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BW Businessworld

Tyre-some Efforts

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Leaders of the G20 nations gather in America's steel capital of Pittsburgh amid deep gloom over a lingering recession in the US and growing worldwide worries about creeping protectionism. They would do well, however, to remember the cliché about thinking global and acting local. While President Barack Obama will no doubt receive an earful about US plans to impose a tariff on Chinese tyres, his critics should first look in the mirror. Although it may be hard for countries to be charitable towards the biggest economic gorilla (even when it is ailing), they should recognise the domestic struggle that colours Obama's controversial trade decision. The unfortunate tyre tariff may turn out to be a very minor local compromise for the sake of a larger issue with tremendous global implications.

First, despite the outrage about Obama's decision to impose a 35 per cent tariff (declining to 25 per cent in three years) on Chinese tyres, Beijing had agreed to precisely those terms when it joined the world trade body. That agreement allows countries to seek temporary relief — a kind of circuit breaker — to prevent a surge of Chinese imports damaging local industry. Such short-term relief not only allows countries time to transition, but also works as a safety-valve against building protectionist steam. Sure, the tariffs on Chinese tyres that came about in response to complaints by US labour unions set a bad precedent at a time when protectionism is in the air. But it is consistent with WTO rules.

Second, tyre tariffs have less to do with trade principles or domestic economic costs and more to do with Obama's urgent need to raise political capital in support of his ambitious healthcare reform. Tyres constitute less than half a per cent of Chinese imports into the US and cutting back is unlikely to create jobs for the 5,000-odd people who are reported to have been laid off because of China's export surge. Importers would simply turn to other low-cost suppliers. However, the tariff succeeded in winning Obama the support of labour unions for his nearly trillion-dollar healthcare reform plan. Union votes and their enthusiastic support for Obama are essential to persuade reluctant Democratic lawmakers to line up behind Obama.

It was no coincidence that the day after announcing the tariff Obama turned up at America's biggest labour union conference to appeal for their support for the healthcare bill. In fact, a whole string of Obama's domestic policy moves are designed to gather maximum support not only from Republican opponents, but the fiscally conservative Democrats concerned about the staggering cost of reforms.

To employ terms of Maoist dialectics on contradiction, Obama's principal contradiction or central struggle of  his presidency today is to pass the landmark healthcare bill. To achieve that he will have to treat minor contradictions, such as organised labour's opposition to free trade, as a necessary evil. Without reform, America's runaway healthcare costs could sink the US in trillions of dollars of debt, causing a collapse of the dollar. A universal healthcare bill that could control spending and improve America's health (the US ranks 37th in a WHO ranking on healthcare) is essential for a healthier US economy and is in the interest of every other economy in the world.

Those who criticise Obama for appeasing organised labour as a cynical move are at best overlooking the bigger picture or being naïve. Politics is the art of the possible, and trade-off is an essential element of that art. Despite some pro-labour measures that dented Obama's standing on trade, in spirit, he has, so far been very careful to stay within WTO parameters. While talking to labour leaders in Pittsburgh, he reportedly set aside suggestions about other protectionist measures saying that he could only go so far under WTO rules.

As the Wall Street Journal reported, he instead told the group that he needed to focus on prying foreign markets open to US products. Despite public opinion turning against free trade, he has repeatedly emphasised its value in bringing prosperity to the country. In order to win back skeptical voters to a pro-trade stance, Obama must engineer the kind of fundamental shift in the economy that only universal healthcare can bring.

Pittsburgh should thus provide the G20 a moment to help Obama win a local battle for the greater global good.

The author is director of publications at the Yale Center for the Study of Globalisation, and Editor of YaleGlobal Online.

boundtogether dot bw at gmail dot com

(This story was published in Businessworld Issue Dated 05-10-2009)