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July 1, 2006

Do Trade Laws Protect Domestic Industry?

Tepid enforcement and outdated remedies frustrate producers of metal products.

When six domestic producers of steel pipe filed a trade action against surging imports of pipe and tube from China last summer, they thought they had a strong case. As a result of a nearly 30-fold import surge, domestic shipments declined by more than 25% between 2002 and 2004, 20% of the workforce was laid off and two plants were closed. The Chinese had seized a market share of 10%, compared with less than 1% just two years earlier.

But President Bush late last year rejected the domestic industry’s plea under Section 421 of the Trade Act of 1974. Despite a finding by the International Trade Commission that Chinese pipe imports were surging and damaging domestic companies and U.S. markets, Bush said relief would harm pipe consumers, outweighing the benefits of helping the beleaguered producers. It was the fourth consecutive time that Bush rebuffed an ITC recommendation to apply remedies against surging imports from China.

“This was one of the clearest cases of surge and damage,” says Bob Johns, director of marketing for Nucor Corp.’s Sheet Mills Group. Johns also leads trade law efforts for the Charlotte, North Carolina steelmaker. “It was a bad decision to ignore this case.”

Adverse decisions like this have disappointed and frustrated domestic manufacturers who are pummeled by low-cost imports, made possible largely by the undervalued yuan and other direct and indirect subsidies supplied to Chinese mills. Indeed, when the Commerce Department in February announced a record $725 billion trade deficit for 2005, with China’s share coming in at more than $200 billion, one congressman—Democrat Earl Pomeroy of North Dakota—dubbed the United States the “trade enforcement wimp of the world.”

As producers across the industrial spectrum cry foul, the perception persists, with good reason, that trading partners such as Canada and the European Union use their trade law enforcement capability far more vigorously and effectively than the United States to protect their economies from practices that are illegal under international agreements or domestic law.

“It’s not as aggressive a regime as the American manufacturing community, in particular, has a right to expect,” says U.S. Rep. Phil English (R-Pennsylvania) of the limp Bush trade enforcement record. English, a member of the Joint Economic Committee and House Ways and Means Committee, also is a member of the President’s Export Council. “There are a number of trade remedies that we have not been aggressive about pursuing, and there are significant loopholes in our trade laws that we have not corrected.”

Applying trade remedies is a time-consuming and costly process that, in some cases, can be rendered useless by presidential fiat, even when independent investigators confirm that market disruption exists. And the Bush administration hasn’t looked to the World Trade Organization for salvation—of the 83 trade complaints on record with the trade organization, there is only one in steel, which dates to 2002.

But enforcement is only part of the problem. The United States also is hampered by remedies that often no longer fit the realities of 21st century global trade. China, the largest supplier of low-cost products sold here at sometimes absurdly low prices, operates by rules that often violate World Trade Organization (WTO) guidelines, yet its illegal practices continue year after year. Despite much talk and public complaints, neither the U.S. government nor the WTO seems willing or able to persuade China to change its ways. It’s the 21st century version of Teddy Roosevelt’s advice: Speak loudly, but carry a feather duster.

“The Bush administration makes believe there are no China import issues,” says Roger Schagrin of Schagrin Associates, Washington, D.C., who represented the pipe and tube producers in the Section 421 case. “The China trade problems they report on are focused on opening the Chinese market, not on problems with imports from China.”

Of course, whether the Bush record is weak depends a little on who compiles it. In a written statement, the Commerce Department said it “vigorously defends domestic manufacturers and industries against unfair trade practices by foreign governments and companies.” It cites 58 anti-dumping orders on Chinese imports, which represent $5.25 billion in trade and 18% of all anti-dumping and countervailing duty orders currently in effect.

Imports from China were $243.5 billion, or 14.6% of total U.S. imports of $1.674 trillion in 2005. Anti-dumping orders on Chinese products range from industrial chemicals to agricultural products and steel. Some are in effect from as early as 1983. The last time an anti-dumping order was issued against China was in June 2005, the International Trade Administration database shows.

