Tag: China

Tony Soprano Meets the Antidumping Law

Forget all the high-minded rhetoric about “fair trade” and “level playing fields.” Discount the apple-pie claims that the antidumping law protects good American companies and their hard-working employees from unscrupulous, predatory, foreign cheaters. Those are just some of the myths that have sustained the costly antidumping status quo for decades.

If the American public were familiar with all of the sordid details of the antidumping case concerning wooden bedroom furniture from China (which I called a Poster Child for Reform back in 2004), they would be angry and ready to change the law.  Well, on Tuesday, the Wall Street Journal did its part by running a story about how U.S. producers of wooden bedroom furniture have been extorting cash from their Chinese competition in exchange for dropping pursuit of even higher antidumping duty rates at the Commerce Department.

The Journal reported that about $13 million was paid to a group of 20 U.S. furniture makers between 2006 through 2009, and that a much larger, but unspecified, amount of money went to pay the U.S. firms’ lawyers.

Surprisingly, this practice is not illegal. Charlotte Lane, one of six commissioners at the U.S. International Trade Commission, which presides over antidumping investigations and sunset reviews, said, “I cannot figure out for the life of me how they are legal.” And her colleague, Commissioner Dan Pearson added that these settlements create “additional costs and distortions” in furniture trade, “with little evidence that these distortions have yielded any benefits to the industry overall, the U.S. consumer, or the U.S. taxpayer.”

But this practice is nothing new. It’s been going on in the shadows for several years in other cases as well. Bill Silverman, a trade lawyer who represents furniture retailers and importers, offered: “Everybody in the industry in the U.S. and China understands that these payments are clever shakedowns.”  Back in 2006, I wrote about similar “shakedowns” with hundreds of exporters from several countries in the shrimp antidumping cases (toward the end of the paper under the subheading, “A Sign of Things to Come?”)

This pay-to-play scheme is made possible by the peculiarities of the U.S. antidumping system. The United States has the distinction of being the only major economy in the world that uses a “retrospective” system for collecting final antidumping duties on imports. That means that importers pay estimated antidumping duties on goods when they enter the United States, but the final liability is not known until much later—often 18 months to several years later. This system creates enormous uncertainty for importers and works effectively to supercharge the impact of U.S. antidumping measures.

Every year the Commerce Department invites parties involved in antidumping cases to request reviews of the most recent year’s imports to determine the actual amount of dumping for that year, and to set new deposit rates going forward. (More detailed description here.) Neither petitioners nor the respondent companies are required to request a review, and if no requests are made within a given time frame, the duty rates already in effect continue.

So, if a foreign exporter has a 10 percent antidumping duty rate on his products, but is managing to continue making sales in the United States, he might not want to request a review of the previous year’s sales, which could establish a higher final liability and a higher deposit rate going forward. But petitioners can request a review of those sales. In the furniture and shrimp cases, petitioners requested reviews of dozens of companies that “could live with” the rates they were paying, thereby introducing the specter of greater uncertainty, more legal and other expenses, and the risk of higher duties. That’s when petitioners offered to rescind those review requests in exchange for payments.

Now, if that doesn’t amount to extortion (link definition), I’m not sure what does.

As I wrote about the shrimp cases in 2006:

Most foreign companies accepted the deal, which arguably was the better option for both parties in each deal. But there is clearly something unseemly about the domestic industry extorting large sums of money from foreign shrimp producers under threat of burying them in heavy legal costs and the uncertainty associated with the Commerce Department’s calculating new antidumping rates. There is also something ominous about the relative ease with which the petitioners’ bar was able to effectively sell access to the U.S. market and split the proceeds with U.S. companies.

Although the Byrd Amendment was found in violation of the ADA [Antidumping Agreement] and will cease to operate next year, the petitioners’ lawyers seem to have concocted a model for effectively resurrecting Byrd. With this success under their belts, petitioners’ lawyers have a new way to market antidumping actions to their current and prospective clients.

