Burnt Rubber: Tire Firms Decry New Tariff
By Diana Ransom
If you’re in the business of selling tires, you probably received some unwelcome news earlier this month.
A 25% to 35% tariff on passenger and light truck tires imported from China went into effect on Sept. 26, and is set to expire after three years. Two weeks earlier, President Barack Obama had said that the United States would levy the tariff to account for a market disruption caused by an increase in imports.
The move signals the first time the U.S. has invoked a special amendment to the 1974 Trade Act that grants the U.S. the right to pass new taxes to mitigate a surge in Chinese imports. The amendment, known as Section 421, was added to the act in 2000, a year before the U.S. agreed to support China’s bid to join the World Trade Organization (WTO). (There had been six other attempts to invoke the amendment under the Bush administration. Two of the six were rejected by the International Trade Commission and the other four were rejected by President Bush.)
The safeguard provision may be used only against China and only until 2013 (the first 12 years of China’s WTO membership). However, businesses and advocates say the government’s invocation of the statute amounts to a startling precedent that could set the stage for more tariffs. Now, many small firms — which were more vulnerable to the downturn than larger companies — are worried about getting caught in the middle of a potential trade war between the U.S. and China.
“The significance of this case can’t be understated,” says John Donohue, a partner in the International Trade Practice group at Thorp Reed & Armstrong in Philadelphia.
Thanks to the precedent set by this tire tariff, any company that imports Chinese products now faces a real threat of future import taxes, says Erin Ennis, vice president of the U.S.-China Business Council, a trade group in Washington, D.C. “I don’t think you can assume that all cases will go forward and that tariffs will go into place, but given that this is what happened under the first 421 case, it’s safe to say that more cases are likely,” she says.
Already, Beijing has opened up probes into imports from U.S. poultry products and auto parts companies. China may also file grievances with the WTO. Depending on how the international trade regulator rules, China could enact equally heavy tariffs against the U.S., Donohue says.
U.S. tire manufacturers did not support the case, which was brought solely by the United Steelworkers, a union that includes U.S. tire workers. But the domestic manufacturers’ testimony wasn’t necessary to prove that workers had been injured by a surge of Chinese imports.
Taxes approved under the 421 statute are at least as punitive as those waged under typical anti-dumping settlements, Donohue says. Cases filed under the 421 statute are also less costly and quicker to adjudicate, he says. “A typical dumping case goes for a year before it’s all over. This case was settled in less than three months,” says Donohue, who is also an adjunct professor of law at Seaton Hall University’s School of Law.
Although many of the implications of this tariff have yet to surface, business owners and analysts say the $1.7 billion U.S. tire industry will contract further. “Job losses may result, and, over time, some of the favorable [production] economies might become less favorable,” says Larry Harding, the president of High Street Partners, an international business advisory firm in Annapolis, Md.
The tariff will cut the U.S.’s intake of Chinese tires by two thirds, according to research conducted by Thomas J. Prusa, an economics professor at Rutgers University. To fill the void, manufacturers will look to other developing economies. Prusa estimates such a move will take 12 to 18 months, which could leave tires in short supply.
Although the tariff was designed to save U.S. jobs, Prusa’s research suggests that the opposite will occur. For every U.S. tire job saved by the tariff, 20 jobs downstream in related tire industries will be lost, he says. Not only will there likely be a shortage of tires over the next 12 months, but many tire sellers will raise prices to help pay for the tariff. “We will see about 20 million fewer tires sold in the next 12 months,” Prusa says.
Many dealers fear a drop-off in demand. “People have been putting off the purchase of tires anyway,” says Bill Trimarco, the CEO of Hercules Tire & Rubber, a private-label tire supply company in Findlay, Ohio. “When the price of tires goes up, [fewer] tires will be sold.”
Still, after getting socked with a $325,000 bill per the new tariff earlier this week, Trimarco says the company was forced to raise prices 10% to 15% on Chinese tires. “This is an anti-small business policy. A company like Goodyear won’t get hit, but a lot of small businesses will be hard hit,” he says.
Source: smSmallBiz.com, September 29, 2009