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The US Case Against Chinese Autos and Auto Parts Is Not Likely to Curb Imports Dramatically

by and Julia Muir | September 25th, 2012 | 11:12 am
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On September 17, 2012, the United States notified the World Trade Organization (WTO) Secretariat of its request for consultations with China regarding what Washington said were “China’s measures providing subsidies […] and other incentives contingent upon export performance to automobile and automobile-parts enterprises in China.”1 The same day China filed its own complaint with the WTO regarding US countervailing and anti-dumping measures on a variety of products, including steel, tires, paper, chemicals, wood flooring, and wind towers.

WTO disputes between the United States and China are nothing new: Since 2002 there have been 21 requests for consultation filed between the United States and China, two-thirds of which were filed by the United States.2 In the last two years, six out of the nine cases the United States lodged with the WTO were initiated against China. During President Obama’s term, the United States brought new WTO cases against China at a rapid pace.3 While details regarding the new auto case are not yet available, the United States has often succeeded in cases brought to the WTO. Of the fourteen cases lodged by the United States against China, the WTO has ruled favorably on six; the remaining eight are either still in the consultation stage or await a WTO decision.

The most recent US-China dispute merits attention because of three features. First, the decision by the Obama administration to bring a case against China in the middle of the presidential election gives the case a political character, especially because Obama announced the case himself on a campaign swing in the battleground states of Ohio and Pennsylvania. Targeting Chinese auto exports signals to the industrial states that the Obama administration is concerned about the prosperity of the US auto industry and its workforce.4 In part, this signal is designed to answer criticisms leveled by Governor Mitt Romney, the Republican nominee, who has come out in favor of trade sanctions against China. However, by our calculations, eliminating the Chinese export subsidy would not make a significant dent in US unemployment.

Second, while the United States has been focusing unfair trade cases on China for several years, the Obama administration has now ramped up the pressure. In February 2012, the administration created the Interagency Trade Enforcement Center (ITEC), tasked with monitoring and enforcing US trade rights to enhance market access and reduce or eliminate foreign trade barriers and unfair trade practices.5 While the ITEC is responsible for addressing trade questions around the world, it has devoted the bulk of its bureaucratic energies to China. Indeed the United States Trade Representative (USTR) stated that the ITEC will build on the US track record of cases against China and “bring a more aggressive ‘whole-of-government’ approach to addressing unfair trade practices.” 6 According to ITEC, this entails working with multiple US government agencies, including the Department of the Treasury, to enforce US trade rights, and raises the theoretical possibility that the United States might challenge China on the exchange rate issue.

Finally, China responded the same day with a direct retaliation action against the United States, leveling its own charges against the US measures. Historically China has brought fewer WTO cases against the United States—seven versus fourteen—averaging one case a year against the United States over the last four years, compared with a US average of over two per year against China. China’s fear about slowing economic growth may have prompted the government to take a more aggressive stance in this episode. Possibly the leadership transition in Beijing played a role. Yet China has in the past shown its willingness to retaliate against US trade measures, but in a less confrontational manner. The tire case illustrates the modus vivendi of past Chinese retaliation practice.7

What is at stake for the United States? Over the past decade US imports of autos and auto parts from China have increased on average 30 percent a year, from just $770 million in 2001 to $7 billion in 2011. Meanwhile US employment in autos and auto parts manufacturing sector has decreased from 1.2 million to roughly 700,000 over the same time period—mainly because of improved productivity and lower sales, not import competition.While US world imports of autos grew on average 3 percent a year between 2001 and 2011, from $125 billion in 2001 to $142 billion 2011,8 US imports as a percent of domestic sales have remained constant, accounting for roughly 30 percent of domestic sales. US exports of autos and auto parts to the world have grown on average 7 percent a year over the same time period, from $65 billion in 2001 to just over $100 billion in 2011.

We calculate the effect of the Chinese export subsidy on US imports of autos and auto parts from China and consequently the possible loss of US production and jobs. We also calculate the effect of the subsidy on China’s exports of autos and auto parts to the world, and consequently the loss of US exports and again the possible loss of US production and jobs.

Table 1 [pdf] shows both the import and export calculations. We start with the alleged subsidy reported by the USTR of $1 billion between 2009 and 2011. This works out to less than $400 million a year, a relatively small figure compared to China’s total exports of autos and auto parts. We then divide the alleged Chinese export subsidy per year by the USTR estimate of China’s world auto and auto parts exports in 2011 (around $69 billion),9 indicating that the alleged subsidy represents less than 1 percent of sales. Applying a very high price elasticity of -3.0 suggests that, at most, US imports from China would fall by 3 percent if the export subsidy was withdrawn. This works out to a drop in US imports of approximately $200 million. Assuming that US production would rise by $200 million to replace the imports, and using a job coefficient of 6,000 jobs per billion dollars of production, suggests that 1,200 US auto industry jobs are at stake.

On the export side we use the same methodology to determine the effect of the export subsidy on total Chinese exports to the world. In the absence of the Chinese export subsidy, Chinese exports of autos and auto parts to the world could potentially decrease by $2 billion a year. Assuming that the US auto producers would claim a pro rata share of the world auto and auto parts export market, US exports to the world could increase by roughly $184 million. Using the same coefficient, 6,000 jobs per billion dollars of production, larger US exports might add just over 1,000 auto industry jobs per year.

Together, the calculated import and export effects of the Chinese subsidies might mean $560 million of lost production for the US auto and auto parts industry, reducing jobs by 2,300 workers. This number of jobs is not negligible, but it represents a small fraction of unemployment in the industrial states.

Notes

1. World Trade Organization, “US files dispute against China on subsidies to the automobile industry,” (accessed on September 18, 2012).

2. For a more detailed account of the case history up until December 2010, see Hufbauer and Woollacott. 2010. Trade Disputes Between China and the United States: Growing Pains so Far, Worse Ahead? PIIE Working Paper 10-17. Washington: Peterson Institute for International Economics.

3. Office of the United States Trade Representative, “Launch of the Interagency Trade Enforcement Center (ITEC),” (accessed on September 18, 2012).

4. Yet the Obama administration never accused China of “currency manipulation” in seven semi-annual US Treasury reports, even when the Chinese renminbi was severely undervalued.

5. The White House Office of the Press Secretary, “Executive Order: Establishment of the Interagency Trade Enforcement Center,” (accessed on September 19, 2012).

6. Office of the United States Trade Representative, “Launch of the Interagency Trade Enforcement Center (ITEC),” (accessed on September 18, 2012).

7. See Hufbauer and Lowry. 2012. US Tire Tariff: Saving Few Jobs at High Cost, PIIE Policy Brief 12-9. Washington: Peterson Institute for International Economics.

8. However, US imports of autos and auto parts remain below their pre-recession peak of around $160 billion.

9. The USTR estimate of Chinese exports of auto and auto parts to the world in 2011 is significantly higher than the figures reported by the WTO ($46 billion) and UN Comtrade statistics ($38 billion). Chinese government statistics report exports of “road vehicles” to the world in 2011 as $60 billion. We are unable to explain the difference between these data sources, and for the purposes of this note rely on USTR figures.