Chinese Tires Case Shows How U.S. Trade Laws Have Run Amok

Daniel J. Ikenson

To secure Trade Promotion Authority last month, President Obama and Republican congressional leadership had to pay off Washington’s protectionism lobby. Part of the payment was enactment of the American Trade Enforcement Effectiveness Act, which reduces the burden of proof on domestic industries seeking protection from import competition under the U.S. Antidumping and Countervailing Duty laws. But a pending case concerning tire imports from China reinforces concerns that already-too-lax standards have opened the so-called trade remedy laws to widespread abuse.

The Antidumping (AD) and Countervailing Duty (CVD) laws are portrayed by the protectionism lobby as tools needed to help U.S. producers “level the playing field” with foreign producers, who exploit unfair practices to establish dominance in the U.S. market. In reality, the laws have become commercial weapons used primarily by American companies and their workers to secure advantages over other American companies and their workers. The rhetoric says “U.S. vs. China,” but the reality is “U.S. vs. U.S.,” with the duties imposed wreaking havoc on U.S. companies and reducing national economic welfare. Rarely have these measures led to net increases in production or employment.

Antidumping duties are imposed when a domestic industry demonstrates that it is “materially injured” or threatened with material injury by reason of imports that have been sold in the United States at prices that are lower than those charged by the same producer in his home market. Countervailing duties are imposed when material injury is found to be caused or threatened by imports that have been subsidized by foreign governments. After a petition is filed on behalf of a domestic industry and a case is initiated, the U.S. Department of Commerce (DOC) estimates whether and to what extent dumping or subsidization has occurred, and the U.S. International Trade Commission (ITC) determines whether the domestic industry is injured or threatened with injury by reason of the dumped or subsidized imports.

“The imposition of duties would be a regressive tax that would also impair the domestic industry’s global production strategy.”

Next week, the ITC will render judgment in AD/CVD investigations involving imports of automobile tires from China. The tires case provides the latest evidence that the trade laws have been co-opted for extra-statutory purposes that go beyond remedying allegedly unfair trade practices.

The United Steel Workers union is the sole petitioner in the case. It represents workers at domestic plants accounting for only 40 percent of total U.S. tire production capacity. None of the nine domestic tire producers — i.e., the firms that account for all domestic tire production — supports the AD/CVD petitions. How much more user-friendly do the trade remedy laws need to be when they already can be deployed on “behalf of a U.S. industry” without the support of a single producer or even a majority of the industry’s workers?

The statute defines material injury as “harm which is not inconsequential, immaterial, or unimportant,” which is already an expansive definition capable of accommodating almost any set of commercial facts. In determining whether such injury is caused or threatened by subject imports, the ITC is instructed by the statute to consider: the volume of allegedly unfairly-traded imports; the effect of the allegedly unfairly-traded imports on prices in the United States for domestic like products; and, the impact of the allegedly unfairly-traded imports on the U.S. operations of domestic producers. In carrying out these instructions, the ITC considers a multitude of factors, including industry profits, utilization of production capacity, capital investments, price elasticities, product substitutability, and so on. In the tires case, these indicators overwhelmingly support a negative finding of injury.

Each domestic producer was profitable every year of the period of investigation, with the industry registering increasing profitability year after year. The industry’s operating profit margin increased from 9.2 percent in 2012 to 10.1 percent in 2013 to 12.9 percent in 2014. By comparison, 2014 operating profits in the broader auto part industry and the overall manufacturing sector were 4.8 percent and 7.8 percent, respectively. Not bad for an alleged victim of unfair trade.

Even as new capital investments have added to U.S. production capacity in recent years (including $873 million of expansion last year), capacity utilization rates averaged around 90 percent throughout the three-year period of investigation. Meanwhile, Goodyear Tires recently committed to approximately $500 million of investments in U.S. plant expansion and three new entrants to the U.S. market have announced plans to invest $1.75 billion on new tire plants in South Carolina, Georgia, and Tennessee to satisfy growing U.S. auto production.

Persistently high capacity utilization rates, domestic producer investments of $2.4 billion over the past three years, and commitments of another $1.75 billion from new entrants can hardly be considered indicative of an industry facing material injury.

