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. Mon, 28 Jul 2014 21:27:46 +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 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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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 18: DetNews Fumbles With The Saber Mon, 09 May 2011 18:53:31 +0000

Just over one week ago, a Detroit News piece pointed me towards a letter written by Senators Carl Levin and Debbie Stabenow, which took China to task for considering draft legislation that might possibly require more technology transfers to Chinese companies as a precondition to market access. Having chased down both the letter and the US National Trade Estimate it was based on, as well as several reports on the draft legislation itself, I wrote a lengthy piece about how Senators Levin and Stabenow were rattling the saber about what appeared to be a complete non-issue. In that piece, I not only debunked the senators’ concerns, but I also pointed out that China’s local consumer EV subsidies were the far more worrying potential trade barrier, as we have been hearing that they require that all qualifying EVs be built in China and sold with Chinese brands (a condition at odds with at least the 2004 version of China’s Auto Industry Development Plan, which stated “local governments should encourage fair competition among motor vehicles made by different places on the local market. They are not allowed to carry out any discriminative policy or measure which may lead to discrimination against non-locally manufactured automobile products.”). And it turns out that my 2,000+ words didn’t put everyone to sleep, as a new DetNews piece re-reports the Stabenow/Levin letter with the inclusion of a new motivation never mentioned in their actual letter, to wit:

For electric or plug-in vehicles to qualify for incentives under the proposed rules, they must be produced in China — by a Chinese carmaker or in a joint venture with a Chinese company

Ignoring for a moment that this wasn’t explicitly mentioned in the letter, there’s another issue here: subsidies aside, building any car in China requires a joint-venture. More importantly, China need not establish any barriers to the sale of imported plug-in or hybrid cars for the simple fact that the Toyota Prius’s epically weak sales there prove that imported NEVs can’t compete in the market. Of course subsidies may change that, but even more important is the issue of registration limits: if China requires EVs to be locally-made in order to waive Beijing’s registration restrictions, that could create more of a barrier than any cash subsidy. Meanwhile, neither Daimler nor Toyota nor VW nor BMW seems to have a problem with building EVs locally under a JV (cost and supply chain make Chinese production the logical choice anyway, necessitating a JV). The DetNews (and presumably Senators Levin and Stabenow) are getting closer to understanding the problems with China’s New Energy Vehicle Plan, but it seems they may yet have some more TTAC reading to do.

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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 War Watch 17: China Slams GM And Chrysler For Illegal Dumping, Subsidies Mon, 04 Apr 2011 18:55:22 +0000

The trade war that erupted between the US and China late last summer may have cooled to an angry simmer, but its effects are once again being noticed in the automotive industry. After President Obama slapped a 35% tariff on imports of Chinese-produced tires, the Chinese government started casting around for potential objects of retaliation, and, as Bertel reported, US auto exports to China made “a good tit-for-tat.” The US imported $1.8b worth of Chinese tires in 2009, while China imported $1.1b worth of US-built cars (including transplant brands) in 2008. You shoot our dog, we’ll kill your cat.”

Now, the Chinese Ministry of Commerce has concluded its “investigation” into US auto dumping and illegal subsidies  in the Chinese market, and it just so happens to single out the two automakers who are partially owned by the US. Coincidence? Not so much. [Hat Tip: Michael Banovsky]

Chinaautoweb reports the Chinese Commerce Ministry’s findings of dumping and subsidies for US-built “saloon cars and cross-country cars (of a cylinder capacity >2500cc)”  as follows:

Dumping margins of US-built vehicles, by manufacturer:

1. General Motors LLC, 9.9%

2. Chrysler Group LLC, 8.8%

3. Mercedes-Benz U.S. International, Inc.2.7%

4. BMW Manufacturing LLC, 2.0%

5. American Honda Motor Co, Inc. 4.4%

6. All Others, 21.5%

Ad valorem subsidy rates, by manufacturer:

1. General Motors LLC, 12.9%

2. Chrysler Group LLC, 6.2%

3. Mercedes-Benz U.S. International, Inc., 0%

4. BMW Manufacturing LLC, 0%

5. American Honda Motor Co, Inc. 0%

6. All Others 12.9%

The good news? At this point, the Chinese government has no immediate plans to introduce new duties on vehicle imports from the US. For now, the Commerce Ministry is collecting comments and evidence, and will make a policy recommendation based on review of that new evidence. Meanwhile, it’s still not clear how the Ministry determined these subsidy or dumping rates, so we’ll continue to examine their determination and seek out insight into its creation and consequences.

