Tag: antidumping

Trade Policy Lessons in WTO Challenge of China’s Rare Earth Restrictions

This morning the Obama administration lodged an official complaint with the World Trade Organization’s (WTO) Dispute Settlement Body over China’s ongoing restrictions of exports of “Rare Earth” minerals. Rare Earths are crucial ingredients used in the production of flat-screen televisions, smart phones, hybrid automobile batteries, and other high technology products.

The formal complaint was not entirely unexpected since the dispute has been on a low boil for nearly 18 months; the U.S. government recently prevailed in a WTO dispute over a similar issue concerning Chinese export restrictions on nine raw materials used in manufacturing; and, this is an election year in which President Obama has carte blanche to outbid the Republican presidential aspirants’ China-bashing rhetoric with administrative action. So, no surprises really.

Despite the added political incentive to look tough on China this year, the administration should be applauded for its efforts to compel China to oblige its WTO commitments. This is a legitimate complaint following proper channels. In fact, this is exactly the course of action I have long argued for. Negotiations, consultations, and formal WTO dispute resolution (which begin with a long consultation period in which the parties are encouraged to find solutions without formal adjudication) are precisely the methods of dispute settlement conducted by governments that respect the process, their counterparts, and the rule of law in international trade.

In a Cato paper published last week, I wrote:

There is little doubt that certain other Chinese policies would not pass muster at the WTO. China’s so-called indigenous innovation policies, forced technology transfer requirements, porous intellectual property enforcement regime, and rare earth mineral export restrictions are some of many legitimate concerns that might justify formal WTO challenges. (Emphasis added.)

Now, my perspective is not motivated by a fetish for WTO litigation, but a certainty that the alternatives would be bad. Unilateral, discretionary actions taken by governments to redress perceived violations or shortcomings of another government undermine the rule of law in trade and encourage retaliation. Both China and the United States are guilty of taking such unilateral, discretionary actions, and bilateral tensions have increased as a result (see here).

U.S. policymakers should appreciate that today’s formal complaint on rare earths is an example of the right way to address perceived trade barriers. They should also recognize in the arguments advanced by the Office of the U.S. Trade Representative the flawed economics in their support of last week’s countervailing duty legislation (the so-called GPX or NME/CVD bill).

Here’s the USTR’s rationale for the Rare Earths complaint:

China imposes several different types of unfair export restraints on the materials at issue in today’s consultations request, including export duties, export quotas, export pricing requirements as well as related export procedures and requirements. Because China is a top global producer for these key inputs, its harmful policies artificially increase prices for the inputs outside of China while lowering prices in China. This price dynamic creates significant advantages for China’s producers when competing against U.S. producers – both in China’s market and in other markets around the world. The improper export restraints also contribute to creating substantial pressure on U.S. and other non-Chinese downstream producers to move their operations, jobs, and technologies to China.

And here’s a quote from USTR Ron Kirk:

America’s workers and manufacturers are being hurt in both established and budding industrial sectors by these policies. China continues to make its export restraints more restrictive, resulting in massive distortions and harmful disruptions in supply chains for these materials throughout the global marketplace.

And here’s Ambassador Kirk in a statement responding (a few months ago) to the WTO Appellate Body ruling that China’s export restrictions on nine raw materials were not in conformity with that country’s WTO commitments:

Today’s decision ensures that core manufacturing industries in this country can get the materials they need to produce and compete on a level playing field.

And, finally, a statement from the USTR’s website on the raw material export restrictions cases:

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.

USTR’s argument against Chinese export restrictions in the raw materials and Rare Earths cases are just as applicable to U.S. import restrictions. Removing restrictions—whether the export variety imposed by foreign governments or the import variety imposed by our own—reduces input prices, lowers domestic production costs, enables more competitive final-goods pricing and, thus, greater profits for U.S.-based producers.

