The Risks In Obama's Tire Tariff

Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times(London).

Avoidance of trade talk would most especially suit the American delegation: when the leaders meet in Pittsburgh on September 24-25 the last thing President Obama wants is a discussion of his position on trade. He has so far managed to talk the talk of free trade while walking the protectionist walk that appeals to his trade union backers. He would like to keep it that way.

Unfortunately for him, he won't be able to do that, having just come down on the side of the protectionists. The Obama team makes it a practice of releasing announcements of which they are not particularly proud on weekends, when they get buried under sports news and the commentariat are out of town. So they held off until late Friday announcing that the President has imposed a 35 percent tariff on low-grade car tires imported from China. The International Trade Commission (ITC) had responded to a complaint by the United Steelworkers Union (tire workers are members of that union) that Chinese imports have cost them 5,000 jobs by recommending tariffs of 55 percent. Significantly, U.S. tire manufacturers did not join in the complaint: they lose money at the low-end of the tire market, and most have simply abandoned it to the Chinese. Whether Obama will claim that 35 percent is so far below 55 percent that his free trade credentials remain intact is doubtful: even by his standards, that would be a brazen attempt to conceal his capitulation to the trade unions.

So picture this. Obama now has to play host to a very angry Chinese President Hu Jintao, among other world leaders, in Pittsburgh, to all of whom he promised not to repeat the beggar-thy-neighbor protectionist policies that extended the Great Depression. He needs the Chinese to continue buying the IOUs he is pouring onto the market to cover the deficits he is running up, and to allow their currency to appreciate relative to the sinking dollar. Hu needs export-based jobs. The Obama charm might just not be enough to send the Chinese president home in a generous mood, or disinclined to continue his ruminations on how to free the world of the dominance of the dollar.

Obama's decision on tires makes it clear that he has no intention of supporting efforts to revive the almost 8-year-old Doha trade-opening negotiations. Some 36 nations met in New Delhi earlier this month and professed interest in completing a deal by the end of next year. Not likely: the recession has made jobs, jobs, jobs politicians' central concern, and few are prepared to take the flak that will surely arise if they open their markets, and expose even a few domestic companies or farmers to job-destroying competition. The talks collapsed in July of 2008 precisely for that reason. Obama has been sitting on proposals for bilateral free trade agreements with Colombia and Korea, among others, and sees no reason to antagonize the strong, protectionist wing of his party, already unhappy with his failure -- so far - to throw his weight behind a bill that would end the secret ballot in union-recognition elections, and require compulsory arbitration when union-management negotiations break down.

He will have to find some way to placate Canadian Prime Minister Stephen Harper. Some 250 Canadian manufacturers have been effectively excluded from bidding for infrastructure work in the U.S. by the "Buy American" provision of America's $787 billion stimulus program, and Harper was not satisfied with the president's typically opaque pronouncement at an earlier meeting, "It [Buy American] was not something that I thought was necessary, but it was introduced at a time when we had a very severe economic recession. We have not seen some sweeping steps towards protectionism." Harper intends to raise the issue again in Pittsburgh. And remind the president that the North Atlantic Free Trade Agreement prohibits just such restrictions on Canadian goods. Now, it is clear that Harper can huff and puff, but he is unlikely to blow down the protectionist wall that the president is erecting.

He will, however, have a hurdle or two to cross as he races to scupper America's post-World War II trade policy. The World Trade Organization has ruled that Brazil is entitled to $295 million now and $150 million annually because the U.S. government has failed to eliminate subsidies to its 25,000 cotton farmers. That pittance won't disturb a president who deals in billions and trillions, but the WTO also ruled that Brazil's generic drug industry can retaliate against U.S. pharmaceutical manufacturers of drugs by copying drugs still under patent protection. That would please the left wing of the president's party, convinced that drug prices in America are set at extortionate levels, but would more than a little upset the drug companies that have so far backed the president's health-care reforms. And reduce the flow of new drugs that have helped to keep health-care costs from rising even faster than they have.

Meanwhile, the President is playing heads-I-win, tails-you-lose, with the WTO using its powers to hand America a few free-trade victories. Boeing won something of a victory when the WTO in a 1,000-page report ruled that EU "launch aid" for the Airbus A380 and other planes constituted an illegal subsidy. Boeing is hoping that this will weigh heavily with Pentagon contractors when they evaluate bids for a $35 billion contract for new aerial refueling tankers -- a bid initially won by Airbus but overturned by government auditors for reasons unrelated to the subsidy issue.

And Hollywood is delighted that the WTO ruled that the Chinese have violated a commitment made when they applied for membership -- a commitment to open their media markets to overseas competition. Until now, Hollywood film producers have had to distribute their products through state-owned distributors, who siphon off most of the profits. That, says the WTO, must stop, and other distributors allowed to compete for films, lowering the charges imposed on film producers.

All of these battles are merely skirmishes in a much broader battle. Almost every country is seeking to export its way out of the recession. Germany is relying on its exporters to create jobs; China is depending on its export machine to keep its economy growing fast enough to create millions of jobs and avoid social unrest; Japan's new government, no longer reflexively pro-American, also needs exports to end a decade of stagnation. But Obama, in charge of the world's consumer-of-last-resort, has decided to eschew that role in the future. Indeed, he has had his Trade Representative, Ron Kirk, announce that America will no longer allow its trade partners to "run roughshod over us." Some of the president's reasons for pushing exports and tightening up on imports are purely political -- he needs the trade unions and his party's left. Others are more fundamental -- he has to cut the U.S. trade deficit lest the value of the dollar continue its descent and add to the inflationary pressures created by his enormous deficits.

Meanwhile, he has sent a signal to the Sino-Franco-Russian et al. anti-dollar bloc that for all his talk about international cooperation to fight the recession, he is in the end willing to go it alone if domestic politics so dictate. That will increase their resolve to find some replacement for the dollar as the world's reserve currency. Obama might indeed turn out to be the "transformative" president he intends to be, but not quite in the way he intends.

By Irwin M. Stelzer
Reprinted with permission from The Weekly Standard