting on Jan. 19. The three-judge body will look into whether the U.S. violated WTO rules. According to the Wall Street Journal, “the panel will publish a decision after nine months of investigation. If it finds that the U.S. unfairly imposed the tariffs, it could authorize China to put tariffs on key U.S. imports, up to the amount lost by Chinese exporters because of the duties. The U.S. can appeal, meaning the case could last several years.”

Says Reuters: “The time it will take to fight the case, and then revoke the tariff if Washington loses, means the tire tariffs will have been in place for most of their original three-year duration.”

The WTO complaint is widely seen as a blocking action by the Chinese to discourage the U.S. from further invoking the special safeguard clause that was rammed down the Chinese’s throats when they joined the WTO in 2001. Other safeguard complaints are piling up, and the Obama administration appears trigger-happy. A moronic trade war with Japan over nearly non-existent U.S. car exports to Japan was avoided by Japan giving in to nonsensical demands of Detroit’s automakers, which hat already mobilized Hillary Clinton and Betty Sutton.

The discriminatory safeguard clause against Chinese imports will expire in 2013, probably before the current tire complaint will have run its course. A lot of damage can be done in these three years. Trade wars exert a big price, paid by the consumer at the check-out counter. Prices of tires are already going up, and higher rubber prices will exacerbate the matter.

Students of history may note that trade wars during recession times can lead to full blown depression.

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Trade War Watch 9: SECSTATE Disses Japanese C4C Wed, 13 Jan 2010 17:40:58 +0000 They all qualify. Picture courtesy

The nerve, the nerve: U.S. Secretary of State Hillary Clinton told Japanese Foreign Minister Katsuya Okada when they met – halfway in Hawaii, so that both had to travel – on Tuesday “that concerns are rising in the U.S. Congress” about Japan’s cash for clunkers incentive scheme, Reuters reports.

As if there aren’t other pressing problems. Such as the economy, global warming, saving the whales, or saving the Marines on Okinawa. (Well, they discussed the Marines. Inconclusively.)

Under the belated Japanese C4C scheme, consumers get up to $2,800 if they trade in their 13 year or older car for new vehicle that meets the 2010 fuel economy standard of 35.5 mpg.  So far, so good.

Except that the Japanese shaken inspection system sees to it that there are very few cars in Japan that are older than 13 years. If they exist, they are usually in the loving hands of vintage-otaku aficionados who’d rather sink a few thousand more into their collectors items than trade them in for a new one. Well, they don’t have to. Buy a new qualifying vehicle without trading in a clunker, and the Japanese government will give you $1,132.

Last week, U.S. Congresswoman Betty Sutton had the nerve to introduce a resolution calling for the U.S. Trade Representative to start talks with Tokyo and urged Washington to bring a WTO case against Japan if it does not open up its program to American cars.

As reported by TTAC, Ford, GM, and Chrysler had complained to U.S. Trade Representative Ron Kirk in December that Japan’s fleet renewal program effectively barred U.S. firms from participating.

At the Hawaii meeting, a Japanese trade official said to Reuters that there is nothing discriminatory in the program. Japanese consumers can apply for the incentives with any car as long as it meets the standards. With the usual Japanese cynicism wrapped into unnerving politeness, the official added that cars made Daimler, BMW, and Volkswagen have no problem complying with the standard.

Hillary Clinton and Betty Sutton should have read TTAC before setting off another trade war about nothing. Here is what Ed Niedermeyer had explained in December:

The problem, in a nutshell, is that American automakers have sold a combined 7,901 vehicles in Japan this year. Because those numbers are so low, the Detroit firms are allowed to import vehicles under a program where their fuel efficiency does not have to be rated by the Japanese government. Because it doesn’t have official efficiency data on the low-volume models that use this program, the Japanese government has made them ineligible for the program. If we’re not mistaken though, this importation program isn’t mandated by the Japanese government, but automakers choose to use it anyway. Presumably, if Detroit had any models that could really compete in a 35.5 mpg market, they’d import them through normal channels. But with fewer than 8k units sold YTD, the Japanese market can’t possibly be worth the trouble.

If Detroit wants to partake in the Nipponese C4C bonanza, all they have to do is to submit their cars for testing that certifies that they get 35.5 mpg or better. Never mind. Let’s start a trade war instead.

