Free Trade versus Protectionism: A Taxing Debate

by Yuejiao Hou October 12 2009, 09:40

I. Introduction

President Obama’s September 11th decision to restrict imports of Chinese tires has sparked a taxing debate both domestically and abroad. On top of the preexisting four percent tariff on all tire imports, the president determined to impose additional ad valorem duties upon certain passenger vehicle and light truck tires from China, designed to taper down from 35 to 30 to 25 percent over three years. [1] China responded within days by raising a World Trade Organization ("WTO") challenge to the safeguard, alleging that Obama’s actions are inconsistent with existing international laws. [2] Meanwhile, the proclamation has incited both criticism and praise from a variety of domestic and foreign interests. This article will assess the legality, consequences, and judiciousness of implementing such a tariff and conclude with a word on the free trade versus protectionism debate.

II. Background

The tire tariffs are in response to a United Steelworkers complaint about the impact of cheap Chinese tire imports on the U.S. economy. The union brought the action to the International Trade Commission ("ITC") in April, citing that from 2004 to 2008, imports of cheap consumer tires from China increased 215 percent, boosting Chinese market shares of tires in the U.S. from 4.7 percent to 17.3 percent while domestic production declined by roughly 25 percent. [3] As a result, United Steelworkers allege that over 5,000 American tire workers have lost their jobs and four tire plants have closed about the nation, with three more to close this year. [4]

The ITC, a bi-partisan, quasi-judicial agency created by the United States to provide guidance to Congress and to the president on trade matters, returned a recommendation of stepped tariffs over three years in amounts of 55 percent, 45 percent, and 35 percent, respectively. [5] President Obama heeded the recommendation, but enforced the tariffs at somewhat lower rates in order to reduce but not to prohibit Chinese tires in the U.S. market. [6]

III. Legality

China’s WTO challenge is based on the premise that the U.S. tire tariff is inconsistent with Article I:1 of the General Agreement on Tariffs and Trade ("GATT") of 1994. [7] The GATT, the treaty that is the predecessor to the WTO and the foundation from which the WTO was born, was created to facilitate the reduction of barriers to international trade. [8] Article I establishes one of the GATT’s most fundamental rules, the "most favored nation" principal, a non-discrimination regulation which states that conditions pertaining to the most favored trading nation must apply to all member-states of the WTO. [9] Although China’s assertion that the tire tariffs violate the GATT because they apply solely to China is sound, there are several exceptions to Article I that the WTO will take into account.

The first relevant exception is the Agreement on Safeguards of Article XIX of the GATT 1994 and Section 201 of the Trade Act of 1974. Article XIX allows a nation to implement temporary safeguard measures when imports are found to cause or to threaten serious injury to a domestic industry. [10] However, as the Agreement on Safeguards requires adherence to strict substantive and procedural regulations, including that safeguards be applied on a non-selective basis [11], the exception is not likely to apply in the present case.

The exception in contention is contained in the Protocol on the Accession of the People's Republic of China and in section 421 of the Trade Act of 1974. [12] When China joined the WTO in 2001, it signed an Accession Protocol whereby it agreed to allow other WTO members the right to impose safeguard relief on goods from China when imports of the goods are in such increased quantities as to cause market disruption to the acting country’s domestic industries. [13] Under section 421, safeguard relief can be granted on a lower standard than in section 201 – a standard of “material injury” instead of “serious injury” to the competing domestic industry. [14] As the objective of the Accession Protocol is to allow the other WTO members a period of adjustment, the China-specific protocol was determined to last for twelve years and is to terminate in 2013. [15] The United Steelworkers filed their complaint pursuant to section 421 of the Trade Act, and upon investigation the ITC found the required material disruption to the U.S. domestic tire industry. [16] The president responded by implementing the ITC’s recommendation, effectively exercising his option to utilize the existing trade laws. As a result, China is unlikely to succeed on its WTO challenge.

IV. Debate

The benefits of the tire tariffs are contentious. Obama’s decision drew a fair amount of praise, but more commonly criticism both from within the nation and abroad. Both sides are adamant in their positions.