Yet the U.S. government imposes its own restrictions on imports of some of the very same raw materials. It maintains antidumping duties on magnesium, silicon metal, and coke (all raw materials subject to Chinese export restrictions).  In fact, over 80 percent of the nearly 350 U.S. antidumping and countervailing duty measures in place restrict imports of raw materials and industrial inputs—ingredients required by U.S. producers in their own production processes. But those companies—those producers and workers for whom Ambassador Kirk professes to be going to bat in the WTO case on rare earths (and the previous raw materials case)—don’t have a seat at the table when it comes to deciding whether to impose AD or CVD duties. (Full story here.)

Ambassador Kirk’s logic and the facts about who exactly is victimized by U.S. trade policies provide a compelling case for trade law reform, such as requiring the administering authorities to consider the economic impact of AD/CVD measures on producers in downstream industries—companies like magnesium-cast automobile parts producers, manufacturers of silicones used in solar panels, and even steel producers, who require coke for their blast furnaces.

Last week, when the CVD legislation passed both chambers overwhelmingly, Congress was implicitly thumbing their noses at these same producers and workers who the USTR rightly identifies as victims of Chinese trade restrictions. They are clearly victims of our own policies, derived in dark shadows by interests with asymmetric influence on the process. Maybe we should dwell on that hypocrisy for a while, and work to fix it by reconsidering the self-flagellation that is the U.S. trade remedies regime.

Time for Some Rapprochement in U.S.-China Economic Relations

Has the Chinese government indulged in protectionist, provocative or otherwise illiberal policies that have, on occasion, violated its commitment to the rules of international trade? Yes.

Do the Chinese maintain other policies that very likely would be found to violate China’s WTO obligations? Yes.

Is the U.S. government within its rights to bring formal complaints about benefit-impairing Chinese trade practices to the World Trade Organization for adjudication and resolution? Yes.

But before getting all righteous and patriotic and demanding that China be deemed an economic pariah worthy of exceptionally harsh treatment, keep in mind that the U.S. government has been found out of compliance with its WTO obligations more than any other WTO member, and it remains out of compliance on a few issues to this very day.

In some respects, the Chinese are emulating the tack taken by U.S. policymakers during the past three presidential administrations and ten congresses by presuming there is no policy or practice that violates WTO rules unless and until that policy or practice has been determined by the WTO Appellate Body to be out of conformity, and sometimes not until after retaliation has been authorized, and sometimes not even then.

China’s protectionist policies – policies that make its markets less accessible to U.S. exports and investment – should be identified and challenged. But U.S. policymakers should consider abandoning self-destructive, protectionist policies that hurt U.S. interests more than Chinese ones in favor of greater cooperation from China resolving problems facing U.S. companies in that market. But greater cooperation doesn’t come at the barrel of a gun.  It requires good will and an attitude of willing reciprocity from the U.S. side.

This new paper gives some background and offers the one important reform that could prove to be the elixir.

Congress Poised to Escalate the U.S.-China Trade War

U.S. policymakers hold the key to vastly improved economic relations with China.  They also have the key to the vehicle that will take the bilateral relationship over the cliff, which appears to be the route that has been chosen. Republican House Ways and Means Chairman Dave Camp will introduce legislation this afternoon that makes explicit the applicability of the U.S. Countervailing Duty (anti-subsidy) law to imports from countries considered to have “Non-Market Economies” (i.e., China and Vietnam). 

Maybe that’s not as obvious an example of escalation as Nixon’s bombing of Cambodia during the Vietnam War, but it is very likely to accelerate the deterioration of U.S.-China economic relations.  Costs will rise and life will become more difficult for U.S. companies trying to do business in China, as well as for U.S. producers and consumers who rely on imports from China.

Those pushing the legislation don’t want the public to understand the issues, which are highly technical and legalistic (and, quite frankly, too much trouble for our legislators to think through, particularly when there’s only political upside in China-bashing). But the consequences will be felt broadly – and there’s danger in that – so let me attempt to boil the matter down to a few salient points.

