Chinese Tires, Once Again
In 2009, President Obama imposed “market disruption” penalty duties on imports of Chinese passenger vehicle and light truck tires. These duties expired at the end of 2012. A previous PIIE Policy Brief describes the case in greater detail and quantifies the cost to American consumers of that decision.
Consumers now risk a repeat journey to the land of penalty duties and higher prices, following the recent determination of the Department of Commerce (DOC) that Chinese tire imports are both dumped and subsidized.1 Under US trade remedy law, once the DOC makes its decision, the US International Trade Commission (USITC) is tasked with assessing whether the imports in question either injure or threaten to injure the US industry. The case for injury is weaker now than it was in 2009 when market disruption was claimed. Moreover, US producers are stronger today than they were in 2012, when the “market disruption” safeguard measures expired. In fact, none of the tire firms have joined the petition seeking trade relief; the sole petitioner is the United Steel Workers union.
Early in June 2015, the USITC held a public hearing on the tires case, and the Commission released the expert reports prepared by its staff.2
The USITC reports provide industry data for the periods of 2004–08 and 2012–14. Comparing 2004 and 2014, it is evident that the United States is producing fewer tires (a 28 percent decline), while consumption is effectively unchanged (a 2 percent decline). Thus by implication, imports are higher.
However, higher unit values for tire sales have more than offset the decline in production volume. Table 1 presents data on US tire sales prices and production costs for the start and end points of each survey period. If the US tire industry is under siege, the market has yet to inform the accountants for the tire firms. Operating income per tire in 2014 exceeded the 2004 equivalent by a substantial amount.
|Table 1 Results of operations of US producers, per tire|
|Net sales price||$48||$52||$87|
|Other production costs||$11||$16||$21|
|Other operating costs||$6||$8||$9|
|Sources: USITC reports TA-421-7, 701-TA-522 and 731-TA-1258.|
Overall, operating income for the firms grew eightfold, from $0.26 billion in 2004 to $1.23 billion in 2012 and to $1.68 billion in 2014. However, profitability and import injury are not mutually exclusive. Unfair competition could lower profits from levels that might otherwise have been achieved. Moreover, the Trade Facilitation and Trade Enforcement Act of 2015, once enacted,3 would instruct the USITC not to reach a no-injury determination merely because the industry is profitable or because its performance has improved. However, the fact that operating income from US production is nearly 50 percent higher now than when the “market disruption” safeguard measures expired in 2012 should create doubt in the minds of commissioners on the injury claim.
The petition claims that profitability has expanded largely because of falling costs for raw materials. However, if US firms are prospering because of low raw material costs, that would seem to provide an argument against imposing penalty duties.
The USITC report broadly rejected the argument that US-produced tires are largely of a higher “tier” than imported tires, instead judging that imported and domestic tires are generally moderately to highly substitutable. If this is true, reductions in the cost of raw materials should be passed on to consumers, in the form of equivalently lower prices, for both domestic and imported tires. Firms seeking to extract rents would struggle to do so since competing firms (both foreign and domestic) would offer lower prices.
Table 2 suggests that the US market does not regard domestic and imported tires as close substitutes. In the period of interest preceding the 2009 case, the import prices of non-Chinese sources roughly kept pace with the rise in raw materials costs.4 But US prices rose notably faster than the raw materials costs, suggesting a low degree of substitutability. Meanwhile, Chinese import prices rose far less. The dramatic fall in the “wedge” between raw material costs and Chinese import prices was at least consistent with a finding of injurious competition in the earlier period.
|Table 2 Cost and price changes, per tire|
|US domestic shipments||$21.29||($3.10)|
|Imports from third countries||$14.87||($5.95)|
|Raw material costs||$13.92||($6.00)|
|Sources: USITC reports TA-421-7, 701-TA-522 and 731-TA-1258.|
However, in recent years the situation has been quite different. Raw material costs have fallen by roughly $6 per tire, a decline that is largely reflected in import prices for both Chinese and third country tires. US producers, on the other hand, have only passed about half of the decline on to consumers in the form of lower prices. Again, this discrepancy suggests that imported and domestic tires are not close substitutes. Moreover, the fact that falling raw material costs were partly turned into higher profits for domestic tire firms seems inconsistent with a finding of material injury from import competition. Firms are free to keep their prices high as costs fall, but shouldn’t be surprised if market share declines in tandem. That’s not import injury, it’s simple economics.
As always, the Commissioners on the USITC face political pressure to make an affirmative injury finding. In this case, the economic facts argue otherwise.
1. Preliminary countervailing duties (CVD) and dumping rates are about 12 and 19 percent respectively for a large majority of Chinese firms, although rates can exceed 80 percent in some instances. See 79 FR 71094 and 79 FR 78399 for preliminary subsidy rates and 80 FR 15987 for the preliminary dumping margins.
3. The bill, which will be sent to the president if the Senate approves changes made by the House, would amend the description of “material injury” by adding the following: “The Commission may not determine that there is no material injury or threat of material injury to an industry in the United States merely because that industry is profitable or because the performance of that industry has recently improved.”
4. We expect that non-US producers face similar raw material costs, since the inputs for tires are highly tradable. However, country-specific factors, such as infrastructure development, could have lowered the purchaser price of raw materials for foreign producers.