Tag: antidumping law

Antidumping Reform Crucial to U.S. Competitiveness

The Cato Institute today published its 13th policy paper on the topic of antidumping. “Economic Self-Flagellation: How U.S. Antidumping Policy Subverts the National Export Initiative” describes with compelling anecdotes and data how the outdated assumptions of a 90-year-old law—one purported to “level the playing field” and protect U.S. companies from “unfair” foreign competition—conspire with its overzealous application to erode the competitiveness of U.S. firms.

During the decade from January 2000 through December 2009, the U.S. government imposed 164 antidumping measures on a variety of products from dozens of countries. A total of 130 of those 164 measures restricted (and in most cases, still restrict) imports of intermediate goods and raw materials used by downstream U.S. producers in the production of their final products. Those restrictions raise the costs of production for the downstream firms, weakening their capacity to compete with foreign producers in the United States and abroad.

In all of those cases, trade-restricting antidumping measures were imposed without any of the downstream companies first having been afforded opportunities to demonstrate the likely adverse impact on their own business operations. This is by design. The antidumping statute forbids the administering authorities from considering the impact of prospective duties on consuming industries—or on the economy more broadly—when weighing whether or not to impose duties.

That asymmetry has always been insane, but given the emergence and proliferation of transnational production and supply chains and cross-border investment (i.e., globalization)—evidenced by the fact that 55% of all U.S. import value consists of raw materials, intermediate goods, and capital equipment (the purchases of U.S. producers)—it is now nothing short of self-flagellation.

Most of those import-consuming, downstream producers—those domestic victims of the U.S. antidumping law—are also struggling U.S. exporters. In fact those downstream companies are much more likely to export and create new jobs than are the firms that turn to the antidumping law to restrict trade. Antidumping duties on magnesium, polyvinyl chloride, and hot-rolled steel, for example, may please upstream, petitioning domestic producers, who can subsequently raise their prices and reap greater profits. But those same “protective” duties are extremely costly to U.S. producers of auto parts, paint, and appliances, who require those inputs for their own manufacturing processes.

President Obama acknowledges as much. On August 11, 2010, at a White House signing ceremony, the president offered the following rationale for a bill that he was about to sign into law:

The Manufacturing Enhancement Act of 2010 will create jobs, help American companies compete, and strengthen manufacturing as a key driver of our economic recovery. And here’s how it works. To make their products, manufacturers—some of whom are represented here today—often have to import certain materials from other countries and pay tariffs on those materials. This legislation will reduce or eliminate some of those tariffs, which will significantly lower costs for American companies across the manufacturing landscape—from cars to chemicals; medical devices to sporting goods. And that will boost output, support good jobs here at home, and lower prices for American consumers.

Higher input prices stemming from antidumping measures are only the first assault on these downstream firms. The next wave usually takes the form of stiffer competition from firms in countries where there are no antidumping duties on the critical input. As a result, the foreign competition often operates at a cost advantage in the United States and in other markets that enables it to sell profitably at lower prices than U.S. firms can charge.

Accordingly, the profits of downstream firms are squeezed by both higher costs, due to import restrictions, and lower revenues, due to lost sales. As a consequence, countless U.S. producers in downstream industries—including firms that were once thriving in the United States and foreign markets—have suffered severe losses, contraction, and bankruptcy.

Again, the administration is well aware of this connection. Indeed, the U.S. Trade Representative launched a formal complaint against China in the WTO for that country’s restrictions on exports of certain crucial raw materials, providing the following rationale:

China maintains a number of measures that restrain exports of raw material inputs for which it is the top, or near top, world producer. These measures skew the playing field against the United States and other countries by creating substantial competitive benefits for downstream Chinese producers that use the inputs in the production and export of numerous processed steel, aluminum and chemical products and a wide range of further processed products.

Moreover, the USTR demonstrates an appreciation for the fact that restrictions on upstream products generate downstream costs that compound at successive stages in the production supply chain:

These raw material inputs are used to make many processed products in a number of primary manufacturing industries, including steel, aluminum and various chemical industries. These products, in turn become essential components in even more numerous downstream products.