These extortions are only the latest shenanigans in the wooden bedroom furniture case. Antidumping is portrayed as a tool to protect “our” producers from “their” producers. But the primary targets in the furniture case were other U.S. furniture producers.  As I wrote in 2004:

The case of Wooden Bedroom Furniture from China has nothing to do with unfair trade and is a perfect example of the need for antidumping reform. The filing of this case was a tactical maneuver by one group of domestic producers that seeks to exploit the gaping loopholes of the antidumping law to get a leg up on its domestic competition. Domestic producers realize that the only way to compete and offer their customers variety is to source at least some production from abroad. Instead of preserving or returning domestic jobs (which is the public justification for the petition) import restrictions will cause a shift in sourcing from China to places like the Philippines, Indonesia, Brazil, and Vietnam–places from which many of the petitioners have begun or are poised to begin importing themselves.

The antidumping law is nothing like what its supporters claim it to be.  Its operation works to the benefit of a few industries and crafty insiders at great cost to the rest of the economy.  Let’s hope the Journal article sparks the kind of outrage that will propel serious antidumping reform in the United States.

Rising Exports — and Imports — Are Good News for U.S. Economy

The U.S. trade deficit rose in 2010, and the bilateral deficit with China reached a record high last year, according to the monthly trade report released this morning by the U.S. Commerce Department. The usual critics (such as Peter Morici of the University of Maryland) are already spinning it into yet another indictment of trade, but the report contains a lot of good news for the U.S. economy.

Last year, Americans bought $2,330 billion worth of goods and services from other countries, while selling $1,832 billion, for a trade deficit of $498 billion. Our bilateral deficit with China grew to a record $273 billion.

Politicians and commentators love to focus on the trade deficit, as though it were a scorecard of who is winning in global trade. But the real measure is the total volume of trade. As economies expand, so does trade, both imports and exports. Exports help us reach new markets and expand economies of scale, while imports bless consumers with lower prices and more choices, while stoking competition, innovation, and efficiency gains among producers.

By this measure the trade report was good news all around, and one more sign that the U.S. and global economies continue to recover from the Great Recession. Last year, U.S. exports of goods were up 21 percent from 2009, while imports were up 23 percent. In contrast, in the recession year of 2009, exports of goods dropped 18 percent from the year before while imports plunged 26 percent. (Unemployment soared in 2009, but, hey, at least the trade deficit was “improving”!)

Our trade with China last year tells the same story. The value of goods imported from China rose 23 percent in 2010 (the same rate as imports from the rest of the world), while the value of the goods we exported to China jumped by 32 percent. That’s a rate of export growth that is 50 percent higher than export growth to the rest of the world. Members of Congress who complain that China’s managed currency is somehow a major barrier to U.S. exports should take note.

Fannie & China: 2 Birds, 1 Stone

Chinese President Hu Jintao’s visit to Washington brought renewed focus on China’s currency.  It was likely the largest point of discussion between President Obama and President Hu.  I suspect a less public, but related, issue was China looking for some certainty that America would make good on its obligations; after all, China is our largest lender.

What is often missed is the connection between these two issues:  currency and debt.  When China receives dollars for the many goods it sells us, instead of recycling those dollars into the purchase of US goods, it uses that money mostly to buy US Treasuries and Agencies (Fannie/Freddie securities).  These large Treasury/Agency purchases (foreign holdings of GSE debt are over $1 trillion) have the effect of increasing the demand for dollars and depressing that for yuan, resulting in an appreciation of the dollar relative to the yuan.  This connection exposes the hypocrisy of President Obama’s complaints about China currency manipulation - without massive US budget deficits, China would not be able to manipulate its currency to the extent it does.  If the US wants to end that manipulation, it can do so by simply reducing the outstanding supply of Treasuries and Agency debt.

Another solution, which would also do much to end the “implicit guarantees” of Fannie Mae and Freddie Mac, is to take Fannie and Freddie into a receivership, stop the US taxpayer from having to cover their losses, and shift those losses to junior creditors, which include the Chinese Central Bank.  Were the Chinese to actually suffer credit losses on their GSE debt, they would quickly start to reduce their holdings of such.  They might also cut back on Treasury holdings.  These actions would force the yuan to appreciate relative to the dollar.  And best of all, it would end the bottomless pit that Fannie and Freddie have become.  It is worth remembering that even today, under statute, the Federal government does not back the debt of Fannie and Freddie.  It is about time we also teach the Chinese a lesson about the rule of law, by actually following it ourselves. 

