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Protection Rolls On

Wednesday, December 15, 2010

President Obama remains conflicted on trade. Consider this week’s ‘victory’ over China at the World Trade Organization.

U.S. Trade Representative Ron Kirk this week trumpeted the administration’s victory over China at the World Trade Organization (WTO). Describing a dispute settlement decision that upheld the legitimacy of U.S. tariffs on imported Chinese tires, Kirk said, “This is a major victory for the United States and particularly for American workers and businesses.”

The Wall Street Journal even joined in the triumphalism: “The World Trade Organization handed the U.S. a big victory in a fight with China over tire imports, bolstering the Obama administration's effort to show it is tough on enforcement.”

There is no disputing the legal victory, but it does little or nothing for American workers and businesses, and was not an enforcement action.

The Obama administration’s protective measure was not illegal, only unwise and ineffective.

The U.S. government can use a number of different WTO-approved mechanisms to reduce or block imports from another country. If it finds that a country has been selling goods at “less than fair value,” it can pursue a dumping investigation. If it finds that a country has been illicitly subsidizing its exports, it can take up a countervailing duty case. Those are the two most common approaches, and each involves a two-stage investigation. First, the U.S. International Trade Commission (USITC) determines whether the domestic industry has been injured. Second, the Commerce Department assesses the extent of the exporting country’s violation—the dumping margin or the size of the subsidy. In the end, tariffs may be applied.

Those could reasonably be called enforcement actions and they have been pursued by Republican and Democratic administrations for decades. The process is not especially political, because Congress has removed the step in which the White House gets to decide whether or not the new protection is a good idea.

The tariffs against Chinese tire imports are entirely different. The authority comes from a special, temporary safeguard provision that the United States and China negotiated when China joined the WTO in 2001. That provision (Section 421) does not require any evidence of wrongdoing. It just requires evidence that imports have caused “market disruption.” The investigation is carried out by the same body that investigates injuries, the USITC, which may be part of the confusion.

China safeguard cases differ from enforcement cases because the president retains ultimate discretion over whether the protection is a good idea.

China safeguard cases differ from enforcement cases not only because they require no violation of rules (to my knowledge, no one argued there was any violation in the tires case), but also because the president retains ultimate discretion over whether the protection is a good idea. In the Bush administration, multiple Section 421 cases cleared the low USITC hurdle, but were then rejected by the White House. The main reason—at least for those decisions in which I participated—was that protection would not have helped anyone.

It can be tempting to think of China and the United States, economic behemoths both, as the only two countries in the world. That’s wrong, of course, and the error matters. These China safeguards only impede Chinese exports, not exports from the rest of the world. In the Bush administration cases, there was evidence that protection would just leave U.S. consumers paying higher prices while production shifted to other countries.

The same arguments applied in the tires case (see here), which was brought by the United Steel Workers, not the domestic industry. President Obama, unlike his predecessor, decided to proceed anyway. The good folks at the Democratic Leadership Council recently offered this assessment of the tire tariffs one year later: “Altogether, then, the tariff seems to have shifted the sources of imports, with China shipping fewer tires and others more, but made little apparent change in total tire-trade or employment.”

Since before he took office, President Obama has been conflicted on trade.

So what does this week’s WTO tires decision really mean? That the Obama administration’s protective measure was not illegal, only unwise and ineffective. That’s not much to celebrate.

Since before he took office, President Obama has been conflicted on trade. The Chinese tire tariffs were part of the president’s “split the difference” trade approach, in which he tried to appeal equally to trade skeptics and enthusiasts within his party. He applied tariffs to Chinese tires, but at half the level the USITC recommended. He argued for exports with his National Export Initiative, but not for imports. He inveighed against the malign effects of trade, but resisted blatant protectionism. He would support new trade agreements in principle, but not back them in practice.

The recent decision to conclude the free trade agreement with Korea may have indicated a shift to a more fully pro-trade stance. Perhaps that stance will allow a new candor in discussing other trade actions, like the needless, but permissible, protection against Chinese tires.

Philip Levy is a resident scholar at the American Enterprise Institute.

FURTHER READING: Levy describes “An 18-Wheel Bellwether” on trucking trade with Mexico, asks “Will the President Confront His Base on Trade?” and evaluates “The Straw Stimulus.” He offers “Everything You Wanted to Know About Last Week's Korea Trade Agreement, But Were Afraid to Ask,” discusses how China and Russia want to “Duck the Buck,” and condemns “The KORUS Catastrophe.”

Image by Darren Wamboldt/Bergman Group.

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