China's Prices Undercut U.S. Tire Makers, Causing Plant Closings

Newhouse News ^ | 8/8/2006 | Thomas W. Gerdel

[Incorrigible]

Derrick Yannayon, assistant lab manager at Standards Testing Laboratories, sets up a tire for the bead unseat test. The lab, headquartered in Massillon, Ohio, tests tires to see if they meet federal standards. (Photo by Gus Chan)

China's Prices Undercut U.S. Tire Makers, Causing Plant Closings BY THOMAS W. GERDEL

[Massillon, OH] -- Rapidly rising imports of tires, especially from China, are increasing pressure on American tire makers to close more plants and cut domestic production.

Passenger-tire imports, which have been steadily increasing every year this decade, topped the 100 million mark in 2005, with Chinese imports up 47 percent from 2004. And while imports have climbed 38 percent since 2000, U.S. tire output has been steadily decreasing year by year.

The trend is expected to continue, given the low cost of tires made in China and tire-making costs in the United States, said Saul Ludwig, an analyst at KeyBanc Capital Markets in Cleveland.

"Imported tires, particularly from China, are much lower cost than imports from any place else," Ludwig said.

Passenger tires imported from China last year had an average cost of $25.23, while a passenger tire from Canada cost $38.67, a tire from South Korea $37.58 and one from Japan $48.29.

Ludwig said that nearly all these imports are going to the replacement tire market, with very few sold to domestic automakers for equipping new cars.

This import trend hovers over contract negotiations between the United Steelworkers union and major domestic tire makers including Goodyear Tire & Rubber Co., Bridgestone-Firestone and B.F. Goodrich, which is part of Michelin of France. Companies want to cut costs, while the union seeks to preserve wages and benefits, and prevent further erosion of production and jobs.

Passenger tire production in the United States has fallen from 223 million tires in 2000 to 176 million in 2005, a drop of 21 percent, Ludwig said. The union is facing another round of plant shutdowns, due partly to the rising imports and a sluggish tire market.

While tire import levels held steady for the first six months of 2006, industry sales of passenger and light-truck tires fell about 7 percent. Industry observers said consumers are postponing replacing tires as they struggle to pay higher gasoline prices.

At the same time, Goodyear and other tire manufacturers have been raising prices to cover the soaring costs of oil and other raw materials.

The 7 percent drop is highly unusual for the North American replacement market. Robert Keegan, chairman and chief executive officer of Goodyear Tire & Rubber Co., said the market has been down by 3 percent or more only in four of the last 50 years. Keegan said consumers are buying fewer tires per store visit and driving fewer miles per vehicle. He also said technicians are noticing less tread depth remaining on tires being removed from cars.

Announced or potential closings include:

Continental Tire will halt production indefinitely at its plant in Charlotte, N.C., ending jobs for most of the 1,000 union workers there. The German company also said it was shutting down the remaining operations at its tire plant in Mayfield, Ky. -- a factory that once employed 2,400.

In June, B.F. Goodrich said it would cut output 30 percent to 40 percent at its Opelika, Ala., plant, which has the capacity to make 8 million tires a year.

Bridgestone-Firestone has said it will close its Oklahoma City tire plant by the end of this year. It said the plant, which employs about 1,200 hourly workers, is not competitive in the global marketplace and is suffering from substantial losses.

The industry is bracing for another potential shutdown as Goodyear follows up on its recently announced plans to reduce its private-label tire business in North America by a third, or by about 8 million tires annually.

Ludwig said he would not be surprised to see additional closings, "one for sure, maybe two," as the production cuts are made.

Private-label tires -- which are made in major tire plants such as Goodyear's but sold under a different name -- appeal to price-oriented consumers, and sellers are using low-cost imports to offer greater value to consumers than if they bought domestically produced tires.

In addition, Cooper Tire & Rubber Co. has shifted manufacture of medium truck tires from its Albany, Ga., plant to China. Cooper, which is the fourth-largest tire producer in North America, soon will start up a plant in China that will be owned by Cooper and Kenda Rubber Industrial Co. of Taiwan. The plant is expected to eventually produce 10 million to 12 million tires a year, all for export to other countries for the first five years it operates.

To keep jobs in this country, the United Steelworkers union is pinning its hopes on the growing consumer demand for larger and more specialty-type tires -- the higher-margin kind used in SUVs and other high-performance vehicles, as well as tires built from specialty materials for added safety, a more comfortable ride, increased vehicle stability, fuel economy and other features that help persuade consumers to pay more money.

