You have a $2-million loan at a local bank. You and your lender are on good terms, or as good as that type of relationship normally allows. A few years ago, your bank began branching into other businesses. He started making widgets and selling them at a low price even though your neighbor, Fred, had been making widgets for decades.
Because your lender has access to relatively low-cost money and labor and owns land he foreclosed on years ago, he has continued to cut his price. The quality might not be as good as Fred's but it was passable. After watching Fred and his company edge ever closer to bankruptcy, you decided you didn't like his practices and you would no longer buy your lender's widgets at cut-rate prices.
Gutsy decision or a foolhardy one? That's a simplified version of what the administration did when it announced it was imposing tariffs on Chinese tire imports. The tariff will amount to 35 percent the first year, 30 percent the second and 25 percent the third.
Free trade advocates chastised the president for his decision, which was based on an International Trade Commission ruling. (The ITC recommended significantly higher tariffs.) The Wall Street Journal referred to Obama as the first protectionist president since Herbert Hoover.
But U.S. manufacturing groups and labor organizations saw it differently. Leo W. Gerard, president of the United Steelworkers, wrote an article, headlined “Finally, a President with the Guts to Enforce Trade Laws.”
The Chinese government agreed to abide by a set of rules, known as Section 421, of the agreement allowing them to join the World Trade Organization. ITC had recommended four times that action be taken against Chinese tires, but nothing was done.
“We demanded penalties against China because it has smothered the U.S. market with tires,” said Gerard. “In 2004, its share of the U.S. market was 4.7 percent. Four years later, it was 16.7 percent as the number of tires it sold rose from 14.6 million to 46 million. As a result, 5,100 workers lost their jobs.”
U.S. manufacturing groups say the Chinese government has taken over traditional U.S. markets because it keeps the cost of fuel and electricity low, provides free land and hands out low cost loans to industries it has targeted for growth. The ITC currently has 61 orders against Chinese products it says violate trade rules.
The Chinese government warned the administration action may set a “dangerous precedent” and threatened possible retaliation against U.S. exports. U.S. farm groups said those could include American soybeans and pork.
Some worry that China may stop buying U.S. Treasury securities. (It now holds around $700 billion in U.S. debt.) But then where will China put all the money it reaps from its growing trade deficit with the United States?