Dumping subsidies and trade protection
By David Shaw*
According to international law, no country can impose penalties unless it can show that there is actual or potential damage to its domestic industry from low-priced imports
I’ve been watching the debates about Chinese tyres and allegations of dumping and subsidies carefully.
This month, I thought I would post my thoughts on this complex and delicate subject. Most readers will know that India’s tyre makers have asked their government to investigate allegations that Chinese tyre makers are undercutting local tyre makers and this is having an detrimental impact on local employment; on rubber consumption and on capital investments.
Globally speaking, it’s not a new story. The Chinese have sought new markets in India and elsewhere as other countries have imposed anti-dumping penalties.
Brazil has had penalties against Chinese tyres for some time. In 2015 the United States put anti-dumping duties (ADD) and countervailing duties (CVD) of 100% or more on Chinese-made car and light truck tyres. Russia and its neighbouring States in the Eurasian Economic Area have put duties of around 25% on Chinese-made truck tyres. In the last few weeks the United States has set preliminary duties of about 40% on Chinese-made truck tyres.
Not everyone sees dumping
But it is not all one way. Earlier this year the EU considered putting anti-dumping duties on Chinese-made truck tyres. During the investigation, the researchers saw that domestic tyre makers’ profits and margins have been increasing, despite the influx of Chinese-made tyres.
In the US investigation into truck tyre dumping, two of the six-member panel decided the same thing. Local manufacturers have seen profits increase in the relevant period. The two dissenters were out-voted by the other panel-members, but their view highlights a real situation.
According to international law, no country can impose penalties unless it can show that there is actual or potential damage to its domestic industry from low-priced imports.
The reality is that in the period from 2011 to 2015, raw material prices were falling faster than tyre selling prices pretty much everywhere except China. This sent profits rocketing at most tyre makers. In fact, the two years of 2014 and 2015 have been something of a golden period for tyre makers, with low costs while selling prices have largely held up – outside China where 2015 was one of the worst years on record for tyre makers.
This is why the Europeans and two out of six American panellists found that there had been no damage to domestic tyre makers.
Tyre prices around the world started falling from about Q3 in 2015, and that is now starting to affect tyre makers’ profits – as we saw in the half-year results of some of the top players – and will continue to do so in the coming months.
A lot of this decline is due to Chinese tyre makers finding new markets. This, I think is what is going on in India.
Chinese exports accelerate
Imports to India from China have accelerated since around the middle of 2015 when I – and many others –first started picking up rumours that the US would investigate truck tyre imports from China.
The Chinese saw how the US duties on car and light truck tyres affected their key markets in the United States. When they picked up on rumours about truck tyres, many of them immediately began looking for alternatives, just in case their truck tyre markets went the same way.
About a year ago, I started hearing stories from around the world that everyone and anyone involved in the tyre industry was receiving more calls and emails and direct messages asking if they want to buy tyres – cheap.
Dozens of Chinese tyre makers put an army of youngsters on the phones to call anyone who looked like a potential customer and persuade them to buy at more or less any price. This effort was designed to fill a big hole in volume expected when the US announced their duties.
Unsurprisingly for a product that is largely commoditised, it worked. Sales results for many Chinese tyre makers in the first half of 2016 were strong.
It looks to me like they were still getting sales from the United States while their efforts to generate new business in new markets were also producing results.
Now that the US has officially declared duties of 40% or so on truck tyres made in China, many Chinese are expecting sales from China to the US to dry up.
The 40% duties will make Chinese tyre a lot less competitive, but that’s not why Chinese tyre makers will move out of the US. The real reason is that Chinese tyre makers or their importers will have to raise a substantial amount of capital to provide the deposit to cover potential sales in the United States.
With bank lending very tight in China, few tyre makers will be able to afford the new conditions of sales into the United States.
Few companies will do well
Three tyre makers – Linglong, Triangle and GST – have generated a lot of cash through public share issues since June 2016. Others have generated cash through private share placements. Some of these – Linglong, Zhongce, Double Coin and Sailun – have truck tyre capacity offshore, so will be largely unaffected by the US duties.
But these are very much the minority. They will do well in the US as the rest of the Chinese tyre makers find it increasingly difficult to sell in the region. In the mean time, those others will be re-doubling their efforts to sell into new markets including Europe, Middle East, Africa and India.
Ultimately, whether India imposes duties or not is largely a political question. How much does the Modi government want to support its tyre makers – who saw increases in profit in the period under investigation; and how far does it want to go down the trade protection route with China.
My feeling is that the decision is likely to go against the tyre makers and with the tyre distribution trade who want more cheap tyres. Either way, I think India’s tyre industry is likely to see more tyres with Chinese brand names.
*David Shaw is CEO of Tire Industry Research (https://tireindustryresearch.com/)