Cartoon: Economy Ready to Go?!

September 16, 2009

Obama seemed to agree…..BUT….

America’s Tired Protectionism


Trade: President Obama has fired the opening salvo in a trade war with China by slapping 35% tariffs on its tires. But besides giving China a kick, this protectionism will harm Americans across the economy.

Read More: Business & Regulation

Sen. Reed Smoot and Rep. Willis Hawley, the two protectionists who deepened the Depression and fueled the rise of militarism ahead of World War II, would have liked the move to keep Chinese tire exports out of the U.S. through tariffs.

There’s no dumping going on — just China’s success in the U.S. market, which has raised its share to 17%.

We can’t blame the president for sneaking in the tariffs late Friday. Raising tariffs is nothing to be proud about. In this case, tariffs jumped from 4% to 35% on Chinese tire imports under Sec. 421 of the 1974 Trade Act, intended to control surges in imports.

But the markets paid attention. Global stock futures tumbled over the weekend. Asian markets dropped sharply Monday, fearing a wave of U.S. protectionism.

China called the U.S. move “rampant protectionism” and vowed to investigate dumping charges against U.S. auto parts and chicken, two industries that have made inroads into the China market. The Asian giant also vowed to challenge the U.S. at the World Trade Organization.

Why should we care? This protectionist move, meant to please a single labor union, takes a big bite out of our global trade credibility, making us look like a country that can’t compete in global markets.

Earlier this year, Obama seemed to agree when the leaders of the Group of 20 declared they wouldn’t worsen the global financial crisis by enacting protectionist measures.

But by mid-year, that strong free-trade declaration was already fraying badly from indirect protectionism in Europe, along with the U.S.’ “Buy-American” provisions in the $787 billion stimulus package. Even so, the tire tariffs this week mark a new low.

“Economically, the idea is ominous,” said Thomas Pruse, an economist at Rutgers University and an expert on trade protectionism. “Not a single tire company thinks it will change the dynamics of the tire industry.” And none supported the tariffs.

Now, we can expect other countries to hike tariffs, going after the U.S., the world’s third biggest exporter, hard. Worse still, expect more requests for tariffs as U.S. special interests line up for their cut of the protectionist pie.

Who pays? On tires, don’t assume for a minute the Chinese will.

The tariff costs will go straight to American consumers who will, as of Sept. 24, pay higher tire prices. First casualty: those who buy low-cost tires, the market where Chinese tires dominate. Big U.S. companies ignore this market because it’s not profitable enough.

Amid a slowdown of tires and an inventory buildup, “I estimate there will be 8 million fewer tires consumed in the first 12 months,” said Pruse. “These are 8 million tires that need to be replaced, and there’s plenty of evidence people are delaying the replacement of their tires, creating safety risks. If (poorer people) can’t replace tires at $120, how can they do it at $200?”

So brace for an upsurge in tire-related crashes on U.S. highways.

But aside from what amounts to a tax on the poor, industry will be hurt, too, and quite a bit of it downstream from mere tires.

Tariffs will add $100 to the price of a new car, cutting into U.S. auto sales, Pruse noted. It will also harm much of the tire installation industry, all of which is U.S.-based. Some 15,000 U.S. workers will lose their jobs from this tire tariff, he said.

The auto industry will get a double-whammy if the Chinese retaliate on auto parts coming into the Chinese market, cutting into sales on that front too. Sales of auto parts in the booming Asian market are critical to the U.S. auto industry’s recovery strategy.

Meanwhile, the United Steelworkers Union, which brought the Sec. 421 complaint, is hurting its own members. No new jobs will be created by this, said Pruse.

The Chinese imports may be replaced by imports from other countries, like India — meaning the U.S. jobs aren’t coming back.

Other unions will take hits too. Longshoremen who unload tires from ships and Teamsters who transport them to tire shops will lose jobs and maybe members. So much for union brotherhood.

It all amounts to the loudest signal yet from this administration that we’re moving toward a level of protectionism not seen since the days of Herbert Hoover and FDR.

This will cost us more than China, with the consequences ricocheting across the globe. Has nothing been learned from history?


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