Obama's new protectionism

The President has once again achieved a trifecta of policy outcomes favoring his agenda:  a victory for the United Steelworkers union, a boost for ObamaCare and another blow in his war on prosperity to boot.  

Mr. Obama announced last Friday night that he would impose a 35% tariff on low cost tires imported from China.  (A Friday night is not quite as slow as just after midnight on Labor Day Sunday, but it is close enough if avoiding scrutiny is the objective.)  The tariff would be in effect for three years, declining to 30% and 25% over the last two years.  According to the New York Times, the Chinese share of the U.S. tire market has grown from about 5% to about 17% over the past four years, resulting in several plant closings in the U.S.  Under the terms of China's 2001 entry into the World Trade Organization, companies that can show market disruption by Chinese imports can request tariff protection.  This is the first time protection has been granted under the agreement, although several other requests were made to the Bush administration.

The crux of the issue is expressed by the New York Times:

The decision is a major victory for the United Steelworkers, the union that represents American tire workers. And Mr. Obama cannot afford to jeopardize his relationship with major unions as he pushes Congress to overhaul the nation's health care system.

Obama and his advisors may be playing a political game to cement the unions' backing for his health care reform agenda, but as the Wall Street Journal said, "he is playing with fire, as the last 80 years of trade history should tell him."  Obama is no doubt well aware of the history, as he claims to have studied FDR and the depression before his inauguration, and he no doubt knows the disastrous results of the Smoot-Hawley Tariff Act of 1930.

Herbert Hoover and his advisors thought the answer to their peril at the beginning of the depression was to increase tariffs on agricultural and industrial goods, but the result was to ignite a trade war around the world, greatly reducing international trade, and deepening the depression.  The unintended consequences for Hoover and the world economy were devastating, and the United Sates and the rest of the world have been working over the decades since then reduce the barriers to trade.  Those efforts have resulted in the General Agreement on Tariffs and Trade (GATT), the World Trade Organization, NAFTA, and most-favored-nation trade status for China, along with a generally open U.S. economy.

The Wall Street Journal has recently run a series of articles on the looming protectionist threats to international trade, and the issue is sure to be a focus of the Group of Twenty meeting of the world's largest economies taking place September 24-25 in Pittsburgh.  The Chinese are seeking a negotiated solution to the tire tariff, but in the meantime have begun looking at retaliatory measures on U.S. chickens and auto parts.  The Chinese have not been shy about expressing their displeasure with Obama's tariff move:

Zhou Wenzhong, China's ambassador to the U.S., warned that President Barack Obama's decision to impose tariffs on Chinese tire imports may set a "dangerous precedent" as other industries ask for protection.  Zhou said U.S. textile and steel producers may file similar so-called safeguard complaints against Chinese exporters, testing Obama's commitment to avoid a trade war.  

"It will set a very dangerous precedent," the ambassador told reporters today in Washington. "We hope the relevant agencies will draw a lesson from the many, many comments here in the U.S. and around the world" criticizing the tire tariffs."

One of the Journal's articles focuses on a study that warns of an expected increase in protectionist measures around the world.  Among the study's findings are that 130 new protectionist measures are planned by various governments, that Russia is planning across-the-board tariff increases, and that "protectionist measures are focused on so-called dying industries, such as automobiles or agriculture."

In this protectionist climate, the United States ought to be showing leadership in tempering pressures for trade barriers and ensuring that a critical engine of U.S. and world economic growth is allowed to function unimpeded.  Instead, President Obama has made a political calculation that firing off an onerous tariff against the country that buys a major portion of our rapidly mounting debt will help him to achieve his top domestic priority of nationalizing the health care system.  While Obama may be aware of the unintended consequences of the Smoot-Hawley Tariff Act, he is either unaware of the unintended consequences that may accrue from his recent tariff action, or more likely, he is not nearly so concerned about possibly igniting a trade war as he is about achieving his political agenda.

Aside from the ripple effects in ramping up trade protectionism, the tire tariff will result in near-term shortages at the low end of the U.S. tire market, and will tend to drive prices up as well.  Distributors will scramble to find new sources, such as Mexico, and the U.S. tire business will see reduced revenue at the low end until new supplies come on line.  Chances are the consumers at the low end of the market are those who can least afford to pay more for tires.  But what does that matter if it gives Obama another club to use to impose unwanted health care reform on America.

The tire tariff is not the first time the Obama administration and the current Congress have dabbled in protectionism.  Last March, Congress cancelled an experimental NAFTA program to allow Mexican trucks full access to the U.S., largely at the behest of the 1.4 million member Teamsters Union.   The Mexican Economic Minister said in response that  "We consider this action by the United States to be mistaken, protectionist and clearly in violation of (NAFTA)."

The trucking episode resulted in Mexico imposing punitive tariffs on 90 American farm and manufacturing products.  The issue was raised again during the NAFTA summit meeting in Mexico City last August, but no resolution was reached.  

More complex protectionist issues have resulted from the Buy-American provisions that were included in the stimulus bill, also at the behest of the unions, and they are now slowing down stimulus disbursements and resulting in headaches for companies that do business with Canadian companies.  The Wall Street Journal reports that

Canadian communities angered by perceived American chauvinism have started a Buy Canadian campaign to exclude U.S. bidders from municipal contracts...

Buy American guidelines are complicating life for American companies, muddling municipal bidding procedures and blunting the overall effect of the stimulus.  To date, the Environmental Protection Agency has disbursed just $77 million of the $5.9 billion it has for municipal wastewater projects, in part because of Buy American provisions.

The Journal article describes a Wisconsin wastewater equipment maker that faces the possible loss of 25% of its business if the Canadian threat sticks.  While some companies are able to revamp production and parts procurement, albeit at a cost, to meet the Buy-America provisions, others are not.  According to a GE Canada spokesman,

"The supply chains are so integrated, it is crazy to try to impose a Buy American provision," he said. "Some components cross the border four or five times" before they are completed.

The EPA, which controls the stimulus outlays for wastewater treatment projects, is allowed to give waivers in certain cases.  No political connections needed, I'm sure. 

Further clouding the Obama trade picture is that trade agreements with Columbia, Panama and South Korea sit in Congressional limbo.  The Columbia agreement is the same one that came up in the Obama-McCain debates last fall, and in fact, the McCain Campaign issued a debate statement saying that Obama is the "most protectionist U.S. presidential candidate in decades."  

The Wall Street Journal Editorial page compares Obama's trade actions with those of Herbert Hoover:

Mr. Obama may not intend to start a trade war, but then Hoover didn't set out to pick one either. His political abdication is what made it possible, however, and trade passions once unleashed can be impossible to control. On his present course, President Obama is giving the world every reason to conclude he is a protectionist.

The President appears to be using protectionism to further his true agenda, with little regard for the unintended and potentially serious economic consequences.  Obama surely knows the consequences, just as he knows the consequences of playing a whole deck of race cards, but it does not matter.  This is all about achieving his agenda of transforming the United States.  

How far Obama is willing to go is illustrated by his Press Secretary's comments last month regarding a bipartisan health care reform bill:

"I think the president would orbit the moon if he thought it would help," Gibbs said. "We'll get in a rocket and fly around the moon if that's what it takes to get people together." 

That reminds me of the old Frank Sinatra classic, "Fly Me to the Moon."  Obama would make a great astronaut, wouldn't he?
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