Of course this would increase the borrowing costs for Agencies (and maybe Treasuries), but then if China were to free float its currency, that would also reduce the demand for Treasuries/Agencies with a resulting increase in borrowing costs.  We cannot have it both ways.

Hu’s Visit and U.S.-China Tensions

Chinese President Hu Jintao arrives in Washington today for a summit meeting with President Obama following spats over economic and military issues that have created a chill in bilateral relations. This follows Secretary Gates’s visit just last week to Beijing for discussions with Defense Ministry officials. On the Huffington Post, I have a piece that looks at the current state of U.S.-China relations in the context of these visits:

“The process of repairing [the U.S.-China relationship] appears to be off to a rocky start. A key objective of Secretary Gates was to get China’s military leadership to agree to a wide-ranging dialogue on strategic issues, including nuclear weapons, ballistic missile defenses, space weapons, and cyber warfare. His hosts rebuffed his initiative, agreeing only to a very limited dialogue on such second-tier issues as combating piracy and cooperating on international peacekeeping missions. Chinese officials indicated that Washington would need some policy changes – especially moderate its willingness to sell arms to Taiwan – before a dialogue on larger strategic issues could take place. The most the Defense Ministry would agree to do in the meantime was “study” Gates’ broader proposal.

“The lack of a meaningful military dialogue frustrates a persistent U.S. goal – to get Beijing to be more transparent regarding both the level of its military spending and the extent of its geopolitical ambitions – especially in East Asia and the Western Pacific. Recent reports of China’s possible breakthroughs in nuclear technology and stealth aircraft have intensified Washington’s concerns.”

The complex U.S.-China relationship has always had elements of both partnership and rivalry. The partnership component has tended to figure more prominently, especially in the economic arena where the benefits to both parties are substantial and widely appreciated. But the balance is now shifting toward the competitive end of the spectrum. There are many reasons for this, including the stress that arises whenever the dominant economic and military player in the international system encounters a rapidly rising great power. However, the current tensions between the United States and China also are the product of the sharply different political systems, histories, cultures, and agendas of the two countries.

The shift to a relationship in which rivalry may top cooperation poses serious challenges for leaders in both countries. Strategic and economic rivalry can easily escalate into viewing the competitor as an adversary, and even an outright enemy. Given the importance of the bilateral relationship, not only for the United States and China, but for the health of the international economic system and the future of global peace, it is imperative that both sides seek to manage and contain their disagreements. The Hu-Obama summit offers an opportunity to advance that process, and one hopes that the two leaders do not waste the opportunity.

Appreciating China’s Currency

China’s President Hu Jintau arrives in Washington today for a state visit, turning the spotlight once again on U.S.-China trade and China’s allegedly undervalued currency, the yuan. Not one to let such an opportunity go to waste, Sen. Charles Schumer (D-N.Y.) is introducing legislation that would threaten to impose duties on imports from China if the yuan does not appreciate quickly.

Count me skeptical that a more expensive yuan relative to the U.S. dollar would make much of a dent in our bilateral trade deficit with China, or that it would have any positive effect on U.S. economic growth and employment. But even if those assumptions were true, the big story is how much the yuan as already appreciated against the dollar.

It has been a mantra of Sen. Schumer and other critics of U.S.-China trade that the yuan is undervalued by 15 to 40 percent. They were saying that before the 2005 appreciation, and they’re saying that now, as though nothing has changed.

Yet a lot has changed. In nominal terms, the yuan appreciated by more than 20 percent between 2005 and 2008. That’s when China relaxed its hard peg with the dollar and allowed its currency to gradually appreciate. After holding the peg steady again during the recent financial turmoil, China has again allowed it to rise another 3 percent since last June.

The nominal rate is just part of the story, however. Price levels in the United States and China determine the real exchange rate–the actual amount of goods that can be bought with each currency. A big story in China recently is its rising inflation rate, which makes Chinese goods relatively more expensive at any given exchange rate. In this way, a relatively higher inflation rate in China compared to the United States acts in the same was as a nominal increase in the exchange rate of the yuan.

