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Price fixation

By the time the last tariff on Chinese consumer tire imports ran its course, the average price of a tire had risen 28.4% in four years. Those lingering 4 for $99 specials suddenly became 4 for $127.11.

The tariff ran from September 2009 to September 2012, decreasing from 35% to 25% along the way.   Last year, without the tariff (also referred to as a duty or tax), prices started to drop.

In 2013, the first full year without the tariff, consumer prices decreased 3.8% compared to 2012. And they have quietly dropped again this year, helped tremendously by low raw material costs.

So recent history tells us tire prices will rise dramatically if a new tariff is implemented. That is my fear, because I think another tariff is a foregone conclusion.

The United States International Trade Commission (ITC) is deciding that as you read this. The due date for a preliminary determination by the U.S. Department of Commerce has been moved to Nov. 21 because it needs more time to study the nature and extent of the subsidy programs under investigation.

The United Steelworkers International union, which alleges Chinese consumer tire imports are being sold in the U.S. at less than fair value, is pushing for a determination as soon as possible. Regardless of whether it is successful or not, the implementation, of any additional tariff will probably not go into effect until 2015. (Remember, a 4% tariff on Chinese consumer tire imports already exists.)

Assuming the ITC determines an additional tariff of some kind is necessary for passenger and light truck tires imported from China (ST tires are not included in the review), there are two important, time-sensitive details that need to be addressed.

First, how long will the tariff last? Unlike the 2009 tariff, which was deemed necessary based on World Trade Organization guidelines, government tariffs are generally put into place for a minimum of five years.

Robert Higginbotham, an automotive industry analyst with SunTrust Robinson Humphrey Inc., thinks it will last longer than that.

“After studying statistics for current tariff orders in place and canceled orders over the past eight years, we find that these kinds of tariffs typically last at least 10 years,” he says.

Note that he says “at least” 10 years. “Permanent” is at least 10 years.

Second — and this is perhaps even more important to tire importers — can the new tariff be implemented retroactively? According to Nick Mitchell, senior vice president of research for Northcoast Research Holdings LLC, the answer is yes.

One tire distributor with whom I talked said Chinese consumer tire producers are coming out of the woodwork, and are constantly driving down the price. “I buy a Chinese-made 225/40R18 tire for $27 and can’t even sell it for $30 because the retailer says it is too high!” he says. “Thirty dollars for an 18-inch tire! I have to make at least 15 points on the tire to survive. Two years ago, I was selling the same tire for $70.”

Like many tire manufacturers, he wants an additional tariff. I am against it if it increases consumer tire prices another 28.4%.

Yes, government subsidies are giving some Chinese manufacturers a big advantage, and that is something the ITC has to closely investigate. I also know that the price hikes the first time around were affected by skyrocketing raw material costs. But a nearly 30% price hike is too hard on the consumer and, by association, tire dealers.

Perhaps market pressures and the tire production capacity added in low-cost countries since 2009 will offset a new tariff. It all depends on how large the tariff is.

At least one tire manufacturer believes the tariff will be much higher this time around. And he may be right.

According to a report by Exane BNP Paribas, an investment firm based in Paris, France, a 60% tariff is possible — as is an additional 26% punitive tariff. That would total 86%!

Before you think the report is mere speculation, the fact sheet published by the ITC lists the alleged dumping margin at between 45.8% to 88%!

As you can see from the previous tariff, the tariff percentage was almost offset by the increase in prices. So, if there is a maximum 88% additional tariff on Chinese consumer tire imports, think of how much pricing will rise this time around.

When the full effect of the tariff is felt, that low-cost 195/60R15 Fuzion Touring tire the Tire Rack sells for $49 might suddenly sell for $88. And, as it did in 2009, pricing on the “better” and “best” tires will follow suit.   ■

If you have any questions or comments, please email me at bob.ulrich@bobit.com.

For more editorials, see:

Ties that bind

When China and friends took over

Ed Bobit: end of an era

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