Tuesday, September 15, 2009

Why Obama had to impose those Chinese tyre tariffs

Business Times - 16 Sep 2009


Why Obama had to impose those Chinese tyre tariffs

By LEON HADAR
WASHINGTON CORRESPONDENT

LATE last Friday night as everyone in Washington was asleep, the White House imposed 35 per cent tariffs on tyres from China. President Barack Obama and his top aides may have hoped that issuing a press release at the onset of a lazy autumn weekend would reduce the overall political impact of the decision to impose trade sanctions on the Chinese.

But the late-night announcement in Washington, which was driven by the political pressure from trade unions and other protectionist forces, ended up puncturing the image of Mr Obama as a free-trader.

It also increases the prospects for a new Sino-American trade battle at a time when the president and the Federal Reserve have been implementing expansionary fiscal and monetary policies whose costs in the form of rising deficits are being financed by the Chinese.

Indeed, after the news from the White House, officials in Beijing pushed back on Sunday, describing the US decision as 'grave protectionism' and have begun investigations into the US 'dumping' of poultry and auto products on the Chinese market, exploring tariffs against American products.

The signs of a rising tension between the world's two economies comes just as America and the world are trying to recover from a devastating recession and on the eve of the summit of the leaders of the Group of 20 (G-20) economies in Pittsburgh, Pennsylvania, to be followed by the first scheduled official visit of Mr Obama to Beijing.

Hence, President Obama's decision to impose new tariffs on tyres imported from China could affect the complex bilateral strategic and economic relationship between Beijing and Washington, at a time when the White House is hoping to win Chinese support for new steps in trying to resolve the nuclear standoffs with North Korea and over Iran, and in pressing ahead in the talks on global warming.

The protectionist moves pursued by the Americans could create a vicious circle of retaliations followed by counter-retaliations, reduce trade between the two countries and hurt both consumers and businesses. Moreover, the spectacle of a Sino- American trade war would play into the hands of protectionists everywhere and put the final nails in the Doha Round global trade talks coffin.

The protectionists' power has certainly been increasing in Washington as Americans who have been facing huge job losses blame China and other trade partners for their economic woes.

In a way, after months of debate among pundits over whether Mr Obama was an authentic free-trader or a protectionist - he had sounded 'tough' on trade, in particular with China, during the election campaign while his economic aides assured anxious foreign diplomats that their man was doing that just to get votes - much of the conventional wisdom in Washington is going to conclude now that the new Democratic president is a political opportunist who has surrendered his trade agenda to organised labour. He has reached the decision that he had no choice but to ride the protectionist wave that seems to be propelling the Democratic Party to the political left and in an anti-globalisation direction.

Indeed, free-trade critics of the White House would argue that in his first important decision on trade, Mr Obama has demonstrated that he was even less committed to promoting free trade than his predecessor in office, who had rejected a similar recommendation by the US International Trade Commission (ITC) to impose tariffs on imported Chinese tyres.

The move could certainly raise doubts about the self-professed internationalism and devotion to multilateralist principles of Mr Obama.

Not that anyone is questioning President Obama's right under the Trade Act, Section 421, to impose tariffs in response to a 'surge' in imports from China or any other economy. In fact, the deals negotiated on China's entry into the World Trade Organization (WTO) permit the slapping of tariffs on China's exports if they surged in a way that hurt American manufacturers.

And the bipartisan ITC - in response to complaints filed by unions representing workers in the tyre industry - has concluded that was indeed the case, pointing to the continuing rise in US imports of Chinese tyres while American production and jobs have been falling in recent years.

Moreover, President Obama's decision has to be seen in the context of his current political quandary. What critics perceive as political opportunism, Mr Obama and his aides regard as a means of political survival.

After antagonising many of his supporters in the labour unions and the rest of the progressive wing of the Democratic Party by his somewhat lacklustre promotion of the healthcare reform programme and his unwillingness to apply a more stringent regulatory system on Wall Street, the Democratic occupant of the White House recognises that rejection of organised labour's insistence that he stand for the interests of American workers in a trade dispute with China could damage any prospect of getting a healthcare reform bill approved by Congress.

Otherwise, the president could have ended up losing the backing of both the Republicans and the large contingency of progressive Democrats on Capitol Hill. While comparative advantage may be an important economic rule, loyalty to your friends and allies is probably the most important rule of politics.

Free-traders and many economists argue that imposing tariffs on Chinese tyres is not going to help workers in the US tyre industry who have lost their jobs and would actually hurt American consumers who, in addition to higher gas prices and diminishing economic conditions in general, would be forced to pay higher prices for their tyres now.

At the same time, it is doubtful that American tyre manufacturers who had relocated their factories to China are going to switch production back to the US.

And then there is, of course, the threat of a Chinese nationalist backlash and the ensuing retaliatory moves by Beijing which could hurt US businesses and damage the well-being of American consumers and complicate American efforts to persuade the Chinese to continue purchasing US government bonds.

But that kind of economic logic is probably not going to change the political calculations of the White House. At a time of growing economic distress, including rising unemployment and increasing populist sentiment against the elites in Washington and Wall Street, Mr Obama and the Democrats are not going to allow the Republicans to embrace the cause of the anguished blue-collar workers losing their manufacturing jobs and a distressed middle class whose members seem to believe that America is in decline while a mercantilist China is set to inherit the earth.

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