And wasn’t the short-lived American cash for clunkers program heavily stacked in favor of pickup trucks, the only segment where domestics reign supreme? Did Japan report the USA to the WTO? They didn’t have to. According to official DOT numbers, 5 of the top 10 cars bought under the U.S. C4C program were Japanese brands, no pickups. According to Edmunds, 2 out of the top 10 had Japanese nameplates, 2 were American trucks.  Anyway, even a $4,500 voucher for a truck that got just 2 MPG more than the old one did not save American truck sales.  Why complain about nothing?  A concept Betty and Hillary don’t seem to understand.

Ah, when Betty Sutton  proposed the “Cash for Clunkers” program, she wanted to limit the program to cars produced in North America., the Wall Street Journal can’t help to remark. After loud complaints, she relented. Payback time?

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Editorial: Trade War Watch 2: A Game of Chicken Mon, 14 Sep 2009 10:47:43 +0000 after Obama signed the edict to slap a 35 percent punitive tariff on Chinese car and light truck tires exported to the USA, the Chinese government "has reacted by launching an anti-dumping and anti-subsidies investigation" into American goods exported to China, writes China Daily. In China's cross-hairs: As predicted by TTAC, the second casualty after Chinese tires will be American cars exported to China. Next in line (who would have thunk it:) American chickens exported to China. Collateral damage: Up to 200K jobs, both in China and the USA.

Here we go. Just two days after Obama signed the edict to slap a 35 percent punitive tariff on Chinese car and light truck tires exported to the USA, the Chinese government “has reacted by launching an anti-dumping and anti-subsidies investigation” into American goods exported to China, writes China Daily. In China’s cross-hairs: American cars exported to China. Next in line (who would have thunk it): American chickens exported to China.

Welcome to Trade War Watch. We fear, a regular feature of

The value of American cars exported to China approximately matches the value of Chinese tires exported to the USA. Around $2 billion, each way. Poof.

Chickens are a totally different matter. According to figures from the United States Department of Agriculture, the US exported 330,000 tons of chicken to China in 2008. Chinese chicken exports to the USA? Zero. “America doesn’t allow any importation of chicken from China. It is quite unreasonable,” said Ma Chuang, deputy secretary-general of China Animal Agriculture Association, to China’s Global Times.

China’s chicken hatchers had contemplated an anti-dumping probe into America for a while. Now, Beijing sends the feathers flying.

Chicks are big business. “The total export value of U.S. poultry meat, table eggs and processed egg products set an all-time record last year, reaching $4.7 billion, 25 percent above 2007,” reports the chicken-chronicle Watt Poultry USA. The biggest markets for American broilers are Russia, China, and Mexico. 81 percent of America’s chicken claw exports go to China, 15 percent go to Hong Kong—we don’t want to know who consumes the remaining 4 percent.

With a face as straight as possible, China’s Ministry of Commerce says that the probes into cars and chicks are “not a retaliation” against the tire dispute, but simply “a response to domestic concerns.”

Also as predicted by TTAC, China wants to drag America in front of the WTO. Trade ministry spokesman Yao Jian said China “reserves all legitimate rights, including referring the case to the WTO”. If the case goes to the WTO, subsidy and anti-subsidy agreements under the WTO framework will come on the table. If anything is subsidized to the hilt, then it is cars made by the two zombie automakers. If we assume $100 billion dumped into them so far, every car made by Chrysler and GM carries a $20,000 subsidy.

This all may sound funny or righteous, but it is highly dangerous. Lessons not learned from the Great Depression: As every historian knows, protectionism was one of the reasons why America, after a recovery from Black Friday, plunged itself and the world deep into a prolonged depression that ultimately led to World War II.

As far as jobs go, Obama’s signature under the tire petition is a disaster. It will not bring a single job back to the American tire industry. As written on Saturday, tire makers will simply shift production to other low wage countries not affected by the China-only ban.

Supposedly, the outsourcing of tire production to low cost countries did cost 5000 US jobs. Now, witness the effect of Obama’s signature: In China, the measure will leave Chinese workers, whose welfare is ever so close to our hearts, jobless and hungry. Fan Rende, chairman of China Rubber Industry Association, said that “Obama’s decision may affect the employment of 100,000 tire workers in China.” China Daily even predicts (without naming sources) that “some 100,000 tire-related jobs in the United States could be affected, including such sectors as imports, distribution and retail.”

