Limited success of Chinese tire tariffs shows why Donald Trump's trade prescription may not work

By Don Lee

July 24, 2016 7 AM PT

Reporting from Washington — A key plank in Donald Trump’s economic platform is to get tough on trade, especially with imported Chinese goods, which the Republican presidential nominee wants to slap with a 45% tariff.

Economists of all stripes have denounced the proposal as tinder for a trade war that would be devastating for the U.S. and global economies.

But there is another reason why such punitive measures are a bad idea: They just haven’t worked very well.

Over the past 35 years, the U.S. has imposed duties and import quotas on foreign-made electronics, socks, steel, cars and solar panels, among many other goods. Sometimes such tariffs have brought relief for a particular domestic industry, but more often, they have had little lasting effect in boosting production and employment at home because the duties came too late, were circumvented or were made largely irrelevant as imports shifted to other foreign countries.

That hasn’t stopped the U.S. from trying. The Obama administration has filed numerous unfair trade cases and won several tariff judgments against China in recent years.

Analysts predict more enforcement activities down the pike, given the anti-trade rhetoric in the presidential campaigns and the public’s increasing disenchantment with globalization.

“I do think we’re setting ourselves up for more tariffs and tougher action; it’s almost inevitable,” said Derek Scissors, a China-U.S. economics analyst at the American Enterprise Institute.

Trump has been unrelenting in bashing China for the loss of American economic strength and manufacturing jobs in particular. In 2015, China overtook Canada as the United States’ top trading partner, a year in which the American trade deficit in goods with China reached a record $366 billion.

In his nomination acceptance speech Thursday, Trump called China’s 2001 entrance into the World Trade Organization a “colossal” mistake for the U.S. because it enhanced the Asian giant’s trading capabilities. And he pledged to halt China’s “outrageous theft of intellectual property, along with their illegal product dumping, and their devastating currency manipulation.”

But it won’t be as simple and straightforward as Trump suggests. The U.S. president cannot unilaterally levy a 45% tax on imported goods. Under existing U.S. law, he or she would be able to impose a tariff of up to 15% on products from another country for 150 days, said Douglas Irwin, a trade expert at Dartmouth College.

Congress could take tougher action through legislation. And the third way that tariffs could be levied on specific items is after a labor union or industry files a complaint with the U.S. International Trade Commission of unfair pricing or government subsidies. The agency could recommend special safeguard duties to the president, who must sign off on these relief measures.

One illustrative case is Chinese tires.

In September 2009, Obama, in response to a union complaint, approved safeguard tariffs of 25% to 35% on imported Chinese car and light-truck tires for three years.

It seemed to work at first blush. Total Chinese imports of new radial tires for cars dropped 28% in 2010 from the prior year, to $899 million.

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But other trading partners rushed to fill the void. Shipments from South Korea, Thailand and Indonesia doubled in value, more than offsetting the decline in Chinese-made tires.

U.S. production of tires increased after 2009, as was hoped. The number of car and light-truck tires made in the U.S. rose nearly 14% in 2010, reversing several years of decline, according to the Rubber Manufacturers Assn. But the count of imported tries increased even more, by about 18% from 2009 to 2010.

Terry Stewart, an attorney for the United Steelworkers union, which initiated the case on Chinese tires, argued that the tariffs helped stabilize the domestic industry, with many union workers in the U.S. being recalled during 2009 and 2012.

The Peterson Institute for International Economics reached very different conclusions: The think tank said the duties saved a maximum of 1,200 manufacturing jobs and when factoring in the higher American consumer cost for tires, resulted in the U.S. economy losing about 2,500 retail jobs.

More than from tariffs, the domestic tire industry benefited from the U.S. economic recovery that began in mid-2009. With manufacturing leading the way, the growing economy lifted all boats in the auto and tire market, imports and exports. Rising tire prices, which helped U.S. manufacturers but hurt some tire dealers, also were bolstered by sharp increases in the price of oil, the main raw-material cost of tires.

What is also clear is that the tariffs did not turn the tide in employment for the U.S. tire-making industry. Data from the Commerce Department show that domestic tire-manufacturing employment has continued a long and steady decline — to 43,197 in 2012 from 49,715 in 2007 and 63,842 in 2002, reflecting in part productivity gains as well as declines in total output.

The tariffs “had a minimum impact on us,” said Keith Price, a spokesman for Ohio-based Goodyear Tire & Rubber Co., one of the top three tire sales leaders in the U.S., along with Bridgestone and Michelin. He said Goodyear produces higher-quality and higher-priced tires than those made by the Chinese, and hence doesn’t compete directly against them. Goodyear currently operates six tire-manufacturing plants in the U.S., down from seven in 2012, and the company is in the process of building a new factory in Mexico.

The safeguard tariffs expired in the second half of 2012, and since then, there’s been a resurgence of Chinese tire imports, prompting a new round of anti-dumping and countervailing duties on made-in-China tires that took effect last summer. Through May of this year, U.S. production of tires was up 3% from a year ago, but total shipments from abroad were running a little higher.

“It is usually the case that by the time we impose the tariffs, the penetration of the imports into our market is so great that it’s too late to reverse what has become a fundamental shift in competitiveness,” said Clyde Prestowitz, an Asia economy expert and former top trade negotiator in the Reagan administration. In addition, Prestowitz said that such duties can be rendered ineffective by a corresponding devaluation in the currency of the exporting country, something that frequently has been alleged by critics of Chinese trade practices.

In trade annals, people have often held up the taxes on imported Japanese motorcycles in the early 1980s as a paragon of a successful tariff. It’s been said that the initial 45% duties levied in 1983, and set to last five years, was so effective that it allowed Harley-Davidson to recover so fast that it did not even want the tariff in the fifth year. But Irwin, the Dartmouth economics professor, writes that the “real story is different: import relief had nothing to do with Harley-Davidson’s turnaround.”

Instead, Irwin says, the motorcycle company recovered thanks to a new management team as well as the rebounding economy. Harley’s sales had suffered during the double-dip recessions of the early 1980s, which clobbered manufacturing and blue-collar workers, its core customers. As for the tariffs and related quotas, Irwin writes in his book, “Free Trade Under Fire,” they had relatively little effect on the company. The duties were on imports of motorcycles with 700 cc engines or larger, but Suzuki and Yamaha evaded the measures by producing a 699 cc version. What’s more, Honda and Kawasaki already were producing heavyweight motorcycles in the U.S.

“But even if protection contributes little to adjustment,” he said, “the escape clause [tariff] has been a political necessity and has helped maintain domestic support for the open world-trading system.”

Supporters of tariffs also point to benefits. Tariffs and quotas have encouraged foreign companies to put manufacturing facilities on American soil. They pushed, for example, Japanese carmakers to establish production operations in the U.S. starting in the 1980s. As Prestowitz observed, “The import restraints didn’t prevent Detroit from losing market share, but they did shift jobs and the value added [on goods] from Japan to America.”

The growing market share of imported tires — and perhaps the threat of tariffs — also are factors behind the recent rise of new tire factories in the U.S. In May, South Korean firm Kumho Tire officially opened a $450 million plant in Macon, Ga., creating about 400 jobs.

Still, William Reinsch, a trade expert at the Stimson Center, a Washington, D.C.-based think tank, said that while tariffs have helped some companies, “sadly, there aren’t a lot of examples” of success. They are blunt instruments that can result in supply disruptions, higher prices and, at worst, retaliation by the country hit with the duties, he said. “There is a search for new tools.”

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