WHAT THE RECORD SHOWS

Anti-dumping and countervailing duty case statistics indicate, at best, only a moderate application of U.S. trade laws. Anti-dumping cases are those brought against products sold below fair value, and countervailing duty cases address subsidized products (See glossary).

Generally the first line of relief sought by manufacturers, dumping and duty cases address only a fraction of products exported to the United States. Between 1980 and 2004, the U.S. International Trade Commission reported 1,549 cases covering textiles, agricultural and manufactured products filed under Title VII of the Tariff Act of 1930, the umbrella statute for anti-dumping and countervailing duty cases. These cases represented a mere 0.4% of all U.S. imports during that period—a number even further diminished by the 63% of petitions that were denied or terminated. In affirmative determinations, a remedy such as a tariff, duty or quota is imposed.

 

A WTO review of internal U.S. trade practices noted that investigations initiated in 2002 and 2003 covered an import value of some 0.1% of U.S. imports each year, compared with 2001, when new cases covered 0.85% of imports. So even as the noise level gets higher, the actual proportion of challenged imports is declining.

During the 10 years through 2004, the last year for which complete data is available, the steel industry filed about half of the 445 anti-dumping and countervailing duty cases. Steel cases were defined as those involving steel beams, bars, wire, angle, plate, pipe and tube products.

One reason more cases are not filed may be the financial resources required to bring a petition. Investigating whether a case is strong enough is an expensive preliminary step. The cost of taking it all the way to final adjudication, with no guarantee of success, ranges from several hundred thousand dollars to about $1 million. That’s why most cases are filed by trade groups or deep-pocketed companies.

“By the time a small manufacturer can bring an anti-dumping case, they’ll be out of business,” Nucor’s Johns says.

Improved procedures would make the laws easier for small manufacturers to use, he says. For instance, in cases against repeat dumpers, allowing facts documented in previous cases to be used in new cases against the same party, instead of the current practice of opening new investigations each time, would help reduce the cost and speed the process.

More frustration stems from a current Department of Commerce policy of not allowing countervailing duty cases to be filed against non-market economies—those countries where the government or a central planning function, rather than the marketplace, sets prices and priorities. Maximum employment, for example, might be a higher priority in a non-market economy than profitability. Non-market economies include China, Vietnam and many of the countries formerly part of the U.S.S.R., such as Belarus and Russia. (The Ukraine gained market economy status in April.)

In a statement, the Commerce Department said it exempts these imports from the countervailing duty laws, citing both a legal precedent and the infeasibility of identifying a subsidy in an economy with no market benchmarks. Instead, it points to the anti-dumping laws as an effective remedy against unfairly traded imports from non-market economies. Anti-dumping investigations use a surrogate country—most often India in cases against China—to establish an equivalent fair value of labor, raw materials and other costs.

Prior to filing their Section 421 cases, the pipe and tube manufacturers brought an anti-dumping petition against China, but it was denied.

“There’s a pro-China policy,” Schagrin says. “We can’t win relief against China.”

GENERAL SAFEGUARDS

Another level of trade remedy is a broad category called General Safeguards, governed by Section 201 of the Trade Act of 1974. In a recent example, Bush granted the steel industry temporary relief against import surges under Section 201 in March 2002. Those restraints, in the form of tariffs on 10 categories of steel products, remained in place until early December 2003. During that period, with much of the industry in bankruptcy, companies consolidated, excess capacity was trimmed, legacy costs were shed by acquirers and other market drivers, including China’s emerging demand, converged to push prices higher.

Imports addressed in safeguard cases, pursued with even less frequency than anti-dumping or countervailing duty cases, are a mere molten drop in the seething bucket. Even when combined with all the anti-dumping and countervailing duty cases, the import value represents less than 1% of all imports from 1975 to 2003.

THE CHINA FACTOR

When China joined the WTO in late 2001, a special safeguard known as Section 421 of the Trade Act of 1974 was adopted to protect American industries against surging Chinese imports. However, that remedy has never been applied. The pipe and tube companies were not the only petitioners to win an affirmative ruling from the ITC, only to have it denied by the president. Of the six petitions filed under this remedy to date, all were denied—two by the ITC after its investigation and the remaining four by the president, who declined to act on affirmative recommendations from the ITC.