The U.S. government considers China a non-market economy for purposes of how it applies the antidumping law.  Certain outdated assumptions about prices, wages, and interest rates being unreliable and fictitious in non-market economies result in China being subject to a punitive antidumping calculation methodology – the NME methodology – by the U.S. Commerce Department.  Under the terms of the treaty by which China joined the World Trade Organization back in 2001, the United States must end the NME designation by no later than December, 2016, which means that China will then be subject to the still-onerous, but less-punitive, market-economy methodology.

The United States also has a Countervailing Duty law, which for 22 years up until 2007 had not been applied to imports from countries that, for purposes of the antidumping law, were deemed NMEs.  In not applying the CVD law to NMEs during that period, the Commerce Department was being consistent: if prices and other market signals are unreliable or fictitious in Country A for purposes of antidumping determinations, then they cannot be reliable of useable for purposes of measuring the benefits of subsidies in Country A in CVD cases. 

For political purposes, that logic suddenly ceased to apply in 2007, when Commerce changed its policy and began initiating CVD cases against NMEs.  Today, the U.S. government has 24 separate CVD orders in place on various imports from China (in addition to 5 cases pending determinations).  In December, the U.S. Court of Appeals for the Federal Circuit ruled that it is illegal for the United States to apply its countervailing duty law to NMEs because Congress’s intent had been subsumed in the policies of multiple administrations to not apply the law to NMEs, and reinforced by the fact that there had been substantial revisions to the trade laws during that 22-year period – a period during which Congress did not make CVD application to NMEs explicit. (Scott Lincicome is the authority on the background and legal interpretation of the “GPX” case.)

Excluding legal appeals (which take us to the same decision tree if the CAFC decision is upheld), the Obama administration has three choices.  First, it can abide the CAFC decision, revoke the 24 existing CVD measures, drop the pending cases, and initiate no more CVD investigations against NME countries. Second, it can do what it is doing: work with Congress to pass a new law making CVD explicitly applicable to NMEs, which will be perceived by Beijing as taking extraordinary measures to punish China, which will invite blatant and subtle forms of retaliation from the Chinese government against U.S. interests and produce numerous lawsuits over the myriad legal issues stemming from the acts of preserving 24 CVD measures imposed under a law that has been found to be illegal.  Third, it can graduate China to “market economy” status now, instead of waiting until 2016.  Option three requires no legislative action whatsoever, preserves domestic industry access to both the AD and CVD laws, and wins enormous amounts of goodwill from Beijing.

From the perspective of a free trader, the first option is best.  But its likelihood can be measured in terms of hundredths of a percentage point.  The second option, which leaves use of the CVD law as well as applicability of the NME methodology of the AD law to China in tact, is the worst.  The third option preserves access to the CVD law, as well as the antidumping law, for U.S. protection-seekers, but requires the Commerce Department to use the market economy methodology in cases involving China.

Option three is the great compromise.  It makes antidumping actions against China slightly less onerous for U.S. consumers and Chinese producers, but domestic industries still have access to both laws.  That’s not great for consumers, consuming-industries, or free-traders on its face, but it would be considered a sufficiently decent gesture of good will by Beijing that it could stop and possibly reverse declining relations.  And that could head off a destructive trade war and be the catalyst for considerably more trans-Pacific cooperation resolving issues that adversely affect consumers, producers, workers and investors in both countries, and beyond.

Unfortunately, dark clouds are gathering as pursuit of that path seems less likely this afternoon.

Understanding the U.S.-China ‘Trade War’

An emerging narrative in 2012 is that a proliferation of protectionist, treaty-violating, or otherwise illiberal Chinese policies is to blame for worsening U.S.-China relations. China trade experts from across the ideological and political spectra have lent credibility to that story.  Business groups that once counseled against U.S. government actions that might be perceived by the Chinese as provocative have relented and changed their tunes.  Use of the term “trade war” is no longer considered taboo.

