Trade relations between the United States and China became threatened last week when President Obama enacted a new tariff of 35% on Chinese made automotive tires. The tariff, which has increased by nearly 800% from 4% to 35%, could bring about a wave of protectionism in what has so far been a relatively “friendly” recession.
The Scope of the Impact
One in every six tires sold in the United States in 2008 was made in China, representing more than 46 million automotive tires. The Chinese grip on the automotive tire industry has increased greatly in recent years, with the number of imports rising 215% from 2004 to 2008, helped in part by a great divide in the value of the US dollar and Chinese yuan and the difference in labor costs. For the United States, there is much at stake in losing the tire industry, as more than 5,100 workers in the field have lost their jobs to Chinese imports and other 3000 job losses could soon be in the pipeline.
Who is Impacted by the Tariff?
It should only seem natural that US tire producers will be the victor should the tariffs be enacted and enforced. Makers such as Goodyear Tire, among others, will find it easier to compete in a global marketplace and in the United States if Chinese tires come with an additional 35% expense.
One marker in particular, Cooper Tire, which was once a 100% American business, will be the most affected. Just a few years ago, Cooper Tire moved its entire manufacturing base from the United States to China in exchange for the right to invest in other Chinese tire makers. That move appears now to be backfiring, as its newfound lower prices are washed away with a new 35% tariff to import to the United States. New tariffs on steel could also be addressed, with the US Commerce Department declaring that Chinese prices were supported unfairly by subsidies that allow them to dominate foreign trade.
Glancing Through History
Financial analysts and historians alike can all agree on one fact: the frequent use of tariffs during the Great Depression (known as protectionism) greatly constrained global trade. Tariffs forced new firms to open up locally to produce goods with little skill or knowledge of the industry, armed with only crude manufacturing ability and willing workers. Ultimately, both quality and quantity were constrained, as international businesses could not compete in local markets where tariffs forced the end prices for the consumer to move higher and higher. Though we have yet to reach such critical mass with the new tire tariffs, Beijing has made it well known that they are not in favor of the tariffs and would consider new tariffs on US imports, such as poultry and other food products.
US Repercussions Could be Dramatic
Other than to announce its review of a multitude of US imports, China has yet to draw a firm line with the United States. Many analysts suggest that China may realize it has much more to lose in enforcing new tariffs, as the US buys far more product from China than the opposite. However, China does need to maintain a healthy balance of trade similar to its current trade surplus. Due to a contracting global economy, the balance of trade is falling out of China’s favor as consumers (mostly in the US and Europe) cut down on Chinese imports.
Making Money with Tariffs
Although it is not yet known to what degree consumers will be impacted by higher prices, in this economic climate, it is certain that the buying populace is more concerned with price than brand name goods. US tire producers such as Goodyear Tire (GT) should benefit, although the company is on a fast track towards bankruptcy. The company shows a loss of $3.54 per share per year against a stock price of just over $17. Investors would be better served to bet against Chinese tire producers, such as Cooper Tire (CTB), which shows a near $4 per share loss per year and a share price of $15.70. Betting against a failing business that will not be served by the new tariff makes more economic sense. We know that Cooper Tire is already in distress without a tariff, and we cannot know whether Goodyear Tire (GT) will be brought up from the bottom by the new tariffs. The odds are good that a short position in Cooper Tire (CTB) will pay out far better in the near term than any investment in US producers.