Flat Tire

posted by
on August 5, 2009

This is the third of four articles in a series on how President Barack Obama’s trade agenda is shaping up. Today’s report focuses on one key decision that the president will have to make personally. Obama is being asked by the United Steelworkers union to decide by mid-September to roll back imports of automobile tires from China. The US International Trade Commission recommended last month that the president slap on stiff 55% tariffs on the Chinese tires, which would almost certainly knock them out of the US marketplace (the tariffs would decrease to 45% next year, and to 35% in 2011, when the plan would end). On Friday, the office of US Trade Representative Ron Kirk will hold a public hearing on the matter, after which Kirk will send his own advice to the White House. For the steelworkers, who worked overtime to help put Obama in the Oval Office, it’s looking like Payback Time.

But for the president, it’s not so simple. Obama’s political problem is that the US statute he must apply requires him to consider the broader American national economic interest, not just the narrower interest of the steel lobby. The bottom line: Given the basic economic forces that are driving the global tire industry, it appears highly unlikely that any trade restraints on Chinese tires would save more than a handful of American steelworkers’ jobs. But it is likely that such tariffs or quotas would also throw thousands of other Americans out of work. The steelworkers are loathe to acknowledge such unpleasant economic facts of life. But some of the threatened jobs would obviously involve members of other unions, including longshoremen who earn their paychecks by unloading cargo at US ports of entry, and teamsters who deliver the tires to well-known US retail outlets like Tire Kingdom and Merchants. Meanwhile, the steelworkers express no sympathy for the the jobs of the non-union workers who sell tires to American consumers — workers who could be collecting unemployment checks by Christmas. In the USW’s eyes, such Americans are traffickers in goods from communist China, and shouldn’t have their jobs in the first place.

Apart from the high economic and political stakes, this case has raised ethical eyebrows in the international trade bar, which is normally marked by civility. Leo Gerard, the steelworkers’ president, has misrepresented the nature of the litigation, while questioning the patriotism of lawyers who represent clients who are opposing the steelworkers in the tire case. A group of Gerard’s allies in the congressional steel caucus have even written a letter to the Government Accountability Office calling for an investigation of some of the lawyers who oppose the steelworkers in the tire case. This in turn raises questions about the ethical perceptions of Terrence Stewart, the veteran Washington trade lawyer who represents the steelworkers and who, with Gerard, has crafted the litigation strategy. Stewart declines comment on whether he encouraged his clients to question the ethics and patriotism of other members of the bar, or whether he has just sat back and let it happen. Stewart perhaps revealed his true sympathies when he declined an invitation to say, for the public record, that he considers the lawyers who are on the other side of his tires case to be respected members of the bar who do not deserve to be tainted because of who they represent. In short, while the available public record turns up no evidence to accuse Terrence Stewart personally of engaging in unethical conduct, the insinuations that his clients and their supporters in the congressional steel caucus have made carry a familiar odor. For those who know their Washington lobbying history, the newest steelworkers’ smear campaign against those who cross them has a familiar smell.

Here’s the story. [Fair journalistic warning: it takes some length to get the context right and provide readers with enough details to enable them to make up their own minds. But at least the tale is easily broken down into bite-sized chunks, if not sound-bites.]

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When US presidents make bad decisions affecting international trade, Americans can get thrown out of work. President George W. Bush’s decision in March, 2002 to impose stiff 30 percent tariffs on imports of steel from the European Union, China, Japan, and other major steel-exporting nations hurt a lot of Americans. By the end of the year, some 200,000 Americans whose jobs depended upon access to the imports had been thrown out of work, as economists Laura Baughman and Joseph Francois (conservatively) documented in a study done in 2003 for the Consuming Industries Trade Action Coalition. Citac spearheaded the successful lobbying effort that helped persuade Bush to abandon his steel plan (which was also found to have violated US obligations in the World Trade Organization not to discriminate among trading partners) in December, 2003. The bitter irony: the steel tariffs that cost at least 200,000 American jobs had been aimed at protecting the jobs of some 187,500 domestic steelworkers. More jobs were lost than were supposed to have been saved. Rather than express gratitude for what Bush had tried to do for them, the steelworkers turned against him. That’s not surprising, but the USW also had previously turned against Bush’s predecessor, Bill Clinton, despite the fact that the Clinton administration had given the domestic industry high anti-dumping tariffs on umpteen steel products from around the world.

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It’s a safe bet that Obama will never be able to do enough to satisfy the USW either — although, given his close political ties to the union, he will probably try. The US International Trade Commission, in calling for the prohibitive 55% tariffs, has linked the Chinese tire imports to the loss of 5,100 American jobs. The USW estimates that some 3,000 more will be out of work by the end of this year. The union had first asked for quotas to cap the Chinese imports, and the suggestion of 55% tariffs is more than the union had asked for. Predictably, union officials now say that that 55% is not high enough.

