How our world changed in five months
In 2000, Congress passed a China-specific addendum to the Trade Act of 1974. The statute, Section 421, gives domestic manufacturers a safeguard against an increase in Chinese imports that leads to a “market disruption.”
President Barack Obama determined that the increase in Chinese consumer tire imports over the last five years was a disrupting force that required remedy. Subsequently, in accordance with the provisions of Section 421, he increased existing duties by the following percentages: 35% for the first year, 30% for the second year, and 25% for the third year.
The tariffs went into effect Sept. 26. They are in addition to the general rate of duty on radial passenger and light truck tire imports, which is 4% of the United States Customs value.
China imports more consumer tires into the U.S. than any other country. Canada is second, followed by Japan and South Korea.
From 2004 through 2008, passenger and light truck tire imports from China to the U.S. rose from 14.6 million units to 46.2 million units, a 216% increase, according to Modern Tire Dealer research. Chinese imports represented nearly 17% of the domestic consumer replacement and original equipment shipments in 2008.
The United Steelworkers (USW) union believes this “import surge” led to thousands of job losses and six plant closings in the U.S. That is why it petitioned the U.S. International Trade Commission (ITC) for relief on April 20, 2009. The ITC proposed additional tariffs of 55%, 45% and 35%, respectively.
“When the USW filed its trade case, it asked that relief be provided in the form of quotas,” says USW International Vice President Tom Conway. “The International Trade Commission agreed with the USW’s view as to the nature of China’s surging exports, but decided that relief in the form of tariffs would best respond to China’s actions.
“Despite imposing a different remedy than recommended by the ITC, we are optimistic that the step taken by the president will provide real, effective relief.”
Bill Trimarco, CEO of Hercules Tire & Rubber Co., does not share that optimism.
“We believe this policy is anti-American consumer, bad for our industry and, quite frankly, unfair to the Chinese because it’s not based on any wrongdoing on the part of Chinese producers.”
Industry analyst Saul Ludwig, a managing director with KeyBanc Capital Markets, says any curtailment of Chinese exports could lead to tire shortages and higher prices for tires in the U.S., even if imports from other low-cost countries increase. However, in general, he sees this as a positive for the domestic tire industry.
“What remains to be seen, however, is what counter-measures, if any, are taken against the tire industry by the Chinese government, which was infuriated by this action of President Obama,” he says.
[PAGEBREAK]Five months to remember
Here’s a 2009 time line of important dates that led to the president’s controversial decision.
April 20: The USW filed a petition with the ITC specifically asking for a 12-month “import quota” of 21 million Chinese-made consumer tires, less than half the number imported in 2008. Under the remedy suggested by the union, the quota, based on the volume in 2005, would increase 5% annually.
“We are aggressively using America’s trade remedy laws to help workers and their employers combat an import surge from a country not playing by the rules,” said Leo Gerard, USW international president.
Although no petitioner had ever received relief under Section 421, domestic importers, wholesalers and distributors of Chinese-made tires did not take the petition lightly.
In early May, the American Coalition for Free Trade in Tires was formed by seven tire suppliers: Dunlap & Kyle Co., Del-Nat Tire Corp, American Omni Trading Co., Hercules Tire, Orteck Global Supply & Distribution Co., GITI Tire (USA) Ltd. and Foreign Tire Sales Inc. The coalition, united against what it considered protectionism, also hired a law firm to represent its interests.
In a letter to Hercules dealers, Trimarco expressed his dismay at the lack of interest shown by domestic tire manufacturers. “Much to our disappointment, the major manufacturers have remained silent on this issue, even though it is clear that they will not reopen any of the plants they previously closed,” he wrote.
June 2: The six-member ITC panel heard testimony from both sides of the issue.
The union directly tied what it kept calling the import “surge” to the loss of jobs — an estimated 6,839 workers by the end of 2009 — and plant closings.
