Case Analysis – U.S. Tariffs on Tire Imports from China
Ramón Alejandro Lomas Iracheta
BSM404 International Business
Instructor: Dr. Carla Weaver
May 24th, 2015
U.S. Tariffs on Tier Imports from China
The decision of President Obama supported by the International Trade Commission of imposing a three year tariff to imports of tires from China has caused controversy. The United States Steelworkers argue that the tariff has brought benefits for them, which include more job capacity, increase in production and increase of sales. In the other hand, China called the tariff a “serious case of protectionism” due to the negative economic effects that imports of tires were causing to ...view middle of the document...
Of course importing or outsourcing is not bad, but they need to be regulated in order to have a fair market competition and this lead to protectionism practices.
Protectionism is a topic of debate; some experts believe that it is necessary to protect domestic industries and jobs, that was Obama´s intention when he decided to apply the tariff on tires from China. In the other hand, some others think that protectionism creates blocks to free trade as China expressed in its complaint, and also it may cause retaliation from trading partners.
It can be assumed that applying a tariff on tier imports with the intention of increasing demand for domestic products, besides fixing a problem, it may cause more problems in a long term.
In Monica Sanders words “Tariffs raise the price of imports. This impacts consumers in the country applying the tariff in the form of costlier imports. When trading partners retaliate with their own tariffs, it raises the cost of doing business for exporting industries. Some analyst believe that tariffs cause a decrease in product quality” (2015, p. 4). Companies will try to balance the cost of the tariff with the cost of production, so they may use cheaper raw material that may affect the quality of the product.
Also as Sanders mentions, trading partners will react by imposing their own tariffs, this will affect other companies that at the beginning were not affected. For example, if the U.S applied a tariff on Chinese tires, China may apply a tariff on wood, now the wood companies will suffer a lower demand for their products. This may lead to a tariff fight in which both countries result affected as well as the final consumers.
A good characteristic of tariffs is that comparing to quotas, they are more transparent and easy to administer, this makes easier for trading partners negotiate to decrease them or eliminate them. And this could be a possible solution, in which U.S. and China negotiate the tariff cost, so the effect of it will not be so critic for both countries. U.S. also exports a lot of goods to China, in its top ten of exports, medical and technical equipment, oil, vehicles, plastics, etc. All of them are important goods for the Chinese economy, and also represent a high income in U.S. gross profit. So there could be a solution, in which U.S. may increase the price of oil, which is used to produce tires and compensate in some way the losses.
Another solution can be subsidies, “Subsidies are usually defined as money directly given by the government to businesses to encourage activities that it wishes to promote. The amount of the subsidy is often based on the amount of the goods or services provided” (Amadeo, K. 2015, p. 1). In this way, the government can avoid applying tariffs and so avoiding retaliation from trading partners, instead of be focused on affecting the imported good, they concentrate in improving domestic goods by giving them a little monetary help.
A third possible solution can be a...