Pres. Obama's recent 35% tax (on top of an existing 4% tariff) on tires imported from China has generally been denounced as a protectionist move motivated by domestic political factors. Bill Witherill of Cumberland Advisors called it a "cynical and dangerous move" because the US tire manufacturing industry is internationally uncompetitive anyway. Some have speculated the tariff will lead to another Smoot-Hawley effect on the world economy. With the lessons from the Great Depression hanging heavy over everyone's head, the recent trend of trade retaliation (such as competing Buy America and Buy China policies) is certainly alarming.
But while the tariff may seem ominous from an economic perspective, from a geopolitical perspective the tariff makes more sense. A recent article from Stratfor (which is unfortunately not public) argues the moves of both countries were politically motivated and are unlikely to escalate. I don't agree, but it's an interesting argument. First they point out this is not a normal WTO case, because Obama never even mentioned any unfair trade practices. Obama did it because he can. In the 2001 Chinese WTO accession agreement, Clinton insisted on including a particular section 421, which basically allows the US to sanction any product without making a case for trade violations until the end of 2013. For that reason, China cannot react in any way that will actually hurt the US, because it could provoke Obama to use section 421 again, completely legally. We have yet to see any meaningful retaliation. China declared it would probe "unfair practices" in US chicken and auto products, but that's it.
But why would Obama do this for domestic political reasons as the FT, WSJ, Stratfor, and others have claimed? Sure he's having trouble with healthcare, but why would he trade a small boost in his base for further complications in Iran? As Stratfor points out, China could easily retaliate by refusing to cooperate with sanctions or stonewalling negotiations. But this would make Obama look terrible. Obama has a lot of political capital riding on Iran. His criticism of Bush's unipolar attitude and unwillingness to negotiate was one of his main foreign policy selling points during the campaign. I think its more likely Obama enacted the duty to remind China of its economic leverage before the P5+1 negotiations with Iran. China is not enthused about sanctioning its third-largest supplier of oil.
Obama said on Wall Street this Monday,
"Make no mistake, this administration is committed to pursuing expanded trade and new trade agreements. It is absolutely essential to our economic system. But no trading system will work if we fail to enforce our trade agreements. So when, as happened this weekend, we invoke provisions of existing agreements, we do so not to be provocative or to promote self-defeating protectionism. We do so because enforcing trade agreements is part and parcel of maintaining an open and free trading system."
These words imply the US sees its ability to tariff-at-will as a right in return for opening up trade with China. While his choice of industry might have been politically motivated, his decision to raise tariffs in the first place was likely a geopolitical one. It will be interesting to see how the trade and Iran issues evolve alongside each other.
