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.

[cowtowney]

another industry and its jobs lost to free trade

I hope you're not with the Buggy Whips of America Association.

[Toddsterpatriot]

I see you can't read an economist. They set the rates they sell at. That is the prerogative of governments selling governmental issues, Todd. They have delayed, deferred, and reduced sales before based on preliminary indicates they wouldn't get sales at their price.

Quick, somebody notify the Treasury. They've been doing it all wrong. They've been holding auctions.....which is a silly thing to do when Paul Ross knows that the Federal Reserve sets the rates on Treasury securities.

How Treasury Auctions Work

Paul, shown to be a fool, again.

[stands2reason]

Maybe we can de-privatize the tire industry.

[DoughtyOne]

While I have favored tariffs at times, I'm not a big fan of protecting industry that has contributed to it's own demise. There are times though, that I have to take exception to our willingness to allow strategic things to be outsourced.

IMO, outsourcing certain technology is foolhardy. Oursourcing certain items like steel in total, is another very foolhardy idea. Tires would come under the same category.

Anyone who thinks it's never a good idea to protect certain industries, would have no trouble outsourcing all weapons and ammunition. I don't think any of us would sign on to that. At least I would hope not. I think other areas should be studied and protected through tariffs as well, in certain instances.

Thanks for the comments. I realize you may think entirely different on this. Tha's okay. Later.

[remember]

Either of you guys want to show Paul the error of his ways?

I assume that you are referring to the chart in post 293 that asks "Where Is The Dollar-Deficit Relationship?". In fact, the possible relationships that I recall having heard of are visible in the following two graphs:

The actual numbers and sources are at http://home.att.net/~rdavis2/tradeall.html and http://home.att.net/~rdavis2/xchngmc.html.

The first relationship is between imports and recessions. As can be seen in the table at the first link above, imports decreased from 1974-75, 1981-82, 1990-91 and 2000-01. This was pretty much in the time periods of the last four recessions. The rationale that I've heard for this possible relationship is that consumers buy less of everything during a recession, including imports.

The second relationship is between exports and the trade-weight exchange rate of the dollar. As can be seen from the second graph above, the exchange rate generally went up from 1980-85, down from 1985-95, up from 1995-02, and down from 2002-05. As can be seen in the first graph above, exports generally moved in the opposite direction during this time. The rationale that I've heard for this possible relationship is that a weaker dollar makes exports relatively cheaper to foreigners who buy more of them in response.

Since the trade balance equals exports minus imports, decreased imports and increased exports will both tend to lessen a deficit or increase a surplus. However, the two possible relationships listed above show how just two factors can combine to effect the same item (the trade balance). There are likely many other factors that further complicate the study of any relationships.

[Paul Ross]

Wrong. Those auctions, which I have explained to you over and over again, are just like regular auctions where there is an asking price. The Treasury is doing it right. That is why they delayed, deferred, and reduced sales before hand after publishing a proposed sale. They optimize their odds of getting that price. And it is tantamount to a set price.

Too bad, Todd. It looks like you have been shown to be the fool, yet again. You just can't stand be confounded, and your prejudices debunked.

[Toddsterpatriot]

And it is tantamount to a set price.

So that's different than a set price. Thanks for admitting another error.

You've really grown in that area. Bravo!

That is why they delayed, deferred, and reduced sales before hand after publishing a proposed sale.

I don't suppose you have any examples of the Treasury announcing say a $30 billion auction and then delaying, deferring or reducing the sale?

Never mind. Of course you don't. Just another example of you liking to hear yourself talk.

[Paul Ross]

When the dollar goes up, there is no relationship to the trade deficit.

Nope, just that other factors are temporarily masking and indeed overwhelming the core fundamentals. When China buys U.S. treasuries and other debt, it isn't because they need a place to park the money and realize a bigger return than elsewhere...if they wanted a bigger return...there is no better place for them to put their money than in their own country. Just ask the outsourcers.

Using the principle of Occam's Razor, the best explanation is state interference...simply that they needed to prop up the dollar as part of their currency peg operations, and this was an optimal method.

The continual and accelerating drag on the dollar's value represented by the accelerating trade deficit to China and its intermediaries [call it the force of gravity] , is neutralized vis-a-vis China by their state bank interference. This allows the dollar valuation to be more directly influenced by other, perhaps less tangible, factors. Hence, the U.S. dollar was freed to rise, with the drag being neutralized, by normal investment flows, or governmental inflationary/deflationary behaviors, or even as the beneficiary of being a transhipment point for Chinese production, with middle-man profits tacked on... and so on.

That is all that happened. But absent the neutralization against the drag...it could not have happened.

A possible driving factor that could overwhelm the postulated masking effect of state interference, explaining the falling dollar against the basket of major currencies, would be the extent to which China's intermediaries who tranship China production into the U.S., and cut out the U.S. as the middleman, (this would also include European manufacturers now outsourcing to China to better compete against the U.S. middleman) have their trade surplus burgeon...while not pegging. Their currencies would rise, and eventually impact all non-pegged currencies that trade with them... including the major currencies in the basket relied upon for the measure.

