President Obama, on September 11, announced that the United States would restrict imports of Chinese commercial, low-cost tires. This action was foreseeable and foreseen (for example this blog foresaw this action in articles titled Attack On China Rolls On New Tires and Consultations To Settle The Tires Dispute: Too Little Too Late?). President Obama committed to additional tariffs of 35-30-25 percent stepped down over three years; the United States International Trade Commission had recommended 55-45-35 percent over three years. Many analysts called the ITC’s recommendation prohibitive; the Obama rates, according to United States Trade Representative Ron Kirk, were derived from an economic model designed to reduce but not prohibit Chinese tires in the U.S. market. The victorious United Steelworkers predicted getting their lost jobs back; most analysts predicted that exports from other countries, not domestic production, would fill in the missing Chinese tires.
Within twenty-four hours, China announced trade remedy investigations into chicken and automobile parts from the United States. Observers were quick to label the announcement as “retaliation” (Inside U.S. Trade headline: CHINA RESPONDS TO TIRES SAFEGUARD WITH NEW AD INVESTIGATIONS), which China denied. China announced a WTO appeal of an adverse decision on the sale and distribution of visual works and music download services almost simultaneously, and a WTO challenge to the tires safeguard decision within days.
Dire predictions, and accusations directed at President Obama, followed quickly. President Obama was accused of breaking the word he gave, and the undertaking of world leaders that he had solicited, at the last meeting of the G-20, to avoid any acts of trade protectionism in the midst of a global recession. He was accused of inconsiderate timing, making his announcement on 9/11, a day that ironically had brought the world together, and less than two weeks before the next G-20 in Pittsburgh, where he would be the host. China complained, expressly, that President Obama seemed prepared to trade off 5000 American jobs for 100,000 Chinese, seeking a superior moral ground. Trade analysts rushed to predict a wave of safeguard actions against Chinese products. After all, if an apparently weak claim could succeed with the Obama Administration, surely stronger claims could prevail, and the standards for relief based on a safeguard action are much lower than for dumping and countervailing duty petitions.
The safeguard action did not require any Chinese violations of any trade rules, and there were no formal allegations of dumping or subsidies in the tires case. Had there been any, the law required them to be disregarded in the decision process. Nonetheless, United Steelworkers President Leo Gerard engaged in vitriolic denunciations of Chinese trade practices before, during, and after the President’s decision. He quickly seized leadership in new petitions that did contain such allegations. The Obama Administration said nothing publicly to recognize the difference between the decision on tires and findings of subsidies or dumping, thereby possibly reinforcing an apparent Chinese impression that the proceedings were unfair and ill-timed for global economic recovery. Gerard’s statements (and similar statements from a Union witness, the Alliance of American Manufacturing, at the Trade Policy Committee hearing), seem intended, in their disregard for the law and in their tone, to damage Chinese-U.S. relations. As they were, in the tires case, outside the law, the Obama Administration may need to be sensitive to an overtly warm embrace of the unions.
Did President Obama start a trade war? Is China retaliating? Will the G-20 countries conclude that the U.S. is not committed to free trade, and will they react by seeking to protect their own domestic markets? Will this trade trigger reverse the promising signs of global recovery from the worst recession since the 1930s?
There are no simple answers to these disturbing questions, but it is possible to address some of them without hysteria. There is here much more than may seem apparent, and also a bit less.
The Decision On Tires
All trade disputes begin with domestic politics. The tires dispute began with Candidate Obama’s promises to give meaning to the special China safeguard and to insist upon Chinese adherence to trade laws and agreements, and the critical support he received from the trade unions in his run for the presidency. It was sustained by a continuing anti-Chinese sentiment in Congress, where various bills alleging currency manipulation and other unfair trade sins are introduced almost routinely. And it was advanced by the analytical conclusion of four of the six Commissioners of the International Trade Commission, led by a Chairwoman previously on the staff of the Democratic Chairman of the Senate Finance Committee, who found that an increase in Chinese tire imports had disrupted the U.S. market and injured the U.S. industry. The Democratic Chairman of the Senate Finance Committee, coincidentally but instrumentally, is essential to the President in his efforts to reform health care, his highest priority.
The President’s rationale is uncomplicated. China agreed to the special safeguard. Its requirements were met, at least insofar as the case was presented to the International Trade Commission, the United States Trade Representative, and the Trade Policy Committee. Therefore, it was right and reasonable to apply the law.
There is perhaps another explanation. The gathered political forces made a presidential refusal to act in the tires case impossible. The trade unions and the Democratic Congress would have accused President Obama of representing continuity with the Bush Administration, not the change he had promised. He would have been seen to condone the offshoring of jobs, which the Chinese interests in the case brazenly emphasized as the core of their defense. He would have been seen as “soft” on China. Most important of all, he would have had no subsequent credibility with Congress or a probable majority of Americans on trade. He would never have been able to advance a free trade agenda. Indeed, he likely would never have been granted the trade negotiation authority that, at present, he does not have but needs.
The Timing
The law, Section 421 et seq. of the Trade Agreements Act of 1974 , as amended, required presidential action by September 17. The President could have let the date slip inasmuch as there is nothing in the law to discipline him had he done so. However, President Obama is particularly respectful of the law, and he would have been under unwelcome political pressure had he not acted when the statute required.
The President probably did not want to act while National People’s Congress Chairman Wu Bangguo was in the United States, which China may have interpreted as insulting. The Chairman, after all, seems to have raised the issue in meetings with the President, Vice President, and congressional leaders during a visit of more than ten days, exactly during the initial window when the recommendation from the Trade Policy Committee and the Trade Representative had reached the President’s desk.
With the September 17 deadline preceding the G-20 Summit in Pittsburgh (beginning exactly one week later) the President surely wanted as much distance as possible between his announcement and the Summit. At the Summit he wanted to discuss the world’s financial institutions, the economic crisis, climate change. He did not want a diversion into a trade war.
Wu Bangguo left for China from Washington on Friday morning, September 11. The President announced his decision that afternoon, which was already the weekend in China. It was the end of the U.S. news cycle for the week. It was as long before the Summit as possible once Wu Bangguo had left, and it met the statutory deadline. It happened to be 9/11, but otherwise there could not have been politically or diplomatically a better time.
The “Retaliation”
China’s nearly simultaneous announcement of antidumping and countervailing investigations could not have been retaliatory in any normal meaning of that term. China’s bureaucracy, like the bureaucracy in any major country, inevitably is large and slow. It could not have arranged to announce antidumping and countervailing investigations on less than twenty-four hours notice. The investigations had to have been planned long before the President’s decision was known.
The Chinese announcement, not the investigations themselves, may have been intended to appear retaliatory, but it, too, had to have been planned. It is probable, therefore, that the President had told Chinese officials during consultations (see Consultations To Settle The Tires Dispute: Too Little Too Late?) when he would make his announcement so that they could prepare. It may even have been agreed that the Chinese would announce the antidumping and countervailing investigations effectively in conjunction with the President’s announcement, so that both sides could posture for their publics but also sweep the dispute away a couple of weeks before the G-20 Summit.
That China has a growing agenda of trade grievances with the United States is not surprising, particularly as a wave of trade remedy petitions has begun to flood agencies in the United States and other countries against Chinese products. As much as China pledges to encourage more domestic consumerism and to reduce reliance on exports (consistent with American requests in the G-20 framework), such a change will not come about quickly. China needs foreign markets to remain open to its products, just as do other countries. China is appropriately aggrieved by the drive to close or limit markets for its goods.
A dispute over chicken has been festering between China and the United States for a long time. China’s domestic industry in auto parts has been troubled, especially in the recession. Both have been likely sources of Chinese trade actions against foreign imports. The timing for these investigations may not have been entirely coincidental, but it would also appear to have been less calculated and calculating than to be called “retaliation.”