"We don't want them to take this high-value work out of the country," said Wayne Ranick, a spokesman for the United Steelworkers.

The union is urging the tire companies to spend more on automated equipment for faster changeover of production, so plants can more efficiently produce a wider range of sizes and premium-priced tires.

When the old United Rubber Workers merged with the United Steelworkers of America a decade ago, the union had more than 98,000 rubber workers, but now it has less than a third of that number -- about 30,000 -- who work in tire and rubber plants in the United States.

With tire factory wages in the United States around $22 an hour, versus 73 cents an hour in China, KeyBanc Capital Markets' Ludwig does not see much chance that the rapid growth of tire imports from China will end soon.

The gap could be narrowed eventually if the pace of industrialization in China forces wages up there or if China raises the value of its currency. In the meantime, imports will continue to be a major challenge for domestic tire plants.

"The gap has to be closed," Ludwig said, "whether their costs go up or our costs go down."

Aug. 8, 2006(Thomas W. Gerdel is a reporter for The Plain Dealer of Cleveland. He can be contacted at tgerdel@plaind.com.)

Not for commercial use.  For educational and discussion purposes only.

[Toddsterpatriot]

You can't read a chart. It appears you have flunked more than math. Logic.

That's Tim Kane Ph.D. I was quoting.

I see you can't read an economist. They set the rates they sell at.

And you have proof they set the rates they sell at? Perhaps a link? Something announcing at what rate they will yield in the next auction?

[Paul Ross]

[The only free trade is fair trade]
What constitutes fair trade and to whom should it be fair? "Fair" is a relative term and can mean all sorts of different things to varying special interests.

Oh, as between bona fide Americans and pro-Americans versus non and Anti-American foreign interests>

How would the government know what's "unfair" vs. what is truly a comparative advantage?

Maybe it doesn't have to with just a generic revenue tariff funding government, and getting out of the way of U.S. production, investments, savings, etc. by eliminating the income tax, and capital gains tax etc.

The domestic sugar industry comes to mind. Do you think we can trust politicians to choose whom to treat fairly? If you do, you could be a big government protectionist.

Same politicians currently supporting the PNTR.

{ As for your repeated concerns about the incompetence of government...it is not rocket science to simply counter a foreign government's own tilting of the playing field.]
This statement leaves no doubt that you believe government bureaucrats are responsible, capable and reliable when it comes to managing trade when in fact their record is abysmal.

They aren't even currently trying...due to abdication from the top. Notice how the White House even played games with the simple determination whether the Chinese government is manipulating its currency for trade advantage. This was a crude display of brazen disregard for truth.

Your level playing field is a fantasy.

Doesn't have to stay that way.

It doesn't exist anywhere in society and it's pollyannish to think that government intervention will create the exception.

As before, who needs to even have anything other than reciprocity, under a generic general tariff? Pretty simple, even for patriotically-challenged traders.

I subscribe to what Milton Friedman has to say about this: "A fourth argument, one that was made by Alexander Hamilton and continues to be repeated down to the present, is that free trade would be fine if all other countries practiced free trade but that, so long as they do not, the United States cannot afford to. This argument has no validity whatsoever, either in principle or in practice. Other countries that impose restrictions on international trade do hurt us.

Yes. He admits it. And this admission destroys and swallows up his argument that tries to minimize the admissions: But they also hurt themselves.

Obviously they don't mind in China.

Aside from the three cases just considered, if we impose restrictions in turn, we simply add to the harm to ourselves and also harm them as well.

This is one area where I think it is clear Milton is just being disengenous...if not vapid. If their is mutual harm...then in a rational world maybe they will repent and go for free trade. The carrot and stick. Worked for the GOP all through the 19th Century.

Competition in masochism and sadism is hardly a prescription for sensible international economic policy! Far from leading to a reduction in restrictions by other countries, this kind of retaliatory action simply leads to further restrictions."

And he knows this how? And who would want to be outright lost to the great American gravy train? Methinks he doth protest too much.

I'll side with Friedman on this. You can keep company with the bigger government types.

You are for a bigger government so long as you are wed to your Income tax and capital gains tax, etc.