[Toddsterpatriot]

Using the principle of Occam's Razor, the best explanation is state interference

Actually, the best explanation is there is no relationship between the trade deficit and the strength of the dollar. But keep tap dancing.

[Paul Ross]

However, the two possible relationships listed above show how just two factors can combine to effect the same item (the trade balance). There are likely many other factors that further complicate the study of any relationships.

Agreed.

[justshutupandtakeit]

What was originally termed a trade "deficit" was an imbalance in specie flows from exports/imports. Those do not occur with floating exchange rates which continuously adjust the value of the home currency to account for the excess supply in the world currency market. When the exporter to the US does not want to hold $ the excess supply will force the value down until a new equilibrium is reached.

Balance of payments deficits resulted from trade deficits and/or capital account deficits. They also cause adjustments in the exchange rates to equilibrate the currency markets. Trade deficits do not necessarily mean there will be a BoP deficit since the excess outflows can be invested back into the country. Hence the capital inflow can remove or reduce the BoP.

Your objection that I confused the BoP with a Trade deficit proceeds to explain what would happen under a fixed exchange rate not floating. Trade deficits are one element of a BoP calculation and, under a floating exchange, do not require any capital inflow back to maintain the money supply unless you do not wish the value of the dollar to remain unaffected by the deficit. That was true under fixed exchanges (the specie flows were the "payments" in the BoP.)

Ultimately trade was commodity for gold and the currency was only the device to obtain the gold/specie. Now the trade is commodity for dollar. The receiver of the dollar then either spends it or saves it. His view of its future value plays a large role in that decision.

I am not sure which equilibrium you refer to in your last sentence. Equilibrium in the foreign exchange market or general equilibrium?

[Paul Ross]

Actually, the best explanation is there is no relationship between the trade deficit and the strength of the dollar.

False. Kane should have his doctorate revoked. And wear the dunce cap you have permanently welded to your cranium.

[Toddsterpatriot]

So what has the Fed set for the 10 year bond yield at the next bond auction. LOL!

Dunce, thy name is Paul.

[captnorb]

Thanks for your post.....You have hit the nail on the head. You can ask my 24 past employees how we could compete with Chinese labor and other costs mandated by our government. Everyone here has gone off on a tangent when they could read your post and immediately grasp the reason why we are losing jobs.

[justshutupandtakeit]

Econometric equations with one independent variable were used during the infancy of the science. How did you get the idea that I claimed one would satisfy the referees at Econometrica today?

When deciding on explanations for an economic change it is usual practice to add one variable at a time to the equation. You don't just throw in everything you can think of into a regression estimation.

As anyone who has looked at the classic Lawrence Klein -An Introduction to Econometrics would know the very first equation discussed used one independent variable. It is standard to start with one and look for more when its correlation is not sufficiently high. Advanced econometric models use many.

While it has been 30 years since I took an econometrics course the terms you refer me to have no obvious relation to what I was discussing. Tests for spurious correlation are available but that was not at issue. Autocorrelation can also be detected and accommodated. Even heteroscedasticity.

[curiosity]

Econometric equations with one independent variable were used during the infancy of the science. How did you get the idea that I claimed one would satisfy the referees at Econometrica today?

From this statement of yours:

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

That is absolutely wrong. Modern econometric methods estimate the effects of many variables simultaneously.

When deciding on explanations for an economic change it is usual practice to add one variable at a time to the equation.

I do econometrics for a living. This is simply wrong. You put in all the variables that theory would lead you to believe would have an effect. If you want to test for the effect of a new variable, you add it in together with all the other variables that have been previously shown to have an effect.

You don't just throw in everything you can think of into a regression estimation.

No, you add everything that theory and previous empirical work tells you is important.

As anyone who has looked at the classic Lawrence Klein -An Introduction to Econometrics would know the very first equation discussed used one independent variable.

Yes, but that's only there for expository purposes. It makes the algebra simpler, thereby allowing undergraduates to better understand the mathematics behind regression analysis.

In actual practice, no one estimates equations with one independent variable. You won't find more than a handful of empirical papers published during the last 30 years that do such a thing.

And BTW, no modern graduate text begins with a single variable regression; they start with multiple variables right away, using matrix notation.

It is standard to start with one and look for more when its correlation is not sufficiently high. Advanced econometric models use many.

You have not the slightest idea of what you're talking about.

While it has been 30 years since I took an econometrics course

It shows.

the terms you refer me to have no obvious relation to what I was discussing.

You need to look them up.

Tests for spurious correlation are available but that was not at issue.

Okay, let me lay it out for you very simply. You have dependent variable Y and two independent variables X1 and X2. X1 has an effect on Y. X2 has no effect, but it is correlated with X1. If you estimate

Y = a + bX2

and leave out X1 from the regression, you'll find that b is statistically significant, even though X2 has no effect on Y. This is an example of spurious correlation driven by omitted variable bias, i.e. failure to include a relevant variable in your specification.