“Since at least 2003, Goodyear has been talking to the union about the increasing volumes of low-cost imports from China, and the severe challenges they pose to the company,” testified Tom Conway, USW International vice president.
Goodyear “launched a new strategy to turn its financial situation around, and it identified low cost imports as one of the threats to its North American operations that required a new approach,” he said. “In light of the difficulties the company was facing, the union made major sacrifices in the 2003 contract negotiations with Goodyear, including agreeing to lose the 1,300 jobs at our Huntsville, Ala., plant.”
[PAGEBREAK]Since then, “the volume of low-price imports from China has exploded,” according to Conway. Goodyear closed another plant, in Tyler, Texas, in 2008.
“From the very beginning, Goodyear told us the Tyler plant was at risk because of low-priced imports,” said Jim Wansley, former president of the plant’s local union. “In presentations to us, the company repeatedly identified imports from Asia, including fast-growing imports from China, as a threat to our plant.
“The reason our plant was vulnerable was because we made the lower price-point, smaller sized tires.”
Ed Gwinn, senior advisor to DE Global Ltd., spoke to the ITC commissioners on behalf of clients with Asian business ties. Gwinn worked at Groupe Michelin for 25 years in the U.S., France and Asia.
“After having made the shift to focus on the higher-end tier one and tier two markets, the domestic industry is not going to invest the capital necessary to produce tires for the tier three segment of the market. Why? Because the labor and raw material costs in the United States would be very similar, if not identical, to the cost of tier one and tier two tires.
“In some cases, equipment changes or adjustments would be needed to produce these tires. However, the margins on tier three tires are simply too low to justify these capital expenditures. There would be a risk that the producers could even lose money, which would be worse than leaving the equipment idle.”
Gwinn added that even if companies were willing to bet on low-profit production again, “it would take them two or three years to make it all happen.”
[PAGEBREAK]Vic DeIorio, executive vice president of GITI Tire (USA), a wholly-owned subsidiary of Singapore-based GITI Tire Pte. Ltd., testified that the decision by domestic tire manufacturers “to abandon U.S. production capacity for the tier three market preceded, rather than followed, major increases in Chinese imports.” He said this has been going on for nearly 15 years.
Ross W. Kogel, president of Tire Wholesalers Co. Inc. in Troy, Mich., said the emphasis on high-end tire production in the U.S. is crucial to understanding the impact of limiting Chinese tire imports.
“You can’t replace Chinese-made tier three tires with U.S.-made tier one or tier two tires. That’s like saying import restrictions on the Kia Sorento would lead Americans to buy Cadillac Escalades. Some folks just want tier three tires.”
On June 18, the ITC, by a 4-2 vote, determined that consumer tire imports from China had caused or threatened to cause market disruption.
June 29: The four concurring ITC commissioners proposed an additional duty of 55% in the first year, 45% in the second year and 35% in the third year. The tariffs were to be based on tire value, rather than weight or quantity.
The duties applied to passenger, light truck, van and SUV tires, including original equipment tires and spares. Racing and specialty trailer tires were not covered by the tariffs.
The ITC noted that “there is a substantial overlap between domestically produced tires and the subject imports” among all tiers, and all six ITC commissioners agreed that U.S. production of tier three tires had not ceased.
Aug. 7: After the ITC submitted its proposed remedies to the Office of the U.S. Trade Representative, office panelists heard arguments for and against the proposed tariffs at an open forum in Washington, D.C.
The USW said it not only backed the proposed tariffs, but also urged the president to raise the percentage in the first year “so domestic tire workers get the full relief prescribed to prevent the undermining of any front-loading of inventories by Chinese exporters or U.S. importers who are dumping higher volumes prior to the president’s decision.”
The American Coalition for Free Trade in Tires countered by submitting an anti-tariff report by Dr. Tom Prusa, an economic professor at Rutgers University with a PhD in antidumping studies from Stanford University. Prusa’s study, “Estimated Economic Effects of the Proposed Import Tariff on Passenger Vehicle and Light Truck Tires from China,” argued that the punitive tariff on Chinese tires would lead to the loss of at least 25,000 jobs in the U.S.
