On September 11, 2009, President Obama imposed additional duties on imports of certain passenger vehicle and light truck tires from the People’s Republic of China for three years. This proclamation followed a decision by the U.S. International Trade Commission (ITC), under Section 421 of the Trade Act of 1974, 19 U.S.C. § 2451 (Section 421), that such Chinese tires caused market disruption in the U.S. tire industry. President Obama’s memorandum calls for an additional 35, 30 and 25 percent duty in addition to the present 3-4 percent general duty rates in the first, second and third years, respectively (although the ITC had recommended even higher rates).

President Obama’s decision represents the first time a president has employed Section 421 to impose additional trade restrictions on products from China. President George W. Bush declined to issue any remedy in each of the previous Section 421 investigations that yielded affirmative determinations by the ITC.

President Obama’s decision in the tires investigation will almost certainly increase the number of Section 421 investigations in the near future. However, it remains unclear whether the president’s decision in this case portends that relief will be imposed in future Section 421 investigations.

Section 421

Enacted in 2000, Section 421 is an “escape clause” action that allows the president to take action on Chinese imports if the ITC determines that “products from the People’s Republic of China are being imported into the United States in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of like or directly competitive products.” 19 U.S.C. § 2451(b)(1). “Market disruption” occurs “whenever imports of an article like or directly competitive with an article produced by a U.S. industry are increasing rapidly, either absolutely or relatively, so as to be a significant cause of material injury, or threat of material injury, to the domestic industry.” 19 U.S.C. § 2451(c)(1).

Section 421 investigations may be initiated by members of a U.S. industry, by the ITC (either on its own or at the request of the president or USTR) or by a resolution of the House Ways & Means Committee or Senate Finance Committee. 19 U.S.C. § 2451(b)(1). If the ITC makes an affirmative determination that the accused Chinese imports cause market disruption, it proposes a remedy. The ITC then sends its report to the president and the USTR. At that point, the president decides whether to provide import relief to the U.S. industry and, if so, the type and duration of relief.

Section 421 arose from the U.S.-China bilateral agreement that paved the way for China’s December 2001 accession into the World Trade Organization (WTO). It gives the United States a right to impose unilateral trade restrictions in the form of tariffs or quotas against Chinese import surges that cause or threaten to cause “market disruption” to a domestic industry. Borrowing procedures from an old statute used against imports from communist countries (Section 406), Section 421 was trumpeted by Congress as an “extraordinary trade remedy specifically designed to address concerns about potential increased competition from China in the future.”

Chinese goods have been subject to numerous unfair trade actions, primarily antidumping investigations on such diverse products as bedroom furniture, candles, steel, honey and mushrooms. While these actions have resulted in import-preclusive tariff increases, these proceedings are expensive and time-consuming, and require the finding of an unfair trade practice. Section 421 promised U.S. industry a cheaper, easier and faster (150-day) proceeding against fairly traded Chinese import surges (involving proceedings before the ITC only), but with a higher causation threshold for demonstrating injury than an unfair trade proceeding. Indeed, the ITC has concluded seven Section 421 investigations in its near decade of existence, and in just two cases has the ITC issued a negative determination.

However, unlike successful antidumping investigations, which result in predictable instructions to U.S. Customs & Border Protection to raise tariffs, Section 421 remedies are subject to presidential discretion. Congress tried to limit this discretion by building into the statute a presumption in favor of relief following an affirmative ITC decision. Thus, Section 421 limits the president’s discretion to deny relief to situations when such relief would have an adverse impact on the U.S. economy “clearly greater than the benefits of such action,” or when such action would harm national security interests. Nonetheless, President Bush denied any relief in the four affirmative Section 421 decisions by the ITC prior to this one.

The ITC’s Investigation of Tires from China

On April 20, 2009, the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union submitted a petition to the ITC requesting relief from market disruption caused by imports of consumer tires from China. The petition alleged that the U.S. market for consumer tires—tires designed and produced for use on passenger cars and light trucks—has been disrupted as a result of increased imports of consumer tires from China. The ITC held a hearing on June 2, 2009, and issued its affirmative determination on June 18, 2009. Four commissioners voted in the affirmative: Chairman Aranoff and Commissioners Lane, Williamson, and Pinkert. Two commissioners cast negative votes: Vice Chairman Pearson and Commissioner Okun.

After making a threshold finding that the U.S. industry’s passenger vehicle and light truck tires are like the imported tires, and that a U.S. industry exists, the ITC’s opinion focused on the “rapidly increasing imports” of tires from China. Specifically, the Commission found a 215.5 percent increase in the quantity of Chinese tire imports from 2004 through 2008, and a 294.5 percent increase in the value of those imports during the same period.

