Protectionism is Back: Obama Slaps 35% Tariff on Chinese Auto Tires
The Obama administration acted quickly and quietly Friday night to impose new tariffs on Chinese produced automobile tires. The new tariff of 35% is a huge change from the relatively low 4% tariff imposed before Friday. What does this mean for US tire makers and their shares? And what about the global economy?
How Many Tires are Imported to the US
More than 46 million tires were imported to the United States from China just last year. That amount represented 17% of the total US tire market, a hefty amount especially with the economic clout so perilous to any car product maker’s business. The new tariffs are certain to affect quite a few companies, namely Cooper Tire.
Cooper Tire
Recently, Cooper Tire made a direct deal with the Chinese government to move all of its production capacity to China in exchange for the ability to invest directly in other Chinese tire businesses. The shift, which was one of the biggest losses of American manufacturing, sent thousands of jobs overseas and brought Cooper Tires’ profit margins to new heights. However, the ability to win on pricing, at least for Cooper Tire, is certainly minimized. The new tariffs will make their products a full 35% more expensive, and less likely to compete with other makers such as Goodyear whose tires typically cost more due to a difference in labor costs.
Sell Cooper Short
Unless the tariff is withdrawn, there is very little reason not to short Cooper Tires’ stock. The company trades under the ticker symbol CTB on the New York Stock Exchange and at last call, posted a loss of $3.96 per share per year. The automobile slowdown certainly played a role in their inability to show a profit, but at a current price of less than $14.50 per share, this stock is a pure money hole. The stock traded as high as $27 per share in the summer of 2007, just as the real estate boom came to an end and the HELOC credit cards hit their limit. I wouldn’t be surprised to see Cooper Tire dump its 11 cent quarterly dividend soon, a move that could prove to be very unfavorable with investors. I’m selling short, mostly with stock options as I think this will be a relatively swift move to the downside the next time Cooper Tire comes out with earnings.
Protectionism
There is little doubt that it was protectionism and trade wars that made the Great Depression last even longer. Free trade is paramount to economic prosperity as each nation succeeds at many different types of businesses. The US service industry helps balance the books and finance Chinese manufacturing operations while China produces goods that Americans want at affordable prices. Should this escalate, a trade war would have long lasting impacts on the economy, starting first with international businesses and ending at the person who works night shift at the factory. At this time it would be rather preemptive to call this an all out strike, but we should soon see the tip of Beijing’s fury.
This is just the start. Next on the list is steel. Obama needs to pick and choose his fights. He can’t be in a trade battle, Afghanistan, and healthcare war all at once. Rookie move.