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May 1, 2011

Fairness Fiasco

In China, evading U.S. trade laws is a booming business.

Vulcan Threaded Products of Pelham, Alabama, was founded in 1978, and by 2005, with Bill Upton as its president, Vulcan had become the nation's largest manufacturer and supplier of low-carbon threaded rod. The rod is used extensively in commercial construction, and demand was high.

Three years earlier, in 2002, Chinese competitors decided they wanted a piece of the action. By 2005 they were fully ramped up, flooding the market with rod selling at prices often below Vulcan's cost of production. That same year, says the U.S. International Trade Commission (ITC), threaded rod imports from China grew to more than 53 million pounds, and by 2008 they were up to 86 million, an increase of more than 60%. By 2008, the Chinese had successfully grabbed more than half the market.

The result was devastating, Upton told the ITC in 2009 at a hearing to consider anti-dumping and countervailing duty orders against the Chinese manufacturers. “From 2005 to 2007, overall capacity in the industry fell by more than 12% and production dropped by more than 18%,” he told the commission. “Shipments of threaded rod by domestic producers plunged more than 20% during the same period. As an industry, we had to lay off good and loyal employees. Our workforce declined by 25% during this period.”

At the same hearing, Gary Ostermueller, president and CEO of Watson Metal Products Corporation, in Kenilworth, New Jersey, told how Chinese imports eroded his threaded rod business to the point that Watson had to close a plant in Virginia, eliminating 50 jobs.

Both executives said they hoped that the ITC case would have some positive impact. Simply by filing their case, they said, a bit of their business had returned. And in fact, the U.S. companies prevailed. The ITC ruled that Chinese threaded rod imports had hurt the industry and the U.S. Department of Commerce imposed duties from 55% to 200%.

A great victory? Perhaps one of the Pyrrhic kind. As this case and others of its kind demonstrate, U.S. trade enforcement is just so much Swiss cheese. It takes a long time and plenty of money to prove violations of trade laws, and winning guarantees nothing. That's because illegal importers are far more agile then U.S. enforcers, who in these days of intense concern about anti-terrorist security have few resources to make anti-dumping rulings stick.

As a consequence, manufacturers who rely on the U.S. trade enforcement apparatus might just as well patrol the borders with cap guns. Thanks for telling us about the problem, buddy, and really, good luck with it. In the case of threaded rod, the Chinese simply shifted tactics. To avoid the duties, they shipped the rod to Malaysia, and to the United States from there. There were no anti-dumping duties on threaded rod from Malaysia. Before the anti-dumping order, not a single threaded rod had been imported from Malaysia. After the order, these imports surged and continue to do so.

“We had a dumping order against China,” says Vulcan's attorney Frederick Waite. “But there was plenty of evidence that there were transshipments from Malaysia and other places. We told customs about this, in detail, and then heard nothing. Well that's not true, we heard they put two Mexicans in lockup in a case in San Diego. But basically, they say they can't tell us what they are doing. And this stuff continues to come into the country.”

“China is not the low-cost producer,” Waite says. “It is just the low-priced producer. And this clear and obvious cheating is supported entirely by the Chinese government.”

The Chinese now routinely ship goods subject to anti-dumping or countervailing duties (AD/CVD) from Malaysia, among other countries, to escape paying those duties. This, of course, is money due the U.S. government and its taxpayers. It is unlikely to ever be collected.

Leggett & Platt Inc., in Carthage, Missouri, has also been trying to play by the rules and has gotten nowhere. The company is North America's largest maker of home furnishing components, including inner coil springs for beds. Leggett & Platt's attorney, Wendy Watson, also chairs the Coalition to Enforce Anti-Dumping and Countervailing Duty Orders, a growing industry group that tries to help customs enforce the law.

“We filed a dumping case at the end of 2007 and got our order in February of 2009, levying duty rates of between 164% and 234%,” she says. “But we found, even before that order was imposed, that we started seeing inner springs coming to the U.S. from Hong Kong.

“We said, 'Wait a minute, Hong Kong is more expensive,' but these were Chinese prices on inner springs,” she says. “So we hired an investigator to go to the locations in Hong Kong. We found they were not manufacturing at those places. We gave all that to customs and have had no luck getting our order enforced. It seems like a waste of time getting our remedy and not getting the benefit of the remedy.” The case has cost Leggett & Platt more than $1 million, not including the private investigator's overseas expenses.

Watson says the coalition has found this obvious evasion of U.S. law to be common among far too many manufactured products, from nails and hangers to threaded rod and pipe. “The manufacturers end up shipping the goods to a third country and declaring it as a product of a third country,” she says. “Sometimes they ship them to the U.S. with false documentation, or to a third country and do a minor alteration of the goods, or they ship it and mis-describe the goods, or under-declare the value. There are a lot of strategies for evasion, but transshipment is the most common now for all industries.”

