Why Obama is taxing Chinese tires

When the President hit China with a tire tariff, he hoped to show Americans he'll enforce free-trade rules. But he can't alienate the country that finances growing U.S. deficits.

By Nina Easton, Washington editor

(Fortune Magazine) -- "No, we are not in a trade war," chief White House economist Lawrence Summers declared when I raised the prospect with him two days after the Beijing regime lobbed U.S. auto parts and chicken wings back at 1600 Pennsylvania Avenue in retaliation for President Obama's Chinese tire tax.

So far Summers, who by all accounts was deeply involved in the President's decision to slap a 35% tax on Chinese tire imports, appears to be right: We'll call this episode a contained skirmish.

So far. What's at risk in U.S.-China relations is the possibility of trade tension that will cloud efforts to reach deals on other critical fronts like climate change and nuclear nonproliferation.

The reason: With Americans saving more and consuming less, the U.S. will need to ramp up exports to maintain its own economic growth. "With both of us promoting exports, there is going to be trade friction," says Kenneth Lieberthal, a China expert at the Brookings Institution.

Add to that mix President Obama's Big Labor love; unions supported his presidential bid to the tune of more than $50 million. Labor and its Democratic allies have long blamed China for the loss of U.S. jobs and are pressing the President to get tough with Beijing, just as NAFTA was an earlier target.

Like the President, Summers argues that the "credibility of our policies" rests on enforcing the commitments that China made when it joined the World Trade Organization in 2001.

The tire case fell under a provision, called Section 421, that gives the President broad discretion on whether to impose quotas or tariffs when imports disrupt the U.S. market. Faced with similar cases, President Bush took a pass on punishing China. Advocates of the tire tariffs argue that a skeptical public won't support open markets unless Obama shows he's willing to take a stand.

"As long as there was a compact of everyone playing by the rules, there was support to move forward," says Terence Stewart, the lawyer representing the Steelworkers in the tires case. The tire case, Summers notes, involved a market segment "in the millions, not the billions," so the White House was able to make its point with limited pain.

Given the complexity of global trade, however, that get-tough policy can rebound to hurt American interests. U.S. tire manufacturers, several of which have Chinese factories, and American distributors, which now must raise prices on struggling consumers, vociferously opposed the tariffs.

U.S. producers of auto parts and chickens will be hurt if China moves forward on plans to tax them in return. "It was folly and will probably cost jobs here," C. Fred Bergsten, director of the Peterson Institute for International Economics, says of Obama's decision.

The tire tax could also whet the appetites of labor to pursue more cases against China, though there are no more Section 421 cases on the immediate horizon.

"People are a bit emboldened by the President making this decision," Ohio Sen. Sherrod Brown, a leading trade skeptic, told Fortune. "The Chinese don't play fair, and we've been cowards. Every time China threatens, we back off."

Yet Obama can ill afford to alienate China. Besides needing the country to buy more U.S. goods, the U.S. will depend on Beijing to help fund $9 trillion in deficits it will produce over the next decade.

"Chinese leaders have expressed concern about the safety" of their investments, notes Jing Ulrich, managing director of J.P. Morgan's Chinese equities division. In July the administration humbly offered a visiting delegation of top Chinese officials a promise to control spending and contain inflation. The tariffs, however, sparked a nationalistic outburst in China, with bloggers calling for disinvestment from the U.S.

As a candidate, Obama described China as "neither our enemy nor our friend. They're competitors." Ideally, the two countries need to become self-interested cooperators. "They are moving toward an informal G-2 where the U.S. and China will start to come to a meeting of the minds," says Bergsten. But on trade, harmony remains a long way off.

In the end the President's biggest challenge on China may not be in Beijing but here at home -- managing the expectations of his own friends. To top of page

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