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Introduction
China, a middle Asia country, had dominated the American tire market until year 2009 when an agreement was ratified to surge the inflow of the tires in the market. The two countries had a bilateral agreement. The situation was that the Chinese tires could be imported into American market with a rate of import duty of 4%. The quality of the tires, though they met the standard set By the American policy makers, were still questionable, and we will however not dwell on this since it was not a major factor in the signing of the ruling that was to lead to a reduced import of Chinese tires in American market (Leo, 2010).
This paper takes a look to the reasons that lead to the decision of the International trade commission to make a ruling that was seen to go against the world trade organization free trade advice; it also takes an in-depth analysis of why President Barrack Obama took the decision to sign the change, although he made changes. In the conclusion, it will interpret the effect of the sanction to China, N. A. F. T. A. and US.
Background
The United States of American labor union called united steelworkers union, whose president is Leo Gerald, filled a case with the International Trade commission to challenge the importation of China tires at the reduced rate of import duty. The tires in question here are passengers car tires and light truck tires (Keating, 2009:1). Although, it may appear obvious that the union was backed by the American Tire manufacturers, the case was different.
This was because the united nation major tire manufactures had shifted their base of operation and were operating in China. This meant that the same imports that America was importing from China were made by Americans who had established base in China. The reason that this companies had shifted to China was because China had cheap labor and technology was more developed in the country than in the home country (Finn, 2009: 90). This made the production cost of manufacturing tires very low. The other advantage that the companies exploited is the fact that even when they produced the tires that far, importing the tires back into America was even more economical than actually producing them there.
The other area that the companies considered is the environmental rules in America and those in China. China rules on environment are not as strict as those of America and thus the extra coin that was paid in America for damaging the environment was saved. Its important at this point to note that Tire manufacture produce a lot of dangerous chemicals into the environment (Karabel, 2009: 34).
The basis that the workers union used was that the imports were continually reducing the work force of Americans that was working in the tire industry. They argued that in 2006 and 2007, four tire companies in America had closed down and three others were preparing to close down (They were actually not closing but were shifting to China). This had led to approximately 5,168 jobs lost in the United States of America between the period of 2004 and 2007. Between the period, China tire imports had increased by 255%. The workers union reasoning was from the angle of the worker who continued to suffer.
A ruling was made by the International trade commission in the favor of the union and what waited was President Obamas signature. He did not hesitate to sign the ruling that was the first to go against an international agreement in the history of America. He signed the ruling on 12 September 2009. The ruling was to take effect fifteen days from the day of signing. The request that the union had made was that in the first year importation duty be levied at 55%, 45% in the second year and 35% in the third year. The president was seen to have acted to strike a middle ground, when he altered the ruling and instead signed for 35% in the first year, 30% in the second year and 25% in the third year (FRITSCH, 2009: 1).
An Analysis Why President Obama Signed the Deal
Looking at the signing from a political point of view, it was seen as a fulfillment of the campaign promises that the president had to the country. He had promised the country to enforce North American Free trade Agreement (N. A. F. T. A.). It was seen as a way of creating market for the segment (Nelson, 2000: 67). He had promised to put the country first than anything else and thus the fact that he signed the deal against the second world biggest trader was interpreted to mean not something could stand his way in his promises. At the time of signing, the Health bill was in the process and he wanted to gather support from the members. This decision was seen as one to mobilize for support (Finn, 2009: 67).
From a trade perspective, this was the time that the world was recovering from the global financial crisis that started in late 2007; it was thus interpreted as a protectionism form by the Americans. The Chinese on the other end were not pleased by the decision and argued that as much as it was against the agreement set, the common man in America would suffer the taxes imposed at the expense of Union high paid staffs (China Daily, 2009: 4).
The Effect of the Ruling on China and America
There will be reduced trade between the two countries since the imports from China are more likely to be unattractive to the local of America. The effect that a duty has is that it increases the price of the good. Then the trader passes the tax burden to the customer. In most cases the increase of price is either equal to the rate of tax added or higher (Whale, 1967: 67). As the China tires become more expensive, their importation is going to reduce.
However, the demand of Tires in the American market if anything can only increase. The deficit created will be filled by the American producers and other N. A. F. T. A. members. The tires at a rate of 4% import duty were cheaper than the America produced tires. With an increased rate of tariff, then the locals will be able to compete effectively with the Chinese tires. Lets take a hypothetical case, if the demand of tires in America stands at 40million tires in a year then at the same time the supply from China stands at 30million, it means that the local companies and other sources will only need to produce 10million tires only.
When high tariff are introduced, then the tires imported from China will reduce say to 20million. The demand of the tires is assumed constant, thus the deficit will be 20million of them. This deficit will be catered for by the American factories among other suppliers (Ecres, 2009: 9).
The effect on N. A.F.T. A. (North American free trade agreement) members
The decision was seen to have been effected to benefit trading with the North American Free Trade Agreement members. The members had been competing with China for the American Market. China was having advantages due to the reduced rate of tariffs that were being levied by the Americans. This gave them a competitive edge. Now that the playing ground has been leveled, there will be no one with an upper hand and thus competition will be fair. There will be a portion of the market that China is going to lose especially that one that was due to its low cost. The beneficiaries are the other players in the market (General Agreement on Tariffs and Trade, 1994: 89). These are among other N. A. F. T. A. Members.
Conclusion
The ruling that was taken by international trade commission and ratified by the President has a give and take effect to the economies of the two most concerned countries. It also has a spillover effect to the other countries that trade with the same goods with America. The increase of Tariff has a favor to the home factories and a negative effect to the exporters. This is a protectionism mechanism.
Reference List
China Daily (2009) Major trade test ahead for Obama with China tire. Web.
Ecres, A. (2009) U.S. Trade Issues: A Reference Handbook. New York, ABC-CLIO.
Finn, R. (2009) China-United States economic and geopolitical relations. New York, Nova Publishers.
Fritsch (2009) Chinese Tire-Import Spat Puts Obama in Trade-Policy Pickle. Web.
General Agreement on Tariffs and Trade (1994) International trade: Trends and statistics. GATT, Schedules XCVI-Slovenia.
Karabel, Z. (2009) Super fusion: How China and America Became One Economy and Why the Worlds Prosperity Depends on It. New York, Simon & Schuster.
Keating, R. (2009) Commentary: Obama takes on China and American tire consumers. Web.
Leo, W. (2010) Chutzpah and cheaters partner to keep American tire workers unemployed. Web.
Nelson, A. (2000) Import/export: how to get started in international trade. New York, McGraw-Hill Professional.
Whale, P. (1957) International trade. London, Routledge.
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