The definitely not left leaning Foreign Affairs journal writes:

Americans are increasingly disturbed by the growing economic clout of China. With Chinese growth rates consistently above nine percent, they accuse it of stealing U.S. jobs, of keeping the Yuan undervalued by pegging it to the dollar, of exporting deflation by selling its products abroad at unfair prices, of violating the rights of its workers to keep labor costs low, and of failing to meet its commitments to the World Trade Organization (WTO). Most of these charges have little merit. But the misunderstandings behind them have opened the way to a trade war between the United States and China — one that, if it escalates, could do considerable damage to both sides.

China is not stealing U.S. jobs or engaging in unfair trade practices to undercut U.S. economic might and exports its way to global power. In fact, almost 60 percent of Chinese exports to the United States are produced by firms owned by foreign companies, many of them American. These firms have moved operations overseas in response to competitive pressures to lower production costs and thereby offer better prices to consumers and higher returns to shareholders.

Wal-Mart alone purchased $18 billion worth of Chinese goods in 2004, more than Australia, Canada, or Russia imported from China. A global trade war is being started with America shooting at its own ghosts. China is prepping for counter-battery fire. Hold on to your wallets.

Ironically, the “fear that a trade war will erupt between China and the U.S.” lifted the value of the dollar this morning, says the Wall Street Journal. Which makes imports even cheaper. Stocks go the other way. Dow Jones reports that “European stock markets traded lower Monday, weighed down by fears of protectionism and a possible U.S./China trade war.” We’ll soon find out how our already battered 401Ks like the game of chicken.

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Editorial: Trade War Watch 1: Yes, We Can Start a Trade War Sat, 12 Sep 2009 12:33:27 +0000

President Obama paid his outstanding union dues and slapped a 35 percent punitive tariff on Chinese car and light truck tires exported to the USA. The new duty will take effect on September 26 and comes in addition to an existing 4 percent duty, Reuters reports. Everybody, except for the United Steelworkers, agrees that this is one of the most boneheaded decisions of the new administration.]]>

President Obama paid his outstanding union dues and slapped a 35 percent punitive tariff on Chinese car and light truck tires exported to the USA. The new duty will take effect on September 26 and comes in addition to an existing 4 percent duty, Reuters reports. Everybody, except for the United Steelworkers, agrees that this is one of the most boneheaded decisions of the new administration.

No American tire manufacturer supported the case. Cooper Tire even publicly opposed it. No wonder: US tire companies are the biggest offenders (in the eyes of the United Steelworkers), having moved most if not all of their budget segment tire production to low labor cost overseas sites. Chinese tires are not in the USA because China wants to rape and pillage the market. Chinese tires are here, because US tire companies set up joint ventures in China to make what the market demands: Tires for less.

China is not the only exporter of budget tires to the USA. According to the Wall Street Journal, 43 percent of the tires sold in the USA are imported. Only 11 percent are imported from China. The far larger share is imported from low labor cost countries such as Malaysia, India, or Central Europe. What the boneheaded decision does is simply shift tire production from China to other low cost producing countries. These countries can take advantage of 11 percent of the tires effectively removed from the US market. The low cost producers can raise their prices until the market settles. The American consumer will bear the cost. Not a single new job is created in US tire companies. Jobs will be lost at tire distributors and dealers. This decision achieves nothing for America except higher prices and troubles with China.

The American Consuming Industries Trade Action Coalition wrote in a letter to the US Trade Representative John Kirk: “The absence of tires from China in the market will raise costs to downstream consuming industries, including automobile manufacturers, will limit consumer choices and affect most seriously those with the fewest resources. Thus, these tariffs will be the most regressive of taxes.”

“Those with the fewest resources” (i.e., the poor) are easiest sold on buying the import-restriction Kool-Aid. They drink it in big gulps: Imports bad for jobs. When they find out that fewer low cost imports mean higher prices, that they still have no jobs, and that their welfare check buys much less, then it’s too late.

