If Only the USTR Were This Enthusiastic about Liberalizing Trade

There was really never any doubt that the United States would prevail in the dispute brought by China to the World Trade Organization over President Obama’s decision last year to levy duties on tire imports from China. The WTO verdict, revealed yesterday, simply affirms that the administration acted in accordance with U.S. WTO commitments—and leaves to others, such as myself, to conclude that the duties were a highly political act perpetrated with utter contempt for the significant economic and diplomatic costs of those actions.

Thus, “prevailing” in the WTO case should not be considered a source of universal joy for all Americans or even most Americans, as one might infer from the reaction of U.S. Trade Representative Ron Kirk, who jubilantly proclaimed, “This is a major victory for the United States and particularly for American workers and businesses.” Really, Ambassador Kirk? Tell that to the American workers and businesses involved in importing, trucking, wholesaling, retailing, and installing those Chinese-made tires. Tell it to the American workers and businesses who also happen to be U.S. tire consumers and are now lighter in their wallets or dangerously riding on worn treads as a result of the duties. Feel free to ask the workers and businesses in the U.S. poultry and auto parts industries—against whom the Chinese imposed antidumping duties immediately after the tire tariffs took effect—how they feel about having “prevailed.”

In fairness to Ambassador Kirk, in addition to working to open markets abroad, the USTR’s office is tasked with prosecuting challenges of our trade partners’ allegedly non-compliant policies and actions, as well as defending challenges to allegedly non-compliant U.S. policies and actions at the WTO. In that regard, warding off a challenge from China of the U.S. Section 421 law constitutes, arguably, a victory for the USTR’s office. But to be clear, Section 421 is a blatantly protectionist law that serves, at best, a sliver of the U.S. population slightly broader than the U.S. Congress.

As part of its WTO accession agreement in 2001, China agreed to allow the United States and other WTO members to treat it differently—indeed, discriminatorily—on several matters for a number of years after it joined the WTO. The China-Specific Safeguard mechanism (known legally as Section 421 of the Trade Act of 1974 and under which the tire tariffs were implemented in September 2009) authorizes the United States to impose duties if there is a surge in imports from China that is causing or threatening market disruption in the United States. Market disruption exists “whenever imports of an article like of directly competitive with an article produced by a domestic industry are increasing rapidly, either absolutely or relatively, so as to be a significant cause of material injury, or threat of material injury, to the domestic industry.” In other words, if U.S. industry is suffering the effects of normal competition—that is, if it must compete against more capable or more efficient foreign competitors—then the firms or workers in the U.S. industry can petition the U.S. government to raise those competitors’ prices through the imposition of trade restraints.

It is also important to appreciate what Section 421 is not. Contrary to the rhetoric of too many politicians, trade lawyers, and union bosses, 421 is not an “unfair trade” statute. Unlike the antidumping and countervailing duty laws, a Section 421 case does not include allegations of prices at less than fair value or prices that benefit from countervailable government subsidies. The evidentiary threshold is much lower. All that is alleged-and all that has to be established-in a 421 petition is that imports from China are increasing in such a manner as to be a cause of market disruption (or threat thereof) to the domestic industry.

Section 421 is not intended to remedy any wrongdoing on the part of Chinese exporters, but is intended rather to give U.S. producers the opportunity to holler “time out!” as they catch their breath, assess prospects, and attempt to adjust to a new level of competition. Of course there are huge costs to this kind of intervention in the marketplace, thus the president is granted discretion, under the law, to deny relief if he determines that the costs to the broader economy clearly exceed any benefits to the petitioning industry. While such discretion provides some comfort that the law’s relaxed evidentiary standards won’t be routinely abused by domestic interests seeking to stifle competition, there are no guarantees that the president’s discretion will be based exclusively on considerations of the national economic interest. If there were, it would be nearly impossible to conjure a scenario in which the concentrated, temporary benefits to a specific industry receiving protection were not overwhelmed by the costs of that protection on the broader economy. Political considerations always influence decisions that lead to protection.

Yesterday’s WTO decision was arguably a victory for the rule of law in international trade—but also a reminder that politicians write the rules of trade, including some that are so antithetical to its purpose. I would be willing to cut Ambassador Kirk more slack for his jubilation if he were to find religion on the WTO and abide the rulings–such as on zeroing, gambling, and cotton subsidies–that his (and his predecessors’) office has lost.