When you combine the effect of rising prices in China with the higher nominal value of the yuan, you get a double boost to the real exchange rate. According to a chart on the front page of this morning’s Wall Street Journal, the real value of the yuan has appreciated by 50 percent since the beginning of 2005. In early 2005, 100 Chinese yuan could be exchanged for about $12; today it can be exchanged for $18 (in real, inflation adjusted dollars).

Rather than complain, Sen. Schumer and his allies should congratulate themselves on achieving their goal of a much stronger yuan and a much weaker dollar, even if we are still waiting for the tonic effect they predicted it would have on jobs and growth.

Look Hu’s in Town to Talk Trade and Security

Chinese President Hu Jintao is in Washington this week for discussions with President Obama. On the agenda are various economic and security issues that are raising dander on both sides of the Pacific.

Frictions in the U.S.-China relationship are nothing new, but they have intensified in the past 18 months. One explanation for the rising tensions is that certain media pundits and policymakers now view the relationship through a prism that has been altered by the fact of a rapidly rising China. That China emerged from the financial meltdown and subsequent global recession wealthier and on a virtually unchanged high-growth trajectory, while the U.S. faces slow growth, high unemployment, and a large debt (much of it owned by the Chinese), is breeding anxiety and changing perceptions of the relationship in both countries.

Once-respected demarcations between geopolitical and economic aspects of the relationship have been blurred, and economic frictions are now more likely to be cast in the context of our geopolitical differences. Lots of ink has been spilled over the proposition that China has thrived at U.S. expense for too long, and that China’s growing assertiveness signals an urgent need for aggressive U.S. policy changes.

Although it may be fashionable to think of China as the country to which the U.S. manufacturing sector was offshored in exchange for tainted products and a mountain of mortgage debt, the fact is that the bilateral relationship has produced enormous benefits for people in both countries. Despite those benefits, Americans are more likely to be familiar with the sources of friction. Although some U.S. complaints about Chinese trade and economic policies are legitimate and probably worth deploying the resources to resolve (including through dispute settlement in the World Trade Organization), other complaints are bogus because there is no violation of an agreement or because the U.S. is guilty of the same infractions.

Much of the tension reflects indignation among media and politicians over China’s aversion to saying “How high?” when the U.S. government says “Jump!” That China is not a U.S. supplicant may rub some opinion leaders the wrong way, but that is not a persuasive argument for a more provocative posture.  China is a sovereign nation.  Its government, like the U.S. government, pursues policies that it believes to be in its own interests (although those policies—with respect to both governments—often fall short of their people’s best interests).  Realists understand that objectives of the U.S. and Chinese governments will not always be the same, thus U.S. and Chinese policies will not always be congruous.  Accentuating and cultivating the areas of agreement, while resolving or minimizing the differences, is the essence of diplomacy and statecraft.  These tactics must continue to underpin a U.S. policy of engagement with China.

Although some policy tweaks would be beneficial, a more aggressive U.S. policy tack is unnecessary and unwanted. Even in a shifting geopolitical environment, U.S. policy toward China should continue to reflect the fact that globalization means interdependence, and interdependence demands cooperation, not conflagration.

(For a full exposition of this perspective, please see this paper.)

Mega-Consumers against Consumerism

Adjacent articles in the latest New Yorker deplore “consumerism” among the American revolutionaries and the modern Chinese. You wonder how a magazine so concerned about manifestations of consumer desire would support itself. Surely it struggles along on a shoestring, preaching the message of austerity and simplicity to sincere but poor readers. In fact, however, these laments about consumerism in societies vastly poorer than our own are sandwiched between lush full-page advertisements for Chanel watches, Samsung home entertainment centers, single malt Scotch, Grey Goose vodka, Cristal champagne, David Yurman jewelry, German automobiles, and Norwegian Cruise Lines. The articles themselves appear on pages lined with small, elegant ads for Jay-Z’s book-ebook-app, tours of Wales, monogram rings, Aeron chairs, European berets, cashmere caps, and a remarkable number of expensive psychiatric facilities, perhaps specializing in the treatment of cognitive dissonance.