[ He knew he needed to restore American industrial supremacy to "transcend" the Soviets.]
Reagan didn't believe that protection was the method for accomplishing this. In the 80's the conventional wisdom was that the Japanese were going to own us unless we did something. The protectionists were demanding that something be done. Reagan agreed to these policies only to placate the economically ignorant without hurting the U.S. economy too much. He skillfully navigated through the issue and it is a testament to the quality of his political skills. He did the wrong things for the right reasons. Let's look at how those quotas you extol affected Americans. From The Heritage Foundation
The cost of saving jobs from foreign competition is higher consumer prices, which harm the economy. For example, when trade quotas were imposed on imported cars in the early 1980s, prices for domestic and imported cars rose by $2,000.3 While these quotas may have preserved some auto workers' jobs, they also passed the cost on to the American consumer. Instead of being able to use this money to send their children to college, pay their mortgages, or put food on the table, American consumers are forced to subsidize the jobs of other Americans who cannot compete internationally. In short, protectionism takes money from the many to support the high wages or jobs of the few.

Ah, but the defense sector connection of the automotive is conveniently overlooked by Heritage. It was vital in WW-II, and no less today. It made the M-1A1 tanks which give us unquestioned superiority on the battlefield today. At least for a while. So it was really the domestic diversion to protect a defense capability. And guess what. It worked. We have a robust U.S. automotive industry today still, albeit that could change as China prepares to invade that market as well.

Well done protectionist!

Yes. I take it you would rather have lost the Cold War.

We won the cold war because we have a strong national defense.

In part. It was a five-pillar strategy that took them down. Read the lateConstantine Menges in his summary of the current situation in his book, China: The Gathering Threat (2005). Nothing like it is in place today, and China's actual enmity is undiminished.

A strong national defense is predicated on having a strong economy, and a strong economy is possible only with economic freedom.

At least internally.

The Heritage Foundation proves this point every year with their Index of Economic Freedom.

Actually it is laughable that Hong Kong always tops their list. Dedicated barriers all over there. But somehow under Heritage's and Cato's radar.

Your prescription will only weaken our economy which will, in turn, weaken our national defense.

The economy is already being attacked and weakened in the areas of national defense-specific sectors.

There is no doubt in my mind that you were screaming loudly for protection against the Japanese back in the 80's.

And clearly Heritage screwed the pooch.

More rational? people? realized that the Japanese model of government working with business, to protect domestic industry, was not nearly the threat the hand wringers wanted us to believe.

So, looks like you snoozed.

Look what all that protection got them. Fourteen years of deflation and they still haven't learned their lesson.

Actually, I believe their version of welfare state is the biggest hampering factor of their economy. Propping up mom-and-pops, etc... They lack an internal free market...which we have with the exception of your income and capital gains taxes. And they subsidize inefficiency. That being said, it is believed they are also winnowing out the contining shock of the inflated real estate collapse that undermined their banking assets. Their competitive industrial prowess they retained, and their savings are simply phenomenal, and it is to the Japanese that Boeing turned to help give life to a counter-strategy of "fighting fire with fire" to compete against AirBus's massively subsidized competition. Boeing has never before risked transferring wing technology to outsourced concerns. Now, Japan will make the wing boxes and wings of the new ultra-modern design of the 787, and do the engineering and financing thereto...and MITI is doing its usual thing... Concern over China is warranted but that doesn't mean I'm going to put on a skirt and go running and screaming into the night because they have an economy that is one-seventh the size of ours and a standard of living that still sucks.

Maybe you should. This kind of smug over-confidence plays right into their hands. This is exactly the kind of liberal mantra that was always preached against conservatives about the Soviet Union, where they claimed that we never had a thing to fear.... when we clearly did. Reagan was right to confront them as an "Evil Empire." It is just such forthrightness we no longer have in the White House...and haven't since Reagan departed.

Many of their joint stock ventures are failures and most of their SOE's are disasters. You're aware of the incredible amount of non-performing loans they have. They have a long way to go and a lot of hurdles to overcome before they become the economic threat you would have us believe exists today.

Those are captial instruments that are essentially doomed to fail so long as they remain a bifurcated economy, with the Potemkin Village of a phoney middle class to suck in still more Western investment ala' the New Economic Program that Lenin deployed in the 20's.

Reagan said: "Our trade policy rests firmly on the foundation of free and open markets. I recognize ... the inescapable conclusion that all of history has taught: The freer the flow of world trade, the stronger the tides of human progress and peace among nations."

Nothing wrong here, although it is a statement of general strategic principles, not the specifics and tactics of trading with communist states whose existence is definitionally adverse to true open markets.