Acclaim for Obama’s actions rang loudly from The United Steelworkers. Although the union had originally sought quotas from the ITC, it was receptive to the idea that the tariffs will provide effective economic relief domestically. [17] The United Steelworkers remain optimistic despite analyst opinions that should the price of Chinese-made tires increase, domestic businesses will simply shift to other low-cost producers to obtain cheap tires [18]. The union states that alternative low-cost sources are few and have limited capacity to supply the U.S. market. [19]

Advocates of the tariff cite that China itself is in violation of international trade law through its labor and business policies. [20] Proponents of protectionism cite moral grounds for enforcing trade barriers against China, including the Chinese government’s own questionable business practices and its brutal labor policies in violation of safety conditions and of its own national minimum wage. [21]

Free trade advocates maintain several arguments against the tariffs. First, they state that the tariffs will not benefit American domestic industry and are even harmful to advancing domestic and global interests – the comparatively higher cost to produce the tires in the U.S. renders the business uncompetitive, and raising tariffs will do little to remedy this in the long run. [22] As a protectionist policy can only impede growth, the focus should not be on protecting businesses that will inevitably be phased out, but on otherwise regenerating growth at home and abroad. [23]

Critics are also afraid that the tire tariff can set a dangerous precedent that may spark a trade war between the U.S. and China. [24] Riding on the victory of the tire tariffs, United Steelworkers, in conjunction with three paper manufacturers, have filed a new trade case against Chinese imports of coated paper. [25] Many fear that protectionist tariffs will heighten bilateral tensions and cause a China-U.S. trade war as textile and steel producers start to follow suit. [26] Within 24 hours of Obama’s proclamation, China announced antidumping trade investigations into U.S. poultry and automobile parts [27], an action that observers were quick to label as retaliation. [28]

A trade war would be disastrous for both parties as bilateral trade accounted for more than $400 billion dollars in 2008, and China-U.S. trade accounts for around 12 percent of the total U.S. trade and 13 percent of total Chinese trade. [29] A trade war between the U.S. and China could lead to severe ramifications for already contracting global trade. [30] With China at the forefront of the battle for global economic recovery [31], a deterioration of the Chinese economy would be disastrous for all international actors.

Finally, some fear that China could pressure the U.S. by refusing to purchase U.S. Treasuries. [32] In September of this year, China became the largest holder of U.S. government debt, holding over $585 billion dollars. [33] Volatile China-U.S. relations could affect U.S. interest rates and lead to unnecessary volatility in the domestic money market, cascading yet again into injurious consequences for global economic recovery. [34]

V. Analysis

While the China tire tariffs may be legally sound, its principle and application are in conflict with the very purpose of the WTO, which was created to promote and advance the prospect of free trade. China has been a member of the WTO for eight years, and China-U.S. trade relations existed long prior to China’s accession into the WTO [35]. The current action seems to arise not out of a need for an "adjustment period" but rather out of the standard consequences of free trade. Absent the Accession Doctrine, the China-specific safeguard falls short legally as it directly contradicts the most favored nation principal as well as the key tenant of the WTO that safeguard measures must be applied on a nondiscriminatory basis. Despite falling within the word of the law, the tire safeguard is at odds with the spirit of progressing international law.

However, while economics agree that a policy of free trade is preferable to a policy of protectionism by margins of up to 100 to 1 [36], no industrialized country has ever adhered strictly and indefinitely to a policy of free trade. [37] In a free trade system, there are always losers as well as winners, but the net gain is said to offset the loss. [38] What happens when one nation is continuously the loser? One can say that a government has a duty to its own people over those not within its constituency, and therefore one cannot expect any government to ignore the immediate welfare and morale of its people. Consequently, the occasional protectionist policies will and should occur despite not being the most beneficial ones on a global economic scale.

While balance in a system of interdependent states is often seen as precarious, the economics of self-interest will demand that each state looks out for itself by carefully heeding its relationships with each other state. As a result, the framework that ties each actor together may be stronger than observers believe.

