The Trade War That Wasn't
There has been no shortage of hand-wringing in recent weeks over President Obama's Sept. 11 decision, under the Section 421 safeguard law on goods from China, to hike tariffs on Chinese-made automobile tires. Speculation is that this step heralds a more protectionist U.S. trade policy that could invite retaliatory measures abroad, sparking a global trade war that could short-circuit the nascent economic recovery. While there is definitely cause for concern--and the implications of the decision merit close scrutiny--the dire warnings of impending doom are perhaps a bit premature.
To anyone watching closely, the president's decision was expected for political reasons, if not economic ones. The case was brought by a labor union, a core constituency that provided substantial support for Obama's presidential campaign and had clearly indicated that stronger enforcement on trade issues, particularly with China, was a high priority. Democrats and Republicans openly called for replacing the pell-mell pursuit of trade liberalization that characterized the Bush administration. They also wanted more aggressive efforts to ensure U.S. trading partners followed the rules of trade agreements already on the books. Most important, trade policy has often been used as a bargaining chip. With the White House putting virtually all its political muscle into the issues of health-care reform, economic stabilization and climate change, the Obama administration vitally needs the support of domestic interests who for years have made China the scapegoat for all manner of economic maladies. In light of those realities, the tire tariff decision was not much of a surprise.
The key issue, of course, is not that the federal government moved to limit imports of Chinese tires in particular, but what that indicates about the Obama administration's approach to trade policy. Some believe the tariffs are indicative of the administration's willingness to curb the open-trade trend of the past 60 years to mollify domestic interests for the sake of advancing broader objectives. Critics warn that this stance could provoke similar moves by other countries that could cut off vital export markets at a time when U.S. manufacturers and service providers need them most. Already, China has launched efforts to restrict imports of American auto parts and poultry products, goods no doubt selected to get the attention of major U.S. exporting sectors and their representatives in Washington. Other countries are beginning to follow the U.S. lead as well, imposing trade restrictions ranging from traditional measures like anti-dumping duties to more subtle policies like tougher standards.
Upon closer inspection, however, it is not clear the Chinese tire case suggests a policy under which further such actions are likely. The decision to increase duties was not trumpeted at a prime-time press conference but released quietly late on a Friday evening, hardly suggestive of an opening salvo in a broad offensive against open trade. The tariffs themselves were more than a third lower than recommended by the federal agency that conducted the most detailed analysis of the issue. This means the White House's sense of obligation to domestic labor unions was tempered by a desire to ease the burden on tire retailers and consumers who rely heavily on imports from China. Also worth noting is that the decision was not made as part of any comprehensive trade policy, given that the Obama administration is preoccupied with domestic concerns.
Many knowledgeable observers have pointed out that Obama's restrictions on Chinese tires continue a 25-year-old trend in which a new president makes a decision to appear as though he is "getting tough" with America's trading partners. In none of those cases, however, did those steps foreshadow the trade policies those presidents would pursue throughout the rest of their terms, which often focused on continuing to open markets and break down barriers. Obama himself has indicated that he is likely to tread a similar path, repeatedly emphasizing the importance of trade to economic recovery efforts and hinting strongly that he is taking a tough line on enforcement now to ease the way for liberalization efforts down the road.
China appears to have little inclination to escalate the dispute. Chinese officials spoke sharply against the safeguard decision when it was announced, calling it "a grave act of trade protectionism" that violates commitments the U.S. made against such moves earlier this year. But their direct response was to simply request talks on the matter--a move that hardly suggests a desire for rapid and substantive retaliation. Beijing did announce the initiation of trade remedy cases against U.S. chicken parts and warned of similar action on auto parts. However, observers say the selection of these goods appears calculated more to send a warning to Washington than to inflict immediate pain. As much as the U.S. relies on China economically and financially, Beijing is no less dependent on America as the primary market for its ever-increasing production. So, like the U.S., China has little motivation for a trade war.
In the meantime, however, there could be headaches for importers of a wide range of Chinese-made goods. With Obama having demonstrated his willingness to enforce the Section 421 safeguard under the right circumstances, domestic industries from textiles to steel are actively considering filing petitions of their own to obtain relief from foreign competition. Even if no restrictions are ultimately imposed, the threat of such action and the additional scrutiny the targeted goods will come under during the process could have negative effects.