I believe Reagan was a man who said what he meant and meant what he said. Gorbachev would undoubtedly agree.

So what about Reagan waging trade war...manifestly impinging on your "free and open markets"... with the Soviets don't you understand?

Phyllis Schlafly said one of the three greatest accomplishments of Reagan was defining conservatism as the belief that big government is the problem not the solution.

Agreed. It was. Phoney Free trade is letting FOREIGN BIG GOVERNMENTS BECOME PROBLEMS.

I believe, like Reagan, that more government control of the economy is not conservative.

Well then push like I do for repealing the 16th Amendment, and a General Revenue Tariff to fund the government. Force this government to live within limited means.

[curiosity]

This whole conversation of yours, gentlemen, seems rather silly.

Trade deficits don't cause currency devaluations, and vice versa. Rather, both figures reflect a complex interplay of economic funadmentals.

Basic trade theory tells us that a shift in economic fundamentals that will push up a country's trade deficit (for instance, a decreased domestic savings rate) will also, other things equal, tend to push down a country's currency. Why? Well, it's very simple. Whatever is causing the trade deficit is causing an increase in demand for imports relative to exports and domestic goods. This in turn increases demand for the foreign currency relative to domestic currency, since imports ultimately have to be paid for in foriegn currency.

So yes, other things equal, shifts in the trade ballance will usually be accompanied by shifts in the exchange rate. But it's not a causal link. The same thing that causes a change in the trade deficit tends to effect the exchange rate.

You also have to remember that there are many, many variables that determine the exchange rate. A simple two-variable graph like the one posted doesn't tell you anything, because it neglects all these other factors, like monatary policy, which will tend to confound your inferences.

[justshutupandtakeit]

Actually since the transition from fixed exchange rates to floating exchange rates there is no such thing as a trade deficit. Under the fixed exchange rate regime, everything being equal, a trade deficit would mean the flow of specie out of the country which would lower the money supply and cause economic activity to be reduced, a deflation would result, this would then lower prices which in turn would reduce imports and spur exports. Removing the dollar from gold convertibility cut that link and means of regaining equilibrium.

The ratio between imports and exports being changed routinely resulted in devaluations and revaluations because of the specie/gold flows to accomodate the deficits or surpluses. A deficit would lead to more dollars in the hands of foreigners than they wanted who would then demand gold and outflows would result. These outflows would cause a devaluation everything else being equal.

Your statement about the complex interplay of many factors is just a truism. Economic analysis requires attempting to isolate one variable at a time. Hence discussions of trade effects does not mean one should try and throw in the impact of tax policy or monetary policy at the same time. Their impacts can be determined later.

Econometic methods take one variable at a time to estimate an equation for testing.

[justshutupandtakeit]

A regression estimation would not show a strong correlation I suspect.

[Toddsterpatriot]

Trade deficits don't cause currency devaluations

Thanks, that's what I've been saying.

[justshutupandtakeit]

Sumner was incorrect about Hamilton.
1) It is a matter of record that Angelica Church (H's sister-in-law) sent Hamilton a copy of The Wealth of Nations from England;

2) Hamilton was not a mercantilist and only used the tariff as a means of obtaining revenues sufficient to run the government. His desire to intervene in the economy with bounties and prizes was to correct the malformed economy resulting from the Colonial system.

3) Federal debt was clearly a blessing when handled correctly. It immediately provided the US with urgently needed capital flowing in from Europe to purchase the new debt. It capitalized the WORD of the US and made it much richer. Banks also increased the available capital of the nation because of fractional banking and because formerly hoarded resources were drawn into circulation. Increasing the velocity of circulation is also an equivalent to an increase in the supply of capital.

4) His policies were designed to bring an economy used to too much barter into the monetized world not because he was a mercantilist. Nor are the statements about his view of foreign trade accurate. Hamilton's understanding of economics and finance was light-years ahead of his enemies who were clueless.

[Mase]

Once Paul complimented me for using Sumner as a source, I decided it would be best to immediately reconsider Sumner's views on Hamilton.

Since Paul thinks he sent you "packing back to school" regarding "The American System", maybe you'd be willing to comment further on it. In your opinion, was the American System, as espoused by Henry Clay, responsible for the rapid growth of government and the protectionist sentiment that dramatically increased import duties and, therefore, prices for consumers?

[Paul Ross]

Nor are the statements about his view of foreign trade accurate. Hamilton's understanding of economics and finance was light-years ahead of his enemies who were clueless.