Watson's coalition also investigated Chinese trickery in wire hanger imports, which were allegedly made in Taiwan. In June 2008, only 154,000 steel wire hangers were imported from Taiwan. But just after the U.S. industry won an anti-dumping order against China for that same product, the number of hangers shipped here from Taiwan suddenly exploded to nearly 145 million. The coalition estimates that the Chinese successfully evaded about $12 million in duties this way, and cost the U.S. industry 220 jobs.

“We visited every company or tried to visit every company claiming to make these hangers in Taiwan,” says Waite, who represented the hanger manufacturers. “And we established that no steel wire hangers were manufactured in Taiwan. China was shipping hangers to Taiwan and creating phony invoices and sending them here. We have the e-mails offering to do that.”

There have been a couple of arrests made in the wire hanger case. They were the result of evidence developed by the industry and handed over to customs. It is little comfort. “Even when we give that information to customs, the goods continue to come in,” says Watson. “We are doing all this work, hiring investigators, watching shipments, and when we spoon feed the information, very little happens.”

Taiwan was also the listed manufacturer of a sudden influx of steel nails following a dumping order against China in 2007. Waite and Watson say no nails were made in Taiwan. Their investigators found that a company in China created two different boxes for the nails they shipped to Taiwan. One was labeled “Made in China,” the other “Made in Taiwan.” Duties evaded: $32 million, says the coalition.

All of this, Waite says, “customs at highest levels acknowledges. I have never seen anything like this and I've been at it 40 years. In the past, there might have been one or two foreign producers that might skate close to the edge, but today, in dealing with China, it is a matter of their business practices.”

Estimating its cost to the U.S. government is difficult, because the duties collected depend on how much of the material would have actually entered the United States. But as far back as 2006, the General Accountability Office estimated that custom's inability to collect this kind of money had cost the government some $480 million since 2003. Watson's coalition estimates that the Chinese are evading at least $90 million a year in AD/CVD duties on just four products—rod hangers, innersprings and nails. There were AD/CVD final investigations pending against nearly 40 different products at the ITC by the end of last year.

But the money lost from evaded duties is really the least of it. The jobs, profits and manufacturing base destroyed, and the resulting massive trade deficit with China are all far more significant. Just as important may be the loss of innovation and creative thinking in industries as manufacturing disappears from the United States. The Alliance for American Manufacturing (AAM) examined this in a 2007 report titled “Enforcing the Rules.” It noted that Japanese and South Korean government policies to capture a significant share of semiconductor manufacturing in the 1980s had an often-overlooked impact. “The losses in human and financial capital are often irreplaceable, or at least would take years to rebuild,” the report said. “Additionally, the benefits of continuing semiconductor production to serve as an incubator of the next generation of technology are considerable. Without a manufacturing facility in place, it can be very difficult to spring into the new generation of semiconductor technology and the input technologies will be less likely to be based in the United States if the primary consumers are overseas.”

Chinese Trickery

Other countries evade customs and trade laws, of course. Between 2002 and 2007, the Chinese were responsible for only about 25% of the anti-dumping cases brought before the ITC. But that percentage jumped in the last half of that period, and a review of ITC Final Phase Investigations — those serious enough to get the full investigation, hearing and ruling process from the ITC and Department of Commerce working together — shows the Chinese were named in 87% of the cases between 2007 and 2010.

Little wonder, then, that China accounted for 75% of the manufacturing trade deficit by 2009 and an estimated 2.4 million in lost or displaced jobs, says Barry Solarz, senior vice president of trade and economic policy at the American Iron and Steel Institute (AISI). Solarz testified before the U.S. trade representative last year at a hearing to assess China's compliance with World Trade Organization's (WTO) fair-trade policies. The trade representative is the person and office that negotiates trade deals with other countries.

“Despite clear evidence that China has repeatedly violated its WTO obligations, China continues to practice market-distorting behavior, and its steel industry continues to grow,” Solarz says. “When we provided our first submission in 2004, China had produced 280 million tons of crude steel and held a 26% global market share. Today, China is on pace to produce well over 600 million tons of crude steel, with a 47% share of global production.” The U.S. monthly trade deficit with China was more than $26 billion in July 2010, the highest since 2008. By the beginning of this year it had inched down to $23 billion, says the U.S. Department of Commerce.

But the impact extends beyond specific companies, rippling all across the industries affected. Looking at steel specifically, the AAM noted in its report: “The domestic coal used to produce steel does not get absorbed by other industries immediately, and may have to be sold at significantly lower prices in the future. Supplier industries in turn reduce spending in response to lower steel demand. Moreover, steel producers faced with lower sales and prices do not immediately lay-off workers. The firms earn lower revenues and income before they adjust to competing with dumped products. And laid-off workers do not immediately find jobs in which they can add value, nor do the new jobs pay as much as the old ones lost due to the market-distorting behavior.”

