Leveling the Playing Field?

Sen. Sherrod Brown (D-OH) introduced a bill on Wednesday called the “Leveling the Playing Field Act.” According to the accompanying press release, the proposal would “restore strength to antidumping and countervailing duty laws” via a “crack down on unfair foreign competition.” The bill includes several provisions relating to practices used by the Department of Commerce to determine dumping and subsidy margins (i.e., the extent to which imported products are unfairly underpriced). It also contains modest changes to procedures used by the U.S. International Trade Commission (ITC) in deciding whether domestic industries have been “materially injured” by imports.

Since I have had only indirect exposure to the role of Commerce in antidumping and countervailing duty (AD/CVD) investigations, I will leave analysis of those proposed changes to others. However, my 10 years of experience as chairman and commissioner at the ITC provide a reasonable basis for commenting on the bill’s suggested modifications to the injury determination.

The existing AD/CVD statutes instruct the ITC to “evaluate all relevant economic factors” that relate to the effects of imports on the industry under consideration. A number of those factors are specifically mentioned, including the industry’s profits. Not being satisfied with just having the commission examine profits in general, the Brown bill adds, “gross profits, operating profits, net profits, [and] ability to service debt.” As a practical matter, the commission already looks in detail at an industry’s profitability and its ability to repay debts, so this additional wording would contribute nothing of substance.

The Brown bill would add a provision to the effect that an improvement in the industry’s performance over the period of investigation (normally about three years) should not preclude a finding that the industry has been materially injured by imports. Yes, there can be circumstances in which an industry’s results are strengthening, yet it is still being held back by import competition. However, the commission’s existing practice already considers this possibility, so the new language would not really change anything.

The bill also adds a section addressing the possible effects of a recession on the ITC’s injury analysis. It states that the commission may extend its period of investigation to begin at least a year before the recession started, which would allow before and after comparisons of how the domestic industry has performed. The ITC already has authority to adjust the period of investigation under special circumstances, but it relatively seldom does so.

Adding another year or two onto the period of investigation makes it more difficult for both domestic and foreign firms to provide the data required for the commission’s analysis. It also is likely to provide less helpful information than might be expected. In a recession, demand for goods tends to contract. It is quite normal for a recession to cause reductions in the quantity of imports as well as in the quantity produced domestically. Thus, extending the period of investigation probably won’t provide much information other than that both domestic industries and foreign producers tend to be hurt by recessions. The key reason that lengthening the period of investigation is not likely to influence the injury determination is that the most recent trends in the marketplace are almost always more relevant than whatever was happening four or five years earlier.

Although the changes proposed by Brown to the ITC’s injury determination are relatively modest, I would recommend against adopting them for a simple reason: litigation risk. The skilled and creative attorneys who represent domestic industries in AD/CVD cases would be only too happy to have another basis for appeal of commission decisions with which they disagree. A claim that the ITC had not adequately considered the newly crafted provisions would provide a potential justification for an appeal. Why invite such mischief?

If members of Congress actually are interested in modifying the AD/CVD statutes to make them better serve the interests of U.S. manufacturers, they should propose legislation that would balance the interests of domestic producers relative to the interests of U.S. consumers. Currently the ITC injury determination is limited to the effect of imports “on domestic producers of domestic like products.” In essence, the commission must disregard any costs that would be imposed on users of the product in the event that imports are restricted. Those costs often can be very large—well in excess of the potential benefits that might flow to domestic producers. (For more on this issue, see this thoughtful analysis by my colleague, Daniel Ikenson.)

As an example, the United States now imposes antidumping or countervailing duties (or both) on imports of hot-rolled steel from China, India, Indonesia, Russia, Taiwan, Thailand, and Ukraine. Hot-rolled is a basic form of steel coil that is further manufactured into products such as cold-rolled steel, corrosion-resistant steel, tin-coated steel, and welded steel pipe. In turn, those steel products are used to make automobiles, farm machinery, appliances, ventilation ducts, and a wide range of other products too numerous to mention. Manufacturing those value-added products employs far more people and contributes far more to the U.S. economy than is the case for hot-rolled steel.

The AD/CVD duties very likely cause hot-rolled steel to be higher priced in the United States than in many other countries. Thus, protection for hot-rolled producers raises costs for all other U.S. firms that utilize flat-rolled steel products. The spread between the cost of steel in the United States relative to other countries doesn’t have to be very wide before it can become more economical to import steel-containing manufactured products from other countries rather than producing them here.

If the Leveling the Playing Field Act achieves its intended purpose of providing an even greater level of protection to firms producing basic products, it certainly will have the unintended consequence of weakening the U.S. economy and reducing employment overall. Artificially increasing the costs borne by the wide swath of U.S. manufacturers that depend on steel as an input will make them more vulnerable to competition from overseas. Supporters of the bill instead should consider the possibility of adjusting the AD/CVD statutes to ensure that interests of downstream users are taken into account. The ITC’s injury determination should be changed so that the commission is required to assess not only the effects of imports on producers, but also the costs that import restrictions impose on users. This would be an important first step toward ensuring that AD/CVD measures don’t inadvertently damage the broad U.S. economy.