Many analysts believe that the tire tariffs will in reality have minimal impact. [39] Chinese tire exports constitute less than 1 percent of China’s total exports to the U.S., an amount that is insignificant in view of China’s total export volume. [40] The Automotive Trade Policy Council calculated that at the tariff rates implemented by Obama, the additional cost per tire would amount to less than $3.50. [41]

Because of heavily intertwined economic interest between both nations, a major escalation is unlikely. [42] President Obama announced on September 15th that the tire tariffs will not spark a trade war and is in fact a step toward expanding trade in the long run [43], alluding to the notion that he recognizes that open markets are a fundamental catalyst of economic recovery. [44] His imposition of a lesser tariff than originally recommended by the ITC also lends to this recognition as well as to his desire not to grievously injure China-U.S. relations. He is unlikely to entertain further protectionist demands in light of the severe detriments a trade war can cause, and likewise, while China must act tough to quell resentment and to promote public image, the Chinese government will tolerate much to avoid social discontent in the form of lost jobs. [45] It is also unlikely that China will respond by halting its purchase of U.S. Treasuries, as doing so would slash the value of its own foreign reserves. [46]

While many fear China’s announcement of antidumping investigations as a retaliatory response to the tire tariffs, there is a substantial argument that it is a coincidence or a setup; a large bureaucracy such as China is unlikely to be able to announce such investigations in less than twenty-four hours response time, and the poultry dispute had previously existed between China and the U.S. [47] Dr. Elliot J. Feldman proposes that instead of viewing China’s actions through a lens of retaliatory fear, China’s actions actually signify its maturation as a major world power willing to accept the legitimacy of international institutions and their disciplines. [48] China’s increasing acceptance of international law further promotes the notion that China will not retaliate illegitimately without the approval of the WTO.

VI. Conclusion

Normally an avid advocate of free trade, the U.S. employs selective protectionism that is contrary to the spirit of progressive globalization and to the goals of the WTO. Nonetheless, occasional protectionist policies employed by member-states are natural and to be expected; in light of the legality of the tire tariffs and their low economic impact, major consequences are unlikely.

The tariffs can be seen as a wise move, as domestically they aim to effectively please labor unions, to raise industry morale, and to give the president political clout.  Internationally, there remains much to be considered outside of economics; the president must be careful not to injure foreign relations and to upset the balance that the global economy rests upon, a contention that he is undoubtedly aware of. While the occasional tariff like this one will ultimately pass without dire consequence, continued protectionist policies may trigger the very trade wars that critics fear. However, as long as each state looks out for itself by regarding the reactions of each other, entwined economic interests will ensure that the occasional exclusively self-serving measure will not destroy the equilibrium.


End Notes

[1] Presidential Determination No. 2009-28 (Sep. 11, 2009), available at http://www.thefederalregister.com/d.p/2009-09-16-E9-22409.

[2] Request for Consultations by China, United States – Measures Effecting the Imports of Certain Passenger Vehicle and Light Truck Tyres from China, WT/DS399/1 (Sep. 16, 2009), available at http://www.worldtradelaw.net/cr/ds399-1(cr).pdf [hereinafter “Request for Consultations”].

[3] Testimony of Scott N. Paul, United States Representative Hearing: Certain Passenger Vehicle and Light Truck Tires from China, Docket No. USTR-2009-0017 (Aug. 7, 2009), available at http://www.americanmanufacturing.org/wordpress/wp-content/uploads/2009/08/testimony-421-tires-aug-7-09.pdf.

[4] Id.

[5] Warren Mass, China Calls for WTO to Settle Trade DisputeNew American, Sep. 15, 2009, available at http://www.thenewamerican.com/index.php/world-mainmenu-26/asia-mainmenu-33/1888-china-calls-for-wto-to-settle-trade-dispute.

[6] Dr. Eliot J. Feldman, Trade War?China-U.S. Trade Law Blog, Oct. 2, 2009, available at http://www.chinaustradelawblog.com/2009/10/articles/trade-disputes/trade-war-eaeaei.

[7] Request for Consultations, supra note 2.

[8] About the WTO – a statement by the Director-General, http://www.wto.org/english/thewto_e/whatis_e/wto_dg_stat_e.htm (last visited October 5, 2009).

