Loser's Lament: Delta Air Sues US Ex-Im Bank

The hapless and pathetic US carrier Delta Airlines seems less interested nowadays in running a viable business than in taking on quixotic wild goose chases. A few months ago it made the headlines by buying an oil refinery to help bring its costs under control. Nevermind that it's the cost of crude oil that's particularly high and not that of refining it, but hey, it made for a pretty good 5-minute publicity stunt if it did not neccessarily improve Delta's bottom line.

Now we have another act of desperation with virtually no chance of paying off: Delta has filed a case against the American Export-Import Bank for allegedly providing "subsidies" to foreign carriers it is in competition with by offering export finance to Boeing when it sells jetliners abroad. Aside from the sheer chutzpah of believing that the US government would prioritize the interests of a constant drag on its purse alike the airline industry at the expense of a viable export industry alike commercial jet exports, the term "subsidy" is arguably being abused here.

How does export finance effectively reduce the purchase price of aircraft to foreign carriers? That is the question Delta will have to build a case on. Export finance is exceedingly common especially in countries with sizeable exports. And, of course, the WTO would not entertain a case in which a domestic firm sued its own government--it's always a government taking a case against another country or countries on behalf of a firm domiciled in its boundaries. At any rate, here's to Delta for the comic relief in an otherwise bleak Stateside airline industry:

Delta Air Lines Inc has sued the Export-Import Bank of the United States over loan guarantees given to support purchases of Boeing Co's widebody planes by certain foreign airlines, according to a court filing. Delta said that Ex-Im bank's subsidies to foreign airlines, including Emirates Airlines, Etihad Airways and Korean Air Co Ltd, to help them buy Boeing planes would cause adverse economic effects on airlines and their employees.

Delta said in the filing that the bank did not properly analyze the adverse economic impact and has requested the district court in Washington D.C. block any loan guarantees...In a complaint filed in federal court in Washington D.C. late on Wednesday, Delta said one of the types of exports that Ex-Im Bank subsidizes is the export of aircraft by U.S. manufacturers, especially ones made by Boeing.

"In 2012, the bank's total exposure to outstanding financial commitments was $106.6 billion. About 46 percent of this amount was for air transportation loans and loan guarantees, more than the three next largest industrial sectors combined," Delta said in the filing.

Delta said the Ex-Im Bank loan guarantees help lower the cost of capital for foreign airline companies. "These foreign airlines will recoup their investment in their new aircraft faster or reduce ticket prices on competing routes without adversely impacting their relative rate of return on those investments," Delta said in the filing. Delta argued that unsubsidized U.S. airlines will be forced to respond by "reducing their prices and reducing or altogether eliminating their capacity to serve those routes where they compete with bank-subsidized foreign airlines."

The whole point of trade finance is to make goods alike American-made jetliners available for purchase in LDCs where commercial finance is not sophisticated enough. To brand this kind of activity "illegal" would hurt any number of American exporting industries by precedent.

Why would the US sacrifice substantial exports to satisfy the (protectionist) interests of an utterly substandard airline like Delta? Even in present-day America, rewarding mediocrity has its limits.

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Priceless: Mastercard/Visa Win at WTO vs China

Yours truly has long noted that the PRC has not been too forthcoming about allowing foreign financial services providers to do business in China. As it turns out, not only is it difficult for foreign banks to set up branches in the mainland, but it is also difficult for American credit card firms to get into the RMB payment card transaction business. While the Chinese have acquired a reputation as savers, perhaps it's partly due to a lack of available consumer credit since the government promotes a domestic alternative that precluded the likes of MasterCard and Visa peddling their brands there. While they dominate in the rest of the world, they are minnows in the high-stakes RMB game.

In the interest of remedying global economic imbalances, I am thus quite happy to report that the WTO has for the most part ruled in favour of the United States in its case against China over discrimination against international payment card transaction firms in the RMB-denominated arena [DS 413]. From the WTO, no less:

[T]he panel concluded that China maintains CUP [China UnionPay] as a monopoly supplier for the clearing of certain types of RMB-denominated payment card transactions. The specific transactions in respect of which the panel determined that CUP is a sole supplier involve RMB payment cards issued in China and used in Hong Kong, China or Macao, China, or RMB payment cards issued in Hong Kong, China or Macao, China and used in China. Article XVI:2(a) requires Members not to limit the number of service suppliers where market access commitments have been undertaken. The panel found that China acted inconsistently with its mode 3 market access commitment under Article XVI:2(a) of the GATS by granting CUP a monopoly for the clearing of these types of RMB payment card transactions. 