But perhaps the most important factor in this case is that imports from China don’t compete with domestically-produced tires. Competition in the U.S. tire market is attenuated by reason of the fact that the market is stratified. U.S. producers dominate the “premium” and “high value” segments of the OEM and replacement tire markets, where profit margins are the highest. Imports from China serve the budget and economy segments of the replacement market, where lower to middle-income Americans’ needs are met. The imposition of duties would be a regressive tax that would also impair the domestic industry’s global production strategy.

The fact of a stratified tire market explains the absence of any injury and the absence of domestic producer support for the petition. Over the past decade, U.S. producers made the conscious decision to shift almost all of their domestic production to high-end tires, while producing abroad and importing it lower-end tires. Eight of the nine domestic producers — accounting for nearly all domestic tire production — also produce tires in China. As importers of their own Chinese-produced tires, U.S. producers themselves would be hurt if AD/CVD duties were imposed. Their support for the petition would be akin to their asking to be saved from themselves.

So one might ask: Why would the union bring a case that would hurt the employers of the workers it represents and — by extension — the workers it represents? After all, the number of hours worked and the wages earned per hour both increased during the period of investigation. Union management cannot possibly expect its effort to obtain duties, if successful, will lead to more domestic production of lower-end tires because it’s tried that before and failed. From 2009 to 2012, duties on the same kind of Chinese-produced tires were imposed under a different statute known as Section 421 or the China-Specific Safeguard law. It was successful at reducing imports from China, but there was no significant increase in domestic production. Domestic producers continued to focus on higher end tires and imports from other developing countries increased to fill the void left by the decline in imports from China. The same thing will happen if duties are imposed this time.

Duties on imports of tires from China would lead to greater production in other developing countries, not in the United States. U.S. producers have chosen to outsource production of their lower-tier tires to China because producing those tires in that location makes the most sense economically. Raising the costs of producing in China by imposing trade restrictions would not make U.S. production more attractive. It would not create U.S. jobs. It would make Indonesian or Mexican or Brazilian production more attractive, and would likely divert jobs from China to those countries.

So how does the union expect to benefit from trade remedy measures? By obtaining negotiating leverage over industry management. If AD/CVD measures are imposed, they will remain in place for at least five years, unless the petitioners are willing to allow the measures to be revoked. Either way, as petitioners, the union can make things more or less difficult for any and all of the producers subject to the orders. In other words, finding ways to stay in the relatively good graces of the union may become a crucial component of the tire producers’ global production strategies.

This case is not about a U.S. industry seeking reprieve from unfair foreign practices. It is about organized labor misappropriating the trade laws to extract production and wage concessions from U.S. tire industry management. It is about the union trying to obtain what it thinks are more favorable outcomes than it has achieved through the normal labor-management negotiating channels. In the meantime, if the union succeeds, that success will come at the expense of U.S. producers, wholesalers, retailers, and consumers. Some consumers may choose to forego purchasing new tires — possibly putting lives at risk — if the lower-end Brazilian or Mexican tires don’t keep prices from rising too much.

This is certainly not the first time the trade laws have been abused like this. More and more frequently, the trade laws are being used by domestic producers to hobble their domestic competition’s supply chains. More and more frequently cases are filed on behalf of single producer seeking to preserve his monopoly position by cutting off his customers’ access to foreign sources of some crucial intermediate good. In fact, over 80 percent of U.S. antidumping measures imposed since the year 2000 have been on imported intermediate goods, which are crucial inputs to other U.S. manufacturers. Yet, under the statute, the impact of antidumping measures on those downstream companies is prohibited from factoring into the ITC’s decision-making. The collateral damage is simply ignored, and the downstream costs mount.

This problem is likely to worsen — especially with the passage of the American Trade Enforcement Effectiveness Act, which creates an express lane for trade remedies abuse and might best be described as a jobs program for lawyers. If the laws are meant to be used to “remedy unfair trade practices,” the tires case is the latest example of how they are being abused. Hopefully, the ITC sees through this charade and declines to sanction such abuse.

Daniel J. Ikenson is the director of Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies