Global Business

Management
The Political Economy of International Trade
Case: US Tariffs on Tire Imports from China
The Situation

▪ In September 2009, the US place a tariff on tire imports from China

 Because intense lobbying from the United Steelworkers Union
(15000 workers at 13 tire plants in the US) through the
International Trade Commission
▪ Tires from China:
 low-end models that sells for half the price of American tires
 46 million tires  3x as many as imported in 2004
 China’s market share  rise from 5% to 17%
 US employment in tire industry fell by more than 5000 workers
 US tire production  slumped from 280 mil tires to 160 mil tires
 Chines tires were causing significant “market disruption”
 The Situation

Chinese tires US tires

• Cheap low-end models
• Imports rose to 46 mil tires
• Market share rose from 5%
to 17%
• Employment fell by 5000
workers
• US tire production fell from
218 mil tires to 160 mil tires
• The US protest that Chinese
tires were causing “market
disruption”

The
US tire
market
The Tarif

▪ Three-year tariff in imports of Chinese tires:

 35% on the 1st year
 30% on the 2nd year
 25% on the 3rd year
▪ The Chinese objected  “a serious case of protectionism”
▪ The Chinese argued that the US was violating WTO rules
▪ The US argued that the tariffs were allowed under the terms of
a special safeguard provision that was part of the US
agreement to support China’s entry to WTO in 2001
Instruments Of Trade Policy

▪ Tariffs
▪ Subsidies
▪ Import quotas and voluntary export restraints
▪ Local content requirements
▪ Administrative policies
▪ Anti dumpling Policies

5
Government Intervention

▪ Political arguments
 Protecting jobs and industries
 National security
 Retaliation
 Protecting consumers
 Furthering foreign policy objectives
 Protecting human rights
▪ Economic arguments
 The infant industry argument
 Strategic trade policy
▫ First mover advantages
▫ Help firms to overcome barriers to entry (subsidy)
▪ Free trade arguments
 Retaliation and trade war (beggar thy neighbor)  only leave all countries involved worse off
 Government interventions do not always act in the national interest  can only for the
interest of a particular group (EU’s Common Agricultural Policy)
Development of the World Trading
System
▪ Strong economic arguments support unrestricted free trade
▪ In practice, a country may not be willing to lower trade barriers for fear
that other countries will not follow suit
▫ Lack of trust
▫ Need a referee  GATT and WTO
▪ World trading system history
▫ (1846) Free trade in the Great Britain
▫ (1930) Great depression and Smoot-Hawley act  wall of tariff
barriers
▫ (1947 – 1070) The GATT (General Agreement on Tariffs and Trade)
▫ (1980s – early 1990s) Protectionist trends  Japan’s economic success
▫ (1990s) The Uruguay round and the WTO
WTO’s Decision

▪ “the US did not fail to comply with its obligations”  The tariffs remain
▪ The Chinese argued that the tariffs had hurt the interest of both the US and China
 The tariffs cost jobs in the US
 Small and medium size wholesalers go out of business
 Burdened low-income consumers  tire prices increased
▪ The United Steelworkers argued that the tariff had been a big success
 US production increase more than 15%
 US companies were expanding
 Imports from China fell by 34%
▪ However, over the next 18 months:
 Imports from other countries rose (Thailand, Mexico, Indonesia)
 Several US companies build factories outside the US
 China responded by placing tariffs on export of some US products such as broiler
chickens
The Impact

The US
• Small and medium
companies went out
of business
• Jobs declined
China • Tire prices increased Other countries:
• Tire imports to US fell • Tire imports from
by 34% other countries rose
• Placed tariffs on US • US companies build
products plants outside the US

The
US tire
market
THANKS!
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