“China has an export-oriented government policy,” says Solarz at AISI. “They want to export at all costs, which includes evasion and fraud with the tacit support of the government. Every year, we submit a pretty detailed document on China's non-compliance to customs and the ITC.” Solarz says the AISI runs training seminars for customs agents, typically four per year, to teach them how to detect this fraud and evasion.

“The Customs and Border Protection people are well aware of this problem,” says Solarz. “One of the great difficulties they have is the companies that engage in this. If they get caught, they just change the name of the company and keep doing it. So it becomes extremely difficult to get at the perpetrator.”

Solarz also says that U.S. customs officials lack adequate resources. “Customs folks do a great job with what they have, and they are relying increasingly on information and tips from private sector,” he says.

What does U.S. Customs and Border Protection (CBP) have to say about this? Not very much. A spokesperson said she was “really sorry,” but no one would be available to talk about the issue.

Well, revise that. The agency offered this statement: “CBP's ability to fulfill its statutory responsibility has been impacted by the United States' retrospective AD/CVD system which requires CBP to issue bills one to two or more years after an entry has occurred to importers who are unwilling, unable or simply have no intention of paying any increase in duties; and by companies who willfully circumvent the provisions of the AD/CVD law through illegal transshipment, undervaluation or misclassification of merchandise in order to avoid paying AD/CVD. The AD/CVD program was elevated to a Priority Trade Issue (PTI) status in fiscal year 2003 to ensure that a concerted, systematic approach was implemented to facilitate legitimate trade, detect and deter circumvention of the AD/CVD law and to timely liquidate transactions with correct determinations regarding final duties owed.” PTI status, according to the agency, is right up there with the fight against terrorism. Feel better?

In any case, Scott Paul, at AAM, says what we now are facing from China is a “boutique industry for evasion of duties.”

Boutique perhaps, but it is a large and sophisticated one. And the Chinese make no attempt to hide it. They have websites, including one run by the government, that feature companies offering transshipment services. The companies advertise and discuss their evasion strategies quite openly. In August 2010, staff from Senator Ron Wyden's (D-Oregon) office spent two weeks discovering just how blatant the Chinese are. Wyden chairs the Subcommittee on International Trade and members of his staff, using e-mail, posed as a fictitious American company interested in importing Chinese products without paying U.S. duties. The Wyden staffers quickly had e-mails from 10 different Chinese companies interested in committing fraud. Manufacturers of products subject to AD/CVD orders ranging from steel nails to diamond saw blades expressed interest in avoiding these orders. Some manufacturers volunteered methods for evading U.S. duties, including changing the country-of-origin documents associated with the merchandise, rerouting goods through third countries, or in at least one case, undervaluing their product to lower the cost of the duties owed.

“We can arrange the container shiping [sic] from Xingang to Malaysia, Bangladesh or Singapore,” wrote one. “And the shiping agent can help us to issue the original certification, it will increase the cost but I think I must be lower than duties.” And another explained “If you want to avoid paying the duties, there is the way is [sic] send goods to Malaysia and change a box, then send to U.S.”

As Wyden pointed out in a press release, “The duties that are supposed to be paid on the merchandise involved in the staff inquiries are imposed to protect more than 120 domestic companies and 12,000 U.S. workers from unfairly traded imports.

“My staff's unscientific experiment makes a very serious point: Chinese companies are not only committing customs fraud and costing the U.S. Treasury in revenue, they aren't afraid of getting caught,” says Wyden. He has authored legislation with Senator Olympia Snowe (R-Maine) to force customs to step up enforcement of U.S. trade laws. It is unclear if that bill has any chance of passage. But certainly the coalition, AISI, AAM and others are behind it.

Too Little Too Late

There are lots of reasons, obvious and otherwise, that explain why this Chinese trade rule evasion has gotten so out of hand. “Well, success breeds success,” says Leggett & Platt's Watson. “We are not doing anything about it, so why not do it? It is pretty easy to set up a small import company and get a bond to operate, and then if you do get caught just go out of business and disappear.”

Then too, what the trade laws require for redress, almost guarantees a “too little too late” result. “It is a lot of time and attorney's fees,” Watson says. “And as an industry you have to be limping for the ITC to even say the industry has been materially injured. By the time you file a case, your company has already been seriously hurt.”

United Steelworkers' International President Leo Gerard is, as usual, a bit more blunt. The steelworkers have been among the most active organizations in filing AD/CVD cases.

“The system doesn't work,” Gerard says. “Under the current trade law, you've got to demonstrate substantial injury. To demonstrate substantial injury, you have to show job and market loss, income and profit losses.