Autocorrelation can also be detected and accommodated. Even heteroscedasticity.

Well yes, of course, but this has nothing to do with the matter at hand. These issues relate to the distribution of the risiduals. I'm talking about relationships between the test variables.

[curiosity]

What was originally termed a trade "deficit" was an imbalance in specie flows from exports/imports. Those do not occur with floating exchange rates

YES THEY DO!!! This is an empirical fact.

which continuously adjust the value of the home currency to account for the excess supply in the world currency market. When the exporter to the US does not want to hold $ the excess supply will force the value down until a new equilibrium is reached.

Yes, and there can be a trade deficit in equilibrium. What makes you think there can't be? Again, all you need is a capital account surplus to balance off the current account deficit. In other words, the exporter holding excess dollars can then invest them in the US, which in turn prevents the exchange rate from moving down to the level where there is trade balance.

Balance of payments deficits resulted from trade deficits and/or capital account deficits.

No, balance of payments deficits occur when the central bank intervenes in the currency market so as to prevent the exchange rate from adjusting so that the capital account surplus (or deficit) balances the current account deficit (or surplus). There can be no balance of payments deficit or surplus under pure floating exchange rates. Period.

They also cause adjustments in the exchange rates to equilibrate the currency markets. Trade deficits do not necessarily mean there will be a BoP deficit since the excess outflows can be invested back into the country. Hence the capital inflow can remove or reduce the BoP.

Yes. I'll also add that under floating exchange rates, the capital inflow will perfectly offset the current account deficit, which in turn allows for a trade deficit in equilibrium.

Your objection that I confused the BoP with a Trade deficit proceeds to explain what would happen under a fixed exchange rate not floating.

No, it's what happens under floating exchange rates.

Trade deficits are one element of a BoP calculation and,

BoP = current account + capital account. Under floating exchange rates, this has to equal zero.

under a floating exchange, do not require any capital inflow back to maintain the money supply unless you do not wish the value of the dollar to remain unaffected by the deficit.

Under a floating exchange rate, one of two things can happen if there is a surge in imports (or drop in exports). The exchange rate can move so as to make the current account balance, which is what you seem to think always happens, but it needn't. Alternatively, (and this is what is happening to us now), the capital account can go into surplus. Either one is possible. If there is a current account deficit, it must be the latter.

That was true under fixed exchanges (the specie flows were the "payments" in the BoP.)

I'm sorry. I lost you.

Ultimately trade was commodity for gold and the currency was only the device to obtain the gold/specie. Now the trade is commodity for dollar. The receiver of the dollar then either spends it or saves it. His view of its future value plays a large role in that decision.

Of course. And what most foriegners are doing now is saving.

I am not sure which equilibrium you refer to in your last sentence. Equilibrium in the foreign exchange market or general equilibrium?

Both.

[justshutupandtakeit]

Perhaps I am not saying what I mean as well I as should. What I meant wrt estimations is that independent variable are examined one at a time to decide for selection within a model. If one is looking at investment one would first look at interest rates then add expected income or some other variable which would explain changes not "explained" by the first two. I am quite aware that a modern model is very complex and has many variables.

I did not mean to imply or state that one variable could explain all or most of the changes in a dependent variable.

There was no need to demonstrate the effect of a spurious variable it is understood. It changes nothing that I said.

[curiosity]

What I meant wrt estimations is that independent variable are examined one at a time to decide for selection within a model.

Not really. Most econometrics seeks to test a given economic theory, and almost always theories involve several variables.

What you seem to be describing is known as "data mining" or "data snooping," i.e. creating an ad hoc model with just as many variables as necessary to "explain" a given phenomenon. Such a practice is generally frowned upon within the profession, as it leads to all kinds of spurious inferences.

If one is looking at investment one would first look at interest rates then add expected income or some other variable which would explain changes not "explained" by the first two.

You're not going to explain investment with single equation model that has interest rates as an independent variable. That's becaue there is significant reverse causality going on, i.e. investment affects interest rates just as much as interest rates affect investment. This is known in the econometric literature as "simultaneity bias" or "endogenetity bias." The upshot is that you have to estimate a multi-equation model.

[justshutupandtakeit]

There is no gold/specie transfers under a floating exchange rate regime because neither is a monetary instrument now.

There can be a trade deficit (X>M) in equilibrium under a floating exchange rate but it is not the same thing as a trade deficit under a fixed exchange. Under the former the excess supply of dollars causes the exchange rate to fall until a new equilibrium is reached. Under the latter the outflow of gold/specie reduces the money supply within the country causing income to fall, prices to fall and imports to follow. Exports will increase because the domestic price level deflates.

I don't see any necessary reduction in the money supply due to the deficit in the first case as there is in the second.

You describe the BoP deficit occurring if the authorities intervene to prevent the dollar from devaluing. How is that any different from saying that there is no deficit under a true floating exchange? Never mind, I meant to say BoP deficit earlier and said Trade deficit.

Heller defines "the balance of payments as the difference between the quantity of dollars demanded and supplied in international currency markets."