[9] The General Agreement on Tariffs and Trade, 1994, http://www.iisd.org/TRADE/handbook/3_4_1.htm (last visited October 5, 2009).

[10] Agreement on Safeguards, http://www.wto.org/english/tratop_e/safeg_e/safeint.htm (last visited October 5, 2009).

[11] Id.

[12] Request for Consultations, supra note 2.

[13] Leo W. Gerard, Enforcing the Rule of Trade Law, The Hill, Sep. 25, 2009, available at http://thehill.com/blogs/congress-blog/economy-a-budget/60359-enforcing-the-rule-of-trade-law.

[14] Ronald A. Cass, Chinese Tires, Forbes.com, Sep. 14, 2009, available at http://www.forbes.com/2009/09/14/chinese-tires-trade-opinions-contributors-ronald-a-cass.html.

[15] Id.

[16] Gerard, supra note 13.

[17] Steelworkers laud Obama decision to enforce trade laws against China, Workday Minnesota, Sep. 16, 2009, available at http://www.workdayminnesota.org/index.php?news_6_4168 [hereinafter “Workday Minnesota”].

[18] Tired Protectionism, New York Times, Sep. 19, 2009, available at http://www.nytimes.com/2009/09/19/opinion/19sat1.html?_r=4&scp=1&sq=tired%20protectionism [hereinafter “New York Times”].


[19] USW Backgrounder, Advisory for Monday, June 29, 2009, http://assets.usw.org/China_Trade_Tires/s421_backgrounder-china-tire-myths_usw062909.pdf (last visited October 5, 2009).

[20] Workday Minnesota, supra note 17.

[21] Id.

[22] New York Times, supra note 18.

[23] Id.

[24] Mark Drajem, China Warns of ‘Dangerous Precedent’ From Obama’s Tire Tariffs, Bloomberg.com, Sep. 17, 2009, available at http://www.bloomberg.com/apps/news?pid=20601087&sid=aiU3EjfF.Phg.

[25] Gerard, supra note 13.

[26] Finfacts Team, China-US: Protectionism on the rise - how likely is a trade war?, Finfacts Ireland, Sep. 24, 2009, available at http://www.finfacts.ie/irishfinancenews/article_1017968.shtml [hereinafter “Finfacts Team”].

[27] Feldman, supra note 6.

[28] Mass, supra note 5.

[29] Id.

[30] Id.

[31] John Lee, Looking East: The Road to Recovery, Illinois Business law Journal, Sep. 21, 2009, available at http://www.law.uiuc.edu/bljournal/post/2009/09/21/Looking-East-The-Road-to-Recovery.aspx.

[32] Finfacts Team, supra note 26.

[33] China becomes largest holder of U.S. government debt, People’s Daily Online, Sep. 19, 2009, available at http://english.people.com.cn/90001/90776/90884/6536616.html.

[34] Finfacts Team, supra note 26.

[35] U.S.-China Trade Timeline: 1784-2008, http://www.stratfor.com/memberships/106695/analysis/u_s_china_trade_timeline_1784_2008 (last visited October 5, 2009).

[36] Benefits of offshoring jobs exaggerated: Experts, India Times, Mar. 19, 2004, available at http://infotech.indiatimes.com/articleshow/569739.cms.

[37] Center for Trade Policy Studies, The Truth about Trade in History, http://www.freetrade.org/pubs/freetotrade/chap2.html (last visited October 5, 2009).

[38] Mankiw, N. Gregory, Macroeconomics (5th Edition, Worth Publishers 2002).

[39] Finfacts Team, supra note 26.

[40] Id.

[41] Workday Minnesota, supra note 17.

[42] Finfacts Team, supra note 26.

[43] Drajem, supra note 24.

[44] International Economic Law and Policy Blog, The Implication of the Chinese Tires Decision, http://worldtradelaw.typepad.com/ielpblog/2009/09/the-implications-of-the-china-tires-decisions.html (last visited October 5, 2009).

[45] Finfacts Team, supra note 26.

[46] New York Times, supra note 18.

[47] Feldman, supra note 6.

[48] Id.

 

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