August 28, 2009    Volume 16, No. 14

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Unions Versus The Chinese & U.S. Multinationals: Chinese Tire Import Case Presents Obama With A Tough Test On Trade & The U.S. Economy


By Pat Choate
patchoate@gmail.com

Will President Barack Obama honor his promises to enforce U.S. trade laws?

American manufacturers and their workers will have their answer no later than September 17, 2009, when Obama is required by trade law to accept, reject or modify the International Trade Commission’s (ITC) recommendations to impose for three years increased duties on Chinese-made tire imports that threaten U.S. domestic tire production and the jobs of American tire workers.

If the president approves the ITC’s recommendations, the balance of American manufacturing and its remaining 11.5 million workers may also be able to use these trade laws to fend off the rising surge of imported manufactured goods from China. If President Obama rejects those recommendations and continues the policy of George W. Bush’s administration, which refused to give such relief, America is sure to lose more of its manufacturing base and millions more good-paying jobs.

U.S. and global trade agreements contain features know as “safeguard” provisions. When a surge of increased imports threatens a domestic industry and its workers, any of the involved parties may petition the International Trade Commission to provide short-term import relief during which the industry can adjust. If the commission makes an affirmative determination, it recommends to the president remedies that will enable the industry to adjust. The final decision to act, however, resides with the president.

The ITC determination does not require a finding of unfair trade practices. Rather, Section 201 of the trade laws, requires that the ITC only find the injury or threatened injury to be "serious" and increased imports to be an important cause of the existing or prospective damage to U.S. producers and workers.

The process is fast, usually with determinations made within 120 days of the petition’s being filed or no later than within 180 days of filing. The period of ITC relief is limited to only four years, with the remote possibility of an extension for up to another four. The petition can originate from one of several sources — a firm, a trade association, a certified union, a group of worker representatives, the President of the United States, the United States Trade Representative, a resolution by the House Committee on Ways and Means or the Senate Finance Committee, or the ITC upon its own motion.

Relief may be in the form of one or a combination of measures, including temporary tariff increases on imports, quantitative restrictions, or an orderly marketing agreement with other governments.

The experience of Harley-Davidson illustrates how useful and powerful the safeguard law can be, particularly during an economic downturn, such as now exists. In the early 1970s, Harley-Davidson dominated the large engine motorcycle market in the United States. Japanese manufacturers aggressively entered the U.S. market with deeply discounted prices and large inventories. In 1981, Japanese makers sold 739,000 machines in the U.S., compared to 41,000 Harleys. The surge of imports overwhelmed the U.S. maker, and Harley filed a petition for safeguard relief at the ITC in 1982. The subsequent investigation found that the surge of Japanese imports, coupled with an additional year’s worth of inventory of Japanese machines in the U.S., virtually guaranteed that Harley would not recover without safeguard relief.

The ITC recommended an increase in tariffs on the imports of large engine motorcycles for five years, enough time for Harley to recover. The first year the recommended tariff was 45 percent; it was 35 percent the second year, 20 percent the third year, 15 percent the fourth year, and 10 percent the fifth year. President Reagan accepted the ITC recommendations, and Harley got its relief.

Harley used the time to improve its product and marketing, diversify its product line, and put its financing on a sound basis. Four years later in 1987, Harley had 47 percent of the big engine market and it was doing so well the company requested that the U.S. lift the fifth-year tariff. In the succeeding years, Harley met the Japanese head-on and prospered. In 2008, it employed 8,600 people, provided its workers with strong benefits and pensions, sold 303,000 machines, a third of which were exported, and had revenues of $5.59 billion and a net income of $654 million.

The Tire Case

On April 20, 2009, the United Steel Workers (USW) petitioned the government of the United States to impose a temporary "safeguard" remedy to protect the manufacture and sale of low-grade commercial tires in the United States against an import surge from China. The ITC accepted the petition and its staff did an analytical report for the Commission.

The ITC found that between 2004 and 2008 Chinese imports increased from 14.6 million tires to 46 million -- almost three hundred percent. In the same period, U.S. production decreased from 218 million tires to 160 million tires.

On June 17, 2009, the ITC issued a report finding "market disruption" -- the legal foundation for recommending safeguard relief to the petitioner, the USW on behalf of the tire workers. On July 9, the ITC recommended that the U.S. provide safeguard relief for a period of three years via the imposition of a 55 percent duty on imported Chinese-made tires in the first year, 45 percent in the second year and 35 percent in the third year. The commission report to President Obama pointed out that, "[T]hese tariff levels would remedy the market disruption that we have found to exist."

No U.S. tire producer supported the USW petition, though that is not required under U.S. trade law. The ITC data also revealed that seven of 10 U.S. tire producers operate factories in China, which manufacture one of every six tires they sell in the United States. Cooper Tire and Rubber Company and Toyo Tires -- both of which have China-based production -- publicly oppose the ITC-mandated relief. The others remained silent as to their position.

The China Factor

China is a non-market economy. The Chinese government owns most of that nation’s manufacturers, regulates the balance, and operates under the guidelines of five-year plans that set national industrial policies. Tire production and the global export of tires are parts of China’s industrial plans.

In 2000, World Trade Organization (WTO) membership for China was a highly controversial matter in the U.S. Congress, for there was widespread apprehension that China, with its cheap labor, easy access to advanced foreign technology and its public subsidies to Chinese producers, could easily overwhelm world markets with its manufactured goods. Thus, Congress enacted a special safeguard into U.S. law -- with the full concurrence of the Government of China and the WTO -- what is now Section 421 of the U.S. Trade Act of 1974.

This China safeguard has a lower standard than a Section 201 action. The 201 petitioners must demonstrate "serious" injury, while the 421 petition must only demonstrate that the surge is a "significant cause of material injury, or threat of material injury." In addition, under a 201 action, the industry must provide a remedial plan, but under a 421 petition that is not required. Section 421 expires at the end of 2012.

Congress was prescient in its creation of the China safeguard because imports from that nation subsequently increased almost exponentially. The U.S. Department of Commerce reports that the $83 billion of Chinese manufactured goods imported into the United States in 2001 made up 27 percent of the total U.S. trade deficit in such goods. By 2008, these Chinese imports had risen to $279 billion or 60 percent of the U.S. manufactured goods deficit. By the end of the first half of 2009, these goods imports ($108 billion) constituted 78 percent of the U.S. trade deficit.

As imports from China have increased, America has lost 6.5 million U.S. manufacturing jobs between December 2000 and July 2009, including 2.1 million manufacturing jobs lost since the beginning of current economic crisis in December 2007.

American producers filed six 421 petitions during the administration of President George W. Bush. In four of those cases, the ITC found in favor of the American producer and recommended the imposition of tariffs. In each instance, President Bush rejected the ITC recommendations. Subsequently, two of those petitioner industries -- the U.S. iron waterworks and wire hanger producers -- have gone out of existence. President Bush accompanied his rejections with a statement that the proposed ITC actions would not be in the national interest. One factor in his decisions was that the U.S. was no longer running budget surpluses, making the Bush administration heavily dependent upon the Chinese government to finance the federal budget deficits, which have almost doubled from more than $5.7 trillion in January 2001 to more than $10.6 trillion when President Bush returned to Crawford, Texas in 2009.

Reneging the Safeguard Deal

The tire case is precisely the economic circumstance for which the Section 421 provision exists -- a surge of imports that is causing material damage. The government of China and America’s largest corporations agreed to the Section 421 provisions in 2000 as part of a broader compromise that produced enough congressional votes to permit China's membership in the WTO.

Now, the government of China and these corporations are conducting a massive political campaign to pressure President Obama into rejecting the ITC recommendations. In the process, they are trying to break the deal they made in 2000.

Chinese diplomats, their lawyers and several American "agents of influence" working for China are propagandizing the American media, Congress and Executive Branch with the claim that the proposed safeguard relief is "protectionism," which it is not.

The intensity of this Chinese political campaign, moreover, is extraordinary. In April 2009, soon after the USW filed its petition, a 10-person delegation from China came to Washington, D. C., where they met with the ITC Commissioners and staff in an informal session to ostensibly discuss U.S. safeguard laws and procedures -- a generic topic. The Chinese delegation, however, began to argue the specific details of the tire case, a strict violation of ITC rules. ITC chairperson Shara Aranoff halted the discussion because it was improper.

In June 2009, Manufacturing and Technology News, reported that the Chinese had hired several former, high-ranking federal officials to help make their case in Washington who included:
• A former Assistant Secretary of Commerce who had recently been responsible for administering U.S. trade remedy laws;
• A former legislative director for Rep. Phil Crane (R-Ill.) and Rep Bill Archer (R-Texas), two senior members who had previously chaired the Ways and Means trade subcommittee, which writes and oversees U.S. trade law;
• An ex-Deputy Chief Counsel of the Commerce Department's Import Administration;
• A former Deputy Assistant Secretary for Anti Dumping and Countervailing Duties at the Commerce Department's International Trade Administration;
• A former staff counsel in the Office of the General Counsel at the International Trade Commission; and
• A former Assistant United States Trade Representative.

The Alliance for American Manufacturing, a group that supports the ITC recommendations, reports that Zhong Shan, China's Vice Chairman of Commerce, came to Washington the week of August 17, 2009, and met with senior officials from the U.S. Commerce and Treasury Departments, plus the Office of the United States Trade Representative. The Chinese media reported that the purpose of his trip was to lobby against the tariff on Chinese tire imports. As the trip to the Treasury suggests, the Chinese are likely to have entangled the tire issue with continued Chinese financing of the rising U.S. federal budget deficit.

