A Free Trade Test for the Obama Administration

On September 17, President Obama will have to decide whether to accept the U.S. International Trade Commission's recommendation to impose tariffs on imports of Chinese tires. Here are the findings of the USITC. And here is their final determination:

On the basis of information developed in the subject investigation, the United States International Trade Commission (Commission) determines, pursuant to section 421(b)(1) of the Trade Act of 1974,1 that certain passenger vehicle and light truck tires from the People’s Republic of China are being imported into the United States in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of like or directly competitive products.

Most "free traders" would argue that he should reject the recommendation because it would 'scream of protectionism' to accept it. But would it? Clyde Prestowitz, in a Financial Times comment argues the opposite. That accepting the recommendation would actually re-enforce Pres. Obama's bona fides as a "free trader".

The conventional view is based on the notion that free trade is always a win-win proposition and that our trade with China fits the conditions of the traditional free-trade model. These include the assumptions that the markets are perfectly competitive, that exchange rates are not manipulated, that there are no economies of scale, that there is no cross-border investment or cross-border transfers of technology, 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. China keeps its renminbi undervalued against the dollar in order indirectly to subsidise its exports. Foreign direct investment in China is often induced by the use of special, targeted tax and financial incentives. Foreign companies investing in China are often required to export the bulk of their production as a condition of being allowed to enter the Chinese market. This is the case with Cooper Tires, which agreed to export 100 per cent of its production in return for being allowed to invest in a Chinese tyre factory. The tyre industry is characterised by enormous economies of scale and imperfectly competitive markets in which a few oligopolistic producers divide the market among themselves. It is Chinese industrial policies and not market forces that are currently determining the trade flows and the location of production and jobs to the detriment of the US tyre industry.

Good stuff from Mr. Prestowitz and he continues:

Orthodox unilateral free-traders argue that, even if the US tyre workers lose their jobs, the US economy will enjoy a net benefit from lower consumer prices. But this is true only if the shuttered US factories and laid-off workers quickly shift to some other equally productive and well-paid activity. If, as we know, they cannot, the entire economy will suffer a loss of productivity and wages.

So, here we go - a real test of Pres. Obama 'free trade' bona fides. September 17 is the deadline and we anxiously wait the President's decision.

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In the First Test of Enforcement:

Commerce Puts Duties on Chinese Steel Pipes - Looks like this was issued today (9/11/09).

But we wait for the President's decision on tires.

RebelCapitalist.com - Financial Information for the Rest of Us.

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I have to take off

i.e. be offline for the afternoon, but I saw this, good news and you might check out the middle column of title feeds to see what some of the other trade groups, economists focused heavily on trade, manufacturing have to say on this one for more insight.

I have to look at this (as well as probable fiction document claiming the Stimulus saved 2M jobs and so on, sorry but with 10% unemployment I'm having a hard time believing that one)

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The White House reads EP - Breaking News

Maybe.

BREAKING: Obama Imposes Tariffs on $1.7 billion in Chinese Tire Imports

According to Robert Gibbs' email statement:

additional duties would last for three years, dropping each year by 5 percentage points.

We will see what kind of bite this has.

RebelCapitalist.com - Financial Information for the Rest of Us.

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very good sign

I'm so used to rhetoric and absolutely zero happens on anything.

good friday news.

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Retaliation is a b#@%h

Here comes China claiming the U.S. is "dumping" chickens and auto parts.

Just hilarious! But goes to show you how China just is intense on maintaining unfair trade at any price.

I just how the Obama administration finally takes a tough line with them.

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meh

The autoparts one is a canard, this is more for show. Why? Well for starters, they already have rules stating that at least 60% of what goes into the car or truck must be domestic. And do you really believe that foreign automakers there really use parts from their home countries versus local suppliers to begin with? GM is on record boasting how they have saved money making an affordable car for the local market by using "exclusive lucrative deals" with domestic parts makers (implying they got the stuff cheaper than what would normally have been).

As for the chickens..well, more for us I guess. Oddly enough, my local KFC closed because they actually ran out of chicken. Chickens like the auto parts though are a distraction.

If you really want to gauge China wait until the next auction of treasury securities. They have already paired back their purchases, focusing on shorter-termed debt like the 5s and 7s. They are also, as you will probably read in the papers, looking into diversifying into "safer investments" in the US to launder their money (ok...maybe launder was a strong word), like purchasing utility companies like AES.

Regarding free trade, well I've always been for that. The problem was we haven't really had it. And we especially haven't had it with our so-called partners across the Pacific. Free markets are just that...free of manipulation, free of onerous irrelevant non-safety regulation, etc. Beijing (well also the Japanese too) have for decades meddled in such things. They've artificially pegged their currency at a low rate (which I believe in the end will backfire on them). They've had a quota system that even has gotten the attention of the WTO. I could go on and on, but you all know what I'm talking about. Free trade? Show me where?

You know, if we wanted to be dicks, the Chinese know it. But conversely, they know our politicians are just as corrupt as they are spineless. The whole world has gotten a free ride off of us since the end of the Second World War. We made deals with third world nations in hopes that by us throwing our jobs their way (And money) they wouldn't go into Moscow's orbit. Once more I could go on and on. But I will only say what has our stupid gratitude/oh-please-be-our-friend gotten us?

Actually, while I've ranted about the Chinese, my hat's off to them. Beijing knows how to play the game, in fact they're using our old playbook before we went all Marshall Plan on the planet. I'll never forget when Charlie Rose had Kissenger on his show and he said that we had to show them "economic tangibility" from our side or they would go to the other side. Now could that have happened? Who knows. I've always thought the domino theory was BS because the "other side's" system was inherently weak. Perhaps there is some form of socialism that works, but what was promoted out of the Kremlin wasn't it. Ok, I'm going off base here, but I just feel we sold out our exportability for the sake of getting third-world Cold War allies.

The Chinese are great students of history. They studied us, every PRC President who has visited us has said they made it their duty to learn about us. We played hardball once with regards to trade. There was a time when we were the great exporter, perhaps not a constant trade surplus (the only data I could find only goes back to 1960), but industrially speaking we were king. Now perhaps the price of labor has gotten too high for some products, but I find that hard to believe generally with all manufacturing goods. We went through periods of free trade in the past, but that has not been the rule. And when we found ourselves in an unfair situation, we adapted.

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