The result of an Obama tariff- or quota plan — depending upon whose calculations one wishes to believe — would possibly protect the jobs of between 900 and 1,800 steelworkers. But the consequences of the trade protection could result in “at least” 25,000 other Americans being thrown out of work. That’s the number that Rutgers University economist Thomas Prusa has crunched for a new coalition of tire-consuming businesses called the American Coalition for Free Trade in Tires. Prusa is no mere hired gun; he’s a respected economist who used the same data that the ITC used in its own economic analysis, although the feds did not look at the impact of the tariffs on other Americans.

Presently, there are some 31,000 US production workers in the domestic tire industry. The Tire Industry Association says there are some 200,000 workers downstream. As Prusa noted of the proposed Obama tire plan: “Under the best case scenario more than a dozen jobs will be lost for every job protected.”

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Before looking more closely at why the case appears economically weak, consider the insinuations that some of the Washington lawyers who represent clients who oppose the steelworkers are ethically tainted. The story illustrates — hardly for the first time — one truism that has marred the Washington lobby scene for years: those who cross the steelworkers can find themselves smeared.

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The chronology of the newest steel lobby smear begins on June 1. Writing in the Huffington Post that day, USW president Leo Gerard said that “a group of tire importers that should be competitors banded together recently to ally themselves with China in a trade case.” The reference was to the American Coalition for Free Trade in Tires, the group of American tire importers, distributors, and retailers that has sprung up to oppose the USW’s call for trade restrictions on Chinese tires. The coalition is headed by Dunlap & Kyle Co., Inc. which is based in Batesville, MS. Another prominent member is the Hercules Tire & Rubber Co., which is headquartered in the Cincinnati, Ohio area. Coalition member Del-Nat Tire Corp. is a cooperative that is owned by retailers with some 3,000 employees. Del-Nat has a 500,000 square foot distribution center in Memphis, from which it distributes so-called “private brand” tires that are made both domestically and in China, along with other Asian and Latin American countries. In his Huffington Post article, Gerard was scandalized by the fact that these American businesses engage in international trade involving China.

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“Doesn’t sound like they’re working for the interests of the United States, does it?,” the USW president wrote. “No, they’re not. They’re collaborating with China against American manufacturing in general and American tire workers, represented by the Untied Steelworkers, in particular.”

Gerard was just warming up. “China cheats in international trade,” he continued. “For the tire importers, calling themselves the American Coalition for Free Trade in Tires, China cheating means higher profits.” They should be called the “Chutzpah Coalition,” the union leader suggested. Then he singled out the coalition’s lead Washington lawyer, Jim Jochum, for a personal attack. Jochum had taken the position that the trade restraints the USW are seeking would harm the jobs of Americans who work for independent tire dealers. While that sounds like a simple recitation of the facts, Gerard had no substantive answer. Instead, Gerard tried to discredit the lawyer-collaborator, calling Jochum “the Chutzpah Coalition lawyer.”

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Besides the name-calling, Gerard’s article misrepresented the nature of the litigation, which was filed under the so-called Section 421 of the US Trade Act of 1974. For a fuller report on how this law works, readers are invited to an April 29 posting on the “current” section of this website: One Hundred Days…and Still No Trade Policy. For now, suffice it to say that Section 421 focuses solely on “surges” of legitimately traded imports that can materially injure a competing US industry (never mind the fact that the law sounds like a description of what healthy market competition is supposed to be about). Regardless of one’s opinion on the law’s merits, it has nothing to do with so-called “unfair” trade, despite Gerard’s claims to the contrary. In other words, the members of the coalition that Jochum represents have only been engaged in legal business affairs that have been supporting American jobs.

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But that’s not the way that some of Gerard’s allies on the congressional steel caucus saw things. Also on June 1, Rep. Louise Slaughter, a New York Democrat who chairs the powerful Rules Committee, wrote a letter to the Government Accountability Office that asked the congressional watchdog agency to investigate the ethics of Jochum and other lawyers who oppose the USW in the Chinese tire case. The letter was also signed by seven other Democrats whose names are a Who’s Who of the protectionist wing of the party: Dennis Kucinich, Betty Sutton, Tim Ryan and Marcy Kaptur of Ohio; Texan Gene Green, and Phil Hare of Illinois. It seems that the caucus members don’t cotton much to Republican lawyers who formerly served in the administration of George W. Bush, and who now are in private law practice.

