Barack Obama’s sudden decision this week to slap a 35% tariff on Chinese tire imports may seem like a sudden bout of irrational protectionism. In fact, it represents yet another act in the endless Kabuki theater of international trade policy (yes, Kabuki is Japanese, not Chinese – but we live in a globalised age).
Neither side is in a position to throw platitudes about free trade at the other, as Clyde Prestowitz points out i
n his op-ed on the subject,
“These include the assumptions that the markets are perfectly competitive…and that there are no government subsidies or export requirements. If this were a true picture of our trade in tyres with China, then imposing tariffs would truly be harmfully protectionist and not be justified.
But this is not even close to the reality of our trade with China, which far from embracing orthodox free trade has openly adopted a neo-mercantilist, export-led economic growth strategy.” (Financial Times)
Very true. As I mentioned last week, our economic relationship to China is deeply colored by both the artificially cheap RMB and their massive dollar holdings. Every action becomes invested with political significance, symbolizing some larger movement or principle.
The drama in this case comes from the political significance of the auto industry. Tires don’t exactly make up a huge portion of US trade with China - $1.8 billion in 2008, or 4/5ths of one percent of total Chinese exports. Granted, that’s still a lot of tires. But the symbolic importance far exceeds the economic factors – tires represent the struggling US auto industry as a whole, and President Obama presumably saw an opportunity to score a political victory on behalf of the beleaguered manufacturers without really rocking the boat.
After all, it’s not as if China welcomes American imports with open arms. American steel and auto parts face steep protectionist tariffs as China tries to bolster domestic industries. Nor is this an isolated incident – In June, the government instituted a Buy Chinese program, although “Just a few months ago Beijing was raging against a proposed Buy American clause included in the US economic rescue package.”
It’s apparent that the leadership of both nations have locked themselves onto a political collision course that they either cannot or will not tack away from because of populist headwinds.
China needs to maintain massive, double-digit growth to sustain their economic miracle while simultaneously appeasing both urban consumer elites and its vast rural population. American imports undermine domestic economies, forcing the government to either tax imports or subsidize their own factories. Unfortunately, doing so antagonizes American voters and politicians, who then retaliate in kind, hurting export-driven industries. Every industry involved in this squabble – poultry farmers, steel makers, automotive parts – has political resonance and a strong lobby.
President Obama, on the other hand, suffers from a fundamentally bi-polar approach to trade. He flips from fiery, protectionist rhetoric in the Rust Belt and industrial heartlands to hushed, backroom reassurances among elites and trading partners that speeches about tariffs are only sound and fury, signifying nothing.
His actions hearken back to former President George W. Bush’s 2002 steel tariffs, which were widely seen as a vote-winning maneuver that appealed particularly to the swing state of Ohio, a perennial indicator in presidential elections. Is it any coincidence that Cooper and Goodyear, two of the major US manufacturers, are also based in Ohio? The state’s (heavily unionized) steel and rubber industries give it the power to throw political haymakers.
Unfortunately for both the President and the people of both nations, China has called Obama’s bluff and appealed to the WTO. They are unlikely to win much, given that the conditions of China’s entry into the WTO included specific provisions allowing the US to apply exactly these sorts of tariffs in response to domestic losses caused by Chinese imports. If the WTO rules against China, though, it will probably increase Chinese suspicions that the whole organization is a tool for US policy abroad.
In the end, this game of chicken may end like so many others, by dropping off of the news cycle and giving national leadership the chance to veer away into compromise. But the stakes are higher this time, raised by the increased political volatility created by unemployment and recession. In times of prosperity, 5,000 lost jobs in tire-manufacturing are a shame – in a recession, they are a scandal. Resolution will depend on the ability of our President and the Chinese government to balance rhetoric with reality.
I’m not holding my breath.
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I did – I believe RMB and CNY are interchangeable – generally, I have used RMB/Renminbi to refer to the currency as a whole, and CNY/Yuan to refer to the actual, physical notes.
Hi. When you wrote RMB for the Chinese currency, did you mean to refer to CNY? Thanks.