February 7, 2012    Volume 19, No. 2

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China Puts U.S. Auto Industry At Risk: Steel And Auto Unions Tell Uncle Sam To Initiate A Comprehensive Trade Case

By Richard A. McCormack

The federal government needs to initiate a comprehensive trade case against China in order to save hundreds of thousands -- or perhaps as many as 1.5 million -- jobs in the U.S. automobile industry, according unions and trade lawyers representing American manufacturing workers.

Imports of Chinese auto parts have been surging into the United States at an annual growth rate of 28 percent over the past seven years. Last year, the United States had a trade deficit with China in auto parts of $9.95 billion, 10 times higher than in 2001. Over that same period, the United States has lost more than 400,000 automobile industry jobs.

If China is successful in implementing its latest five-year economic plan that targets a 35 percent annual growth rate in auto parts production, the United States auto trade deficit with China could top $100 billion by 2020 -- a conservative estimate.

The U.S. industry is at a "tipping point," says Leo Gerard, president of the United Steelworkers union.

In the past, the burden of holding China accountable for its illegal trade practices has fallen on American unions and companies. The USW, for instance, has been involved with 24 trade cases. But a large-scale case targeting China's widespread industrial support policies that have resulted in a surge of auto parts exports is too big for an individual organization to initiate.

"We have been doing our job, now it's time for the government to do its job," says Gerard. "At some point, the government has to stand up for the country and the working people in this country. Our objective is to build substantial support in the House of Representatives, the Senate and communities at the state level for the government of America to launch a case. If we don't do it now, we will lose too many jobs."

Terence Stewart, managing partner in the law firm of Stewart and Stewart, says a U.S.-government initiated case against Chinese industrial subsidies and trade distortion practices "is a test -- a test to see whether the rules can be made to be responsive to see that the problems get addressed."

The auto parts sector, which employs 75 percent of America's auto workers, "is the most important manufacturing sector in the United States because it feeds virtually every other major manufacturing sector in the country," says Stewart. "So it is a logical place for there to be a call to action to say we need a comprehensive approach. We need to see that the rules in fact work -- whether it's our existing rules or a new set of rules. But the status quo can't go on because whatever number of jobs that have already been lost due to the rapidly growing Chinese imports there is no doubt that if they capture $100 billion or more of the volume here they will have destroyed hundreds of thousands of jobs in the United States."

In his State of the Union Address on January 24, President Obama proposed the creation of a "Trade Enforcement Unit" in the federal government that "will be charged with investigating unfair trade practices in countries like China." It is time for this unit to take action, said Gerard speaking at a U.S. Capitol building press conference with Stewart, United Auto Workers representatives, Senators Debbie Stabenow (D-Mich.), Sherrod Brown (D-Ohio), Robert Casey (D-Penn.), Rep. Sander Levin (D-Mich.), and representatives from the Alliance for American Manufacturing and the Economic Policy Institute.

The United States has no time to lose. In the past when companies have filed trade cases, it has taken years for the United States system to adjudicate a case. "A process that goes on from the workers' perspective is more time than we have" in the case of China's targeting of the U.S. automobile sector, says Stewart. "Having practiced in this field for a long time, I can tell you we have never faced a situation where the battle can be lost as quickly as it can once China has decided to dominate a sector."

China's government has committed an "overwhelming force" of $1.5 trillion to developing seven strategic industrial sectors including automotive over the next five years, notes Stewart. It plans a "staggering surge of production that will cause significant problems here and globally," he added. "It's a very large country; they throw a tremendous amount of resources at it; they invoke a wide variety of discriminatory practices to see that you don't have access to their market while they are dominating your market; and the timeline is much shorter than we have experienced with most other competitors in most industries."

China is breaking rules it agreed to when it joined the WTO, says Stewart. It has put in place a system of export restraints on raw materials important in the production of automobile parts, which makes them cheaper in China and forces investment to move there. It has export duties on cobalt used in rechargeable batteries; copper used in wiring and cables; germanium used in transistors; manganese used in making aluminum alloys; rare earths used throughout the electronics supply chain; titanium; tungsten; tin; and vanadium used in alloys and plating. "That may be good for China, but it is bad for the world," says Stewart. "It is bad for the United States and it is clearly contrary to WTO obligations. There are hundreds of those types of problems that we have with our important trade partner, China."

It has also implemented a sales tax waiver on electric and alternative-fueled vehicles made in China but imposes the tax, along with the VAT, on imports. "They have basically told foreign auto companies that if you want to play in our market, you have to move your technology and production here," says Stewart. "That changes the outcome of the game not based on competition, but based on the iron fist of the government saying you can't play if you don't shift where you produce. That is not how the system is supposed to work. That is not how comparative advantage is supposed to be determined. And it is the reason that we lose hundreds of thousands of jobs [to China] in various sectors."

China is ramping up all of its subsidy programs. It is making huge loans directly to companies like Beijing Automotive Industry Holding, Brilliance China Automotive Holdings Ltd., FAW Group, BYD Automotive and others.

Its exports of auto parts have surged from $10 billion a year in 2004 to $60 billion in 2011.

Gerard said the U.S. must avoid what happened in the trade case involving Chinese coated paper. The U.S. industry won the case, but it didn't show sufficient injury to warrant duties. "So we brought the same case three years later after losing 7,000 jobs," says Gerard. "There is something wrong with the law where you have to lose jobs to win a case."

Sen. Casey said Americans are asking "some basic questions" of its government. "One question is when China cheats will we act? When China subsidizes unfairly, do we have a plan of action against that? When China does what it does on currency, or intellectual property or subsidies, will we fight? A lot of Americans are asking those questions and haven't heard the answer yet. They are asking it of both parties. They want us fighting for these jobs every single day of every single week. And they have a real question mark as to whether this Congress and this government will fight for their jobs in ways that are appropriate and long overdue. The American people are waiting for an answer. When they cheat and don't play by the rules will we act?"

Stewart's firm notes in a report on China's industrial and trade policies related to the automobile sector that in 2010, China produced more than double the amount of cars produced in the United States, 90 percent more than in Japan and more than all of Europe combined. China expects to produce 40 million vehicles per year by 2015, "exceeding projected domestic demand by 13 million vehicles," says the study titled, "China's Support Programs for Automobiles and Auto Parts Under the 12th Five-Year Plan." If such levels are achieved, "China would be exporting nearly twice as many vehicles as the U.S. produces for all markets, both at home and abroad," the study notes.

There are hundreds of different auto parts targeted for Chinese government support, from LED headlamps to high-strength steels, composite plastics, transmission control units, electric air conditioning, electric braking, idle stop-start systems, electronic parking systems, battery packs, engine air-intake superchargers, hydrogen storage systems and many more.

U.S. imports of Chinese automobile parts and components are surging in dozens of sectors. Imports of aluminum wheels from China have grown from about eight million in 2009 to 18 million in 2011.

Imports of radiators from China have increased from three million in 2009 to more than four million in 2011. Imports of laminated safety glass windshields from China have increased from six million in 2009 to more than 10 million in 2011. Brake lining imports from China have surged from about 15 million in 2008 to more than 40 million in 2011. Imports of Chinese engine ignition coils have increased from under four million in 2009 to more than 14 million in 2011.

The Stewart and Stewart report, along with two similar reports from the Economic Policy Institute, "Growing Threats to the U.S. Auto-Parts Industry from Heavily Subsidized Chinese Tires and Parts," and "Putting the Pedal to the Metal: Subsidies to China's Auto- Parts Industry From 2001 to 2011," are available for download from the Alliance for American Manufacturing's website at http://americanmanufacturing.org/autopartsjobs.

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