Sino-US trade ties face a tough tire test

Boosting bilateral trade can help China and the US overcome the global economic crisis. But though US exports to China have doubled in the past five years, it's still difficult for many Chinese goods to enter the US market because of pressure from powerful lobbies.

For example, US trade unions are trying to restrict Chinese tire imports, a move that could force US President Barack Obama to choose between a firm free trade and a pro-labor policy.

US Treasury Secretary Timothy Geithner visited China last week and called for greater cooperation to smoothen the two countries' often fractious relationship. As Geithner was proposing that in Beijing, a hearing began at the International Trade Commission in Washington on June 2 on a case filed by the United Steelworkers (USW) Union.

The union alleges that an increase in Chinese tire imports has cost 7,000 US jobs. It wants Obama to more than halve the number of imports from 46 million units last year to 21 million. It wants the administration to use section 421 of the trade law, which requires the ultimate approval or rejection of the president even after a ruling of the US International Trade Commission.

The US administration has sent mixed signals on trade with China since Obama assumed office. On one hand, officials such as Secretary of State Hillary Clinton have encouraged China to continue to buy US debt, on the other, Geithner accused China of "manipulating" the value of the yuan - though the US government quickly corrected that statement.

Unfortunately, some groups in the US are pushing the Obama administration to use the economic crisis as an excuse to resort to trade protectionism.

According to the China Chamber of Commerce for Import & Export of Machinery and Electronic Products, three types of tires are sold in the US, and the main difference is their prices, and profit margins. There is very little difference in their performance or quality, though. "Top-grade" tires fetch the highest price and profit, and are targeted at affluent Americans. "Medium-grade" tires are bought by average Americans who want a brand, but don't want to pay any premium. "Grade-3" tires are meant for Americans who want good quality tire for low price.

US companies dominate the top- and medium-grade tire market, while tires imported from China and other countries make up the bulk of "grade 3".

Over the past four years, the number of Chinese tires exported to the US has tripled, and its share of the US market has risen from 5 percent to 17 percent. The US union cites it as evidence that Chinese manufacturers are doing something wrong and should be punished for it. But that is a gross misreading of the tire market.

Like in other manufacturing sectors, US companies began exiting the "grade-3" tier market when foreign firms entered it. That happened because the profit margin on these tires was already low and the US firms chose to concentrate on the more lucrative top and medium-grades in which they could make big money. Chinese and other countries' manufacturers can produce high quality tires at lower prices because their cost of production is lower, and not because they indulge in unfair trade practices.

Moreover, even if the US government decides to limit the sale of Chinese tires, there is no guarantee that its manufacturers will re-enter the "grade-3" tire market. Interestingly, some of the firms have already done away with the plants and equipment to make the "grade-3" tires. Others import tires from countries such as Venezuela and sell them as one of their own brands.

In short, it is quite likely that other countries would take up China's share of the US tire market rather than American firms filling up the supply gap if Chinese exports are cut. It is quite likely, too, that prices of such tires will increase.

Hopefully that will not happen. If the US investigating body rules in favor of the union, Obama has the power to overrule the decision in case he thinks it will do more harm than good to the US economy. That happened five times when George W. Bush was the US president.

Many experts see the tire hearing as a "test" case that will decide how Obama will treat trade issues with China.

Commerce Minister Chen Deming said recently: "A positive, cooperative and comprehensive Sino-US relationship will surely bring new prosperity and development to both the economies." This is the US government's chance to send out a signal that it will not cave in to forces that seek to harm this important relationship.

The author is a representative of the Chinese Tire Manufacturers Association.

(China Daily 06/09/2009 page9)