In the most recent Section 421 petition denied by the administration, the ITC recommended annual quotas that would cap steel pipe imports from China at 2000 and 2001 levels for three years. In the three months following the president’s decision, pipe imports from China rose another 35%, Schagrin says.

The 0-6 record of Section 421 decisions removed any deterrent effect on China that the law might have had, English says. “At a time when we want China to be operating within the rules and developing a market-based trade tradition, it’s extremely frustrating that this very important provision has been frittered away,” he says.

Each time, the president’s explanation was the same: Raising the price of the products in question would cause more harm to American consumers than it would benefit the petitioners. Joseph Massey, professor and director of the Center for International Business, Tuck School of Business at Dartmouth College, and former chief U.S. trade negotiator with China between 1985 and 1992, who served as the chief U.S. trade negotiator with China from 1985 to 1992, says traditional U.S. trade philosophy always has been on the side of the consumer rather than the producer.

“The fundamental philosophical bent of our economic policy for many years has been, ‘If it hurts the consumer, it’s bad. If it doesn’t hurt the consumer, but it hurts the producer, we’ll have to look at it.’I don’t think you would have had a different answer [on a Section 421 case] from another administration,” he says.

Which begs the question, what good is a remedy designed to protect industry against Chinese surges if it is not enforced?

“If you start out with a remedy designed to raise prices if sudden surges are harming the petitioning industry, and then you say at the end, ‘We’re not going to impose a remedy that increases prices,’ you completely eviscerate the remedy,” says Alan Dunn, an international trade lawyer with Stewart and Stewart, Washington, D.C., and former assistant secretary of commerce for import administration who oversaw the anti-dumping and countervailing duty laws from 1991 to 1993.

The industries that petitioned for trade actions under Section 421 are under siege, while at least one is fast disappearing from the American landscape. When steel wire hanger manufacturers petitioned under Section 421 in 2002, there were 15 manufacturing plants in the country employing more than 1,220 workers. China’s market share of 15% had nearly doubled over the previous year. Today, only two companies remain, with fewer than 170 workers, says Frederick P. Waite, an attorney with Vorys, Sater, Seymour and Pease LLP in Washington, D.C., who represented the petitioners. Chinese imports are now estimated to hold 37% of the market and 75% of the market in the dry-cleaning industry.

When trade remedies are applied, do they work? Sometimes better than others, depending on the remedy and how effectively it is enforced. Schagrin points to anti-dumping duties on steel pipe against seven countries as a good example. “We won a 100% duty against Brazil in 1991. The following year, Brazilian imports dropped to zero.” The duty orders on Brazilian pipe, still in effect, currently are under review.

CURRENCY DISTORTIONS

With Section 421 effectively defanged, frustrated producers and lawmakers look for ways to get at the controlled exchange rate of the yuan, viewed as a major reason that Chinese imports are so cheap. However, currency practices remain outside the scope of existing trade remedies. That means enforcement falls into the domains of the U.S. Treasury, the U.S. Trade Representative (USTR), the International Monetary Fund and the State Department’s diplomatic efforts.

Various groups have brought petitions against Chinese exchange-rate practices directly to the USTR under Section 301 of the 1974 Trade Act, which is meant to protect domestic companies against unjustifiable practices that restrict U.S. commerce. This avenue is meant to deliver a relatively quick determination from the USTR, which decides whether to open an investigation that could lead to filing a WTO complaint, bilateral talks or proposal of another remedy. It dismisses complaints it doesn’t consider appropriate.

In the past two years, three Section 301 petitions for relief against China’s exchange-rate practices were dismissed by the USTR because the complaints weren’t considered “an appropriate or a productive way” to get China to change its practices, the USTR said in rejecting a 2005 case.

“That’s understandable,” Dunn says. “That would place the regulation of currency within the jurisdiction of the WTO—not something any of the world’s central bankers would want to see.”