The media have portrayed the United States as a victim of myriad Chinese provocations, including currency manipulation, dumping, subsidization, intellectual property theft, forced technology transfer, discriminatory “indigenous innovation” policies, raw material export bans, industrial espionage, and other ad hoc restrictions on U.S. investment and exports.  Indeed, it is beyond doubt that certain Chinese policies have been provocative, discriminatory, protectionist and, in some cases, violative of the agreed rules of international trade.  But, as usual, the story is more nuanced than its early renditions allow.

U.S. policies, politics, and attitudes have contributed importantly to the atmosphere of rising frictions, as have rabble-rousing politicians and a confrontation-thirsty media.  If the public’s passions are going to be inflamed with talk of a trade war, prudence demands that the war’s nature be properly characterized and its causes identified and accurately described.

Politicians, policymakers, and members of the media should put down their battle bugles and consider that trade wars are never won.  Instead, trade wars claim victims indiscriminately and leave significant damage in their wake.  Even if one concludes that China’s list of offenses is collectively more egregious than the U.S. list of offenses, the most sensible course of action – for the American public, if not campaigning politicians – is for U.S. policymakers to avoid mutually destructive actions and to pursue constructive measures that will reduce frictions with China.

The full paper discussing this topic will be published sometime this week, but feel free to dikenson [at] cato [dot] org">contact me if you would like a preview of its contents.

Is the U.S. Trade Representative a Closet Free Trader?

Not to get him in trouble with his boss, but U.S. Trade Representative Ron Kirk has been sounding like a free trader lately. I’m beginning to think Ambassador Kirk consumes the analyses we produce over here at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies. Well, let me rephrase: that he consumes the meat of our analyses, but still hides the vegetables under the picked-over potatoes.

Still, that’s pretty commendable for a Washington policymaker.

Just the other day, Ambassador Kirk lamented how policymakers do a poor job selling trade agreements to a skeptical public. Inside U.S. Trade [$] paraphrased Kirk as saying:

[P]oliticians must ‘talk about trade differently’ and demonstrate how trade policy is directly responsible for sustaining economic growth and creating jobs. If the focus is only on how trade deals will improve supply chains for businesses, for instance, that is not enough to build the base for support for trade deals.

That is a sound criticism. The typical, mercantilist arguments that tout the benefits of exports and rationalize imports as necessary evils are foolish and self-defeating—particularly in a country that will run trade deficits into the distant future as its economy continues to grow and attract greater amounts of foreign investment. The freedom to engage in commerce with whom and how one chooses, and the impact of import competition are the real benefits of freer trade.

Like some others in town, we at Cato advocate free trade. But unlike most, we advocate free trade here in the United States—not just over there in foreign countries. Free trade requires more than getting other governments to eliminate their barriers to U.S. exports; it requires getting the U.S. government to eliminate its barriers to U.S. imports from abroad. The latter is the real objective of free trade advocacy and the well-spring of most of its benefits.

But the economic benefits of imports rarely make the Washington “free trade advocate’s” Top-10 list of talking points, nor do they officially register in the minds of trade negotiators, whose chief aims are to secure for their exporters the greatest possible access to foreign markets, while simultaneously conceding to foreigners as little access as possible to the domestic market. “Import” is a four-letter word in the Washington trade policy community.

That’s why Ambassador Kirk’s recent comments have me thinking: epiphany?

In a statement responding to the WTO Appellate Body ruling last week that China’s export restrictions on nine raw materials were not in conformity with that country’s WTO commitments, Ambassador Kirk made the point that U.S. firms that use those raw materials will be better able to compete once those restrictions are lifted.

Today’s decision ensures that core manufacturing industries in this country can get the materials they need to produce and compete on a level playing field.

The USTR had previously made the following point:

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.

