The US govt placed a 35% tariff on tire imports from China,because of a complaint from the United Steelworkers Union, not because of a complaint from US tiremakers. How peculiar that is that none of the US tiremakers “publicly supported the Steelworkers complaint.” The exec VP of GITI Tire company, Vic DiIorio, said in a statement “By taking this action, the Obama admin is now at odds with its own public statements about refraining from increasing tariffs. This decision will cost many more American jobs than it will create.” I think Vic may have meant to say “save” rather than “create” jobs.
Multinational companies like CAT and MSFT have lobbied Obama, alongside Chinese officials, to not curb imports as it could lead to a “downward protectionist spiral.” Tariffs will have “highly damaging ripple effects throughout the US economy by increasing the cost of tires that largely comprise the low-end of the tire market” wrote the emergency committee for American trade in a letter to Obama last month.
This tariff that Obama has imposed have shades of the Smoot-Hawley tariff written all over it.From Wiki:
The Smoot-Hawley Tariff Act was a protectionist act signed by Herbert Hoover, which raised tariffs on 20,000 imported goods into the United States. Hoover signed the law into law on June 17, 1930. The act is thought to have been a major factor of causing the 1930’s Great Depression, and thus Herbert Hoover was largely blamed for the crisis.
In May 1930, a petition was signed by 1028 economists in the United States asking President Herbert Hoover to veto the legislation, organized by Paul Douglas, Irving Fisher, James TFG Wood, Frank Graham, Ernest Patterson, Henry Seager, Frank Taussig, and Clair Wilcox.[3][4] Automobile executive Henry Ford spent an evening at the White House trying to convince Hoover to veto the bill, calling it “an economic stupidity”.[5]J. P. Morgan’s chief executive Thomas W. Lamont said he “almost went down on my knees to beg Herbert Hoover to veto the asinine Hawley-Smoot tariff.”[6]
At first the tariff seemed to be a success. According to historian Robert Sobel, “Factory payrolls, construction contracts, and industrial production all increased sharply.” However, larger economic problems loomed in the guise of weak banks. When the Kredit-Anstalt Bank of Austria failed, the global deficiencies of the Smoot-Hawley Tariff became apparent.[7]
U.S. imports decreased 66% from US$4.4 billion (1929) to US$1.5 billion (1933), and exports decreased 61% from US$5.4 billion to US$2.1 billion, both decreases much more than the 50% decrease of the GDP.
According to government statistics, U.S. imports from Europe decreased from a 1929 high of $1,334 million to just $390 million during 1932, while U.S. exports to Europe decreased from $2,341 million in 1929 to $784 million in 1932. Overall, world trade decreased by some 66% between 1929 and 1934.[9]
There is not any universal agreement about the effect of the tariff. According to the U.S. Statistical Abstract, the effective tariff rate was 13.5% in 1929 and 19.8% in 1933 with 63% of all imports being duty-free. From 1821 through 1900 the United States averaged 29.7% effective tariff rates and peaked in 1830 at 57.3% with only 8% of all imports being duty-free, dwarfing the Smoot-Hawley rate. In addition, imports during 1929 were only 4.2% of the United States’ GNP and exports were only 5.0%. For monetarist authors who consider the Great Depression an effect of the monetary policy of the Federal Reserve, the Smoot-Hawley’s effect on the entire U.S. economy may have been small compared to monetary policy. By 1937 the effective tariff rate was reduced to 15.6% when the reaction of 1937–1938 occurred, demonstrating no statistical correlation between this economic downturn and tariff levels. Senator Robert L. Owen testified at the hearings on HR 7230, the bill to make the Federal Reserve banks a national property, that “In 1937, when the Federal Reserve Board called upon the banks to raise their reserves to twice what they had been before, there was a contraction of credit of two billion dollars.[10]
Using panel data estimates of export and import equations for 17 countries, Jakob B. Madsen (2002) estimated the effects of increasing tariff and non-tariff trade barriers on worldwide trade during the period 1929–1932. He concluded that real international trade contracted somewhere around 33% overall. His estimates of the impact of various factors included about 14% because of declining GNP in each country, 8% because of increases in tariff rates, 5% because of deflation-induced tariff increases, and 6% because of the imposition of nontariff barriers.
While tariffs may create ripple effects and downward protectionist spirals that worsen the crisis, the spin from politicians is quite misleading to the American public. White House Spokesman Robert Gibbs told reporters this tariff won’t spark a trade war. This is pure conjecture on Gibbs part, how does he know this won’t spark a trade war? Chian “strongly opposes” Obama’s decision to place a tariff on tires and is expecte to refer the case to the World Trade Organization. “It is an abuse of the trade remedy measures and made an extremely bad start against the backdrop of global financial crisis,” China’s statement said. Two days after Obama’s tire tariff, “China announced a probe into the alleged dumping of American auto and chicken products.” Whether the Chinese probe is or is without merit, the probe itself does indicate how quickly a retaliatory “protectionist downward spiral” can spread and worsen the global recession. Trade retaliation can go viral virtually overnight.
White House spokesmen Robert Gibbs went on to say “For trade to work it has to be based on fairness and rules.” We’re simply enforcing those rules and would expect the Chinese to understand those rules.” Gibbs fails to cite any specific trade rule or law, so it is not clear that the White House is defending any specific rule, if there is one.
Readers that are familiar with any specific trade law or set of trade laws being “enforced” are encouraged to comment.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aIMC3B3J0bQE
http://www.bloomberg.com/apps/news?pid=20601087&sid=a7nGNZzouDOM
