The Real Reasons Behind Chinese Tire Tariffs – Part 1

On Saturday, September 26th, the USA places tariffs on a broad range of imported tires from China. Last week, during the Mining and Tire News Roundup, I stated that I was going to dig in deep, and publish the results of my findings . It was a bit more involved than I originally thought, as it entailed poring through multiple documents. Most notable was a 400 page transcript of a hearing held before a joint Congressional committee ( 9+ hours of oral testimony). I will be giving a summary, and reasonably detailed analysis later on in this post/article. For the record, I read every single page of this document.

The coverage of this matter will be so exhaustive, that I will be cutting it into 2 parts: The portion of the hearing that petitioned for the tariffs (The USW), and those against it (The Chinese, and domestic Tire Dealers and Wholesalers).

( Now available : Part 2 of The Real Reasons Behind Chinese Tire Tariffs )

As of the writing of this  document, I had yet to hear anyone in the tire community give the technical definition as to what tires would definitely be included in the tariffs. Sure, I had heard passenger, light truck, and SUV tires, but nothing defined in inches, centimeters, and law. So, I went searching through those same documents to find a precise description of what would be included when it came to the levying of a tariff.

So, let’s get to the question of the hour:

Which Chinese Tires Are Subject to Tariffs?

This, it turns out, was hard to find, and easy to answer. While nosing about the USITC’s website, I found the presidential decree that defines the tires that are covered. Even better, it gives the HTS numbers which define the tires.

From the presidential proclamation:

2. For purposes of its investigation, the USITC defined certain passenger
vehicle and light truck tires from China as new pneumatic tires, of rubber,
from China, of a kind used on motor cars (except racing cars) and on-
the-highway light trucks, vans, and sport utility vehicles, provided for in
subheadings 4011.10.10, 4011.10.50, 4011.20.10, and 4011.20.50 of the Harmonized Tariff Schedule of the United States (HTS).

There we go. For the sake of space here, I have linked to the definitions listed above in the Government’s HTS definitions reference, rather than reprinting them here in detail. Now, if you have a question about whether a tire is covered or not, just ask for the HTS number, and that should answer any and all questions from a potential supplier. As a rule of thumb, the proclamation covers tires used on the highway, with rim sizes up to 18.5 inches or so (40.6 cm or less).

It is interesting to note that this is merely a proclamation, and not a law that was passed. It is not final, however, as China can appeal its case before the World Trade Organization, and have the tariffs overturned.

That is an issue for another day, however. Today, we are going to dive in, and find out what is at the heart of these tariffs. In reading the testimony, I was extremely surprised at what the real issues turned out to be.

Getting ready to read

Before beginning, you may want to know the source of my information. Publicly available on this page, the document I will be referencing is the USITC hearing that took place on June 2nd of this year. The page numbers that I will be noting are the page numbers of the PDF, and not those in the upper right hand corner of the document. If you  aren’t referencing the PDF page number, then you are going to wonder whether or not we are reading the same document.

On the first couple of pages, there is a list of who appeared at the meeting, which Senators and or Congressman will give testimony, and also the players for relief from the Chinese imports (the USW), and against relief (various organizations, including Independent tire dealers).

Laying out the case.

Of course, given that tariffs have now been imposed, we know what the hearing was about. The USW said that tire industry was materially threatened by Chinese imports, and that this was the reason that so many tire manufacturing jobs had been lost. So, they wanted a tariff or quota (interchangeably referred to as “a remedy”) imposed that would allow them time to “breathe”. They were seeking relief under a statute of the World Trade Organization, known as section 421, which states that the WTO conducts:

…”China safeguard investigations” in which the USITC determines, following Section 16.1 of Part I of the Protocol on the Accession of the People’s Republic of China to the WTO, whether a product from China is being imported into the United States in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of like or directly competitive products. If the USITC makes an affirmative determination, it proposes a remedy, and sends its report to the President, who makes the final remedy decision. (ed. Italics added for emphasis)

It was under these provisions that the USW sought remedy.

The Hearing

In this hearing, testimony breaks down into 7 distinct categories:

1. Congressional testimony
2. USW Testimony (For Relief)
3. USW Q+A
4. Tire Dealer and Wholesale Testimony (In Opposition to Relief)
5. TD&W Q&A
6. USW Closing Remarks
7. TD&W Closing Remarks

I’ll be as brief as possible in some of these areas, but I have 10 pages or so of notes and excerpts for this one document, and I am not sure how much I will be able to condense them. It is also worth noting that all of this testimony is under oath. This is important, for reasons which I will more fully explain later.

Congressional Testimony

Now, we get into the meat of things. The Congressional testimony is something that you can skim over for the most point, after you read Senator Arlen Specter’s testimony. Why? He makes the best case out of everyone for the necessity of remedy.

His basic points, communicated on pages 12-17, lay out the crux of the Congressional argument for relief.

1. The US has lost millions of jobs.
2. He had reservations about admitting China as a member of the WTO.
3. China has always engaged in dumping, and other unfair trade practices.
4. Chinese imports of tires are up 215% from 2004-2008.
5. China is in violation of Section 421 (Ed. The language in this statute is really broad in scope)
6. This is a problem which the Bush administration ignored 4 separate times, and needs to be addressed immediately.

