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Wednesday, January 5, 2011

The U.S. Tire Industry: Technological Change and Import Competition

Glennon J. Harrison
Specialist in Industry Policy

Michaela D. Platzer
Specialist in Industrial Organization and Business

U.S. production of passenger vehicle and light truck tires has undergone significant change over the last two decades. What was once considered a major U.S. manufacturing sector is now part of a global industry that is largely controlled by foreign-headquartered corporations. The top four global tire companies, accounting for 49% of worldwide tire sales in 2009, included only one U.S.-headquartered company: Goodyear Tire and Rubber Company. Confronted with sharp declines in output, employment, and the number of plants in the consumer tire sector, numerous members of Congress have expressed concerns about the future of tire manufacturing in the United States.

The market for passenger vehicles and light truck tires is actually two distinct markets. Original equipment (OE) tires are sold to vehicle manufacturers rather than consumers and are usually tailored to car manufacturers’ specifications. The vast majority of OE tires used on Americanmade vehicles are made in the United States in order to reduce carmakers’ supply-chain risks and to protect the tire manufacturers’ proprietary production processes. U.S. production of OE tires can be expected to recover along with domestic light-vehicle output. However, increasing automation is allowing tire manufacturers to meet OE demand with fewer plants and fewer workers.

The larger portion of the consumer tire market involves replacement tires that are sold to consumers through various retail channels. Tire manufacturers have increasingly moved production of replacement tires from the United States to Asia, especially China, as imports undercut sales of domestically produced tires. Chinese production capacity far exceeds Chinese domestic demand for tires, and China has pursued an aggressive export agenda.

In response to a petition filed by the United Steel Workers with the U.S. International Trade Commission, the Obama Administration imposed punitive tariffs on Chinese tires for three years, starting in September 2009. A World Trade Organization (WTO) panel determined in December 2010 that the U.S. tariff measures were in compliance with its WTO obligations. The higher tariffs have caused an increase in imports of low-cost tires from countries other than China, notably Thailand and Mexico, but have not led manufacturers to shift production back to the United States.

Congress appears to have few policy levers with which to support tire manufacturing in the United States. To the extent that government policy encourages domestic production of small vehicles, most of which are now imported, there may be additional demand for U.S.-made OE tires. More stringent federal standards for tires also might encourage domestic production, albeit at the cost of higher prices for consumers. However, it seems unlikely that U.S. factories will return to large-scale production of low-cost replacement tires.

Date of Report: December 27, 2010
Number of Pages: 31
Order Number: R41551
Price: $29.95

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