Mode 3 concerns commercial presence commitments, here obviously those which China made to welcome payment card firms from abroad. Continuing...

Regarding the other Chinese requirements at issue, the panel found that China maintains a requirement that all payment cards issued in China must bear the “Yin Lian”/“UnionPay” logo and be interoperable with that network, a requirement that all terminal equipment in China must be capable of accepting “Yin Lian”/“UnionPay” logo cards, and finally, a requirement that acquiring institutions post the “Yin Lian”/“UnionPay” logo and be capable of accepting all payment cards bearing the “Yin Lian”/“UnionPay” logo. The panel found each of these requirements to be inconsistent with China's mode 1 and mode 3 national treatment obligations under Article XVII of the GATS. It found, through these requirements, that China modifies the conditions of competition in favour of CUP and therefore fails to provide national treatment to EPS suppliers of other [WTO] Members, contrary to China's commitments. 

That said, some are still pessimistic that this ruling will open the floodgates for the American giants in China since they lack economies of scale against the obviously state-sponsored entity:

China requires all foreign card companies to piggyback on UnionPay's network when accepting yuan payments. This means Visa and Mastercard must give a cut of every credit or debit card transaction to UnionPay and the card issuing bank. In most other countries, the foreign card issuers pay only the bank because they use their own network.

High interbank transfer charges and the inability to charge fees means the credit card business is unprofitable for most banks unless they achieve a scale that has so far been the preserve of domestic lenders. A senior bank executive interviewed by auditing firm PricewaterhouseCoopers for its annual Foreign Banks in China report said scale of at least 20 million cards was needed for the business to be successful.

Do not doubt though that China is a lucrative market; unbeknownst to the rest of the world, UnionPay has already more cards in circulation than Visa thanks to the sheer size of the Chinese market (where it largely operates as well as in Hong Kong and Macau):

Mastercard estimates credit card spending in China will reach $2.5 trillion by 2025 from just over $1 trillion now, in a country where it remains common to see wads of cash being handed over for big ticket items such as luxury watches. Some 55 million new credit cards were issued in 2011, up more than a fifth from 2010. There are now 285 million credit cards in circulation in China, according to the country's central bank.

Set up in 2002, UnionPay is already the world's largest card payment scheme. Its logo appears on 29.2 percent of the 8 billion cards issued worldwide, higher than Visa at 28.6 percent, according to a study by Retail Banking Research in London. It says its cards can be used in more than 100 countries.

It's a story worth following since there's a lot of money at stake. To paraphrase the late Carl Sagan, trilyuns and trilyuns, to be sure.

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Lamborghini Aventador, US-Subsidized Supercar

Now for one of my occasional Robb Report impersonations--albeit with an IPE twist. (We've got style, baby.) In 1998, Lamborghini became a wholly-owned subsidiary of Audi AG, which in turn is a luxury brand of the almighty Volkswagen Group--the real largest automaker in the world. What if the Germans overran not the world's territory but the global automobile industry? I'd venture that it would look a lot like the present-day VW Group: (British) Bentley, (French) Bugatti, (Italian) Lamborghini, (Spanish) SEAT, (Czech) Skoda and the father brands (they're from the Fatherland, right?) Audi, Porsche and Volkswagen. Being made to point out this fact because of Obama's disingenuous SOTU address jogged my memory of this post which I planned to write sometime ago. Many blogging ideas; too little time.

The debate over whether Volkswagen or General Motors is the world's largest automaker obscures a number of things we should also consider in which firm outdoes the other. First, VW has never, ever needed any bailout from the state of Lower Saxony (which owns part of it) or Germany itself. This is partly down to the astute management of Ferdinand Piech--a real automotive genius who is none other than the grandson of Ferdinand Porsche (of the eponymous marque and the designer of the VW Beetle). Piech has proven himself to those in the motor trade by, among other things, designing the Le Mans-winning Porsche 917 in his early days. Second, VW's profitability is secured by owning a lot of luxury brands that can command higher margins on the market. The cachet of Audi, Bentley, Porsche and so on is unmatched by anything Goverment Motors offers.