“By contrast, the tire manufacturing industry will experience little to no job creation as a result of the tariff,” he wrote. “Under the best case scenario, more than a dozen jobs will be lost for every job protected.”
Del-Nat President Jim Mayfield offered up a compromise, telling panelists that tire distributors could live with a 6% to 8% increase.
Trade Representative Ron Kirk had until Sept. 2 to prepare his final recommendations, which are not made public, to President Obama. He, in turn, had until Sept. 17 to make a final determination.
[PAGEBREAK]Sept. 11: On the anniversary of the terrorist attacks of 2001, almost a week ahead of his deadline, the president decided relief was needed. He modified the ITC’s proposal by reducing the annual tariffs to 35%, 30% and 25% over the next three years, effective Sept. 26, 2009, on all tire imports not yet having cleared customs.
“These remedies are a necessary response to the harm done to U.S. workers and businesses, designed to achieve the objective of curbing what the ITC determined was a harmful surge of Chinese tires into the U.S. market,” said Kirk.
“China is America’s second largest trading partner, and the health and strength of our relationship are very important to both countries. We consulted with China as allowed for under the WTO. This decision has been based carefully on America’s rights under WTO rules, namely China’s accession agreement, and on sound economic calculations.”
The USW’s Gerard praised the president for standing with American workers.
“This decision means a better deal for hardworking American men and women and the millions of manufacturers, farmers and ranchers, and service providers who ask only for a chance to compete on fair terms,” he said.
The effect of tariffs on tire dealers
Tariffs, according to basic economic theory, are undesirable because the cost to consumers ultimately exceeds the benefits.
“There are a few exceptional cases where a tariff can have greater benefit to the imposing economy than costs, for example if the foreign supplier is a monopolist,” says Prusa. “But those cases are not that common; moreover, even in those cases the tariffs that could raise welfare are generally quite small — single digits.”
According to MTD’s recent “Made in China” tire survey, 88% of the independent tire dealers in the U.S. sell tires that are made in China. The majority of them, 67.5%, buy the tires through local warehouse distributors.
When asked, “Do you think that limiting the number of Chinese tire imports will hurt your business?” 59% of the respondents who sold tires made in China answered “No.” The remaining 41% answered “Yes.”
“It appears higher prices for U.S. consumers on Chinese built product seems quite certain,” says Ron Sinclair, senior vice president of marketing for American Tire Distributors Inc. “However, whether or not these tariffs will impact the number of tires produced in U.S. factories remains to be seen.”
(In its findings, the ITC noted that the increase in prices would be “modest,” and any negative effects on U.S. consumers would be “very small in absolute terms and even smaller in relative terms.”)
[PAGEBREAK]Cooper Tire & Rubber Co., one of only two domestic tire manufacturers to openly campaign against additional tariffs (Toyo Tire Holdings of Americas Inc. was the other), almost immediately raised prices on its Chinese-made major and private brand product.
Hercules, Tireco Inc., TBC Corp. and Kumho Tire U.S.A. Corp. also increased pricing in the first week following the president’s decision. One distributor raised prices to prevent a run on inventory.
“Obama just paid back the USW in hopes of gaining USW support for his health care plan,” says Phil Schonaerts, president of Phoenix Tire Inc. “He has no concept of the real world.”
To Schonaerts, Phoenix, Ariz., represents the “real world.”
“The tariffs are going to hurt my business. We have contracts with the city of Phoenix. We supply 11 different articles, and they are all Chinese tires. And the city is having financial problems.”
Phoenix Tire offers Firestone, BFGoodrich, Mastercraft, Maxxis, Pro Comp and Nankang consumer tires.
