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Monday, September 21, 2009

Obama's Chinese Tire Decision and the Importance of Not Being Earnest About Campaign Promises

I read with a sinking heart Gregory Bowman's post about the Obama Administration's September 11th decision to impose section 421 "safeguard" tariffs on Chinese tire imports. Gregory Bowman thought that the decision indicated that the Obama Administration has an interest in "regulation that achieves outcomes that are perceived of as 'fair' from some normative perspective other than efficiency."

This characterization of the decision is, I think, naive. In my own view, the tire decision is merely a concession to raw political realities rather than fairness: The United Steel Workers wanted some sort of restriction on trade, Obama had promised such restrictions during the Presidential campaign, and so he felt he had to deliver on these campaign promises. This leads to my vexed question: Was I too cynical in thinking that Obama was insincere when he indulged in nationalistic demagoguery on trade during the Presidential race? The terrible truth might be that Obama actually meant what he said: He now might really intend to wreck the international trading system during a recession in order to keep his campaign promises to the unions. And here I was thinking -- indeed, praying -- that he was a cynical Chicago pol who would trim his sails once the election was won. Darn: Never have I been so convinced of the Importance of Not Being Earnest about campaign promises

Others have already eviscerated the tire decision's policy-making merits. (See, for instance, the Economist's leader). (Has any neutral academic observer actually praised the decision?) After the jump, however, I will highlight three aspects of the decision that suggest that a regard "fairness" cannot be regarded as either its motivation or likely effect: (A) The decision was dishonestly defended by the Administration as a remedy for illegal actions by China; (B) The decision was a breach of the United States’ specific promises not to impose new restrictions on trade in goods at last November’s and April’s G-20 Conference; and (C) the decision will probably not save any jobs.

1. The Administration dishonestly defended the decision as retaliation for unfair trade practices. Initially, the Administration described its action as an effort to provide a remedy for Chinese trade violations. According to the Wall Street Journal’s story, “administration officials said the president couldn't ignore findings that they said were violations of China's obligations under the rules of the World Trade Organization."

This White House statement was an egregious misrepresentation. The section 421 safeguard is not predicated on any violation of WTO rules: Instead, the “safeguard” is a special remedy applicable only to China that applies whenever imports from China “cause or threaten to cause market disruption to the domestic producers of like or directly competitive products,” even if that disruption is produced by perfectly legal trading practices. The Administration’s implicit suggestion to the contrary is, at best, a slippery prevarication.

2. The Administration’s decision broke this country’s promise to the world. At the November 2008 G-20 Conference, the United States agreed to a joint communiqué that “underscore[d]the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty.” The leaders specifically agreed that, [i]n this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports.” The United States signed on to an identical statement at the April 2nd G-20 meeting
(paragraph 22).

The section 421 sanction is undoubtedly “a new barrier[] to … trade in goods and services” and is thus a flagrant violation of our nation’s word twice given. We face another G-20 conference in a few weeks: What credibility will we bring to the table after these breaches of our word?

3. In return for breaking its promises and lying about its reasons, the Administration either did not save any jobs or saved such jobs at an absurdly exorbitant cost to the consumer.

Jobs in low-end tire production are offset by the jobs in tire retailing. If an increase in low-end tire tariffs causes the price of Chinese tires to rise enough to affect the buying patterns of low-end consumers away from Chinese tires, then marginal consumers may simply delay tire purchases rather than switch to more expensive American-made brands, putting the tire retailers’ jobs at risk. Of course, it is likely that the lost Chinese imports will instead be replaced by cheap tires imported from Brazil. This is, at least, the claim of Obama’s own Trade Representative, Ron Kirk. In either case, no jobs will be saved by this action.

On the off-chance that some low-end tire makers refrain from laying off their workers as a result of this tariff (an unlikely result, given that tire makers mostly opposed this tariff), the cost to the consumer will be exorbitant. The ITC’s own
is that the decision will impose“a first-year impact on consumers of $459 million to $534 million.” (page 37, note 209). Assuming that the tariff will bring back every single one of the 5,000 jobs that have been allegedly lost as a result of cheap Chinese tires and that the tariff will not sacrifice any other retail jobs – i.e., assuming that demand for low-end tires is price-inelastic beyond the wildest dreams of the tire makers -- this amounts to paying $100,000 per job.

Would it not make more sense to take the recommendation of the dissenting ITC commissioners, Daniel R. Pearson and Deanna Tanner Okun? They sensibly stated that “the best remedy would be to provide economic adjustment assistance to tire workers who lose their jobs, and that implementing a trade restriction would be far more likely to cause market disruption than to alleviate it.”