“If you could get at the distortions that non-market economies create,” Johns says, “it would go a long way to making a difference in the trade deficit.” China sets the tone for the rest of Asia, he notes, adding that virtually every Asian country intervenes in currency markets.

Peter Morici, economist and professor at the Robert H. Smith School of Business at the University of Maryland, says that without a mechanism to address subsidized imports from non-market economies or manipulated exchange rates, world trade is in danger of moving back into 17th century mercantilism. At that time, countries exported goods to acquire gold in a zero-sum game in which they would benefit at the expense of their trading partners. In the 21st century, mercantilism translates to jobs in developing countries.

“The Bush administration has been absent without leave on trade policy,” Morici says. The ever-growing trade deficit is an indicator that “we’re doing a lot of things wrong, leaving ourselves vulnerable to mercantilism and protectionist policies in Asia.”

In February, the USTR issued a top-to-bottom review of U.S./China trade relations, noting that of all China’s obligations under the WTO agreement, the easiest ones largely have been fulfilled. These include substantial reductions of tariffs on U.S. exports and improved access to Chinese markets for U.S. companies. The more difficult issues are still to be resolved, and “a large and growing trade deficit with China remains a significant concern.”

The Treasury Department has declined to label China as a manipulator of its own currency under the 1988 Trade Act and reaffirmed its position as recently as May, although then-Treasury Secretary John Snow said the United States is “extremely dissatisfied with the slow and disappointing pace of reform of the Chinese exchange-rate regime.” A spokesperson declined to elaborate on further actions being considered.

A lack of improvement is likely to lend momentum to bills in Congress that take aim at China’s currency manipulation. They include H.R. 1498, also known as the Chinese Currency Act, which would bring China’s currency practices within the jurisdiction of the existing countervailing duty laws; and the English bill, H.R. 3283, which would make it possible to file countervailing duty cases against non-market economies, including China (See “Gaining Currency,” Forward, March/April 2006).

Massey says a gradual floating of the yuan would benefit everyone, but cautions against an abrupt unpegging, which he says would have little impact on the trade deficit and would not restore production to the United States, but shift production to the next cheapest country. “I feel for our industries,” he says. “It’s a hard-nosed world.”

COLLECTING DUTIES

While the trade remedies and their limitations are complicated enough, some disadvantages come from the government’s own procedures and implementation processes.

One hurdle is the United States’ cumbersome enforcement system, which assesses an estimated duty and requires a long investigation to verify the amount. In the meantime, the contested imports continue to enter the country. At the end of the process, when duties should be deposited in the Treasury, fraudulent practices often allow the importer to skip town without paying anything.

Other trading partners with anti-dumping or countervailing duty laws employ a prospective system, which sets and collects duties up front. Exporters who don’t pay take their products back home.

Legislation pending in Congress includes bills that attempt to close the loopholes in the U.S. retrospective collection system.

Yet another complicating factor is the way the WTO views different international tax systems. Indirect taxes, such as the Value Added Tax (VAT), are paid on goods and services by producers in 125 countries. The VAT can be rebated on exports and assessed on imports. In contrast, rebating direct taxes, such as an income tax, is considered a subsidy and not permitted.

DEFENSIVE TRADING PARTNERS AND WTO

Beyond China, trade attorneys representing domestic manufacturers say the world’s major trading countries look for ways to give their industries every trading advantage. They point to Luxembourg’s resistance to the proposed acquisition of Arcelor SA by Mittal Steel Co., of Rotterdam, to vigorous efforts by Canada and Australia to enforce duty drawback (a mechanism that rebates duties paid on imported components when the assembled product is exported) and to Canada’s imposition of a border-adjustable tax after NAFTA was negotiated.

European Union countries have more cases at the WTO in steel—seven complaints, all against the United States. Of the 91 complaints against the United States, 29 are in steel and mostly dispute tariffs or countervailing duties, some of which are no longer in effect, WTO records show. For example, complaints by eight groups, including Japan, Korea and the EU, were resolved when the Bush administration lifted steel tariffs at the end of 2003.

In contrast, the United States hasn’t been an active complainer in steel, having only one steel complaint on record, which was a result of the European Union imposing provisional safeguards on imports of certain products.