Agreed.

[Paul Ross]

Once Paul complimented me for using Sumner as a source, I decided it would be best to immediately reconsider Sumner's views on Hamilton.

Gee, maybe I should tell you that I agreed with each of the four points that Justshutupandtakeit just posted. We're not so far apart on history.

[Paul Ross]

A regression estimation would not show a strong correlation I suspect.

Controlling for all factors? I'm not so sure of that. Surprised no enterprising econ PhD candidate hasn't already done it.

[justshutupandtakeit]

I haven't studied Clay or the American System sufficiently to offer an opinion. I have a book on the Whigs which is on my Read List. However, I do not believe there was any rapid growth of government from ratification of the Constitution until the Civil War. And the big expansion during the War was quickly eliminated after it.

There is little doubt that protectionism did increase prices for consumers.

[Old_Mil]

With tire factory wages in the United States around $22 an hour, versus 73 cents an hour in China, KeyBanc Capital Markets' Ludwig does not see much chance that the rapid growth of tire imports from China will end soon.

A perfect illustration of why no American worker - no matter how educated - can compete with his Chinese counterpart. $0.73 an hour equates to a mere $1,518.04 a year.

[justshutupandtakeit]

A typical regression equation uses independent variables to estimate the impact on the dependent variable. Unexplained influences go into the residual.

For example (X-M)= f(V,I,P) this would be an equation to estimate the effect on the trade deficit of a function using Value of the $, Income growth, and the Price index. If these three variable explained 70% of the change in the deficit the other 30% would be in a residual. Adding another variable or two might get it down to 3%.

I am sure there are many dissertations using this tool in analyzing international trade.

[Paul Ross]

Pardon me, but I got curious about what you are terming, a "causal link" since you said this:

Whatever is causing the trade deficit is causing an increase in demand for imports relative to exports and domestic goods. This in turn increases demand for the foreign currency relative to domestic currency, since imports ultimately have to be paid for in foriegn currency. So yes, other things equal, shifts in the trade ballance will usually be accompanied by shifts in the exchange rate. But it's not a causal link. The same thing that causes a change in the trade deficit tends to effect the exchange rate.

Wouldn't you call this an indirect causation nonetheless, rather than a mere sympathetic indicator?

[Paul Ross]

There is little doubt that protectionism did increase prices for consumers.

No argument there. Particularly during what was called the "Tariff of Abominations." Nice colorful language by our more disgruntled forebearers. Why don't people today use that to describe what we currently have?!

"The Income Tax of Abominations. The Payroll Tax of Perfidity. The Capital Gains Tax of Utter Damnation, etc."

Somehow even when there is humor...such as the waggish "Infernal Revenue Service" it is just not nearly apocalyptic enough...

[capitalist229]

Our standard of living depends on low cost consumer products, including cheap credit with which to buy it all.

China is not a threat because increasing productivity benefits everybody, it is NOT a zero sum game as some here propound.

BUMP

[curiosity]

Actually since the transition from fixed exchange rates to floating exchange rates there is no such thing as a trade deficit.

Sorry, but that's just wrong.

Under the fixed exchange rate regime, everything being equal, a trade deficit would mean the flow of specie out of the country which would lower the money supply and cause economic activity to be reduced,

Stop right there. You're confusing a balance of payments deficit with a trade deficit.

Under floating exchange rates and without central bank intervention, a trade deficit (actually, current account deficit, to be precise) must be offset by an equal capital account surplus, thereby leaving the domestic money supply unchanged.

But you can certainly have a trade deficit in equilibrium.

[Toddsterpatriot]

So you are still left with the most clear evidence of a relationship...and its bloody recent. Not ancient history.

I think I understand. When the dollar goes up, there is no relationship to the trade deficit. When the dollar goes down, of course the decline is caused by the trade deficit.

Is that the logic you're using?

[curiosity]

Your statement about the complex interplay of many factors is just a truism. Economic analysis requires attempting to isolate one variable at a time. Hence discussions of trade effects does not mean one should try and throw in the impact of tax policy or monetary policy at the same time. Their impacts can be determined later.

Econometic methods take one variable at a time to estimate an equation for testing.

You have absolutely no idea what you're talking about. Have you ever even read an empirical economics paper published in a reputable journal? Just try submitting a paper with with a single variable equation, and the referee will laugh in your face.

Do me a favor, pick up an econometrics book and look up the terms "omitted variable bias" and "spurious correlation."