Obama’s Tire Tax

35-Percent Tariff on Tires Imported from China

Everyone knows that labor unions were major supporters of President Obama’s campaign in the 2008 election and remain by his side on issues today. Many have implied gratuitous legislative paybacks would be inevitable once Obama was elected and settled into his Presidency. So on Friday, September, 11th, when an announcement was made to impose a 35-percent tariff on all automobile and light-truck tires imported into the U.S. from China, one has to wonder who will benefit most from this new tax: the United Steelworkers Union or the American people? 

Imposing a tariff on imported goods invokes a special safeguard provision made during a 2001 agreement supporting the entry of China into the World Trade Organization. That safeguard provision allows for government protection to be given American companies or workers harmed by a "market disruption" or "surge" from China imports. The International Trade Commission (ITC), voted 4-2 in favor of this new tire tax. Keep in mind that just because the ITC requests a trade tariff, the president has discretion of accepting or rejecting recommendations. President George W. Bush, for example, received four similar recommendations from the trade commission during his presidency, but rejected each of those recommendations. In this case, however, President Obama chose to side with the ITC.

Will the Tire Tax Benefit Americans?

American consumers can soon expect to pay a substantially higher amount the next time they need to buy tires. This increase is not a matter of if they will pay more for tires, but when. As pre-tariff inventory stock is depleted, U.S. tire wholesalers warn that retailers will begin increasing the cost of tires by about 15% on average and higher. At a time when Americans are trying to cut back on unnecessary spending, many consumers will not be able to afford to buy new tires at this higher rate and will ride on tires longer than is safely recommended before replacing them. Some will buy a cheaper brand of tires than they are used to in order to recoup the additional cost of tires brought about by the new tax. And the impact is not only on the American consumer. American jobs are also at stake. Thomas J. Prusa, a Rutgers economist calculates that 20,000 jobs in the tire distribution and retail sector will be lost for each 1,000 jobs saved at domestic manufacturing plants. For each 1,000 of these plant jobs, U.S. consumers will be paying $330,000 in higher tire prices.

China’s Reaction to New Tire Tax

Calling this move by the U.S. "rampant," it is possible that trade relations worldwide could be affected. The China Rubber Industry Association has called on their government to retaliate, and some fear possible punitive sanctions on soybean imports. China suggests the U.S. tire tariff Obama has imposed is a violation of the World Trade Organization (WTO) rules and has threatened to file a formal complaint.

Since the tire tax announcement, China has launched investigations on anti-dumping and anti-subsidy of chicken products and anti-subsidy investigations into automobiles produced in the United States. Currently, the United States is the largest exporter of chicken products to China. The Ministry of Commerce Spokesman Yao Jian has stated that China opposes trade protectionism and discourages the use of trade remedies measures.

The Chairman of the China Rubber Industry Association, Fan Rende, said, "Obama’s decision may affect the employment of 100,000 tire workers in China and may bring an aggregated loss of up to $1 billion to China’s tire exporters."  Fan has also urged the Chinese government to take countermeasures against U.S. tariffs. He stated, "I believe we could find ample cases that is also in line with the WTO rules."

Despite the anger stirred up among the Chinese leadership, President Obama insists that the U.S. shouldn’t expect a cycle of retaliation, that "we’re not going to see a trade war." Professor Eswar Prasad, a Cornell University trade policy professor and former head of the IMF’s China desk, said, "The actions by the U.S. and China suggest that both sides are taking a tougher stance on trade issues, which could make their relationship more complicated and contentious." Prasad suggests that important multilateral initiaves, including climate change, handling nations such as North Korea, and promoting reform of international financial institutions may have slowed progress.

So it looks like China is not happy. Looks like the American consumer is certainly not going to be happy. Just who is going to be happy with this new Obama tire tax?