Travels of a Cheap Tire in the Global Economy

Tom Bozzo

agrees with Ken (but observes that even Garth Brazelton falls for the ‘Pareto fallacy’ [*]), and sees Brazelton’s (so far) one anonymous comment, which takes issue with Brazelton’s hypothesis that the Obama administration is giving us a backdoor safety-enhancing Pigovian tax:

This is probably incorrect. Tires like many other things need to meet standards. Tiers [sic] for America must meet American standards etc.

Indeed they do, but there’s the econoworld of frictionless international trade in widgets and then there’s the sausage making of actual trade in manufactured goods. Let’s set the Way-Back Machine just two years ago to the case of Foreign Tire Sales below the jump.

Here’s the lede of the NYT account:

Federal officials have told a small New Jersey importer to recall 450,000 radial tires for pickup trucks, sport utility vehicles and vans after the company disclosed that its Chinese manufacturer had stopped including a safety feature that prevented the tires from separating.

[snip]

[NHTSA’s] top officials were “outraged” that Foreign Tire Sales’ executives waited more than two years to pass on their suspicions about problems with the tires. The company first suspected problems in October 2005. Almost a year later, in September 2006, the Chinese manufacturer, Hangzhou Zhongce Rubber, a former state-owned company based in eastern China, acknowledged that a gum strip that prevents the tread from separating was left out of the manufacturing process.

Now Foreign Tire Sales did not intend to import substandard tires:

The tires were supposed to exceed federal safety standards, partly by including a gum strip between the plies to prevent separation, and ultimately passed a road test in which they were driven 40,000 miles…

Nevertheless, a few years into the relationship with its factory, problems started to appear:

In October 2005, the company said it became concerned because of a sharp increase in customer complaints about the Hangzhou Zhongce radial tires. In investigating the complaints, Foreign Tire Sales’ officials became suspicious that Hangzhou Zhongce was manufacturing the tires without the gum strips or with inadequate gum strips, but the Chinese company denied it.

Tests of tire segments conducted by an outside firm were not conclusive but “seemed to indicate that there were no gum strips or insufficient gum strips in the inspected tires,” Foreign Tire Sales wrote in its June 11 report to the National Highway Traffic Safety Administration.

Foreign Tire Sales’s ability to monitor its contract manufacturer and get to the bottom of the quality problems was surely compromised by the fact that it was a seven-person office that never actually touched the tires it brought into the country.

For the money shot:

Hangzhou Zhongce admitted in September 2006 that it had “unilaterally decided to omit the gum strips” in the tires, the report says. The Chinese company was “generally unresponsive” when asked how many tires were involved and what they were going to do to resolve the problem, the report says.

With little or no monitoring and financial returns to cutting corners, amazingly corners are cut. Lo, incentives matter! But that’s not all!! Foreign Tire Sales, being asset-light, lacked the wherewithal to actually shoulder its obligations in the event of a large-scale recall. An account at the Huffington Post says that they were spared bankruptcy by virtue of most of the recalled tires having stayed on the road, sparing F.T.S. the expense of actually replacing them with tires more-or-less known to be up to standard.

The anonymous commenter makes a follow-up point:

There used to be a term Jap Crap for Japanese stuff. Now Japan sets the standard for manufactured items. China will do the same eventually.

This post was written on a Chinese-assembled laptop computer which, at age 3, is still working pretty well, so it’s not that Chinese stuff necessarily is crap. Of course, Apple’s handle on the product quality lead of its supply chain may be better than that on its contract workplace conditions. Certainly Korean products have improved radically since, say, Hyundai’s entry into the U.S. auto market.

Perhaps if we could just trade with the Aspirational China with its fast trains, gleaming 500-meter skyscrapers, massive renewable energy investments, and middle class, some of the conditions might actually hold to justify the U.S. economist hand-wringing. Meanwhile promotion of trade should not be a suicide pact.

[*] I.e., because a policy may be Pareto-improving after the losers are compensated, it is worth implementing from a social welfare perspective even if we all know that the losers won’t be compensated.

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