Here’s the key paragraph from the lawmakers’ letter: “Recently, for example, it has come to light that a number of former trade officials — James Jochum, former Assistant Secretary of Commerce for Import Administration, Marguerite Trossevin, former Deputy Chief Counsel for Import Administration at the Department of Commerce, Stephen Claeys, former Deputy Assistant Secretary for Antidumping and Countervailing Duty Operations at the Department of Commerce and David Spooner, former Assistant Secretary of Commerce for Import Administration — have chosen to represent foreign producer interests, either directly or through importing parties, on a Section 421 case at the International Trade Commission. The knowledge, expertise and contacts they gained during government service is now being adversely applied to U.S. interests. We believe that an examination of the activities of these and other former trade staff and officials is merited to determine whether additional limitations on their post-government employment activities are necessary.”

Washington lawyers Jochum, Trossevin, and Claeys are now affiliated with Jochum Shore & Trossevin. David Spooner is Of Counsel to Squire, Sanders & Dempsey, and represents the China Rubber industry Association. They lawyers are well-regarded in the trade bar. But in a June 1 press release that accompanied the letter calling for a GAO probe, Rep. Slaughter expressed her disdain for them. “We need to slam the revolving door so that government employees do not walk out of their office and into lobbying positions where they may work against the best interests of American workers and industries.”

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On June 2, just one day after Gerard and the lawmakers had questioned the lawyers’ patriotism and ethics, the US International Trade Commission held its public hearing on the Chinese tires case. Terry Stewart was there as the USW’s lead lawyer, as was a delegation from the USW that included President Gerard. Louise Slaughter was one of the members of the steel caucus who also testified at the hearing to show her solidarity with the union.

None of the congressional offices contacted for this article were willing to say who brought the lawyers’ activities to their attention — but it is considered inconceivable that the lawmakers would not have heard from Gerard and other USW officials, if not from Stewart.

In any event, the letter that implied that there was something unethical about the lawyers’ advocacy in the Chinese tire case has drawn serious fire from some heavyweights in the American Bar Association.

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Thomas Susman, the director of the ABA’s governmental affairs office in Washington, D.C., took issue with the steel caucus members in a June 30 letter to them. “Federal laws as well as local bar rules prohibit conflicts of interest, and there are are already a number of laws on the books addressing the so-called revolving door issue,” Susman pointed out. “Moreover, lawyers are subject to codes of professional conduct that prevent use of confidential information obtained during prior government service or prior private sector legal representations.”

Susman didn’t pull his punches: “As we understand, you are not alleging violation of any of these laws or standards, but suggest nonetheless that it may be inappropriate, or even unethical, for former trade officials to represent foreign interests, or even domestic interests involved in import trade or the distribution of imported products. We disagree and are concerned that your inquiry suggests a goal of imposing additional post-employment limitations on former trade officials and that limitations on representation of clients by former government officials should be tied to the particular clients they represent.”

Susman also pointed out that “we would certainly not equate representing foreign clients, and domestic clients involved in the acquisition and distribution of foreign-origin products, to advancing interests that are inevitably inimical to those of American taxpayers and citizens. Were this otherwise, the many former members of Congress who represent such foreign and domestic clients might be clouded with comparable public opprobrium — a result that is clearly unwarranted.”

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Before we get back to the economics, it’s worth mentioning that this case is hardly the first time where the steelworkers have played their xenophobic card. In 1994, Paula Stern, a former chairwoman of the US International Trade Commission who was a friend of Bill Clinton, was the subject of an anonymous whispering campaign that sank Stern’s hopes to become Clinton’s first US trade representative. It seems that Stern’s offense was that she had not always voted with the steel lobby in anti-dumping litigation. In February, 2001, domestic steel lobbyists circulated an intemperate memorandum on Capitol Hill that said that if Thelma Askey, then a sitting ITC commissioner, were reappointed, that would be “a disaster for domestic manufacturing.” In May, 2000, the memo added, “Askey voted with the ITC to find that the U.S. steel industry was not being injured or even threatened with injury from imports of cold-rolled steel.” Imagine such an unpatriotic act!

In June, 2001, Sen. Jay Rockefeller, a West Virginia Democrat, implied that Anne Krueger, one of America’s most respected economists, was unpatriotic, basically because she did had (rightly) criticized the anti-dumping laws as economically flawed. When the US loses cases in the World Trade Organization, stalwarts of the steel lobby like Rockefeller are always there to blast the international jurists as biased against America. And some people who pointed out that the Bush steel plan of 2002-2003 was seriously flawed got the same treatment. During that trade war, economist Tom Prusa wrote an analysis for a coalition of foreign steel producers that attributed the domestic steelmakers’ competitive weaknesses less to import competition and more to an economically toxic combination of un-affordable pension liabilities and union contracts that made little economic sense. I remember getting calls at the time from angry steel lobbyists who tried (unsuccessfully) to get me to believe that Prusa was “an idiot” who knew nothing about the industry’s problems and didn’t care about America. That was, of course, before all the bankruptcies that resulted from the stratospheric pension liabilities and un-economic union contracts that Prusa had cited. There’s a lot more to this history, but you get the point.