China's U.S. corporate allies have also joined in the call to ignore the ITC recommendations. The Washington-based Emergency Committee for American Trade (ECAT), an association whose corporate members "account for major segments of the manufacturing, financial, processing, merchandising and publishing sectors of the American economy" publicly supports China's position. ECAT reports that its members' annual global sales are $1.5 trillion. Much of that commerce is with China.

These large U.S. corporations defend their support of the Chinese position with the notion that the exercise of U.S. rights under the U.S.-China 421 deal would encourage other nations to "raise their own tariffs and undertake other restrictive measures if the United States itself will not keep its market open." By attacking the legitimacy of the ITC's actions, ECAT makes no distinction between a legitimate safeguard action and acts of old-fashioned predatory mercantilism. In a letter to President Obama, the organization says the proposed tariffs would increase tire prices, depress sales, "and lead to very negative effects on downstream wholesalers, retailers, repair shops and their workers and consumers." Implicitly, therefore, ECAT advocates letting the domestic U.S. tire industry die and its workers lose their jobs. ECAT says the best way for President Obama to deal with the problem is "the authorization of expedited consideration for trade adjustment assistance or other adjustment assistance for workers and firms affected by the subject imports."

Whether Chinese officials have encouraged American corporations and their U.S. trade associations to lobby for presidential rejection of the ITC's recommendations is unknown. Yet, the Chinese lobbying that is visible, its intensity and ECAT's unprincipled stand strongly suggest that they have. A nation that imprisons employees of a foreign corporation when business negotiations go sour, as happened recently with an Australian iron ore company, is unlikely to be delicate about pressuring U.S. corporations to lobby on its behalf.

If the Chinese and ECAT are successful in their lobbying, the presidencies of both George W. Bush and Barack Obama will have effectively repealed the safeguard provisions of U.S. trade law -- one of the few legal protections American manufacturers and workers can use to confront foreign mercantilism and predation.

If the President rejects the ITC's tire recommendations, safeguard protection no longer effectively exists. China has proven that it will not keep its deals and President Obama would have proven his trade promises are worthless.

Then, American companies and workers have only one viable alternative -- politically pursue a hard line position to remove all Executive Branch discretion in trade matters such as presidential review of ITC decisions. Congress, therefore, would need to reassert its Constitutional responsibilities to regulate foreign commerce.

The irony of the Chinese and ECAT position is that if they succeed, they are likely to create irresistible political pressures in the United States for the "protectionism" they claim they are trying to stop.



The Risks Of Economic Diplomacy

American presidents have repeatedly traded away significant parts of the U.S. economy for political and foreign policy purposes.

During the Reagan era, for instance, Japanese Prime Minister Yasuhiro Nakasone cultivated a special relationship with the American President that became so close that insiders quietly celebrated it as the "Ron-Yasu" connection. Repeatedly, Yasu asked his friend Ron for economic favors, including one in 1983, at the bottom of a deep U.S. economic recession.

The American machine tool industry, facing an industry-destroying surge of Japanese imports, had filed a relief petition at the International Trade Commission (ITC), a judicial body, which recommended that the president impose stiff tariffs on imported Japanese machine tools for a short time and thus give the U.S. companies time to adjust. Yasu called Reagan and asked him to reject the ITC's recommendation. Reagan granted Yasu's wish. The Japanese quickly wiped out the American machine tool industry. In partial exchange, the Japanese government continued to purchase the U.S. Treasury bonds that helped finance the Reagan administration's mounting federal budget deficits.

The economic diplomacy of Presidents George H.W. Bush and Bill Clinton focused on what President Bush termed "A New World Order." As part of their diplomacy, both presidents agreed to sacrifice the U.S. textile and apparel industries and its 1.55 million American jobs in exchange for the World Trade Organization's adoption of a pact that would protect U.S. patents, trademarks and copyrights -- what became the WTO's agreement on the Trade-Related Aspects of Intellectual Property Rights (TRIPS).

In January 1995 when TRIPS took effect, the U.S. textile and apparel industry employed 1,557,500 American workers. By July 2009, the industry employed only 414,400 people, a loss of more than 1.1 million American jobs. Although the United States got TRIPS, China and other nations refuse to honor its provisions and continue their pirating and counterfeiting.

During the administration of President George W. Bush, six different U.S. industries filed a 421 ITC petition against China. In four of those cases, the ITC found in favor of the American producer and recommended that President Bush impose remedies. In each instance, Bush rejected the ITC recommendations as a matter of "national interest." In partial exchange, the Chinese government continued to finance the Bush administration's massive U.S. federal budget deficits.

-- Pat Choate is the author of Saving Capitalism (Vintage, September 2009) from which this article is adapted and Agents of Influence (Knopf, 1990).


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