Recently, I've succumbed to an admittedly unproductive diversion I've had growing up which should be familiar to males the world over: reading car magazines. Having not read these darned things in a while despite watching Top Gear fairly regularly, I like many was struck by today's supercar du jour, the Lamborghini Aventador. Just watch that mighty beast in action. To achieve truly astounding performance feats alike accelerating from 0 to 60 MPH in 2.9 seconds, this "Italian" supercar embodies among the most advanced technologies you can find in a production car.

Thus the third point that underscores just how far the once-mighty GM has fallen is the advancement of VW Group designs over their American counterparts. In particular, the carbon frame pictured above of the megabuck Lamborghini Aventador is impressive, combining very low weight with very high strength. The most galling thing for USA #1 cheerleaders--and there are too many out there in the part of the blogosphere I come across--is that this technology comes from the American commercial jetliner maker Boeing. In turn, Boeing gained this technological edge via subsidies from the US government. Don't believe me? Fine. How about a WTO ruling which suggests just that?

Boeing received at least $5.3 billion in improper subsidies from the United States government to develop its 787 Dreamliner and other jet models, giving it an unfair advantage against its European rival, Airbus, the World Trade Organization confirmed...

In an 850-page report, the Geneva-based trade body accepted a claim by the European Union that research and development grants provided by United States space programs contributed substantially to the technologies used in building the 787, Boeing’s latest flagship aircraft.

Trade watchers will want to scrutinize the nitty-gritty details of DS 353 - Measures Affecting Trade in Large Civil Aircraft which are available on the WTO website. As for the rest of us, just keep in mind that the Lamborghini Aventador shares the carbon fibre space frame technology found on the 787 Dreamliner. Notably, the Aventador has not only starred in a car show but also an advanced materials show:

Whoever said “beauty is only skin deep” apparently never watched a Lamborghini get built. Thanks to the Italian automaker, those shallow types can head over to the Paris 2011 JEC composite show, and see their latest supercar, sans skin.

Built with a reinforced carbon fiber composite that was developed in conjunction with Boeing, the Aventador LP700-4’s naked chassis looks right at home in the showcase of materials and technology. And since composites also comprise many of the car’s other components, including wheels, frame and seats, there’s a little more to look at than just a carbon tub.

And here's the Lambo press blurb:

Automobili Lamborghini's participation in the 2011 edition of the JEC Composite Show in Paris - one of the world's most important exhibitions of composite materials - is intended to emphasize the company's leadership in this highly specialized sector, not only in applying these materials in mass production (as shown by the new Aventador LP 700-4), but also in the investigation and development of new manufacturing technologies and the resulting product spin-offs.

The use of composite materials reinforced with carbon fiber is becoming increasingly widespread in the automotive sector, as revealed by a study by Lucintel that foresees a growth of 65% over the next 5 years. Many manufacturers are working on developing and applying these technologies so they can build lighter vehicles that make an important contribution to reducing fuel consumption and air pollution, through improvements that include increasing the strength of the vehicle's structures.

The overall point is that the main beneficiary of Boeing's advancements in carbon fibre technology which are partly down to DoD and NASA inputs are not fellow US companies but a German-Italian concern. In other words, what's best for Boeing is not what's best for GM. With their superb application in road cars as exemplified by the Lamborghini Aventador, this knowledge gap between automakers will only become larger. There is a "trickle down" of technologies here, but for the benefit of non-Americans' bottom line. While you can of course argue that GM cannot sell such a premium vehicle, it calls into question why its marketing prowess does not extend to luxury cars. Remembering GM's Saab fiasco gives me shivers.

Bailouts aside, the world has moved on. Isn't it great that all those US government subsidies that funded Boeing are helping...a German-Italian automaker? VW is rolling on the tarmac laughing all the way to the bank. American industrial policy (whatever that is) is so inept and uncoordinated that they can't even tilt the playing field in the favour of their own companies consistently.

