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Meltdown 101: China-U.S. Tire Trade War

Tue, 09/15/2009 - 8:40am
Bree Fowler and Emily Fredrix, AP Business Writers

China and the U.S. are bickering over tariffs on tires and exports of chicken.

The political back-and-forth could hurt businesses on both sides -- some of them already struggling -- and it could also affect consumers. Most notably: You could see rising prices for tires from China, and fewer price cuts on the ones that aren't imported from there.

Here are some questions and answers about the trade dispute.

Q: What is happening?

A: Let's start with Friday. That's when President Barack Obama approved raising the tariff -- a tax on imported goods -- on all car and light truck tires from China, in an effort to slow the growth of U.S. imports of Chinese-made tires. Unions blame the growth of these imports for the loss of thousands of American jobs.

China accused the U.S. of protectionism and said the move violates World Trade Organization rules. On Sunday, China announced it would investigate complaints that American exports of auto and chicken products benefit from government subsidies or are being dumped in China, meaning sold there at below market prices.

Then on Monday, Beijing filed a World Trade Organization complaint over the tire tariffs, a move that sets off a 60-day WTO process where the two sides try to resolve the dispute through negotiations. If that fails, China can request a WTO panel to investigate and rule on the case.

This all comes as China and the U.S. prepare to participate in a summit of the Group of 20 leading economies in Pittsburgh on Sept. 24 and 25. The summit aims to talk about ways to end the global downturn.

Q: How much is this tire tariff?

A: Before this past Friday, there was a small tariff of 4 percent. But Obama's decision imposed an additional tariff of 35 percent for the first year, 30 percent for the second year and 25 percent for the third year.

Obama decided to impose trade penalties on Chinese tires after the U.S. International Trade Commission, an independent federal agency that provides trade policy advice to the government, ruled that an influx of the tires into the U.S. was hurting American producers.

The federal trade panel had recommended a 55 percent tariff in the first year, 45 percent in the second year and 35 percent in the third year.

Q: Why is the tariff being increased?

A: To save American jobs. Though it's unclear if the higher tariff will do that.

The United Steelworkers union says more than 5,000 tire workers have lost jobs since 2004, as cheaper Chinese tires overwhelmed the U.S. market and hurt profits for American companies.

From 2004 to 2008, U.S. imports of Chinese tires more than tripled and China's market share in the U.S. went from 4.7 percent of tires purchased to 16.7 percent, according to the U.S. Trade Representative's Office.

Meanwhile, four American tire plants were shuttered in 2006 and 2007 and three more are closing this year. During that time, just one new plant opened.

Q: Do the U.S.-based tire companies support the higher tariffs?

A: Actually, as a group, no. In recent years, tire makers, like many other manufacturers, have increasingly shifted their production from the U.S. to countries like China to save on labor and production costs. That means American-owned factories in China would be subject to the tariffs if they imported those products back to the U.S.

The Tire Industry Association doesn't support the tariffs and said they will not save jobs since the jobs have already been sent elsewhere. The tariffs, the industry says, will cause tire manufacturers to simply shift their overseas production to another country.

The U.S.-owned companies also could divert their Chinese-made tires and sell them in countries other than the U.S., limiting the supply of cheaper tires here.

Meanwhile, U.S. tire companies that don't export many tires from China to the U.S. could get a boost. That could happen, for example, with Akron, Ohio-based Goodyear Tire & Rubber Co., which says less than 2 percent of its tires sold in North America come from China.

Deutsche Bank's Rod Lache said both Goodyear and Findlay, Ohio-based Cooper Tire & Rubber Co. stand to benefit from higher prices in North America, which could result from the higher tariff.

But that could hurt consumers.

In particular, Cooper will be under less pressure to keep its prices low, Lache wrote to investors, since many of the less expensive tires it makes compete directly with Chinese imports. So Cooper would fetch higher prices for its tires -- but its China operations, which are more substantial than Goodyear's, could be hurt since they'd be subjected to the tariffs, too.

Q: What about chicken? How is that involved?

A: Chicken has been a sticking point in the global trade world. This summer, the World Trade Organization launched a formal investigation of the U.S. ban on Chinese poultry imports. China alleged the U.S. government was breaking global commerce rules by not allowing the imports.

China, meanwhile, is the U.S.'s largest chicken export market, surpassing Russia for the top spot earlier this year, according to the USA Poultry & Egg Export Council. Last year, some $722 million worth of chicken was exported to China. In the first seven months of this year, that figure is $393 million. The U.S. exports about 20 percent of its chicken production, worth nearly $5 billion a year.

And this past weekend, China alleged that American chicken makers are receiving subsidies from the U.S. government and are also selling their products -- mainly chicken feet -- at below-market prices. Council president Jim Sumner said neither of those allegations is true.

Q: How does all this affect the consumer?

A: For tire shoppers, the tariff will raise the cost of Chinese imports, which tend to be mostly lower-end and store or generic brands.

Some industry observers put the average cost of an American tire at over $100, while the cost of a comparable Chinese model can be half that.

The Alliance for American Manufacturing, which includes the Steelworkers union and supports the higher tariff, said the ITC report shows that the higher tariff would only result in price increases of 5 percent to 7 percent for Chinese tires, or about $3.50 per tire.

But the tariffs are expected to raise pricing of all kinds of tires to some degree because there will be fewer cheap competitors.

Companies like Goodyear will be under less pressure to lower prices since their cheaper competition will shrink. These companies have also been cutting production to scale back their business, so that means there will be fewer tires for sale. It all adds up to less incentive for tire makers to put their products on sale.

That may be good news for the struggling industry, but not for consumers looking for a bargain.

As for chicken, there are no tariffs to deal with since the U.S. does not import chicken from China, so it's not likely U.S. prices will be affected. But a spat with a major export market could hurt the already struggling industry if it escalates. There could be retaliatory tariffs against exports of chicken to China, or the loss of access to that market altogether.

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