Last week, I had a few very interesting discussions with a few very famous people, and I should not keep them to myself. The discussions were about one of my pet peeves, the supposedly closed Japanese car market, and the allegedly manipulated Japanese currency. Some very knowledgeable people I talked to were convinced it’s true. Other very knowledgeable folks said it’s utter baloney. In a rare display of balanced reporting, I will bring you both. And as they say, we purport, you decide.
Tag: Trade War
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.
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]
Unconvinced by electrification plans, Porsche’s new boss Michael Macht publicly joined the fray. He doesn’t mince words. “What’s happening here borders on a trade war,” said Macht yesterday evening, while Das Autohaus took notes. “We’ll keep at it. The German auto industry will not give up territory over there unnecessarily.” Financial Times cited Macht as saying that “the Americans are spoiling for a fight.” (Read More…)
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.
President Obama started a trade war by slapping a 35 percent punitive tariff on imported tires as a big “Thank you” to his friends at the United Steelworkers. Most industry observers think this was mentally challenged exercise: Production of cheap tires will be shifted to other countries. Not a single US job will be created. Jobs will be lost and consumers will have to pay more.
The war is not going away. As a matter of fact, it is heating up. Not only did China lodge a formal complaint to the WTO. China has told the United States it is launching a trade investigation that could lead to new import duties on autos and sports utility vehicles made by Chrysler, Ford and General Motors, a U.S. industry official confirmed to Reuters.
The action will leave no happy faces with U.S. Commerce Secretary Gary Locke, Trade Representative Ron Kirk and Agriculture Secretary Tom Vilsack, who are in China right now for high-level talks aimed at resolving trade disputes between the two countries.
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.
Ever since bailout measures for the auto industry were first mooted, free market detractors whispered “WTO.” Nobody took it seriously. True, according to the World Trade Organization’s rules, direct subsidies are not allowed. But it’s equally important to note that the 153-member quango has never put a single issue to a vote since its birth in 1995. Consensus governance means that as long as nobody complains, and especially, as long as everybody plays the same game, the WTO hangs fire on principle. Auto industry loans? They’re all doing it. Still, there is a line a WTO member mustn’t cross. And America almost crossed it.
Recent amendments to Uncle Sugar’s near-as-dammit trillion dollar economic stimulus package would require US firms to use local steel and other components in state-funded projects. The provision kicked sand in the face of the WTO’s raison d’être: the most favored nation (MFN) rule.
Under the terms of the MFN rule, a WTO member must apply the same conditions on all trade with other WTO members. The provision also applies to trade within and without a given nation. “Imported and locally-produced goods should be treated equally (at least after the foreign goods have entered the market).” To do otherwise constitutes blatant protectionism.
Similar buy local protectionist measures have been adopted or considered in Argentina, China, Indonesia, Ecuador, India, Russia (re: imported used cars) and Vietnam. All seven WTO member nations have landed on a WTO surveillance list.
The Guardian writes that the European Union (EU) is pissed with the “buy American” bailout provision. They’ve threatened legal action and retaliatory measures against the US if the Obama administration enshrines this clause in its multibillion-dollar economic stimulus package. Brussels said it could take the US to the World Trade Organization for breaching treaty rules.
The warning came just a day after Joaquín Almunia, EU economic and monetary affairs commissioner, pointed to “clearly protectionist measures” emanating from Washington. The EU ambassador to Washington has expressed similar concerns. A spokesman for Lady Ashton, EU trade commissioner, said: “If the provisions that are finally passed by the US Senate and approved by President Obama infringe the provisions of the GPA [general procurement agreement], to which the US is a signatory, then this is something we will have to consider taking them to the WTO over.”
Compared to previous hints and “concerns,” this amounts to a barrage of warning shots. Amid fears that the US and other countries could trigger a disastrous 1930s-style “Great Depression” trade war through protectionist blocks on trade, the European commission highlighted similar moves in Europe.
A French €10b aid program requires firms to source components solely from France, keep only the French plants open and scrap plans to “de-localize” jobs to elsewhere in the EU. Neelie Kroes, EU competition commissioner, will warn French ministers in talks in Brussels that state aid must not only comply with competition rules but also with EU laws on freedom of movement and capital. “They have to realize that once they start down that protectionist path it’s a descent into chaos,” her aides said.
On Tuesday, U.S. President Barack Obama signaled fear that Buy American provisions—supported by Democrats in steel-producing and economically distressed states—would trigger a trade war at a time when the global economy is in dire straits.
On Wednesday, lawmakers voted to soften the controversial “Buy American” provisions in the proposed U.S. economic stimulus package. The amendment, approved by the Senate, requires the Buy American provisions be “applied in a manner consistent with U.S. obligations under international agreements.” Which is like saying you can burgle a house as long as you don’t break the law.
The bottom line for carmakers: even if America’s avoided a trade war (for now), they can’t win.
If the feds restrict the bailout buffet to The Big 2.8 and domestic production, they run the risk of retaliatory measures from neighbors—and markets—around the globe.
And don’t forget it’s a small world after all. In the run-up to the meltdown, Motown’s automaker practically demanded that its suppliers outsource abroad. By now, keeping the suppliers’ share of the domestics’ business within U.S. borders will be more about spin than compliance. Especially if those suppliers receive their requested $20.5b bailout.
On the other hand, if the feds don’t limit their largess to domestic producers, they run the very real risk of alienating whatever voter and/or union support exists for the pork barrel parade. A billion dollars of TARP money for Brazil? Esqueça-se.
On a practical basis, a truly “fair” bailout would put the domestics at a disadvantage.
Think of it this way: the existing Chrysler loans are equivalent to a current subsidy of $10k per vehicle sold. If, instead, you offered American car buyers $10k off a car, they wouldn’t buy a Chrysler. Clearly, you couldn’t offer the discount certificate just to Chrysler buyers. What kind of country would that be? Welcome to Bailout Nation.