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2012 — A look into the past: Tire tariffs fini — now what?

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Tire tariffs expiring

(Editor's Note: This story is part of our #TireBiz30 in which we feature one archived story every day of September to celebrate Tire Business' 30th anniversary. Each story represents one of the most relevant news story published in our pages for that year.)

After three years, the tariffs on Chinese passenger tires are history, expiring at midnight on Sept. 26.

The much-debated—and in some quarters maligned—tariffs were levied under Section 421 of the Trade Act after a petition for relief by the United Steelworkers (USW) union. Their end has spawned reports of Chinese tire factories gearing up to meet demand, as well as speculation from industry analysts that U.S. tire prices could come down sharply in the foreseeable future.

Tire makers and distributors, meanwhile, say they prepared some time ago for the foreseeable end of the tariffs.

In the first year, the tariffs on Chinese-made passenger and light truck tires totaled 39 percent. They dropped to 34 percent in their second year and to 29 percent in their third. At midnight Sept. 26, the duties reverted to their previous level of 4 percent.

There was some last-minute speculation that, this being an election year, President Barack Obama would extend the tariffs. However, a request from the United Steelworkers (USW) would have made an extension much more likely, and the union affirmed that it would not make such a request.

The union decided not to ask for an extension after it found out the U.S. might have to pay reparations to China, said Leo W. Gerard, USW International president.

Mr. Gerard praised the tariffs as a boon to U.S. tire manufacturers and workers.

"Since his decision, by every measure, success has been achieved," Mr. Gerard said. "Jobs have been retained and created, production has rebounded, investments in plant and equipment have been made and many companies have returned to profitability. That's why the law was enacted, and it worked."

The U.S. tire industry has stabilized and rebounded since the tariffs were put in place, according to a spokeswoman for the Office of the U.S. Trade Representative (USTR).

"Following many years of annually declining U.S. passenger car and light truck tire production prior to September 2009, U.S. production has been increasing on a quarterly basis since the 421 tires remedy went into effect," the USTR spokeswoman said. Since September 2009, six tire makers have announced U.S. investments totaling more than $2 billion, she added.

Most of that investment, though, is for tires not affected by the tariffs.

Three years was the maximum length of time the U.S. could impose tariffs under World Trade Organization rules without facing trade retaliation or forced compensation to China, according to the spokeswoman.

"The administration remains strongly committed to enforcing our trade agreements and using and defending our trade remedy laws to level the playing field for our workers and industry," she said.

Other sources, however, are more doubtful about the tariffs' effects. BB&T Capital Markets issued a report Sept. 26 saying it believed the tariffs led to a 10- to 15-percent increase in U.S. tire prices, which combined with higher raw materials costs to raise prices a total of 10 to 20 percent during the three-year period.

"General industry feedback and political claims from the Obama administration would place the job savings from the program at roughly 1,000 to 1,200, while the incremental cost to the U.S. consumer has been estimated at roughly $1 billion," BB&T said.

The Tire Industry Association (TIA) opposed the tariffs from the beginning. All available evidence shows that TIA was right, claimed Roy Littlefield, TIA executive vice president.

"You look at the imports, and imports did not go down," Mr. Littlefield told Tire Business. "Instead of coming from China, they came from Korea, Indonesia, Thailand."

TIA has no way of calculating the effect the tariffs had on jobs at its member companies, according to Mr. Littlefield. "But they certainly had an impact on distributors, importers, buying groups and dealers.

"They added a whole new layer of complications."

What the future will bring

The BB&T report said consumers could expect a drop in tire prices of 10 to 20 percent beginning in the fourth quarter of 2012, with the steepest decreases in the lower end of the market.

During the tariff period, some buying groups continued to import Chinese tires under free trade zone provisions and stockpile them in anticipation of the tariffs' end, according to Mr. Littlefield. "We still have to see how it plays out, but I think you'll see some Chinese tires being sold at very competitive prices," he said.

One company that never stopped importing Chinese tires was Del-Nat Tire Corp., the Memphis, Tenn.-based private brand company.

"With the end of the tariffs, we'll have a better delineation between our entry-level, mid-level and premium tires," said Jim Mayfield, Del-Nat president.

"We've been subsidizing entry-level products for quite some time," he told Tire Business. "Now we won't have to do that."

The end of the tariffs means Del-Nat will buy more tires from China, but it will continue to purchase as many tires as before from its domestic supplier, he added.

Mr. Mayfield reported Del-Nat shipped 89 truckloads of China-sourced tires on Sept. 27 and 28, the days after the tariffs expired, and the company has a full order book for more tires.

The big demand from dealers has been for entry-level tires, he said. Del-Nat reserves its Finalist brand for the entry-level segment, he added, but the firm's other brands, Delta and National, also have lines sourced from China.

Del-Nat sources passenger tires from four factories in China, he said, with which the company has long-term relationships.

He declined to discuss specifics about how Del-Nat is pricing its China-sourced tires now but said it's a level that should allow the firm's stakeholder customers to recapture some profit margins that the tariffs had eaten into.

As for marketwide pricing, he said Del-Nat's seeing prices "all over the place" and that he expects the market to be turbulent for several weeks until the supply/demand situation eases.

Tireco Inc., which distributes the Nankang, Milestar and Westlake car and light truck lines produced at least partially in China, said it "strategically maintained significant production capacity in China" during the three years of the tariffs and is "positioned to continue and further expand this to meet the developing marketplace."

Its objective is to deal with customers based on the four C's—comprehensive, current, competitive and consistent.

Tireco declined to comment specifically on its expectations for pricing post-tariff, but said it's offering shipments that reflect "current market conditions and pricing structures."

For Foreign Tire Sales (FTS), the Union, N.J.-based tire importer, the time of the tariffs was a tough period, according to Richard Kuskin, FTS president.

"Our sole supply of passenger and commercial tires comes from China," said Mr. Kuskin, noting FTS survived during the period mainly by reducing its overhead.

Mr. Kuskin said tire makers in Asian countries other than China would feel the greatest impact from the end of the tariffs, with South Korea a possible exception. "Korea has large factories, but its equipment is not as modern as China's," he said.

Among domestic tire manufacturers, Goodyear said the tariffs had little effect on the Akron-based tire maker. "The vast majority of tires that we sell in North America, we also make in North America," a spokesman said.

Bridgestone Americas also accepted the tariffs and the end of the tariffs with equanimity, a Bridgestone spokesman said.

"As it stands right now, we have been prepared for three years," he said. "We have made the proper adjustments. Our stand now is just to watch the market and react as needed."

Meanwhile, news came from China's Shandong Province that the tire manufacturers there—including Triangle Group, Shandong Linglong Rubber Co. Ltd. and Shandong Sailun Tire Co. Ltd.—were gearing up to resume making tires for the U.S. market.

During the three years of the tariffs, imports from China slowed but hardly stopped. A recap of available government import data shows the U.S. imported 70.1 million car tires and 9 million light truck tires, valued at nearly $3 billion, for the period starting in October 2009 through July 2012—the last month for which statistics are available.

By contrast, U.S. imports for the three full years prior to the imposition of the elevated tariffs were 94.5 million car and 20 million light truck tires.

Based on the available shipment data and the elevated levels for the three years, the U.S. collected nearly $1 billion in tariffs over the three-year period.

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