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Published on September 28, 2009

Tariffs will have consequences

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Opinion

AKRON (Sept. 28, 2009)—Considering the depth and breadth of testimony against higher tariffs on Chinese consumer tires, it's surprising the Obama administration chose to raise them to the extent it did—an additional 35 percent in the first year, followed by 30 and then 25 percent in 2010-11 and 2011-12.

Predictably, the first consequence of the decision is higher wholesale tire prices, to be followed soon by higher retail prices, meaning consumers are the ones who'll end up bearing the additional cost, as forewarned by the opponents of the tariffs.

After reviewing the arguments for and against tariffs, it seemed apparent some sort of compromise, a hybrid solution if you will, was called for that would have appeased the United Steelworkers (USW) while at the same time not risking a possible trade skirmish with China. The union sought the sanctions/tariffs in the first place and is part of the organized labor movement that played a key role in Mr. Obama's election.

A compromise might have combined both import restrictions, which the USW sought, and tariffs, which the International Trade Commission recommended.

For instance, the administration could have allowed a certain level of imports—perhaps up to the 21 million the USW sought—to come in under the existing tariff structure (4 percent of value), and then start imposing tariffs on imports over that amount.

This would have addressed the USW's position while minimizing the impact on the marketplace.

Granted, such a solution likely would have led to a rush by the Chinese manufacturers and U.S.-based dealers/distributors to get as many tires into the U.S. before the threshold was reached. That in turn would have left a lot of distributors with bulging inventories and the associated costs of warehousing tires for months on end.

But that's the free enterprise system at work.

As for the distributors' contention that imposing tariffs will lead to thousands of layoffs in the distribution channel—we don't buy it. Sure it almost certainly will lead to disruption at those concerns already established in the distribution network, but someone's going to find a way to fill the demand for the millions of tires not coming from China anymore.

It likely will set in motion the creation of new import/export companies and/or the overhauls of existing distributors as they search for alternative sources of supply. That's likely to come from tire makers in places like Indonesia, Thailand, Vietnam, etc. It might even kick-start imports from India, where tire makers like Apollo Tyres and JK Tyres have made noise about getting into the U.S. market but so far haven't shown much tangible progress.

One thing's for sure, the millions of units no longer imported from China will, with few exceptions, not come from U.S. factories. U.S.-based tire makers have made this clear with their investment decisions of the past several years, phasing out nearly all their capacity for these entry-level tires in favor of higher-profit-margin tires.

Under the regulations governing these tariffs, the Obama administration has the option to review its decision in six months. Meanwhile, the Chinese government has asked the World Trade Organization to review the U.S.'s decision—a process that could take a year or longer.

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