NOTE: Making these carbon fibre thingamajigs is a costly, proprietary process as demonstrated by the even more exclusive (if not higher performance) Lexus LF-A.

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Long Time Coming: Int'l Derivatives Court, Now Live

Here's something that I found in the LSE employee newsletter, of all places. Given the often legalistic culture of Western economies, it is no surprise that they prefer the settlement of economic disputes in formal fora. The WTO's dispute settlement mechanism exemplifies that for trade. Meanwhile, the likes of the International Court for the Settlement of Investment Disputes (ICSID) and the International Chamber of Commerce (ICC) Court of Arbitration do the same for disputes involving foreign investors and governments. Think of Hugo Chavez's latest fulminations against international energy companies.

Whatever you think of derivatives or financial instruments that derive their underlying value from that of another instrument, there is no denying their proliferation. Trade volumes have simply exploded, with notional amounts of existing contracts now amounting to the hundreds of trillions of dollars. Some even implicate them in both the US subprime crisis and the European debt crisis. Warren Buffett famously called them "financial weapons of financial destruction"--before taking out some derivatives of his own and losing money on them in the process. Ah well, I guess that it underscores their ubiquity.

But, along with their ubiquity comes the realization that these are not often technically straightforward contracts to interpret--especially the more esoteric derivatives. Hence, the lack of many nation's courts of the necessary technical understanding means that there is much scope for interpretation, especially when things go awry. From the press blurb:

A tribunal devoted to settling the world's most complex and contentious financial cases opened for business today in The Hague. Comprised of a group of judges and other international legal and market experts with more than 2,000 years of relevant collective experience, the P.R.I.M.E. Finance Disputes Centre will take on cases which are too specialised for many national or local courts.

It also aims to create an internationally-agreed body of law in areas where different countries often hand down conflicting rulings. It was the brainchild of Professor Jeffrey Golden of LSE's Law Department and he is chairman of its management board. The tribunal expects to handle multi-billion-dollar cases in fields such as derivatives and structured financial transactions. Its role is all the more urgent, argue its founders, because of the uncertainty created by world financial crisis.

P.R.I.M.E. Finance (the Panel of Recognised International Market Experts in Finance) is backed by the Dutch government and will hear cases at the Peace Palace in The Hague, where it will be formally opened by Jan Kees De Jager, Finance Minister of the Netherlands. Its advisory board is chaired by Lord Woolf, former Lord Chief Justice of England and Wales.

Our Professor Golden [great name, that, for what he does] explains the rationale for P.R.I.M.E. in terms of there being a need to reconcile often conflicting opinions passed down in national bodies:

Professor Golden said: "This project emerged against a backdrop of financial market crisis and legal uncertainty. The amounts at stake are staggering, the legal and contractual issues are complicated and the volume of complex cases is increasing.

"To date, national courts and ad hoc arbitration have been unable to produce a settled and authoritative body of law. Decisions are unpredictable, too decentralised, often taken too slowly and not always enforceable in other jurisdictions. The global marketplace needs a more innovative method of settling disputes and we believe this tribunal is the answer."

P.R.I.M.E. sounds too close to S.U.B.P.R.I.M.E. to my tastes. All this finance makes me want to cry U.N.C.L.E., but there is definitely a niche market to be found here. Even a necessary one insofar as there has been no great climbdown in the use of these instruments.

Lastly, do note that P.R.I.M.E. is not a free-floating body but one which aims to institute the arbitration rules set forth by the UN Commission on International Trade Law (UNCITRAL).

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Apple & Samsung: Who's Got Whom by the Balls?

[NOTE: For those who don't get the title, play this AC/DC song.] There are two broad debates going on regarding the current dominance of Samsung in the consumer electronics space. First we have the perennial question about the role of industrial policy for its success. Widely lauded for being a source of South Korea's competitive advantage during its rise to "Asian tiger" status, industrial policy was subsequently derided as a mechanism for harmful corruption during the Asian financial crisis. Surely there are those who criticize the continued state favoritism shown towards chaebol and its effective stifling of the emergence of smaller, nimbler Korean startups.
Me? I say the results speak for themselves.

