The economy is a hot topic in today’s society as the American economy starts to show signs of sputtering to life. Recently, American automakers won a significant WTO case concerning Chinese tariffs on American-made cars and sport utility vehicles. According to the complaint, tariffs ranged from 2% to 21.5% on large cars starting in 2011 that impacted nearly two-thirds of $8.5 billion worth of U.S. Auto Exports (1, 2). American manufacturers and officials lodged the complaint as an unfair practice within the global economy and sought a level trading field.
It is believed that the duties were implemented by China in retaliation for an American 2009 enactment of an anti-dumping duty of up to 35% on imported tires (3). The WTO also backed the U.S. anti-dumping program due to the unfair practice related to pushing cheap Chinese products on the market. Lower than cost products are viewed as an attempt to game the free market and damage American manufacturing capacity.
In the ruling the WTO global trade arbiter found that China’s duties on American made vehicles violated international laws and is in line with other WTO decisions involving steel and chicken broiler parts (4). Tariffs often restrict free trade and countries that effectively negotiate treaties with each other expect relatively transparent trading approaches.
American automakers are likely toasting to the ruling as an official endorsement of their complaints. The automotive industry will have an easier time improving upon their sales and marketing in the Chinese region of influence. Combining this legal market adjustment with an improving U.S. manufacturing costs there are new opportunities rising (5).
Countries often engage in tariffs to strengthen domestic markets. Despite this seeming advantage there are long-term risks to the Chinese economy. A paper by Azam Chaudhry highlights some of the tradeoffs that countries face when they use tariffs (2011). Raising tariffs allow for greater rental income and political stability while reducing tariffs increases long-term growth and potential instability.
Tariffs support emerging economies but damage those same countries when they mature and need advanced knowledge. China is an emerging economy that is maturing and they seek to suck in innovation, knowledge, and production capacity when possible. However, as American markets become more equated in costs those same tariffs lower the desire to invest and share knowledge which has a direct impact on innovative growth.
The tariffs that were supposed to help China are now contributing to political and financial instability. China is concerned about growing corruption within their society and is trying to curb the loss of intellectual and financial capital to shore up economic waste. According to Rotunno & Vezina (2012), the use of tariffs increases corruption as companies and officials skirt government restrictions in search of greater financial gain. We experienced much of the same thing during the Prohibition Periods. This process of business and government officials bulking national laws for personal interest has increased thereby furthering the strength of the shadow market (6).
China’s economy isn’t as stable as was once thought. They have reaped the reward of cheaper labor but as the economy globalizes some of these benefits become limited. What once protecting their new industries may have a detrimental flip side of the coin. Multi-national companies are seeking greater mobility, flexibility, and fairness in the transference of goods, services, and information and are not able to get that in difficult import markets.
This ruling not only creates greater opportunities for American businesses to sell in China but also develop their own internal capabilities through better policy, information management, and investment guidance. As Multi-national companies search out innovative enhancements they will naturally seek business friendly and information rich clusters. Semi-closed economies may do better if they open up and reach out to international investment opportunities and improve their financial positions beyond protectionist policies. American clusters combined with progressive trade policies may just further tip the manufacturing balance in favor of the next American transformation.
Chaudhry, A. (2011). Tariffs, trade and economic growth in a model with institutional quality. Lahore School of Economics, 16 (2).
Rotunno, L. & Vezina, P. (2012). Chinese networks and tariff evasion. World Economy, 35 (12).