Technically, Ambassador Kirk is not engaging in profanity—he doesn’t use the word import. But his argument against Chinese export restrictions is just as applicable to U.S. import restrictions. Removing restrictions—whether the export variety imposed by foreign governments or the import variety imposed by our own—reduces input prices, lowers domestic production costs, enables more competitive final-goods pricing and, thus, greater profits for U.S.-based producers.

So let’s take Ambassador Kirk’s sound logic and see if it might apply elsewhere in the realm of U.S. trade policy. If the U.S. government thought it worthwhile to take China to the WTO over the restrictions it imposes on raw material exports because those restrictions hurt U.S. producers, then why does the same U.S. government impose its own restrictions on imports of some of the very same raw materials? That’s right. The United States maintains antidumping duties on magnesium, silicon metal, and coke (all raw materials subject to Chinese export restrictions).

If Ambassador Kirk ate the vegetables as well as the meat of Cato’s trade policy analyses, he would recognize that his logic provides a compelling case for antidumping reforms, such as one requiring the administering authorities to consider the economic impact of antidumping measures on producers in downstream industries, such as magnesium-cast automobile parts producers, manufacturers of silicones used in solar panels, and even steel producers, who require coke for their blast furnaces.

We will know that the ambassador has eaten his free-trade vegetables when he starts sounding like former USTR Robert Zoellick who once hoped for the Doha Round of trade negotiations that it would “[T]urn every corner store in America into a duty-free shop.”

President Obama Could Improve Relations with China at the Stroke of His Pen

When China joined the WTO in December 2001, one of the many terms it agreed to was to allow the United States to continue to treat it as a non-market economy under U.S. antidumping law for a period of 15 years. China has regretted that concession ever since, and there are precious few gestures that would win more goodwill from the Chinese government than a decision by President Obama to graduate China to market economy status now.

A ruling last month from the U.S. Court of Appeals for the Federal Circuit making it illegal to apply the U.S. Countervailing Duty Law (anti-subsidy law) to imports from non-market economies gives the president the perfect opening to make the change now. From the perspective of a free trader, that solution is far from ideal: it preserves domestic industries access to the antidumping law and countervailing duty laws, both of which produce egregiously punitive duties on imports and are ripe for serious reform or outright repeal.

But the benefit of granting market economy status to China now is that it will help slow, and likely reverse the deterioration in bilateral economic relations. And that would be an important benefit for all of us.

At the very beginning of the Obama administration, Scott Lincicome and I urged the new president to consider more than just the litany of gripes so often heard at home and to recognize that China has its own justifiable concerns about U.S. policy:

The time has come to seriously consider carrots and not just sticksparticularly since the pain from the sticks is not limited to its intended targets, but is felt in the United States and in other countries, given the transnational nature of supply chains. President Obama would invigorate the relationship if he were to grant China market economy treatment in anti-dumping cases. While such a reform would take very little out of petitioning industries hides, the gesture would win vast sums of goodwill from the

Chinesegoodwill needed to resolve more important issues going forward. Indeed, repeal of the non-market economy (NME) designation presents a win-win scenario for several reasons.

First, graduation from NME status is one of the Chinese governments top international

trade priorities. China wants to be treated like all other major economies, and accordingly, the Chinese government is likely willing to make important concessions in other contested areas of trade policy to achieve market economy status. But the longer we wait to grant market economy status to China, the less valuable that concession becomes. Under the rules governing Chinas accession to the WTO, the United States must repeal Chinas NME designation by 2016. Thus, the value of that concession

will be greater in 2009seven years earlythan it will be in 2010 or 2012. Much beyond

2012, and the concession looks a bit like Confederate money.

Second, Chinas NME designation has drawn intense criticism from domestic consuming industries, trade policy experts, and U.S. trade partners because of its incongruous application (for example, Russia was deemed a market economy in 2002, yet still is not a WTO member, while China became a WTO member in 2001) and the latitude for abuse of administrative discretion it affords. Also, the relatively recent change in policy that opened the door to countervailing duty cases against China has sparked controversy about whether NME treatment in anti-dumping cases should still be permissible.