Pearson's and Okun's statement highlight a question that is begged by Gregory Bowman's post: The issue raised by the Obama Administration's tire decision is not whether to regulate the market but how: Choosing transition relief over tariffs protects fairness for the losers in international trade, but it does not penalize working-class consumers, Chinese tire workers, or tire retailers, and it does not violate our international commitments.

Transition relief, however, would not satisfy the United Steelworkers, and Obama had promises to keep. It is that political reality, I submit, and not any commitment to fairness over market efficiency, that explains the Obama Administration's decision.

Posted by Rick Hills on September 21, 2009 at 08:18 AM in Current Affairs | Permalink


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I missed your post during the week, so I am only now responding. My statement about the Obama Administration having an interest in "regulation that achieves outcomes that are perceived as 'fair' from some normative perspective other than efficiency" does not mean I think the actions were fair, or a even good idea. And by no stretch of the imagination do I think it was not politically motivated in some way (see my earlier post). Look at the USW website and you get a sense of the union's position and response to the Obama administration's action. Yet I do think the tire safeguard action is suggestive of the fact that Obama's campaign statements were not mere rhetoric. Perhaps we are in agreement on that. You are discouraged; I am curious to see how it plays out.

As to your listed points:

#1: Certainly section 421 is not supposed to be used in response to "unfair" trade activities. Interestingly, this very aspect has meant that AD and CVD actions historically have been far more popular--there is more political cover to be had, and there is perhaps more likelihood of successful defense of any WTO challenge. That being said, perhaps the Obama administration's misrepresentation of the action is just shrewd politics--or to borrow your phrase, a "slippery prevarication."

#2 & #3: Yes, the whole point of safeguards is protectionism. Which gets back to the point I made in my original post--what interests me is that the action shows a willingness of the administration to follow up, at least in part, on the "free but fair" trade statements made during the campaign. Whether it is the best way to do that is a separate question. You address that in your post, and I agree with you that it is generally (almost always, actually) preferable, per economic theory, to provide trade adjustment assistance instead of tariff protection. That does not mean that the action taken, however, is entirely without benefit.

So the larger point to be made here, I think--a main point of my earlier post--is that the tire safeguard action is an early indication of how the Obama administration differs from the previous administration in terms of trade policy. You believe the action is primarily driven by political obligations, whereas I am undecided. Time will tell, and it is something I will monitor with interest. It is worth pointing out, though, that Obama has shown a willingness to support second- (or third-) best options (witness the current health care debate), and the tire safeguard action is consistent with that tendency. That is, he has decided (a) to protect a sector of the U.S. workforce, (b) that has political clout, (c) in a manner that spreads the cost indirectly (imperceptibly?) across the rest of the U.S. population, in order to mitigate rapid sectoral adjustment to trade in the U.S. economy. The cost may or may not be greater than the benefit, but that too remains to be seen.

Posted by: gregory bowman | Sep 26, 2009 3:15:52 AM

As I noted in my original post, the Obama Administration endorsed the relevant words of November G-20 statement at the April 2008 G-20 conference. So the argument that the Obama Administration is not bound by the outgoing Administration's words is simply irrelevant to the case.

Posted by: Rick Hills | Sep 22, 2009 1:33:14 PM

Rick, I think your point two is pretty dubious. Note that the "communiqué", which of course no one thinks is binding in any way, was signed on Nov. 15, 2008. That's to say, it was signed by the Bush administration after Obama had already won the election and had already made his campaign promises. Now, I think the tire decision is wrong. But do you think that an incoming administration should be bound, or that any reasonable person would expect it to be bound, by a "communiqué", with no legal force, put out by an out-going administration from a party that has just lost a presidential election and control of the senate? That seems pretty unreasonable, doesn't it? This seems especially unreasonable when the campaign of the newly elected president seemed to indicate that he didn't agree with at least some of the statements in the communiqué. Foreign leaders are not dumb, so I assume that they understand this. I can imagine, as well, their using it as part of a rhetorical ploy for domestic consumption in their own countries. But given the situation in hand it seems deeply implausible to me that this change in policy would have the sort of impact you attribute to it. For it to be so would require foreign leaders to be much dumber than they are and not to realize that completely non-binding statements made by an outgoing administration that represented a party that had just suffered a significant electoral defeat might not have much continuing validity.

Posted by: Matt | Sep 22, 2009 1:24:30 PM

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