Second and more interesting to me at the moment is the ongoing legal battle being waged by Apple against Samsung. At the same time that the Korean firm manufactures a number of the components used in the Apple iPhone, it makes its own line of smartphones. Samsung has been very successful in this regard, overhauling Apple as the world's largest seller of such devices in Q3 2011. Samsung's explanation for this strategy is that being a parts maker and a branded seller helps achieve economies of scale which it otherwise would not have had if it did not spread development costs to other customers. On the other hand, Apple is very much in line with the modern vision of an American "knowledge economy" firm that does not concentrate on manufacturing (the gritty stuff whose value-added tends to fall over time) but on branding and design (the glamorous stuff whose value-added tends not to fall). That is, who wants to be stuck with plant, property & equipment when they eventually become obsolete--isn't it worth a lot more "up there" in your head?

In many ways it's a next-generation debate between those who see the "knowledge economy" or a broader shift towards services as a source of comparative advantage (especially Americans) and those who perceive that industrial policy is still viable in the 21st century with tweaks here and there (especially Asians). Yet to paraphrase an ad slogan from long ago, Korea no longer practices its grandfather's reverse engineering but one wherein it sets the pace in new industries ahead of its Western competitors. It has certainly done well in this regard during the 21st century with bets that have paid off:

In 2000 Samsung started making batteries for digital gadgets. Ten years later it sold more of them than any other company in the world. In 2001 it threw resources into flat-panel televisions. Within four years it was the market leader. In 2002 the firm bet heavily on “flash” memory. The technology it delivered made the iPhone and iPad a reality, and made Samsung Apple’s biggest supplier—and now its biggest hardware competitor.

Or so the Koreans would like to think. As you know, Apple has taken Samsung to court over, indeed, copying the look and feel of its products (imitation is the sincerest form of flattery and all that):

Competitors also balk at the way that Samsung scales up quickly to supply parts to other firms as well as to price its own gadgets keenly. Supplying the rest of industry drives down Samsung’s costs yet further, with its rivals in effect financing its success. This strategy can create problems. Samsung is Apple’s most important supplier in the smartphone and tablet-computer markets. Samsung components, which include all the product’s application processors, account for 16% of the value of an iPhone. It is also Apple’s greatest competitor in those markets. Apple is now suing the socks off the company for copying the look and feel of its products. At the same time it is urgently seeking new ways to diversify its supply chain.

There may thus be limits to the symbiosis said to be going on between these firms. Apple may want to broaden its component supplier base in case Samsung tries to get back at it for legal contretemps. Meanwhile, Samsung may want to devote more attention to the software side as the hardware side of the consumer electronics equation. That is, an amount of overlap in expertise is perhaps inevitable for each to maintain competitiveness vis-a-vis each other. While the Economist views this relationship as rather unique, B-school professors Brandenburger and Nalebuff already noticed how widespread the phenomenon of "co-opetition" was back in 1997 when Steve Jobs had yet to sell a single iProduct (having just rejoined Apple). Been there, done that, saw the movie, bought the T-shirt.

Returning to the post's title, who has whom by the balls? In the short term it's to an extent mutually assured electro-destruction if either backs out in a significant way. In the long term it's probably not a question we will be asking as Apple seeks to broaden its supplier base and Samsung does what it's done many times before and moves on to other industries it deems more promising--which are not necessarily those in the consumer electronics space. Remember, Samsung was not originally a consumer electronics company. Tis but a momentary convergence of interests.

That said, the broader debate on the prospects for the "knowledge economy" which America has in large part bet its economic future on compared to those for the reworked conception of industrial policy which Asian nations have staked a claim to should be interesting to watch. Who says both cannot work--and purchase stocks of both firms to diversify one's portfolio? More importantly from a political economy perspective, which specific strategy will be most beneficial to their home nations? I've already criticized the Apple model for not doing much that is good for America, for instance.

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Hugo Away: Chavez Ignores World Bank on Exxon

File this under: pre-emptive strike. It appears that the indefatigable Hugo Chavez is back on the warpath against all things American. A few days ago he publicly suspected the United States of unleashing cancer on fellow left-leaning Latin American leaders. In less improbable news, however, we now understand that his Venezuela will not abide by subsequent rulings that find the country liable for nationalizing ExxonMobil oil fields in the Orinoco Belt. At the end of last year, forum shopping ExxonMobil received a favourable $746.9 million verdict against state oil company PDVSA at the International Chamber of Commerce (ICC) Court of Arbitration over the expropriation. While a victory nonetheless, ExxonMobil believes that this sum amounts to less than a tenth of its original investment.