If you need more evidence that the antidumping status quo is weighted heavily against import-consuming U.S. industries, consider this gem: three of the nine mineral raw materials that are the subject of the U.S. case against China in the WTO (magnesium, silicon metal, and coke) are simultaneously subject to U.S antidumping restrictions. That’s right! With our own import restrictions firmly in place, the United States is suing China to remove its export restrictions on the same products. That sounds like an excellent use of resources.

As a final indignity, many U.S. exporters suffer the wrath of foreign antidumping restrictions and other forms of protectionism that are often the result of persistent U.S. opposition to antidumping reform, as well as outright retribution for specific U.S. antidumping actions. Among recent victims are U.S. exporters to China of automobiles, fiber optic cable, chicken, grain, and paper. In countless ways, the antidumping status quo subverts U.S. competitiveness and is an albatross around the neck of the U.S. economy.

To bestow real and enduring benefits upon the U.S. economy, the antidumping law should be reformed to—at a minimum—give legal standing to manufacturers and workers in consuming industries; require the administering authorities to conduct an analysis of the economic impact of prospective antidumping duties and to deny imposition if the costs exceed a certain threshold; and require that any antidumping duties imposed not be excessive.

Death by Antidumping

A Wall Street Journal editorial today shines a long overdue spotlight on an antidumping case that is emblematic of the dissonance within U.S. trade policy. I, too, wrote about this case last year as an example of how the U.S. antidumping regime undermines U.S. manufacturing, penalizes U.S. exporters, and diminishes chances for achieving the administration’s goal of doubling exports in five years.

In 2005, U.S. Magnesium Corporation, the sole producer of magnesium in the United States, succeeded in convincing the U.S. International Trade Commission and U.S. Commerce Department to impose duties on imports of magnesium from competitors in Russia and China. Before toasting this outcome with some clichéd or specious utterance about how the antidumping law ensures fair trade and a level playing field for U.S. producers, it is important to understand that downstream, consuming industries (those U.S. producers that require for their own production the raw materials and intermediate goods subject to the antidumping measures) have no legal standing in these cases. Statute forbids the U.S. International Trade Commission from considering their arguments or projections about the likely consequences of prospective duties. Statute requires that the ITC consider only the conditions of the petitioning industry.  In other words, the analysis is slanted.  The antidumping law codifies these evidentiary asymmetries, which makes it easier for U.S. suppliers to cut-off their U.S. customers’ access to alternative sources of supply. In our increasingly globalized economy, this is a recipe for propping up old industries and discouraging and crippling new ones. It is a recipe for economic decline.

Here’s what I wrote about the impact of the magnesium duties on one formerly promising U.S. growth industry in May 2010:

Consider the case of Spartan Light Metal Products, a small Midwestern producer of aluminum and magnesium engine parts (and other mechanical parts), which presented its story to Obama administration officials, who were dispatched across the country earlier this year to get input from manufacturers about the problems they confronted in export markets.

Beginning in the early-1990s, Spartan shifted its emphasis from aluminum to magnesium die-cast production because magnesium is much lighter and more durable than aluminum, and Spartan’s biggest customers, including Ford, GM, Honda, Mazda, and Toyota were looking to reduce the weight of their vehicles to improve fuel efficiency. Among other products, Spartan produced magnesium intake manifolds for Honda V-6 engines; transmission end and pump covers for GM engines; and oil pans for all of Toyota’s V-8 truck and SUV engines.

Spartan was also exporting various magnesium-cast parts (engine valve covers, cam covers, wheel armatures, console brackets, etc.) to Canada, Mexico, Germany, Spain, France, and Japan. Global demand for magnesium components was on the rise.

