Legal Commentary

I read with a sinking heart Gregory Bowman's post about the Obama Administration's September 11th decision to impose section 421 "safeguard" tariffs on Chinese tire imports. Gregory Bowman thought that the decision indicated that the Obama Administration has an interest in "regulation that achieves outcomes that are perceived of as 'fair' from some normative perspective other than efficiency."

This characterization of the decision is, I think, naive. In my own view, the tire decision is merely a concession to raw political realities rather than fairness: The United Steel Workers wanted some sort of restriction on trade, Obama had promised such restrictions during the Presidential campaign, and so he felt he had to deliver on these campaign promises. This leads to my vexed question: Was I too cynical in thinking that Obama was insincere when he indulged in nationalistic demagoguery on trade during the Presidential race? The terrible truth might be that Obama actually meant what he said: He now might really intend to wreck the international trading system during a recession in order to keep his campaign promises to the unions. And here I was thinking -- indeed, praying -- that he was a cynical Chicago pol who would trim his sails once the election was won. Darn: Never have I been so convinced of the Importance of Not Being Earnest about campaign promises

Others have already eviscerated the tire decision's policy-making merits. (See, for instance, the Economist's leader). (Has any neutral academic observer actually praised the decision?) After the jump, however, I will highlight three aspects of the decision that suggest that a regard "fairness" cannot be regarded as either its motivation or likely effect: (A) The decision was dishonestly defended by the Administration as a remedy for illegal actions by China; (B) The decision was a breach of the United States? specific promises not to impose new restrictions on trade in goods at last November?s and April?s G-20 Conference; and (C) the decision will probably not save any jobs.

1. The Administration dishonestly defended the decision as retaliation for unfair trade practices. Initially, the Administration described its action as an effort to provide a remedy for Chinese trade violations. According to the Wall Street Journal?s story, ?administration officials said the president couldn't ignore findings that they said were violations of China's obligations under the rules of the World Trade Organization."

This White House statement was an egregious misrepresentation. The section 421 safeguard is not predicated on any violation of WTO rules: Instead, the ?safeguard? is a special remedy applicable only to China that applies whenever imports from China ?cause or threaten to cause market disruption to the domestic producers of like or directly competitive products,? even if that disruption is produced by perfectly legal trading practices. The Administration?s implicit suggestion to the contrary is, at best, a slippery prevarication.

2. The Administration?s decision broke this country?s promise to the world. At the November 2008 G-20 Conference, the United States agreed to a joint communiqué that ?underscore[d]the critical importance of rejecting protectionism and not turning inward in times of financial uncertainty.? The leaders specifically agreed that, [i]n this regard, within the next 12 months, we will refrain from raising new barriers to investment or to trade in goods and services, imposing new export restrictions, or implementing World Trade Organization (WTO) inconsistent measures to stimulate exports.? The United States signed on to an identical statement at the April 2nd G-20 meeting
(paragraph 22).

The section 421 sanction is undoubtedly ?a new barrier[] to ? trade in goods and services? and is thus a flagrant violation of our nation?s word twice given. We face another G-20 conference in a few weeks: What credibility will we bring to the table after these breaches of our word?

3. In return for breaking its promises and lying about its reasons, the Administration either did not save any jobs or saved such jobs at an absurdly exorbitant cost to the consumer.

Jobs in low-end tire production are offset by the jobs in tire retailing. If an increase in low-end tire tariffs causes the price of Chinese tires to rise enough to affect the buying patterns of low-end consumers away from Chinese tires, then marginal consumers may simply delay tire purchases rather than switch to more expensive American-made brands, putting the tire retailers? jobs at risk. Of course, it is likely that the lost Chinese imports will instead be replaced by cheap tires imported from Brazil. This is, at least, the claim of Obama?s own Trade Representative, Ron Kirk. In either case, no jobs will be saved by this action.

On the off-chance that some low-end tire makers refrain from laying off their workers as a result of this tariff (an unlikely result, given that tire makers mostly opposed this tariff), the cost to the consumer will be exorbitant. The ITC?s own
estimate is that the decision will impose?a first-year impact on consumers of $459 million to $534 million.? (page 37, note 209). Assuming that the tariff will bring back every single one of the 5,000 jobs that have been allegedly lost as a result of cheap Chinese tires and that the tariff will not sacrifice any other retail jobs ? i.e., assuming that demand for low-end tires is price-inelastic beyond the wildest dreams of the tire makers -- this amounts to paying $100,000 per job.

Would it not make more sense to take the recommendation of the dissenting ITC commissioners, Daniel R. Pearson and Deanna Tanner Okun? They sensibly stated that ?the best remedy would be to provide economic adjustment assistance to tire workers who lose their jobs, and that implementing a trade restriction would be far more likely to cause market disruption than to alleviate it.?

Pearson's and Okun's statement highlight a question that is begged by Gregory Bowman's post: The issue raised by the Obama Administration's tire decision is not whether to regulate the market but how: Choosing transition relief over tariffs protects fairness for the losers in international trade, but it does not penalize working-class consumers, Chinese tire workers, or tire retailers, and it does not violate our international commitments.

Transition relief, however, would not satisfy the United Steelworkers, and Obama had promises to keep. It is that political reality, I submit, and not any commitment to fairness over market efficiency, that explains the Obama Administration's decision.