Tire prices are rising and some analysts are pointing fingers at the Obama administrations 35% tire tariff on Chinese imports. I had previously vocalized why this was a bad idea: that although the current impact would be small, it could lead to a trade war with China. Of course with any tariff, there will be a dead weight loss, resulting in a decline of consumer surplus. So, how have consumers been affected by this? Explicit costs include: (From the AP article)
Under the government’s new tariff, which went into effect in September, a set of Chinese tires that would have cost $280 now cost nearly $100 more.
As well as implicit costs:
Jennifer Stockburger, a tire test engineer for Consumer Reports, says six of the top ten all-season tires recently tested by the magazine were made in China by major manufacturers.
More importantly, the price increases for domestic tires is expected to end up offsetting the tariffs. Some of the price increases have been caused by an upcoming rise in demand due to an economic recovery and maintenance needs as well as increasing material costs for production.
Lets do a cost-benefit analysis. 17% of the tire market is made up of Chinese tires. Tire sales for 2008 was around $27 billion, which means that about $4.6 billion is Chinese tires. With an average price of $280 for Chinese tires pre-tariff, the total quantity of Chinese tires sold would amount to 16.4 million. With a $100 price increase, assuming that domestic tire price increases offset the tariff increase, U.S. consumers are expected to lose out on a net savings of over $1.6 billion. And that of course does not take into account the implicit cost of quality loss.
The tariff was expected to stop the loss of employment in the U.S. tire industry. By assuming there would be a benefit of saving 5,000 jobs in the tire industry, even at the median U.S. income, that only amounts to a very large estimate of over $250 million of saved income.
Therefore, Obama’s tire tariff cost the U.S. over $1.35 billion dollars. Lets not to mention the sour trade relations he has made with China, and considering how his current trip there went; he has made it even worse. I hope his political support from the unions was worth it when he goes for re-election in 2012. It is quite an expensive campaign contribution.