Chinese Tire Tariffs and U.S. Plans

CHINA FORMALLY LAUNCHED A CASE with the World Trade Organization (WTO) on Monday, challenging U.S. President Barack Obama’s decision on Sept. 11 to levy a 35 percent tariff on Chinese tire imports. Normally we do not dive into the eccentricities of national laws, trade or otherwise, but the Section 421 authority that Obama used to justify the sanctions stands apart — and raises complications that resonate far beyond trade. Most trade agreements are governed by bilateral or multilateral accords that include a method for settling disagreements. For example, the WTO has an adjudication board that hears complaints by its members and issues rulings about who is at fault and what restitution is required. Under normal circumstances, the adjudication almost certainly would rule for the Chinese in this case, as Obama did not even mention an unfair trade practice in his sanctions announcement. In fact, the sanctions decision does not have much to do with China at all. Enter Section 421, a pre-existing U.S. law that was incorporated into China's WTO accession agreement in 2001. In essence, it says that if the U.S. government perceives a large increase in the import of any Chinese product, the government may enact sanctions to limit the inflow of those products. The specific wording reads that sanctions can be used if "such increased quantities and under such conditions … cause or threaten to cause market disruption to domestic producers." Because it was negotiated into China's accession agreement, this clause is a de facto short-circuit of the normal WTO adjudication process. China agreed to the clause only when the Clinton administration insisted upon it, with the understanding it would never be used. In the years since, China's steady expansion as a trading power has meant that there are few products that could not be sanctioned using Section 421 as a justification — the United States need not even prove that unfair trade practices existed. In fact, the sanctions decision does not have much to do with China at all. Instead, it is an effort by the U.S. president to shore up support within his political base — specifically the United Steel Workers — before the congressional vote on his health care plan. The American president needs all the domestic support he can get at the moment and simply cannot afford to lose the unions. So that's what the Obama administration is thinking. But what about the Chinese? Beijing estimates the sanctions will cost it $1 billion in revenues and will affect 100,000 jobs — hardly a price the Chinese are happy to pay for helping Obama out in a domestic political tussle. The WTO case filing on Monday is part of the Chinese response, and Beijing has publicly mused that it is likely to target American chicken and automotive exports in retaliation. But any threats of major retaliation are mostly to placate their own domestic lobbies. Section 421 allows the U.S. president to target — legally, and in a manner that China agreed to in order to qualify for WTO membership — nearly any Chinese export until December 2013. And now that the Section 421 sword has been unsheathed, one of the most self-destructive things that China could do would be to provoke Obama to use it again. For China, the challenge will be to bark with the ferocity of a Doberman in order to craft the image at home that China cannot be pushed around, but to nip with the strength of a chihuahua to ensure that the United States does not actually push it around. China's means of retaliating will need to be indirect, and for this there are few good options. Beijing could resort to other, non-Section 421 sanctions, such as those that the White House levied last week on steel pipes. But that strategy risks another activation of the most recently used — and greatly feared — sanctions tool. Beijing could again raise the threat of dumping U.S. government debt, but for several reasons this is not, and never has been, anything more than a public relations ploy. China's real leverage exists wholly outside its trading or financing relationship with the Americans. The Obama administration is sliding toward confrontation with Iran over its nuclear program, specifically in the form of gasoline sanctions intended to make Tehran more pliable. China has the ability to supply gasoline to Tehran directly, provide shipping insurance for third parties to do the same or simply to block action at the U.N. Security Council, thereby denying any sanctions regime full international legitimacy in the first place. Obama may find China so easy to go up against that he can fire blind in a trade fight, but Beijing is not without levers that can complicate — if not outright scuttle — U.S. plans elsewhere.