WTO Tire Decision: A Political Win for Obama

December 14, 2010

Any WTO decision involving the US and China is bound to get a decent amount of press these days, and the Tire case has proven to be no exception. On the other hand, most of the news reports I’ve seen include only one or two paragraphs on the actual case and background, with the rest of the article devoted to filler on current US-China economic and trade battles.

The main reason for this is that the case itself wasn’t all that exciting, so unless one wants to get down into the technical challenges, which were all shot down by the panel anyway, there is little to discuss about the merits. Well, there is another reason as well — journos don’t want to bother with the wonky legal issues. In this instance, I don’t blame them.

What was this case all about? Here’s the background from page two of the WTO panel decision text (PDF file):

This case is about a transitional product-specific safeguard measure under Paragraph 16 of the Protocol that has been applied on imports of certain passenger vehicle and light truck tyres from China pursuant to Section 421 of the Trade Act of 1974.

A petition was filed by the USW on 20 April 2009, requesting the USITC to initiate an investigation under Section 421(b) of the Trade Act of 1974. The USITC instituted the investigation effective on 24 April 2009. The USITC determined that there was market disruption as a result of rapidly increasing imports of subject tyres from China that were a significant cause of material injury to the domestic industry. Following a Presidential decision additional duties have been imposed on imports of subject tyres for a three-year period, in the amount of 35 per cent ad valorem in the first year, 30 per cent ad valorem in the second year, and 25 per cent ad valorem in the third year. The Tyres measure took effect on 26 September 2009.

Basic safeguard situation. The US was hit with a ton of Chinese imports, so Obama invoked the special safeguard mechanism available to the US under the Accession Protocol agreed to by China when it joined the WTO. The domestic law reference here is Section 421 of the US Trade Act of 1974, a piece of legislation with a sunset provision that kicks in three years from now (i.e., don’t expect to see too many 421 cases in the future).1

The US International Trade Commission (ITC) has the authority for investigating and determining whether the claims made in these cases are valid. In the Tires case, the claimant was a labor union, the United Steelworkers (USW), which is quite unusual. We’ll get back to that in a second.

The ITC investigation cleared the way for additional duties to be imposed on these imports by the Obama Administration, and once that decision was made and bilateral negotiations proved unsuccessful, China filed a WTO case.

China challenged the safeguards on a variety of levels, but one can generally categorize them as: 1) procedural; or 2) substantive. To be more specific, the technical challenges either went to the way the case/investigation was handled by the ITC, or the underlying law used by the US to impose the duties in the first place. China was unsuccessful with those challenges across the board.

So if the decisions on these technical issues were not all that exciting or, one can argue, surprising, is there anything of interest here? In a broader context, yes. The panel got roped into considering some “big picture” issues because of the overall economic and trade factors that led to the changes in the US tire industry in the first place.

Remember that the ITC petition originated with the USW, not the tire industry itself. The reason is that the US tire industry, several years earlier, decided to close several factories and move production to China (or perhaps they increased production in China, and then later closed the US factories — depends on which version you accept).

The US producers, now manufacturing in China, were therefore now making up a percentage of those imports, and obviously they did not support the additional duties. The surge of imports, therefore, was more of a problem for producers who remained in the US and the union, which was concerned with the remaining domestic jobs.

The panel summed up the oddity of this case on page 15 of the decision:

[T]his case involved the invocation of a mechanism designed to protect a domestic industry that did not want that protection and by its own actions had precipitated the events that were now being invoked to justify the application of the transitional product-specific safeguard mechanism of China’s Protocol of Accession. Arguably, it explained too why the investigation had been initiated by a labour union, a body that was concerned with job losses resulting from this transfer of manufacturing capacity to China, and not by the domestic producers themselves. Thus, the Panel was aware that this aspect of the case raised the question of the suitability or relevance of safeguard mechanisms in the context of “outsourcing” and “globalization”, matters of considerable systemic interest to WTO Members.

In other words, this situation is mighty funky and involves some very important global trade and economic matters. If you’re interested in how the panel dealt with this stuff, take a look at the decision text where the panel discusses causes of the import surge. This includes some detail of the industry, the US market, the 2008 recession, and speculation on the reasons, and timing, of the decision by many US tire manufacturers to move overseas. Kind of cool stuff, if you’re into this sort of thing.

What’s the upshot of all this? Not that much, really. This is being bandied about as a win for the US, which it is. It’s also a case of what I’ll call “sanctioned protectionism,” or local protectionism that is legal and allowed under current global trade rules, which I don’t particularly care for. Why the US government needs to artificially protect an industry that doesn’t want that protection in the first place is a mystery to me.

On the other hand, this is a nice victory for Obama domestically. He can tout this in front of supporters from the Left, populists, and China bashers. That’s a big group. Moreover, since progressives are (justifiably) not happy campers these days due to Obama’s domestic policy decisions (e.g. tax cut deal), perhaps this will mollify them slightly.

Other folks are even more optimistic about the positive aspects of the case:

The World Trade Organization handed the U.S. a big victory in a fight with China over tire imports, bolstering the Obama administration’s effort to show it is tough on enforcement as it girds for a battle in Congress over passage of a free trade pact with South Korea. (Wall Street Journal)

Some believe that the Tire case may allow Obama to say “See, free trade can work, as long as we are aggressive” and use this to drum up much needed support for the South Korea FTA. I don’t think I’d go that far, but it is an interesting point.

I’d say that this decision, on the whole, is not very significant. This is a minor political victory for Obama and the labor union, an extremely minor setback for China, and another boost for trade protectionism.

A few things to read (caution, they are all pretty much the same):

WTO Panel Backs US Tariffs On Chinese Tires (Bloomberg)

W.T.O. Upholds Tariffs On Tires From China (New York Times)

WTO Rules Against China Over Tyre Exports To US (Associated Press)

US Hails Major Victory In Tires Spat With China (Reuters)

WTO Backs U.S. In Tire Dispute With China (Wall Street Journal)

WTO Upholds US Tariffs On Chinese Tyres (Financial Times)

China Expresses ‘Concern’ On WTO Tire Tariff Ruling (Businessweek)

WTO Rules US Tariff On Chinese Tire Imports [sic] (China Daily)

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  1. China law geeks, this Section 421 sunset is, in practical effect, similar to the timing issues with Administrative Protection for pharmaceuticals. That was the only example I could think of, anyway.[]

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