In the second installment of this topic, we explored how oil prices directly affect the price of tires. In particular, we examined how global events can create fear of a potential disruption in our supply of oil. This type of market speculation drives the oil prices higher. Since synthetic tires are produced with oil, the raw materials cost adversely affects the final product price. If you’ve purchased tires recently, you know that prices have skyrocketed compared to the last time you bought them. If you need to buy tires, be prepared to experience sticker shock. Over the last three years tire prices have increased an average of 70%. According to Tire Review, “we are seeing twice-annual tire price increases, and these are ranging from 5% to 12%.” In other words a tire that was $100 at the beginning of 2009 is probably listed around $170 today. From 2005 to today “the same tire costs about 87 percent more.”
As we’ve discussed in past articles, the primary factors currently influencing tire prices are rubber supply, oil prices, tariffs, emerging markets, supply and demand, and the proliferation of tire sizes. This article will examine how tariffs on imported products have affected tire pricing.
What is a Tariff
According to Export.gov, a “tariff or duty (the words are used interchangeably) is a tax levied by governments on the value including freight and insurance of imported products. Different tariffs are applied on different products by different countries. The average duty worldwide is about 5 percent… Tariffs and taxes increase the cost of your product to the foreign buyer and may affect your competitiveness in the market.”
Tariff on Chinese Tires
In 2009, the Obama
Administration implemented a steep tariff on imports of
Chinese-made tires. The tire tariff was structured with a 35
percent duty the first year, 30 percent the second and 25 percent
the third. This is in addition to the 4% base tariff. The
intent of this regulation was to protect American
jobs and save the tire manufacturing industry in the
US. According to
Market Watch “U.S. imports of Chinese tires
rose from 14.6 million in 2004 to 46 million in 2008, accounting
for about one-sixth of the U.S. market. Four U.S. tire plants have
closed in the past two years (2007-2008) and more than 5,000
workers have lost their jobs.”
There are a couple of issues to this tire tariff. The first is that “U.S. tire manufacturers years ago decided to move production of low end tires off-shore,” said David Spooner, a lawyer representing the Chinese tire industry. “Frankly, a temporary tariff is not going to get them to change their business plan.” Most large manufacturers have several international tire facilities. So what is not produced in China can readily be made in South Korea, Thailand, Indonesia, etc.
The second issue and perhaps more crucial is that since “cheap” Chinese tires are no longer inexpensive, other manufacturers do not need to cut tire prices to stay competitive. The Obama Administration has pledged to “crack down on China” and “work to ensure that China is no longer given a free pass to undermine U.S. workers”. According to U.S. Trade Representative Ron Kirk “enforcing trade laws is key to maintaining an open and free trading system.”
As reported by Reuters, it’s important to note that “no American tire manufacturer supported the case and one, Cooper Tire, publicly opposed it.”
Marguerite Trossevin, who represents a coalition of U.S. tire companies that import Chinese tires, said the tariff decision is “very disappointing.” She predicted price increases for U.S. consumers and losses for U.S. tire importers. “For the U.S. tire distributors and consumers, there’s going to be a heavy burden to bear,” she said. “It sends the message that special interests will get protection if they ask for it — regardless of what that means for broader trade policy.” She also added “you don’t keep jobs here by forcing companies into unprofitable lines of business… the president disregarded the interests of thousands of other American workers and consumers.”
Impact of the Tire Tariff in 2012
In his 2012 State of the Union speech, President Obama pointed out that “over a thousand Americans are working today because we stopped a surge in Chinese tires.”
U.S. China Business Council President John Frisbie disputed the president’s assessment on the success of the tariff. “We disagree that the tariffs on imports of low-end Chinese tires have had any positive effect on American jobs or the American economy. All evidence suggests that the beneficiaries have been other low-end tire producers in Asia and Mexico,” he said.
Bob Ulrich, editor of Modern Tire Dealer, says tire prices are “up 29% in the replacement market since 2009”. Large increases in shipping and raw-material costs have contributed to the rise, as has recovering consumer demand in the U.S. “All this shows that tariffs on Chinese low-end tire imports likely have nothing to do with creating American jobs.”
While tire imports from
China have declined since 2009, as you can see from the chart on
the right, tire imports from several other countries are up.
This confirms that if “it doesn’t get built in China and it’s too
expensive to make in the U.S., it will get made in a cheap locale
somewhere else.”
According to John Bussey of the Wall Street Journal, the tire tariff was meant to “whack imports of passenger and light truck tires and give a boost to manufacturers and job creation in the U.S. Yet, for a variety of reasons, it has apparently done little of either – and has surely raised prices for consumers.”
Closing Thoughts
There are obviously differing views on the success of this tire tariff. Has it created new jobs and opportunities in America – or has it done more harm than good? It will take more time to truly measure the full impact of this regulation. The tariff on Chinese tires is scheduled to expire this year. As an election year, it will be interesting to see if the tariff will be reviewed and extended. We will do our best to monitor the situation and keep you informed.
Stay tuned for our next segment which will investigate the role of supply and demand in emerging markets and the direct impact on local tire prices.