But then all of a sudden, in February 2004, an antidumping petition against imports of magnesium from China and Russia was filed by the U.S. industry, which comprised just one producer, U.S. Magnesium Corp. of Utah with about 370 employees. Prices of magnesium alloy rose from slightly more than $1 per pound in February 2004 to about $1.50 per pound one year later, when the U.S. International Trade Commission issued its final determination in the antidumping investigation. By mid-2008, with a dramatic reduction of Chinese and Russian magnesium in the U.S. market, the U.S. price rose to $3.25 per pound (before dropping in 2009 on account of the economic recession).

By January 2010, the U.S. price was $2.30 per pound, while the average price for Spartan’s NAFTA competitors was $1.54. Meanwhile, European magnesium die-casters were paying $1.49 per pound and Chinese competitors were paying $1.36 per pound. According to Spartan’s presentation to Obama administration officials, magnesium accounts for about 40-60% of the total product cost in its industry. Thus, the price differential caused by the antidumping order bestowed a cost advantage of 19 percent on Chinese competitors, 17 percent on European competitors, and 16 percent on NAFTA competitors.

As sure as water runs downhill, several of Spartan’s U.S. competitors went out of business due to their inability to secure magnesium at competitive prices. According to the North American Die Casting Association, the downstream industry lost more than 1,675 manufacturing jobs–more than five-times the number of jobs that even exist in the entire magnesium producing industry!

Spartan’s outlook is bleak, unless it can access magnesium at world market prices. Its customers have turned to imported magnesium die cast parts or have outsourced their own production to locations where they have access to competitively-priced magnesium parts, or they’ve switched to heavier cast materials, sacrificing ergonomics and fuel efficiency in the face of rapidly-approaching, federally-mandated 35.5 mile per gallon fuel efficiency standards.

Thus, antidumping duties on magnesium have almost entirely snuffed out a U.S. growth industry that was succeeding in export markets by selling environmentally-friendlier auto parts—two attributes that really should make this a showcase industry, given the administration’s stated goals.

But on trade policy formulation, it seems that the right hand doesn’t always know what the left hand is doing. Last year, while magnesium imports from China were subject to U.S. antidumping duties, the Obama administration launched a WTO case against China for its restraints on exports of raw materials, including magnesium. That’s right. The U.S. government officially opposes China’s tax on exported magnesium because it imposes extra costs of U.S. consuming industries, but it insists on enforcing its own antidumping duties on magnesium imported from China despite those costs.

As if that is not enough dissonance, consider that the same U.S. Commerce Department that authorized the antidumping duties on magnesium is simultaneously charged with overseeing the National Export Initiative (and its goal of doubling U.S. exports to $3.14 trillion by 2015). The Commerce secretary, Gary Locke, was even featured in Washington Post profile piece Sunday preaching about the national imperative to boost exports. Is Secretary Locke even aware of the incongruities under his roof?

The WSJ editorial concludes with a call to revoke the antidumping duties on magnesium, which is under consideration in a “Sunset Review.” (Regrettably, as presented in this analysis from 2005, revocation pursuant to sunset review is more the excepton than the rule.). I agree with the WSJ’s conclusion, but would implore policymakers to go further and implement sweeping reform of the antidumping law. It is extremely costly to U.S. industry and totally out-of-step with 21st century economic reality. As I wrote last year:

Spartan’s is not an isolated incident. Routinely, the U.S. antidumping law is more punitive toward U.S. manufacturers than it is to the presumed foreign targets. Routinely, U.S. producers of upstream products respond to their customers’ needs for better pricing, not by becoming more efficient or cooperative, but by working to cripple their access to foreign supplies. More and more frequently, that is how and why the antidumping law is used in the United States. Increasingly, it is a weapon used by American producers against their customers—other American producers, many of whom are exporters.

If President Obama really wants to see exports double, he must implore Congress to change the antidumping law to explicitly give standing to downstream industries so that their interests can be considered in trade remedies cases. He must implore Congress to include a public interest provision requiring the U.S. International Trade Commission to assess the costs of any duties on downstream industries and on the broader economy before imposing any such duties.

The imperative of U.S. export growth demands some degree of sanity be restored to our business-crippling trade remedies regime