Ultimately though, Chinese imports of large-capacity US-built cars are small enough that this tussle will seriously affect neither the Chinese market nor GM and Chrysler. Of greater interest: the extent to which these two firms were targeted due to their US government ownership stakes. After all, if you’re going to retaliate in a trade war, why not attack the firms closest to the opposing government’s heart?

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Trade War Watch 16: Hot Wheels Just Got Hotter Mon, 25 Oct 2010 12:30:45 +0000

It’s been some time since since we had a “Trade War Watch” on mounting trade tensions in the auto industry, and thank goodness for that. In this economic climate of cuts, currency swings and bankruptcies, what we need are things which will make the situation worse, right? In May I reported about how the EU put a 20.6 percent tariff on aluminium wheels from China. The EU did this in response to complaints from domestic manufacturers. Naturally, this left a sour taste in China’s mouth. Well, over 5 months later, you’d think that the EU would have calmed down and this nasty business would be swept under the carpet, right? Erm, not quite….

Bloomberg reports that the EU have not only turned the temporary tariff into a 5 year tariff but increased it from 20.6 percent to 22.3 percent. Chinese exporters like YHI Manufacturing (Shanghai) Co. and Zhejiang Wanfeng Auto Wheel Co. will get hit by this new tariff. But not only will they get stung, but also BMW and Renault will because they buy these wheels from Chinese suppliers. Thus, the price of their cars will rise. The tariff is expected to be imposed by November the 11th.

Naturally, the EU defended this move by claiming that the benefits of this duty outweigh the disadvantages which come on the carmakers. Aluminium wheels are about 1 percent of the total cost of a car, therefore, the cost increase can’t be no more that 0.22 percent according to the EU. “Even this maximum cost impact appears limited in the view of the turnover achieved by car makers,” said the EU. Some automakers have threatened that this move would force them to move production abroad, but the EU dismissed this threat as “disproportionate”.
We”ll keep an eye on the news to see how (or indeed “if”) China hits back. Remember, the EU have far more to lose by China imposing tariffs on EU goods than the other way around. After all, China is far more important to the EU as a market than as a manufacturing center. The EU has 501,064,211 potential customers for Chinese products. China has 1,338,612,968. In this poker game, the EU are holding a four of a kind, China’s got a royal flush.
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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 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 8: China Probes US Bailout Tue, 17 Nov 2009 10:40:21 +0000 Bail! Picture

As U.S. President Barack Obama landed in Shanghai for a weeklong visit to his largest creditor, China, the news awaited him that China’s Ministry of Commerce will investigate the U.S. government’s financing and rescue plans for the American auto industry, Shanghai Daily reports.

The move is part of China’s probe into possible dumping and subsidies on U.S.-made vehicles imported to China, the ministry said. Trade officials will be looking for dumping practices and for unfair government subsidies.

Ministry spokesman Yao Jian said China’s probe will look into 24 items which include the U.S. government’s rescue and restructuring plans for the auto industry as well as government subsidies on new-energy vehicles and its “cash-for-clunkers” incentive program.

The concerned U.S. automakers have the right to defend themselves with evidence presented to Chinese investigators by registering within 20 days after China started the probe of U.S. auto imports on November 6, and corrective action must be taken within 60 days after a case is registered.

The investigation applies to sedans and off-road vehicles with engine displacements of 2.0 liters or more, and the whole process of the probe and ruling is expected to be completed within 12 months.

The probe is widely seen as a tit-for-tat measure after Obama imposed punitive tariffs on Chinese tires and steel pipes. These investigation have become a common occurrence: The U.S. has carried out 13 investigations against Chinese products this year for alleged dumping and illegal subsidies.

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Tradewar Watch 7: More Shots Fired Fri, 06 Nov 2009 20:35:29 +0000 Don’t like our pipes? Keep your SUVs. Picture courtesy

China’s Ministry of Commerce on Friday announced it would formally launch an investigation into subsidies on imports of some automobiles from the United States, Reuters reports. With all the bailout money sloshing around, China won’t have a hard time coming up with evidence.

The announcement is seen as a tit-for-tat after the U.S. imposed anti-dumping duties on Chinese-made steel pipe after finding that producers benefited from Chinese subsidies.

China had previously announced it would launch investigations into poultry and auto imports from the U.S. after the U.S. slapped punitive tariffs on imports on Chinese-made tires. Gasgoo reports a steady growth of car imports to China, especially in the SUV department.

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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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