The ITC found that the U.S. tire industry was materially injured. The ITC emphasized a continuous decline in the number of employees working in the U.S. tire industry, the number of hours worked and the earnings of tire workers. Additionally, the U.S. industry’s production capacity steadily decreased during the investigation period, due largely to the closure of four U.S. tire plants. The four plants that closed had a combined 43.4 million tires per year production capacity. This decrease in production capacity was accompanied by a decrease in capacity utilization at the remaining U.S. plants. In sum, the ITC found that “[v]irtually all the industry indicators declined during the period examined.” The ITC emphasized that the domestic tire industry operated at a loss in 2008.

Although the ITC found decreased demand in automotive tires from 2004 through 2008, resulting primarily from a decrease in miles traveled by consumers and the weak economy, the ITC found that the surge of Chinese imports represented a significant cause of the U.S. industry’s decline. In support of this finding, the ITC cited the steady increase in market share of the Chinese tires, coupled with a “nearly universal underselling” of U.S.-made tires. Specifically, the ITC reviewed 120 price comparisons between U.S. and Chinese tires and found the Chinese tires less expensive in all but one comparison. The ITC recommended additional duties of 55 percent in the first year, 45 percent in the second year and 35 percent in the third year. In adopting the ITC’s ultimate determination, President Obama reduced the additional duty rates to 35, 30 and 25 percent, respectively.

Early Reaction to President Obama’s Imposition of Additional Duties

In a statement issued shortly after the White House’s announcement of President Obama’s determination in the tires investigation, USTR Ron Kirk remarked that

[t]his Administration is doing what is necessary to enforce trade agreements on behalf of American workers and manufacturers. Enforcing trade laws is key to maintaining an open and free trading system. . . . China is America’s second largest trading partner, and the health and strength of our relationship [is] very important to both countries. We consulted with China as allowed for under the WTO. This decision has been based carefully on America’s rights under WTO rules, namely China’s accession agreement, and on sound economic calculations.

This first imposition of Section 421 duties has sent shock waves through the international trade community and elicited a decidedly mixed reaction. A statement from the United Steelworkers claimed that, “[f]or far too long, workers across this country have been victimized by bad trade policies and government inaction. Today, President Obama made clear that he will enforce America’s trade laws and stand with American workers.” Conversely, a statement from the American Coalition for Free Trade in Tires released a statement that it was “certainly disheartened that the [P]resident bowed to the union and disregarded the interests of thousands of other American workers and consumers.” The Chinese tire industry had previously told the White House that even a single-digit tariff increase would force them out of the U.S. market due to low profit margins. House Ways and Means Committee Chairman Charles Rangel applauded the president’s proclamation, stating that “[t]he American tire industry lost more than 5,000 jobs since China flooded our market with cheap tires and stood to lose thousands more without this remedy.”

Diplomatic tensions are high following the White House announcement, and the upcoming G20 summit in Pittsburgh will test the strength of U.S.-China trade relations. Immediately after the presidential proclamation, China formally asked the WTO to investigate the matter. This request triggers a 60-day process in which both sides are encouraged to negotiate a settlement in the case. If none is reached, a WTO panel may review the ITC’s decision.

Further, in what the trade community has generally perceived as retaliation for the Section 421 duties, the Chinese government has initiated antidumping investigations of automotive products and chicken exported to China from the United States. Current U.S. exports of automotive parts and chicken products combine to approach the total value of China’s tire exports to the United States. When questioned directly on whether these investigations served as a response to the Section 421 decision, however, China’s Ministry of Commerce responded that the new investigations were unrelated and compliant with WTO rules and regulations. China has previously retaliated against various foreign trade partners, such as Japan (onions) and Korea (garlic), and may do the same here unless the countries reach a negotiated settlement.

Future Prospects for Section 421 and U.S.-China Trade Relations

While it remains unclear how the Obama administration will act if presented with future affirmative Section 421 determinations by the ITC, it is almost certain that the presidential proclamation and imposition of additional duties in the tires investigation will breathe new life into Section 421, which lay dormant during the later years of the Bush administration. It also appears clear that the decision will draw further attention to growing tensions in the trade relationship between the United States and China.

Manufacturers and members of the international trade community should carefully monitor the institution and progress of new Section 421 investigations, and pay particular attention to how the Obama administration proceeds in any subsequent presidential reviews. Whether Congress renews Section 421 before its expiration in 2013 will largely depend on the outcome of this presidential proclamation, whether the White House acts on any subsequent Section 421 affirmative determinations and the mood and makeup of Congress.