“We had a paper case a few years ago with coated paper,” Gerard recalls. “We proved China was cheating. But when it came to the remedy, they said the companies hadn't lost enough money or had enough layoffs. Later, with 7,000 jobs lost and three or four companies in bankruptcy, we finally succeeded. The stupidity of the case is we had to lose several thousand jobs first. . It doesn't work on behalf of workers or companies that are getting screwed.”

Those who deal with it regularly also say that the very structure of trade law enforcement assures delay and inefficiency. “The U.S. trade representative negotiates, ITC and Commerce are the mechanisms for relief and Customs and Border Protection enforces the rulings,” says Scott Paul. “Is that the most effective way to organize this? There are literally 12 agencies that deal with trade. And I would say that is not the right approach.”

More than that, it is pretty obvious that the focus of U.S. trade policy is far more on exports than imports. “So much of our trade bureaucracy is focused on opening markets and exports and there is very little attention given to import-sensitive industries,” says Paul. “We seldom hear the president or the commerce secretary talk about how we've got to defend American industry from unfair imports.”

U.S. policy is clear on encouraging the free flow of goods across borders. “It goes against that to stop things at the border,” say Paul. “So basically we are only doing spot checks. In other trade bureaucracies, if there is a question, they leave your shipment of automobiles on the docks until they get it sorted out. But that would take a complete reorientation of our focus.”

Conflicting Interests

Just as important, says Paul, “in a lot of industries the domestic manufacturing constituencies have disappeared. So we're left with the multinationals. And they do not want to get in the game. It is just not in their interests.”

“We filed a successful tire case because a lot of our members make tires,” says Gerard. “But we couldn't get a tire company to testify. They were afraid of Chinese retaliation. In the wind turbine case, same thing, we couldn't get a company to testify. They were also afraid of Chinese retaliation.”

Paul and Gerard are hardly alone in this view.

“The global corporations don't see their job anymore as having obligations to their workers and customers and communities,” says former U.S. trade negotiator Clyde Prestowitz. “Now they feel their only obligation is to their shareholders. So they don't feel responsible for what happens to U.S. competitiveness. Their interests are not at all the same as the country's interests.

“Regardless of the administration, the primary U.S. international priority is to play the great game of geopolitics,” says Prestowitz. “That is, worrying about what they perceive as the big stuff — moving troops, Iraq, Iran, North Korea, the big things statesmen like to do. And that is simply a much higher priority than our economic circumstance. So we make economic concessions. We think we need China to help us deal with North Korea and Iran so we do not want to upset them.”

“The administration is being advised by people who believe in globalization and outsourcing,” says Peter Morici, professor at the Robert H. Smith School of Business at the University of Maryland. “If American manufacturers think they have a friend in the White House, they need to look again.”

They also need to look at Congress for evidence that anything might change. Will there be more money for trade enforcement, or a shift in focus of the laws to protect companies before they are put out of business by foreign predatory pricing? “Congress, with a few exceptions, just does not understand this problem,” says Waite, Vulcan and Leggett & Platt's attorney. “The naiveté is breathtaking sometimes. Since the last election we are even getting mixed signals from Republicans. They are asking, 'Is this really a problem?'”

Gerard calls it “stunning intellectual rigidity,” where facts don't matter. “In America for 25 years in row, except 2008, we've had record breaking trade deficits,” he says. “The accumulated trade deficit since NAFTA is $7 trillion, which means we have transferred $7 trillion of wealth to these countries. Fifty-five thousand factories have closed. During the same period in time, we went from being the world's largest creditor nation to its largest debtor nation. But we still get these fools in both parties who hang on to this false, irresponsible ideology that trade deals create jobs.”

Just as disturbing, the AISI's Solarz sees the Chinese shifting their economic focus in a way that could threaten even more of the U.S. manufacturing base. Most of the metals trade cases and AD/CVD rulings to this point have involved commodity products like wire hangers, bedsprings and nails.

“The Chinese are talking about new engines of growth because of what they see as a declining steel consumption growth rate,” says Solarz at the AISI. “They are talking about more focus on strategic emerging industries like solar, wind and biotech. And the Chinese steel industry is saying that it wants an increasing emphasis on product quality. It says it is going to be producing more lightweight high-strength steel.”

These are exactly the products that are now so important to U.S. manufacturing. And as larger volumes of Chinese subsidized high-quality, high-tech steel begins hitting our shores, look for a flood of new trade cases, despite the system's expense, delay and other flaws.

“How can we afford not to?” asks Gerard. “If we don't stand up to the bully they will destroy us. Besides, these cases do have an impact. I would make the case that without them, steel would have been wiped out. If [you] don't stand up, they'll kill you and put you out of business.”