Within a week of these “retaliatory” Chinese actions, three more antidumping and countervailing duty petitions were filed in Washington against Chinese products. No one suggested that these petitions were part of a new trade war, or were retaliatory. Instead, they were understood to be part of the normal course of trade relations between China and the United States, where China is still a major producer of goods that Americans want to buy and American manufacturers and, more significantly it seems, American trade unions, want to keep out. Notwithstanding the grand objectives of the G-20 Summit in Pittsburgh, to make China more a consumer society and less export-driven, while making Americans greater savers with a reduced compunction to buy, the life of the two countries goes on, and with it the rhythm of American trade complaints against Chinese products.
The Maturing Of China
Although life goes on, there are unmistakable changes, precipitated in part by the global recession, but also by the maturing of China in the international system. China made significant sacrifices to join the WTO, including negotiating compromises that created exposure to the special safeguard that produced President Obama’s tires decision. China has been exposed to the WTO disciplines, and nine Chinese actions have been challenged in cases filed in the WTO against Chinese practices. However, China during the last twelve months alone has launched four cases against others. China has begun to recognize the WTO not only as a forum where it might be brought to judgment, but also one where it may challenge others.
China’s growing engagement in the WTO is part of its growing engagement more generally, whether in the G-8 or the G-5, the G-20 or the International Monetary Fund. China is growing into a new role, still a developing country, but one with a voice to be heard. Rather than characterize China’s use of trade laws as “retaliation,” these actions more properly can be seen as maturation, China’s willingness, ability, even determination to act like other countries participating at comparable levels in the world’s trading system.
China is now neither first nor last in the invocation of trade remedies and dispute settlement. It is one among few, but it is more inside the norms of international organizations than out.
These developments signal more than mere maturation. They also signal that China accepts the legitimacy of international institutions, and their disciplines. China accepts full international citizenship, claiming its rights as well as its responsibilities. Instead of finding fault or danger or risk when China exercises these rights, it is probably wiser to find relief as China integrates into the global economy and polity. It was not so very long ago when China was an effective member of neither.
The Next Road For Tires
There is no forum other than the WTO where China can appeal the Section 421 safeguard decision. Nonetheless, China is likely to be disappointed there. Were it to win, it would not be a victory that could be finalized soon enough to impact the tires trade (especially as all WTO relief is prospective), nor to head off other safeguard actions much before the expiration of Section 421 at the end of 2012. China, therefore, should not permit the safeguard actions to create an illusion about the WTO, nor exaggerated expectations.
The tires decision may also have limited effect encouraging other safeguard actions. It took seven months from the filing of the petition to reach presidential decision, which means that “full” relief (three years) requires beginning a case with at least 43 months left in the statute. It is no longer possible to bring any safeguard action under this provision of the law and obtain a result that could yield even three years of relief, as only 39 months of legal authority remain. With every passing day, the potential length of time for relief diminishes because of the law’s mandatory expiration.
It would be more prudent and effective for Chinese interests to continue pressing for reconsideration in the White House, where the statute directs everyone after a year. Were the first year of relief to produce American jobs, a continuing challenge to the President’s decision likely would be futile, but should the predictions of the economists engaged by the Chinese side prove correct, such that safeguard relief does little or nothing for American jobs, the President might be willing to rethink, just as President Bush was forced to do after two years of steel safeguards. In the latter, even as the President was driven to give up the relief, there was a significant recovery in the domestic industry. Without any recovery in the tires industry, the likely scenario, the President would be that much less likely to continue the relief in a form harmful to China.
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We noted in our article entitled India, China, and the Doha Round that India and China have forged a formidable alliance in the Doha Round of negotiations. Now the two “Asian giants” have combined forces in an effort to gain leverage in another multilateral dialogue – this time, the dialogue on climate change that will take place in Copenhagen later this year.
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