The Obama administration’s first real test on trade policy has arrived. The US must decide whether to impose new import restrictions on Chinese tyres under what is known as its “China safeguard” law.
This decision is not just a test of President Barack Obama’s support for free trade. History could well record it as the defining moment when the multilateral trading system was able – or not – to withstand the crisis-provoked protectionist forces that currently threaten to bring it down.
The World Bank-sponsored Global Antidumping Database suggests that, since the economic turmoil began, countries have been ganging up to use World Trade Organisation rules in an almost mob-like response to restrict imports from China. The tyres case could make this far, far worse.
The US tyres case began in April when the United Steelworkers union asked the government to investigate tyre imports from China. By June, the US International Trade Commission recommended the president impose a new 55 per cent tariff. President Obama has the discretion under the law to accept this, offer a different package of assistance to the steelworkers or dismiss the case.
There are numerous comparisons between the tyres decision and the first trade policy test President George W. Bush faced over a steel safeguard case in 2001-2002. Each test occurred under safeguard laws subject to presidential discretion, took place early in each president’s first terms, and could lead to import barriers which would benefit a key domestic constituency.
However, for any US administration with multilateralist aspirations, an important historical element is what happened after the Bush administration imposed import restrictions. The 2002 US trade barriers ignited a protectionist fire that quickly spread across the world. Nine other economies, including the European Union and China, followed the US lead by imposing new steel import restrictions. Some governments feared that the steel exports newly shut out of the US market would be deflected into their own markets.
It is doubtful that today’s struggling world economy, still reeling from the financial crisis, could withstand a similar global protectionist backlash. Unfortunately there are three reasons to expect an even stronger international protectionist response if Mr Obama accepts new tariffs.
First, this China safeguard is just one of many anti-China trade policies currently in vogue. Industry demands for new import restrictions against China under this and other policies such as anti-dumping were up 23 per cent in 2008, and are on pace for another increase in 2009. It is not limited to the US and EU; India, Brazil, Argentina, Indonesia, South Africa and Turkey are imposing most of the new import restrictions China faces.
Second, a little-known loophole in the rules governing China’s 2001 WTO accession makes it easy for a global protectionist response to spread faster and further than that which took hold in 2002. Nowadays, once any one country imposes a China safeguard on imports, all other WTO members can immediately follow suit, without investigating whether their own industries have been injured.
Third, much of the world still follows the US lead regarding new import restrictions. The most recent example was the Bush administration’s reversal of a long-standing US policy that made a particular anti-subsidy law off-limits for use against China. After the US charged China under this law, Australia and India initiated their first such cases against China, and others will follow.
Neither China’s exports nor its policies are blameless in these affairs. Some of the US and other WTO member countries’ concerns are based on legitimate problems. It is simply that the mob mentality on new trade barriers does not help the trading system address such problems.
The best option for the US administration in the imminent China-safeguard decision over tyres is to decline to implement new trade barriers, but to offer the adversely affected communities in the US help through adjustment assistance programmes. Doing so will help the US stand up for the trading system and counter the crisis-driven mob mentality that threatens to bring it down.