“We have to find alternate sources now, whether it be Korea or Mexico or India, to fill our pipeline,” he says. “We have to fulfill the contracts we have or lose the business.”
Chuck Hamad, president of Hamad Tire Inc., is taking a wait-and-see approach to supply — and demand. He sells Summit, Nexen, Mastercraft, Goodyear and Dunlop at his three stores in Northeast Ohio.
“I’m not quite sure about other sources of supply yet,” he says. “I don’t know what else is out there.
“How much will South Korea and Mexico come into play? I don’t want to jump the gun.
“We’re going to have to raise our prices, no doubt about that,” he says. “Whether the product will sell, I don’t know.”
The Chinese government has filed a formal complaint over the ruling with the World Trade Organization.
Under the WTO’s dispute settlement system, China and the U.S. have 60 days to find a “mutually agreed solution.” If the discussions fail to resolve the complaint, China can have a WTO panel adjudicate the matter, which could take up to nine more months.
China believes the decision is clearly unwarranted protectionism. “It will not only hurt bilateral economic cooperation and trade between China and the U.S., but also affect an early recovery of the world economy,” said Jiang Yu, spokesperson for the Ministry of Foreign Affairs of the People’s Republic of China. “China has made solemn representations to the U.S. and reserves all rights to take responsive actions.”
The U.S. doesn’t see it that way. “Enforcing trade laws is key to maintaining an open and free trading system,” said Kirk.
[PAGEBREAK]At his own discretion, the president, under Section 421 provisions, can revisit the decision after six months. The issue may be moot by then.
Manufacturers already are moving molds to other low-cost countries. Because of the logistics surrounding such a move, “the industry will be hard-pressed to get any meaningful volume from new supply sources to domestic dealers’ warehouses before April,” says the CEO of one domestic manufacturer. “I would not be shocked if it didn’t happen until June.”
Suppliers are scrambling for supply as well. “We were working with our suppliers for about three months in case this happened,” says Del-Nat’s Mayfield.
“The biggest challenge will be finding companies that will supply private brand tires. We just want to be sure we have our supply in place. It’s not going to be easy.”
Mayfield says entry-level tire shortages will affect pricing at all tier levels.
“I anticipate some significant price increases in the market. The prices will be very volatile in the next few months because the market has to adjust to what the entry-level pricing is.
“After that’s established, the tier two and tier one prices will adjust as well.” ■
Chinese consumer tire imports in 2009
Through the first seven months of this year, consumer tire imports from China were down 4% compared to the same period last year. That number, however, is somewhat misleading.
Chinese imports were down nearly 15% through the first quarter of 2009. Then the United Steelworkers petitioned the United States International Trade Commission asking for relief from the “surge” in Chinese consumer tire imports. Orders picked up after that, as dealers and suppliers decided to stockpile Chinese-made passenger and light truck tires in case a quota or tariff was implemented.
Over the same period, U.S. imports from Canada, Japan and South Korea were down anywhere from 25% to 28%, according to government and Modern Tire Dealer figures.
By the numbers: United they stand -- Tire industry unions represent more than 20,100
The United Steelworkers (USW) is part of the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union. It represents 850,000 active and 350,000 retired workers.
There are some 70,000 tire and rubber workers employed in the United States. USW local unions represent more than 20,100 tire industry workers at 20 plants in the U.S., broken out as follows:
Manufacturer Employees Plants
Goodyear Tire & Rubber Co. 10,000 six
Bridgestone Americas Tire Operations LLC 2,611 four
Michelin North America Inc. 2,500 three
Cooper Tire & Rubber Co. 2,500 two
Yokohama Tire Corp. 900 one
Denman Tire Corp. 270 one
Titan Tire Corp. 1,355 three
Close to 75% of its active tire industry members, or 15,000, work at the 13 domestic plants that manufacture consumer tires. When Michelin closes its Opelika, Ala., facility by the end of the year, active USW membership will be reduced by 1,000.