The Bush administration brought only 15 trade complaints to the WTO, compared to an average of 11 cases a year filed during the Clinton administration, WTO data shows.

The continuing problem of China’s undervalued currency, along with the growing trade deficit, could apply increased pressure on the Bush administration to modify its trade policy and could become an issue in the 2008 presidential election.

The growing trade deficit tests the political consensus for an open system, Morici warns. “It will evaporate if American industries are vulnerable to unfairly traded products.”

A GLOSSARY OF TRADE REMEDIES

Title VII of the Tariff Act of 1930 Title VII is the umbrella statute for anti-dumping or countervailing duty orders. Dumping addresses unfairly priced imports. A cheaper product is not necessarily a dumped product. Countervailing duty cases address imports that are subsidized, either directly or indirectly, by foreign governments. Subsidies might be in the form of labor, energy, buildings, preferential loans and grants, and even export subsidies.

Anti-dumping and countervailing duty petitions are investigated in a joint process between the International Trade Administration (ITA) in the Department of Commerce (DOC) and the International Trade Commission (ITC), an independent agency.

The agencies conduct their investigations simultaneously; each addresses different questions. The ITA investigates whether dumping has occurred or a subsidy exists. If the preliminary finding is negative, the case ends at both agencies. Both agencies must reach affirmative final decisions for an anti-dumping or countervailing duty order to be issued.

In an affirmative finding, the ITA sets the margin—the difference between the price or subsidy and the value. The remedy is enforced by U.S. Customs in the form of cash or a bond.

The ITC is an independent agency with a panel of six commissioners appointed by the president. To minimize political bias, no more than three commissioners may be members of the same political party. An ITC investigation determines whether there is injury to a U.S. industry. A negative finding ends the case for both agencies. Ultimately, the ITC determines the extent of the injury and sets tariffs or quotas.

When tariffs or countervailing duty orders are applied, decisions are reviewed by both agencies every five years to determine whether to continue or remove the orders.

Global Safeguards Safeguards, governed by the Trade Act of 1974, are special remedies to address market disruptions that cause serious injury to a domestic industry producing a similar or directly competitive product. General safeguards are filed under Section 201, which also is known as the Escape Clause. Petitions are first reviewed by the ITC only. In affirmative decisions, the ITC recommends a remedy in the form of a quota, a tariff or a trade adjustment, which is then passed to the office of the U.S. Trade Representative (USTR). The USTR consults several agencies and prepares a consensus opinion for the president, who makes the final determination.

The special China safeguard known as Section 421 addresses import surges. Quantity is the only standard in this remedy; whether the imports are priced fairly or unfairly is not part of the equation. Section 421 is different in that it is China-specific, something not usually permitted under World Trade Organization (WTO) rules. The 421 safeguard was negotiated as part of China’s permanent entry into the WTO.

Section 337, a special trade remedy, is reserved for investigations of intellectual property violations. These include patent, trademark and copyright infringements.

Trade groups, industries or individual companies can petition the USTR in the Department of Commerce under Section 301 of the Trade Act of 1974 as a fast-track method to impose trade sanctions. A case also can be self-instituted by the USTR, which may reject a petition, pursue bilateral talks, apply an existing trade remedy or file a complaint with the WTO.

The statute known as Special 301 specifically addresses issues of intellectual property rights. This is not to be confused with Super 301, a trade remedy process mandated by the Omnibus Trade and Competitiveness Act of 1988 for a two-year period. Currently expired, Super 301 is an order from the president to the USTR to launch a Section 301 investigation. It was last activated from 1999-2001. It can be renewed only by executive order.

World Trade Organization To maintain a stable global economy and prevent trade disputes from escalating into political or military conflicts, the WTO establishes the legal ground rules by which member countries agree to conduct trade. The United States and other members agree to take no unilateral trade measures against other member countries without using WTO dispute procedures. Only governments may bring cases to the WTO.

Under a lengthy panel review process, with an option for appeal, the losing country is supposed to correct its fault. If it refuses to comply with the finding, the country is expected to offer compensation or suffer a penalty.