After that, it descends into testimony that could be described as “Ooohh, oooh, meee tooo!”. Basically, it is Congressman after Congresswoman with a tire factory, or steel mill in their district, repeating the same talking points. They want to make sure they are on the record, so that come next election, they can say that they stood up for the workers in their district. I can’t say that I blame them.

In looking at the points, there are 2 that I take issue with: 4 and 5. I’ll take up #4 later on in this dissertation.

Point , concerning Section 421 is very broad with defining situations under which relief may be asked for. On P. 14 of the transcript, Sen Specter has this to say:(the numbers on the left are line numbers):

2  This language sets the standards.  It’s in
3 the disjunctive, one of two factors:  Increased
4 quantity or — either/or — under such conditions to
5 cause or threaten to cause market disruption. It
6 doesn’t have to actually cause the market disruption.
7 It can threaten the market disruption.

In layman’s terms, the Chinese don’t even have to be materially hurting the markets. They could just be looking at someone the wrong way, and we could file for relief on the basis of a perceived threat. That is where Senator Specter makes the strongest argument. Under that wording, the Chinese are in violation. So, the remedy should definitely be considered under section 421. I take issue with the reasoning, but do admit that the USW is within their rights here. It’s the law, it’s just not a very good one.

In Favor of Relief ( The State of the Union(s) )

Now, it’s the USW’s turn. They throw everything but the kitchen during their arguments. We go from story to story of plant closings, loads and loads of statistics that they say confirm that the Chinese have hurt them. Huge declines in manufacturing, massive concessions in Union contracts, and they have still lost 5,148 jobs directly attributable to the Chinese.

As I read, and read the same arguments, the same statistics kept hitting me in the face: 215% increase in Chinese imports between 2004-2008..lost jobs, retired union workers paying higher premiums for benefits. They just kept hitting the same talking points, and never showed me any strong statistical correlation for any of this. Essentially, you could put X industry, in place of the tire industry, and the Union would have the same argument for relief. Below are some of the points that really stuck out to me as I went through the testimony.

On page 79, they(Meaning, Terence Stewart, the USW’s chief legal representative) really go out on a limb, to speak with regard to deliberate Chinese currency manipulation. Basically, he’s saying that China devalues the Reminbi, to ensure that exports remain high. It’s part of an overall argument that Union labor cannot compete with Chinese labor. I would assert that Union labor can’t even compete with non-union labor costs here in the states. If it could, Wal-Mart would  welcome them with open arms.

On P. 85, Ron Hoover(USW) begins to explain a portion of what is really becoming a problem for the Unions: There isn’t enough membership to properly finance their ongoing obligations(VEBAs) to retired members. Tire companies pay benefits into the Union funds, based on how many hours are worked. 5100 job cuts reduces how much tire companies have to pay, and also the “tax base” (if you will) of the Union in general. In short, the Unions have the same issues as Social Security and Medicare do: A growing beneficiaries pool, with a shrinking labor pool to finance the benefits. This petition for relief is part of an effort to stave off further losses in Union jobs. Their energies are misdirected, as we will see in part 2.

P. 102 The President of the USW, Mr. Gerard states, with regard to why tire manufacturers aren’t present:

16 A number of them aren’t here
17 because they also have facilities in China producing
18 various products, not just tires. To be very blunt, a
19 number of them have said that they’re concerned about
20 Chinese retaliation. Period. End of story.

While that may be the case, the Manufacturer’s have another great reason not to go on the record. It becomes abundantly clear when we get to those in opposition of relief. I’ll give you a hint: It has a great deal to do with being under oath.

On P. 120, we have a latecomer to the hearing, Rep. Louise Slaughter. The most interesting thing in her testimony was encapsulated in the following statement:

6 Manufacturing is the leading employer
7 in thousands of communities across America, but that
8 is fading very fast. I think now manufacturing
9 amounts to less than 10 percent of GDP.

So, we could say that manufacturing is experiencing a crisis. In fact, it could be described as a systemic problem, rather than an isolated incident influenced by tire dumping. Could this problem be a part of the larger decrease of the manufacturing sector as a whole? Methinks so. We’ve lost manufacturing, because we can do it cheaper elsewhere. You can’t restrict imports, if you are going to do nothing when it comes to the export of labor overseas. Only a holistic approach will bring a true remedy to this problem.

P. 123 Rep. Tom Cole of Oklahoma goes on record, and states that the vote to admit China to the WTO was a tough one. Congress knew of the potential for harm that could possibly result, and voted to approve China anyhow. Once again, he references the increases in imports from 2004-2008. These are the years that will come back to bite the USW in the opposition’s rebuttal.

P.132 For the USW, Mr. Conway:

2 MR. CONWAY:  this cycle has been going on,
3 and as far as a business strategy, I mean, we are
4 clearly at an odd place here where we are here with
5 ourselves. Typically we have our management
6 counterparts with us to explain the markets and
7 explain their own business strategies and what’s going
8 on. But in each one of these rounds of negotiations
9 that we struggled through with these series of plant
10 closures no one is saying to us, our plan is to walk
11 away from this.  What they are saying is we just can’t
12 do this. We just cannot compete in this climate
13 against this pressure, and against what is, you know,
14 what I believe is really tremendous cohesive pressure,
15 frankly, too, and as these companies expand
16 relationships, global relationships, it puts them in
17 difficult positions.

