Friday, September 11, 2009

Cui Bono? Trade War With China Over Tires and Pipes

Obama to impose tariffs on Chinese tires (9/11/09 AP)

"WASHINGTON (AP) -- President Barack Obama on Friday slapped punitive tariffs on all car and light truck tires entering the United States from China in a decision that could anger the strategically important Asian powerhouse but placate union supporters important to his health care push at home.

"The federal trade panel recommended a 55 percent tariff in the first year, 45 percent in the second year and 35 percent in the third year. Obama settled on slightly lower penalties -- an extra 35 percent in the first year, 30 percent in the second, and 25 percent in the third, White House press secretary Robert Gibbs said."

So how big is this Chinese "threat" that warrants 35% tariff? According to AP article above,

"...from 2004 to 2008 and China's market share in the U.S. went from 4.7 percent of tires purchased in 2004 to 16.7 percent in 2008."

Wow I'm scared.

This is on top of the tariffs on Chinese steel pipes that were announced on September 9. The U.S. Commerce Department decided to slap as much as 31% tariffs on Chinese-made steel pipes for oil rigs, again under the strong pressure from the United Steelworkers Union, who also pushed for the tire tariffs.

China Strongly Opposes U.S. Duties on Steel Oil Pipes (Update1)
(9/10/09 Bloomberg) [emphasis is mine]

"Sept. 10 (Bloomberg) -- China “strongly opposes” a ruling by the U.S. Commerce Department to impose duties of as much as 31 percent on steel pipes, the Ministry of Commerce said today.
The U.S. decision doesn’t comply with rules set by the World Trade Organization, the ministry said on its Web site.

"The average duties on $2.8 billion in annual imports of the pipe, used in oil and gas wells, will be 21.3 percent, the Commerce Department said yesterday in a preliminary decision. The ruling agreed with American producers led by U.S. Steel Corp. that the imports were supported by unfair subsidies.

"The tariffs may help U.S. Steel and other domestic producers weather a drop in pipe demand following last year’s collapse in oil prices."

Hmmm. The pipe demand dropped because price of oil (and natural gas) collapsed last summer, hurting the U.S. producers. So they want to impose tariffs on the Chinese imports so their higher-priced pipes would be just as competitive as the Chinese pipes. Higher prices in low demand period, however, may discourage the users (oil/nat gas companies) from using these pipes. The users may simply source from different countries, instead of paying extra 21-30%.

When demand is low, what do you do to move your product? Cut price, not raise it.

When the demand was high due to higher oil price, the business was booming both for Chinese and American steel pipe manufacturers. Americans clearly didn't have any complaint while the boom was on. Chinese allege that the U.S. exporters receive fuel subsidies.

The U.S. move on Chinese steel pipes follows EU, who already slapped 17-40% tariff on Chinese steel pipes pre-emptively (i.e. they took the word of steel makers at face value that they are suffering, without actual proof of injury).

Who loses? Chinese companies, and the U.S. end-users - companies who use these pipes and tires - and the U.S. consumers as the extra high cost (up to 35%) will be passed on to them. Instead of the demand coming back, extra high cost due to tariffs will drive away the demand. In case of Chinese tires that are used as low-end replacement tires, it will hit people with limited income who can't afford pricier tires.

Cui bono? [Who benefits?] Union members? I doubt it. Jobs are unlikely to come back to them unless the demand comes back. But the perception of jobs returning to the U.S. at a high pay that union members expect may be enough to secure the votes for Democrats. So the beneficiaries are Democratic Congressmen and Senators in those districts where the United Steelworkers Union is strong. Who else? I can't think of anyone else.

A trade war with China is the last thing the U.S. needs. Particularly right before the G20 summit meeting in Pittsburgh on September 24/25. During the week of G20 summit, the U.S. Treasury Department will have to sell a lot of Treasury securities. China is the largest holder of the U.S. government debt. You would think we don't want to piss them off unnecessarily, wouldn't you?

But on this particular administration, common sense doesn't seem to register. Or they have a very different set of common sense from the rest of us. Placating the labor union (in these two cases, the United Steelworkers Union) and securing the union votes for Democrats for the mid-term election next year apparently trampled not angering one of the most important buyers of the U.S. debt, which the administration will continue to issue in greater quantities to fund their grandiose projects on top of what's already an unsustainable amount of debt. Obama is also counting on union support/pressure to pass the health care "reform" bills, as he is set to speak at a convention of the AFL-CIO, the nation’s largest labor federation, next week.

That China may renege on the derivative contracts on commodities seems more certain now.

It has started to smell more and more like we're in a "Herbert Hoover" era. Smoot-Hawley anyone? We are not in the "recovery phase" at all. We are just starting. Good grief, as Charlie Brown would say.


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