— John Kemp is a Reuters columnist. The views expressed are his own —

By John Kemp
LONDON, Sept 15 (Reuters) – President Barack Obama’s decision to impose additional tariffs on imports of certain passenger vehicle and light truck tyres from China is not surprising and despite all the accusations coming from Beijing, it does not mark a retreat into protectionism.
China has already requested formal consultations with the United States at the World Trade Organisation (WTO), the first step in challenging the decision. But despite heated rhetoric on both sides, the decision is entirely consistent with U.S. and WTO law and the president had little or no discretion in the outcome.
To secure congressional approval for China’s entry into the WTO in 2001, and allay concerns about a wave of cheap imports, the 1974 Trade Act was amended to require the president to impose additional tariffs or use other remedies if a rapid increase in imports from China (in either absolute or relative terms) cause or threaten “material injury” to domestic producers of the like or competing products in the United States.
Under the newly created Section 421, if the United States International Trade Commission (USITC) determines a “market disruption” causing or threatening material injury has occurred, the president must impose additional tariffs or other remedies. Tariffs or other remedies can only be waived if the president shows they would harm the national security or the national economic interest of the United States.

RELATIVE SURGE
In the case of tyres from China, the problem is an increase in relative rather than absolute imports during the recession, mostly at the expense of imports from third countries.
Imports from China have risen substantially since China joined the WTO. Most of the increase occurred between 2004 and 2007, and volumes have been fairly stable since then. But as imports from the rest of the world have slowed in response to the recession, China’s share has grown sharply, and it is this which made the country’s tyre manufacturers vulnerable to a section 421 complaint.
The attached chart (http://graphics.thomsonreuters.com/ce-insight/CHINA-TIRE-IMPORTS.xls) shows imports of passenger vehicle and light truck tyres from China and the rest of the world in the four categories investigated by USITC. China’s share has risen from 22 percent in July 2006 to 33 percent in July 2007 and 2008 and 43 percent in July 2009.

TRADE NOT “UNFAIR”
This is not a dispute about “unfair” trading practices. There is no suggestion China’s tyre producers are benefiting from WTO-inconsistent subsidies. Nor are they “dumping” tyres onto the U.S. market below production cost, or at a price below the one charged in the home market or third countries.
Instead, the United States is invoking a temporary “safeguard” measure against entirely legitimate imports to give its domestic manufacturers time to adjust.
Safeguards have always been a part of the GATT/WTO landscape. They allow a WTO member to impose a temporary tariff in the event of a substantial and unexpected surge in imports even when trade is fair and there is no proof of dumping or subsidisation. The intention is to give domestic producers a strictly limited period to consolidate, restructure or otherwise prepare for increased competition in future.
Safeguards are often portrayed as the ultimate “safety valve” in the trading system. Officials in the United States and other countries claim they need the power to provide protection for hard-pressed and politically sensitive industries to avoid a general backlash against free trade and sustain public support for the broad thrust towards liberalisation.
The special safeguards in section 421 are simply a tougher form of the general safeguards set out in the GATT/WTO agreements. Section 421 was added to U.S. trade law as part of the negotiations when China entered the WTO, and specifically confirmed in China’s accession protocol.
These special transitional arrangements apply to China until 2013 (see section 16 http://docsonline.wto.org/DDFDocuments/t/WT/L/432.doc).
In that sense the section 421 safeguard action appears consistent with both the letter and the spirit of WTO rules. It might send an unfortunate signal at a time when policymakers are keen to stress their commitment to an open trading system. It is doubly unfortunate at a time when the United States needs to maintain and expand its access to China’s own markets to export its way out of recession. But unless the USITC has made a mistake in its “material injury” determination, the 421 safeguard action should survive a WTO challenge.

CREDIBLE DEFENCES
The decision to impose the tariffs has drawn criticism from economists and think-tanks supporting “free trade”. Previous investigations have ended in a negotiated solution or presidential waivers; the administration has been heavily criticised for not finding a way to avoid tariffs in this case.
Section 421 was written to limit the president’s discretion, but the vague “national economic interest” test contains enough scope to allow penalties to be avoided. And the United States and China have had more than two months since the USITC finished its investigation to negotiate a settlement avoiding tariffs or other restrictions. Evidently the two sides were unable to reach an acceptable compromise.
In this instance, though, the Obama administration had little choice. The rapid relative increase in Chinese tyre imports is precisely the market disruption envisaged by section 421. If the administration had waived the tariffs, it would have been flouting the clear intention of Congress.
At a time when recession, job losses and the trade imbalance with China have made legislators and voters sceptical about the case for further liberalisation, the administration is under pressure to show trade defences can be effective to stem rising protectionist sentiment and secure support for concluding a new trade round.
Maintaining confidence in safeguards and other defences is especially important as the administration pushes for an ambitious cap-and-trade programme to limit emissions of greenhouse gases.
Cap-and-trade will raise costs for domestic producers, especially of energy intensive items. To level the playing field and limit “unfair” competition from producers in countries that choose not to implement restrictions on emissions, a compromise is emerging in which cap-and-trade is paired with a border tax adjustment or other remedies.
But this will only work if the administration can show it has the will to invoke them when necessary even at the risk of offending key trading partners. While it needs congressional support for the climate bill, the administration cannot afford to appear soft on trade remedies.

Source: Reuters

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