Now, as most of you know, the International Court for the Settlement of Investment Disputes (ICSID) is a World Bank body that does what it says on the label. That is, it addresses legal conflicts over the handling of international investment--most often cases of expropriation alike what Venezuela is said to have done to ExxonMobil. ICSID is currently set to pass judgement on ExxonMobil's investment in Venezuela alike many others who've similarly complained about expropriation at Chavez's hands.

Anticipating a more negative ruling, Chavez is already signalling that Venezuela will not honour the decision of the Washington-based institution:

Venezuela won’t accept any verdict from the World Bank’s International Centre for Settlement of Investment Disputes, including Exxon Mobil Corp.’s claim for its nationalized Cerro Negro project, President Hugo Chavez said. The Washington-based court is considering Exxon’s claim in one of about 20 suits filed there against the Venezuelan government. Chavez, a self-professed socialist revolutionary, has taken over assets in the energy, metals, cement and telecommunications industries.

“We won’t recognize any decisions from the ICSID,” Chavez said on state television yesterday during his first Sunday program since announcing he had cancer last year. The company is “seeking the impossible, that we pay what we will never pay.” Exxon, the world’s largest oil company by market value, was the first to abandon Venezuela after Chavez expropriated industry assets in the Orinoco heavy crude belt in 2007. The president forced foreign oil producers into joint ventures as minority partners that year and is also in arbitration with ConocoPhillips, which rejected the terms...

Despite being a buffoon in many respects, Chavez logically assumes that the World Bank's ICSID and its usual American influences will result in a less favourable outcome. Here's a thought for you, though: What if the ICSID awards ExxonMobil an even smaller amount than the ICC's International Court of Arbitration or even finds in favour of PDVSA? The willingness of PDVSA to compensate ExxonMobil for what the ICC adjudged means it believes that it's as good as it gets:

In a separate case, the New York-based International Chamber of Commerce, an arbitration court, ruled last month that state oil company Petroleos de Venezuela SA must pay a net $746.9 million for the nationalization. Venezuela will compensate Exxon for the Cerro Negro project as ordered by that court, Chavez said yesterday.

“If Exxon gets an award in the ICSID, the enforcement mechanisms are strong,” Michael Nolan, a partner in the Washington office of Milbank, Tweed, Hadley & McCloy who has represented clients in arbitration with Venezuela, said in a telephone interview last week. “There’s a treaty.” Exxon in 2010 reduced its claim to $7 billion from $12 billion, according to PDVSA, as the Caracas-based company is known. The Venezuelan company said Jan. 2 that it would pay $255 million in cash for the International Chamber of Commerce judgment, after accounting for about $300 million in a frozen New York bank account and $191 million of Exxon debt that it will cancel.

Perhaps unsurprisingly, ExxonMobil is again forum shopping for the best result. Having been disappointed by the ICC ruling, it now awaits that of the ICSID which is supposedly considering a more strictly enforceable bilateral investment treaty (BIT) as evidence as opposed to a contract between just ExxonMobil and Venezuela. On the other hand, PDVSA is also looking for the best deal to get ExxonMobil off its back for now which it believes can be done by promptly (or at least by Venezuelan standards) paying at least part of the $746.9 million. I leave you to (enjoy?) more Hugo-isms:

“It’s insane!” Chávez said. “It’s such an insane position taken by this company than the decision [of the court] recognizes less than 10 percent of what they were asking for. How much must these companies have robbed in the last hundred years? They stole from us; they had to pay us back for damages made in the last hundred years; the capital they have wouldn’t be enough,” Chávez said.

Even Hugo knows a good deal when he sees one (perhaps). Still, I would be gobsmacked if the average Venezuelan knows what the ICSID is when most persons don't. Moreover, permanently blowing off those with the actual know-how to extract extra-heavy sour crude may not be the best course of action insofar as PDVSA does not necessarily have this expertise on its own.

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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.

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