Stephen King: Obama must resist the siren call of protectionism ahead of the G20

Outlook: Japan is no longer at the centre of American paranoia. That role has been foisted upon China

Monday 21 September 2009 00:00

The internal combustion engine was not invented in the US. With the honourable exception of Mario Andretti, Americans tend to ignore Formula 1. General Motors and Ford no longer produce the iconic brands of yesteryear. On his new album, Jay-Z talks about "Cruisin' down 8th Street, off-white Lexus drivin' so slow", no doubt keeping Toyota very happy but leaving Detroit rather sad.

Yet America is still the spiritual home of the automobile. From American Graffiti to Prince's Little Red Corvette, from the narcotic madness of Hunter S. Thompson's Fear and Loathing in Las Vegas to NASCAR, cars and their drivers help to define the American way of life. And the car industry – from manufacturers through to suppliers – has proved a rich source of American jobs ever since Model Ts began to leave Henry Ford's innovative production line.

Life in the US car industry has got tougher over the years: poor designs, too many lemons and escalating costs. Often, those involved in this decline have gone hunting for a scapegoat. In the late 1980s, an advertisement on American television warned of the perils of buying Japanese cars, suggesting that American families would say goodbye to their Christian values and, instead, worship at the shrine of the Japanese emperor. Despite Jay-Z's preference for the Lexus, Japan is no longer at the centre of American paranoia. That role has now been foisted upon China.

This time, it's not the automobile manufacturers themselves who are up in arms. Instead, the story revolves around tyres (excuse the pun) and, in particular, concerns about the severe loss of jobs in domestic tyre manufacturing as a result of rising Chinese imports. The numbers are certainly staggering. In 2004, 14.6 million tyres were imported into the US. By 2008, 46 million were imported. The value of Chinese-sourced tyres increased fourfold over the same period while US tyre-producing plants have gone to the wall.

In response to intense pressure from the US United Steelworkers union, which represents the tyre-workers' interests, the bipartisan International Trade Commission (ITC) ruled in June that the domestic tyre market had been disrupted by the mercantilist activities of the Chinese and that the imposition of retaliatory tariffs would be appropriate.

Last week, President Obama accepted the ITC's ruling. This is important for two reasons. First, it is a triumph for union power. American tyre companies were perfectly happy with China's advances in the American domestic market because American tyre companies make a lot of their tyres – and profits – in China. President Obama ignored their interests. Because of the lower cost of Chinese-sourced tyres, he also ignored the interests of American consumers. Instead, he focused on the specific concerns of American tyre workers.

Second, while President Bush rejected every ruling from the ITC during his presidency, President Obama has taken a different path that appears to be not entirely consistent with the principles of free trade.

The Chinese have reacted angrily to the decision and are already threatening to retaliate, with poultry and vehicles in the firing line. The anger however also relates to the sense that China has been singled out for what I call "contingent protectionism".

At the beginning of the decade, China's entry into the World Trade Organisation was made conditional on an addendum to the US Trade Act of 1974. Section 201 of the Act authorised the use of temporary trade barriers if higher imports could be shown to be a "substantial cause" of "serious injury" to domestic producers. For China, however, a new section, 421, was added. This basically allows a US President to impose duties on Chinese imports to the US if they cause "market disruption to the domestic producers of a like or directly competitive product".

There is a world of difference between "serious injury" and "market disruption". Market disruption can mean anything. The Chinese never thought the US would ever use these powers, hoping that America would stick to the principles of free trade. The dangers of invoking the disruption clause were, surely, too great. Now that President Obama has done so, all manner of protectionist pressures are likely to arise. Workers in other US industries will look at this landmark decision with keen interest hoping that they, too, will be able to claim they are suffering the effects of market disruption.

Some have leapt to President Obama's defence, arguing that China leaves its exchange rate undervalued and forces foreign firms investing in China to pursue a mercantilist agenda. For both reasons, China's exports are boosted at the expense of production elsewhere in the world. Yet, even if these claims were true, it is difficult to see how tariffs will be able to ride to the rescue. President Obama's decision will most likely hurt both China and the US. While section 421 allows the US to single out the Chinese for "special treatment", it doesn't give the US powers to deal with other countries on a similar basis. Tyres now being produced in China will probably end up being produced somewhere else in the emerging world with no benefit whatsoever to US workers. Section 421 is a bilateral clause in a multilateral world. It can do only harm, which is presumably a key reason why the Chinese thought a US President would never invoke it.

On their own, tyres are not going to change the world but this comes at an inauspicious time. In Europe, protectionist pressures are also building. Magna's proposed takeover of Vauxhall and Opel has already opened wounds between Germany and the UK, with a strong sense that Angela Merkel's government is prepared to subsidise German jobs at the expense of those in the UK and in other European countries. Of course, part of the problem lies with the weakness of the UK's fiscal position: Germany has deeper fiscal pockets with which to protect its interests.

Next weekend sees the G20 circus setting up shop in Pittsburgh. Since April's London Summit, much has been achieved. There are plenty of economic green shoots. The banking crisis has eased. Financial markets have rallied. Even housing markets are showing signs of improvement. But for the majority, the recession is ongoing. US unemployment has reached its second-highest peak since the end of the Second World War. Unemployment has shot up elsewhere, most obviously in the UK and Spain. And it's because unemployment is so high that the siren voices of protectionism are being heard far too clearly. The Pittsburgh summit might still end up as a great back-slapping event, particularly if Silvio Berlusconi makes an appearance. Nevertheless, the cracks are beginning to show. International cooperation tends to work best during emergencies, as we saw earlier in the year. Now, however, it increasingly seems that each protectionist is for himself.

Stephen King is managing director of economics at HSBC

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