U.S. revocation of Chinas NME status would alleviate many of those domestic concerns at virtually no cost to domestic petitioning industries, but petitioners value NME because of the trade-suppressing uncertainty the process engenders. It is important that President Obama understand that our trade relationship with China has been mutually beneficial, that the rhetoric about the impact of unfair Chinese practices has been highly exaggerated, and that unnecessary provocation could open a Pandoras Box of economic problems.

(Read the whole analysis here.)

Well, Lincicome (in a thorough analysis) and I (in a fairly technical one) continue to make the case for market economy designation, and welcome the retorts of those who are opposed.

Solar Panel Case Shines Light on the Imperative of U.S. Trade Law Reform

Earlier this year, the Cato Institute published this paper, which describes the self-flagellating nature of the U.S. antidumping law. Nearly 80 percent of all U.S. antidumping measures imposed between 2000 and 2009 (130 of 164 measures) restrict imports of intermediate goods—inputs required by U.S. producers for their own production processes.

Antidumping duties on magnesium, polyvinyl chloride, and hot-rolled steel, for example, enable petitioning U.S. companies that often dominate domestic supply of raw materials to foreclose alternative sources and then thrust higher prices on their U.S. customers. But those customers—U.S. producers of auto parts, paint, and appliances—who consume the now-restricted raw materials to produce higher value-added goods and who might otherwise create jobs, are instead made less profitable and less competitive, burdening the broader economy.

But here’s the kicker. The statute itself forbids the administering authorities from considering the economic impact of antidumping restrictions on those firms or on the economy at large. The well-being of the petitioning industry is all that matters and the collateral damage to downstream industries and the overall economy is to be ignored.

Now, the high-profile antidumping and countervailing duty cases recently initiated against solar panels from China are shining some fresh light on this outrage. A group called the Coalition for Affordable Solar Energy (CASE), which represents the portion of the U.S. solar industry that is downstream of the solar panel producers (the producers’ customers), is asking the cases be dropped or settled. CASE, representing 145 member companies that employ over 14,000 workers in solar project development, logistics, construction, and installation, argues:

The severe tariffs [being sought] would have a very damaging effect on the solar industry in the United States and would fundamentally undermine many years of effort by all of us who care about the future of solar power …

In simple dollar terms, [the] petition threatens the planned installation of solar electric power systems in the amount of $11 billion in 2012 and the potential installation of $60 billion currently in the total pipeline …

By asking government to interfere and artificially increase the price (equivalent to putting on a high tax) will only hinder the deployment, cost thousands of jobs … and further negatively impact an already shaky economy.

There is no good reason for arguments like these—and the facts supporting them—to be ignored in trade remedies cases. Several other major countries that have antidumping and countervailing duty laws on their books employ a so-called public interest provision that directs the authorities to deny duties when the likely costs are demonstrated to exceed any benefits to the petitioning industry. (See page 18 for an elaboration.)

It is difficult to fathom how an administration that begs U.S. businesses to invest and hire would not be pushing hard for this particular reform. After all, the administration acknowledges the importance of ensuring downstream producers have access to imported inputs. The Office of the U.S. Trade Representative has argued this point in its complaint against Chinese export restrictions at the World Trade Organization. And the president himself described how the competitiveness of U.S. firms is hurt by restrictions on imported inputs when he signed into law the Manufacturer’s Enhancement Act last year.

But then again, incongruities in this administration’s economic policies seem to be the rule, not the exception. In the solar panel case, the president has offered his rhetorical support (at least) to the petitioners, even though their success would drive up the cost of already-too-expensive solar power, reducing demand for an energy source the president has been advocating and subsidizing with the incentive of 30 percent tax credits.

I suppose the White House has determined that the cost of import duties—to consumers up front and to taxpayers through the a much higher tax credit—is worth the benefit of having a Chinese scapegoat to take the heat off the president for Solyndra’s failure.