The complaint by the US Steelworkers does not allege unfair trade practices. No longer needed. In US law, there is a special anti-China provision, called section 421. The Hong Kong Trade Development Council explains the complicated law in the most succinct way: “Under Section 421, the USITC determines whether a specific product from the mainland is being imported into the U.S. in such increased quantities, or under such conditions, as to cause or threaten to cause market disruption. ‘Market disruption’ is defined as rapidly increasing imports, either absolutely or relatively, so as to cause or threaten to cause material injury to a U.S. domestic industry. If the USITC makes an affirmative determination it proposes a remedy, which the president may or may not implement.”

The USITC is the United States International Trade Commission, “an independent, quasi-judicial federal agency that provides trade policy advice to both the legislative and executive branches of government.” The USITC is often called the International Trade Commission to give it a fake supranational flair. It’s pure US government.

“Market disruption” is a vague concept. If anyone feels disrupted by Chinese imports, they can petition the USITC. If the USITC accepts it and takes it to the president, and if he signs it, no more Chinese imports. Under Bush, for all his failings, every section 421 petition that reached his desk was rejected: He had to decide on strategically important goods such as wire hangers, steel pipe, brake drums and rotors and “pedestal actuators,” a component used in scooters for the disabled. All voted down.

Obama approved the first 421 petition that was put before him. China and US companies are rightly afraid that this will trigger a flurry of section 421 cases. “Multinational companies such as Caterpillar Inc., Citigroup Inc. and Microsoft Corp. have urged Obama to refrain from curbing imports, saying it could lead to a “downward protectionist spiral,” writes Bloomberg.

The United Steelworkers based their complaint on the allegation that Chinese tires had cost a paltry 5,000 union jobs over a number of years. Which of course is bunk. The jobs were lost because US consumers increasingly refuse to buy the high priced tires, and because US tire companies have reacted to consumer demand and moved their production elsewhere. Only one fourth of the tire imports comes from China.

Understandably, the Chinese are deeply upset. China’s state-run news agency, Xinhua, writes, “This ruling came at a time when the U.S. economy is at an uncertain turning point from the worst recession since World War II.” Officially, China exercises restraint. “Observers said that the president needs his people to help make domestic reform smoother,” is as low as Xinhua wants to publicly stoop.

The verbiage from China’s Ministry of Commerce is stronger: “China expressed strong dissatisfaction and is resolutely opposed to this,” said China’s Ministry of Commerce (MOC) spokesman Yao Jian. “This does not comply with WTO agreements on subsidies. The U.S. used an incorrect method to define and calculate the subsidies, which has resulted in an artificially high subsidy rate, hurting Chinese firms’ interests.”

What China is likely to do is threefold:

One, China will drag the USA in front of the WTO. China will have the tacit or open support from other low-cost countries, including the EU (many low cost countries, such as Poland or Romania are EU members.) The world will also love to slap around a country that demanded free trade as long as free trade was good for America. Note that China mentioned “subsidies.” The bail-outs will come on the table also. WTO proceedings can drag on forever.

Two, China will take some tit-for-tat measures. On the table is a hefty tariff on US auto imports to China. During the first half of the year, China imported more than $1 billion worth of automobiles from the US. China could buy fewer Boeings and more Airbusses. If things get really bad, China could put a dent in the Chinese growth of the automotive ward of the state, GM. Europe will love it all.

Three, Chinese President Hu Jintao will give Obama a tongue-lashing when they meet in Pittsburgh at the G-20 Summit September 24-25. Obama will be gently or not so gently reminded that America’s largest creditor deserves a little better treatment, or the money could be moved elsewhere. Timothy Geithner will also be reminded that his announcement in June that “Chinese assets are very safe” is bunk. The greenback is on its way down. A EURO bought $1.46 today and it’s heading toward $1.50. Come to think of it, a falling dollar is the best protection against cheap imports from all corners of the world: The lower the dollar, the more expensive the imports. A truly free market needs no section 421.

Forbes writes: “The current round of disputes will undoubtedly end up in a trade war, and China, a country extraordinarily dependent on exports, will surely be the biggest loser.”

Don’t bet on it.

America is already involved in two shooting wars which it couldn’t afford would China not buy its bonds. America cannot afford two shooting wars and a trade war with its largest creditor.

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