Manifold Destiny: PRC Slaps Tariffs On US Autos

You can say that eventual trade war is written in the stars above between the world's two largest nations, though here's another example of a skirmish testing the waters. There I was enjoying the holiday season, watching A Charlie Brown Christmas for the nth time when the Yahoo! front page news item from Forbes caught my eye about how "China Gets Revenge On Obama With Tariff On US Autos." The first few lines provide the gist of the PRC argument against alleged US subsidies to the automotive industry:

President Barack Obama hit China automobile tire makers with a trade tariff in 2009 and now Beijing has struck back with a potentially more punitive tariff, as much as a 21% tax hike on U.S. car exports bound for China, the world’s largest auto market.

This week, the Chinese government upped the ante in the Obama-China trade dispute by surprisingly imposing new tariffs on imports of Honda and Cadillac models, Chrysler Jeep Grand Cherokee, the BMW X5 and X3 and Mercedes Benz models made in Michigan, Alabama and South Carolina. China argues that the U.S. provided illegal subsidies to these companies during the economic downturn in 2008 and is selling those vehicles cheaper in China than they are sold for in the U.S.

Tire-car metonymy aside, it seems odd to me why China would retaliate directly in response over tariffs on China-made tires given the time lag and the relatively small volume of such tires being sold in the US. To be sure, the proportion of affected American automobiles affected by this new ruling--those with engines larger than 2.5 litres displacement--will be relatively small as well. More pertinently, the Chinese should have a job on their hands proving that 'transplants' or US-made cars from foreign brands alike the aforementioned Honda, BMW and Mercedes-Benz (ML series) benefited from government subsidies during the Great Recession.

Yes, Chrysler and General Motors received substantial, money-losing state support to keep them alive during the recent recession. However, the case is not clear with regard to the transplants. It is true, for instance, that the state of Alabama gave Mercedes a hefty $300M worth of subsidies to locate its SUV plant there, but that was in 1994, not 2008. Though the states and incentives in question vary, the other transplants like BMW also chose to locate in the (largely union-free) American South during the Nineties and not in the aftermath of the subprime crisis.

In addition to subsidy claims, the New York Times' Keith Bradsher notes that the Chinese are oddly making dumping claims given that these cars sell for much more in China than in the US after all levies are accounted for:

The new tariffs, totaling up to nearly 22 percent of the import prices, will probably have a mainly symbolic function, rather than reducing the already skimpy sales of such vehicles in China. Other tariffs and taxes already in place have limited sales of American imports by helping raise their retail prices by about three times what the same cars and S.U.V.’s sell for in the United States. [my emphasis]

The new tariffs China imposed Wednesday will be antidumping duties of 8.9 percent for G.M. vehicles, 8.8 percent for Chrysler, 2.7 percent for Daimler and 2 percent for BMW. The ministry separately imposed additional antisubsidy [countervailing] duties of 12.9 percent for G.M. and 6.2 percent for Chrysler.

Is it the United States manifold destiny [no sic] to take China to the WTO over this action? That the US is hardly a saint on the matter of propping up its automakers is evident. Hence, the subsidy claims against GM and Chrysler probably pass muster. However, the dumping claims are quite far-fetched IMHO given how much these types of US-made vehicles sell for in China. Still, the PRC is adamant that their actions will hold up even if the US takes the WTO litigation route. Chinese Commerce Minister Chen Deming added the following:

"China according to WTO rules ... conducted in an open manner and rule-based manner investigations into US car imports in China and decided to impose anti-dumping and countervailing measures," he said. "This is in line with WTO rules and not a form of protectionism...[i]f anyone begs to differ, the best solution is to ask the WTO experts to rule," said Chen, adding that China will respect the trade watchdog's verdict.

The pile-up of US cases against China in tires, chickens and solar panels probably made China hurry up with a retaliatory measure to make the larger point that the US is not Mr. Clean, either. However, singling out the big-engine American automobile import sector minimizes the domestic political cost of making this point by angering more price-insensitive luxury brand buyers instead of Jiang Average:

Wednesday's announcement came amid Chinese anger over a U.S. investigation into whether China unfairly subsidizes its solar panel makers. But China's previous experience with trade disputes have taught its officials the lesson that American firms can be allies in opening American markets. In recent years, the U.S. poultry industry lobbied actively against a Congressional ban on negotiating with China to import Chinese cooked chicken -- imposed after Chinese food safety scandals -- because they feared losing the lucrative Chinese market for chicken feet.

China's choice of targets is limited by its reluctance to alienate Chinese consumers with higher prices for imported foodstuffs or raw materials. The value of soy and oilseeds imports from America so far this year is triple that of cars, at about $12 billion. Making imported cotton, chemicals or grains more expensive would also only contribute to inflation in China.

Imported cars, however, appeal mainly to China's wealthiest consumers, who aren't very price sensitive to begin with.

China has laid the gauntlet down by practically daring the US to take it to WTO dispute settlement.