I feel for the Union, because it is evident that they have been stuck out here to make their argument alone. The manufacturers have sold the them out for a bigger piece of the pie.

p. 143-146 Vice-Chairman Pearson begins his questioning, and talks about the fact that he could not find a Chinese tire at Wal-Mart, or any of the big-boxes when it came time for him to purchase a new set.  Then he asks for clarification of what a tier one tire is. This my friends, is where things start to become a little more clear.

Tire Tiers

A tire tier, is not necessarily determined by the quality of the product produced. It can be, but is more or less organized by the overall level of brand recognition. Below, I’ll give an explanation of what each tier is, and how it can be defined.

Tier 1: Made up of brands with high name recognition, with large advertising budgets, and newer tire technology. Companies within this sector are made up of brands like Michelin, Bridgestone, and Goodyear. A tire in this tier usually is rated at around 75,000 to 80,000 miles before replacement.

Tier 2: Sometimes these brands are less-well known brands. Many times, they are owned by a tier 1 brand, like Michelin, who in turn, owns tier 2 brand, BF Goodrich. The same thing applies to Goodyear, who owns Dunlop. It may well be a tier 1 tire, with all the same features and technology. It just has a different name on the sidewall.

Tier 3: Tier 3 tends to be  a bare bones model tire. It is manufactured for so-called “private label” purposes. It is a low profit tire to manufacture. While safe, it may not have the newest technology. It’s what you would call the “store brand”. You know, the white bread the your supermarket sells as its own. It’s not as good as WonderBread, not as soft, but it still makes a sandwich. This tire is increasingly manufactured overseas, and believe it or not, this tire is the one that the Unions are making all the fuss over.

Back to testimony.

P. 151 Counsel for the USW, Mr. Salonen and Mr. Pearson are having a discussion about why he can’t find a Chinese tire at Wal-Mart or Costco:

5 MR. SALONEN:  Thank you, Commissioner
6 Pearson.  In fact, if you take a look at a source such
7 as Modern Tire Dealer or Tire Business they will give
8 you sort of a breakout of who carries the most tires
9 in the replacement market, and by far it’s the
10 independent tire dealers who carry them.

The question here is why. Why do the chains not carry them? After all, I go by the bays at Wal-Mart and BJ’s Wholesale on a weekly basis. The bays are full of people getting new tires. Could it be that they don’t have the experience neccessary to market a Tier 3 tire? That people are so loyal to brand, that they don’t have the time to try to sell a Chinese tire. Let’s not forget that Tier 1 tires have over 70% of the market share. Add in Tier 2 tires, which Costco and Wally World most definitely sell, and the percentage of tires we are talking about is a very small portion of the tire market.

P. 190 Speaking about the difference in profit between a tier 1 “Michelin ” branded product, and one of its tier 2 models (Mr. Stewart, for the USW):

9 Yes, the top brands believe that they
10 get a premium, and Michelin has put it in its annual
11 reports that it gets as much as 10 to 15 percent.

Obviously, Michelin would want to put the bulk of its efforts behind selling a Tier 1 tire. As we will find out later, that was the strategy being pursued by the vast majority of manufacturers. This will become one of the leading arguments for those in opposition to relief.

P. 194 The USW reveals that they did not seriously petitioning for relief until February of 2009. One can only assume it was because they brought a Union-friendly administration into the White House. The Bush Administration was particularly friendly with the Chinese, because Bush (41) was ambassador to China under President Nixon. By association, Bush (43) was predisposed with regards to honoring China’s interests. If Bush was still in office, this issue would have been a non-starter. Under the Obama administration, it was out of the park before they threw the first pitch.

No more relief (for now)

This is the last of the Union we will hear for awhile. Around P. 200, everyone breaks for lunch. We’ll do the same for a little bit, just to let you digest the Union argument. Part 2 is where the real action begins. From opening testimony to the end, we find out the real meaning of the statistics that the USW has been throwing out. By the end of this thing, we’ll find out who is really behind this problem. It’s unsettling,at best. Stay tuned for part two, and keep your arms and legs inside the car.

( Now available : Part 2 of The Real Reasons Behind Chinese Tire Tariffs )

Things are about to take off…

Note: Tomorrow’s Mining and Tire News Roundup will be pre-empted to make room for Part 2 in this series.

Until then, we’ll be, signing off…

Related posts:

1. The Real Reasons Behind Chinese Tire Tariffs – Part 2
2. GPX Tires Faults OTR Tariffs For Failure – What Happened…and Why?
3. Obama’s Ruling Hurts Dealers and Chinese Alike
4. The Chinese Tariff Issue Just Won’t Die
5. Goodyear To Institute Partial Shutdown of Truck Tire Plant

Tagged as: Bridgestone, china, Goodyear, Michelin, quotas, tire dumping, tire tariffs, USITC, USW