Chinese companies moving production to US as Trump's tariff wall gets higher

Chinese direct investment in the US declined to $2bn during 2018 from $45.6bn in 2016

Domestic tyre manufacturers who pushed for tariff protections in 2009 and in 2015, said the industry needs and has benefited from government protection (AFP/Getty)

President Donald Trump is building a wall of tariffs around the domestic economy, attempting to protect US jobs by limiting imports. But a tyre factory that opened last year in Richburg, South Carolina, offers a reminder that globalisation is hard to stop.

In 2009, US tyre makers persuaded the Obama administration to impose tariffs on Chinese tyres, and imports of tyres from China fell sharply. But Chinese companies did not stop making tyres in response to the tariffs – they simply moved production to other places, including to the United States.

Giti, one of the largest tyre makers in China, built the South Carolina factory to make low-cost tyres for Walmart. Two other Chinese tyre companies are building plants in the neighbouring states of Georgia and North Carolina, and a fourth Chinese company acquired a tyre factory in Georgia this year.

Mr Trump on Monday said the United States would begin imposing tariffs on another $200bn (£152bn) worth of Chinese goods on 24 September, on top of the $50bn (£38bn) worth of products he previously taxed. The new tariffs hit many of the consumer products that Americans use every day, like food, clothing and electronics, and the president threatened to go even further, saying he is prepared to tax all Chinese imports if Beijing retaliates.

The president also has imposed tariffs on steel and aluminium imports from most foreign countries, and has threatened to tax imports of cars and car parts.

Tariffs are taxes ultimately paid by US consumers, in the form of higher prices. The purpose of a tariff is to raise the price of imports above the price of the domestic alternatives. The bill for this method of protecting domestic jobs is paid disproportionately by lower-income households. And it is often quite large.

One study of the Obama tyre tariffs found in a single year, 2011, Americans spent an extra $1.1bn (£760m) on tyres as a result of a tariff that preserved, at most, 1,200 jobs. That is almost $1m (£760,000) per job, for jobs paying an average of about $40,000 (£30,000).

Steel tariffs imposed in 2002 by president George W Bush yielded similar results, penalising not just consumers but companies that use steel to make other products, like construction companies and carmakers. Dartmouth economist Douglas Irwin estimated 140,000 US workers make steel, while 6.5 million workers make products that include steel.

“If for some reason you said, ‘we just want to help steel producers, shareholders, possibly steel workers,’ it makes sense,” Mr Irwin said. “If you care about manufacturing employment or the manufacturing sector, it doesn’t make sense.”

The political counterargument for tariffs is that change is painful. Workers who lose jobs may struggle to find new ones; communities that lose factories may crumble. Mr Trump has presented tariffs as an effective prophylactic, arguing that import taxes will protect US workers and companies.

But the United States’ tyre tariffs – and similar efforts by past administrations to tax everything from socks to solar panels – have generally failed to protect existing factories and jobs. The Chinese factories in the southeast will create new jobs for US workers but, in effect, the tariffs are simply moving jobs from one place to another at a high price.

The Reagan administration’s 1981 deal with Japan to restrict auto imports helped to catalyse the production of Japanese cars in the United States. Honda, an upstart manufacturer assigned a relatively small import quota, arrived first, opening an automobile factory in Marysville, Ohio, in 1982.

One of the few studies on the subject found 19 per cent of foreign companies hit with US tariffs during the 1980s responded by investing in the United States.

While presidents between Ronald Reagan and Trump imposed fewer trade restrictions, the pattern continued. The Clinton administration restricted imports of Fuji film in 1993. Three years later, the Japanese company opened a plant in Greenwood, South Carolina.

State and local governments in the Southeast have ardently pursued Chinese investment in recent years, but it is far from clear that the Trump administration would welcome an influx of Chinese companies in response to its tariffs.

The administration, which can block foreign investments in the United States that are judged to threaten national security, has taken a particular interest in scrutinising proposed investments by Chinese companies, although in June it backed away from a proposal to impose broad restrictions on such investments.

Amid rising tensions, Chinese direct investment in the United States declined to $2bn (£1.5bn) during the first half of 2018 from $45.6bn (£34bn) in 2016, according to Rhodium Group, a consultancy. Wanli Tire, another Chinese company, suspended plans in May to build a $1bn factory in Orangeburg County, South Carolina.

Domestic tyre manufacturers who pushed for tariff protections in 2009 and in 2015, said the industry needs and has benefited from government protection.

Paul Reitz, chief executive of Titan International, an Illinois company that makes tyres for farming equipment and other off-road uses, said the tariffs have helped, even though he said that imports have climbed to 40 per cent of the off-road tyre market from 20 per cent of the market since 2009.

Indeed, he said he would like the Trump administration to increase the tariffs on tyres. Tariffs allow him to charge higher prices and to earn larger profits. “I’d much rather be putting it into investment than to be giving it away to fight off foreign competitors,” he said.

But Mr Reitz does not like the tariffs on steel, which the company uses to reinforce tyres and to make wheels. And he does not like the escalation of trade tensions with China, which is spooking the farmers who are the primary buyers of his tyres and whose exports are particularly exposed to retaliation by the Chinese.

“It’s created a lot of uncertainty with our cost structure and our customers,” Mr Reitz said. “We just don’t know what the full impact of the tariffs are going to be.”

The New York Times