Tariffs on China’s Tires and Revisiting Smoot-Hawley

Protectionism sells well in a climate of fear, but it’s hardly a base for economic policy. After US President Barack Obama’s announcement on September 11 of a 35% tariff on Chinese tires, he immediately downplayed the possibility that the measure will spark a trade war with America’s second largest trading partner. In an interview with Bloomberg News, the president argued that existing trade rule must be enforced to build support with lawmakers and the American public. The White House enacted the tariff in reaction to a petition by the United Steelworkers Union against China for flooding the US market with “entry level” tires.

Domestic industries, especially mature ones, asking the government to enact shortsighted protection from foreign competition are nothing new. Following a Wall Street crisis that spread rapidly to the greater economy, the infamous Smoot-Hawley Act of 1930 raised tariffs on a basket of foreign goods. European agriculture was recovering after the ravages of World War I, driving down commodity prices worldwide. Along with growing competition overseas, Americans were facing a banking meltdown at home. The tariffs designed to protect American business sparked retaliatory trade barriers worldwide. As a result the global economy shrank by 14%, pushing the 1929-30 recession into the Great Depression.

Chinese retaliation to the tire tariff this week was quick but measured. China’s President Hu Jinato requested a probe into the pricing of heavily subsidized US chicken and automobile products. State subsidies, as well as tariffs, distort prices and the flow of free trade on the global market. In fact, it was China’s subsidies to its tire industry that prompted the original petition by the US Steelworkers.

Economists Kym Anderson of the University of Adelaide and Alan Winters of the University of Sussex reckon that the global cost of trade distortion from subsidies and tariffs at just under $500 billion annually. According to Global Trade Alert, a trade analyst group, governments worldwide have planned some 130 protectionist measures that are waiting to be implemented.

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After two decades of aggressive market globalization it’s not even clear that punitive tariffs help domestic businesses even in the short run. Goodyear Tire & Rubber (GT) and Cooper Tire & Rubber (CTB), two American companies with factories in China fall under the measures . “There are so many parts manufactured in different parts of the world,” said John Key, New Zealand’s Prime Minister, “you’re chasing your tail the whole time about where something was actually made.”

In order to join the World Trade Organization (WTO) China agreed to anti-dumping “safeguard cases” that President Obama is using to justify the tariffs. In its petition, China expressed concern that a “dangerous precedent” is being set. On cue, this week US Steel Corporation (US) requested further protective measures on cheap steel pipe from China.

Only time will tell how China will react. Its economy is poised to overtake Japan as the world’s second largest, so wants to send a message that if the US enacts any more tariffs it will hit back. China has rarely been held accountable for trade violations, but earlier this month both India and Mexico filed petitions with the WTO against China over “dumping” of cheap steel. The key to China’s recent growth is its trade with the US and membership in the WTO, and it is unlikely that it will jeopardize its relationship with either.

With success for tires, requests for more tariff protection are likely from US industry.

With the trade tariffs on tires it appears that Goodyear and Cooper Tire will stand to benefit. However, if the tariffs are revoked, then these companies might not do so well. A covered call investing strategy enables investors to generate income and also provides stock investors downside protection for their stock portfolios. A stock investor can enter a covered call investing position by selling a call option against a purchased stock.

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[tags] Barack Obama, Chinese tires, White House, United Steelworkers Union, Wall Street, Smoot-Hawley Act of 1930, World War I, Great Depression, China’s President Hu Jinato, University of Adelaide, University of Sussex, Global Trade Alert, New Zealand, World Trade Organization, China, CTB, Cooper Tire & Rubber Co., GT, Goodyear Tire & Rubber Co. [/tags]