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As for the economics that drive the USW’s pleas that President Obama give them some relief from Chinese import competition, it’s difficult to see how any Obama tire plan would work. Maybe he could try to finesse the issue by imposing a tariff of “only” ten percent on Chinese tires, hoping that markets would adjust. That, and some additional financial/retraining assistance steelworkers who need help in moving on with their lives. But the fundamental economics in play strongly suggest that the kind of trade relief that the USW is now demanding would cause a lot of harm.

Last year, US imports of Chinese tires — which are mainly composed of “private brands” in the lower-end of the market, as opposed to the higher-priced premium tires made in the US by manufacturers like Bridgestone, Goodyear, and Cooper — were nearly $1.8 billion. This compares to more than $5 billion in lower-end tires that were imported from other countries. Knock out imports of tires from China, and other suppliers in places like Canada, Japan, Korea, Indonesia, Brazil, Mexico, Poland, and Indonesia will be more than happy to grab the business. That’s not just logic, but lessons learned from observing the consequences of how high tariffs and restrictive quotas divert trade. A lesson the USW has never learned, however.

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Even the ITC’s majority report on the matter cites the public record created by US tire makers, who have made no secret they see their future profits based upon moving their lower-end operations offshore, while focusing instead on making higher-priced premium tires in the USA.

The ITC’s report quoted a Bridgestone annual report that explained that the company had decided to close a plant in Oklahoma in 2006 because it had been producing “tires in the low-end segment of the market where demand is shrinking and fierce competition from low-cost producing countries is increasing.” And Cooper Tire had indicated in one of its annual reports that “part of its strategy would be to free up capacity in the United States by outsourcing the production of opening-price-point and economy-type tires to manufacturers in Asia and Mexico.” While the USW laments the fact, it is extremely difficult to see how the proposed trade restrictions aimed solely at China are going to bring any jobs back to America.

The large US tire manufacturers do not support the USW petition; rather, they have maintained silence. No wonder, if you consider basic economics. If high tariffs would drive up prices for lower-end imports, the domestic tire makers could then hope to raise the prices of their premium brands and look to increase their market share.

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The more one looks at the case, the weaker it appears. While the UAW has expressed solidarity with its brother steelworkers, Ford, Chrysler and General Motors say that they could be hurt if the Obama administration drives up the price of tires. There also seems to be a valid safety issue, as poorer American consumers who would face higher prices for tires that should be replaced would be given an incentive to delay the purchases. The ITC report acknowledges that tire purchases have fallen in the current recession.

And speaking of consumers, economist Tom Prusa estimates that high tariffs on Chinese tires could raise costs for Americans who buy tires by $600-700 million each year. Meanwhile, you’ve seen the headlines about how the Obama administration hopes consumer spending will increase, thus helping the US climb out of the current deep recession. So, apart from politics, why should the president be considering doing anything to slow down consumer spending? And of course there is the question about the adverse job impact upon those 200,000 Americans who work in the downstream US tire industry.

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I sent an e-mail to USW spokesman Gary Hubbard, asking how the union weighs the possible gains to its members against the costs to other American workers. “Thanks for your good question,” he replied. “I will respond.” But after that brief exchange on July 25, Hubbard did not respond. In any event, further checking revealed that Leo Gerard had already answered the question in his June 1 rant in the Huffington Post against Americans who were “collaborating” with the Chinese against American workers.

Meanwhile, the USW petition has some hardworking Americans deeply concerned that the president of the United States will press ahead with a tire plan, knowing that he will be harming innocent bystanders. Remember how Joe the Plumber dogged Obama on the 2008 campaign trail? Next time around, maybe we’ll see Mike the Tire Guy. A lot of Mike’s.

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Mike Wolfe owns Southeastern Wholesale Tires, Inc., headquartered in Raleigh, NC. Southeastern imports foreign tires, including those from China — the kind of tires, he says, that “US producers don’t want to produce anymore.” I asked Wolfe what would happen to his business if Obama slaps on stiff tariffs on Chinese tires. In his answer, he explained the math. “We now average $25-26 million a year in sales,” Wolfe said. If Obama follows the bidding of the steelworkers, Wolfe said he could lose “between $7- and $8 million dollars in business.” If his small businesses’ bottom line is pulled out from under him by the feds in Washington, Wolfe said that he will have no choice “but to start letting people go.”