Tag: China

Antidumping and Bedroom Furniture from China: The Real Story

The Washington Post ran a story in yesterday’s print edition about the U.S. antidumping order against Wooden Bedroom Furniture from China—a case I described seven years ago as the “Poster Child for [Antidumping] Reform” because its sordid details explode the myths upon which rest the rationalizations for the law’s existence.

Those details are nowhere to be found in the WP article, which was published, presumably, to make a few other points.  One such point—the only one with which I agree—is that antidumping duties aren’t very effective at restoring or preserving U.S. jobs.  As the article demonstrates, since the imposition of AD duties on Chinese furniture beginning in 2005, imports from Vietnam, Indonesia, and other countries not subject to the AD restrictions have emerged to fill the vacuum created by declining imports from China.  Not much news in that, though.  This kind of trade diversion is a typical consequence of antidumping restrictions. Likewise, furniture production and the jobs it used to support has not undergone a renaissance in the United States – despite that being the rallying cry of the domestic producers who brought the case in 2004. (More on that in a moment.)

But the article—beginning with its title (“Chinese Make a Run Around U.S. Tariffs”)—leads readers to the faulty conclusion that those cunning Chinese are at it again, looking for ways to prosper at the expense of innocent, upstanding U.S. producers and their workers.  A pretty good tip-off that an article about China and trade is going to miss the mark, mislead, and misinform is when the author describes trade as a contest between two countries with the trade account characterized as a scoreboard.

The United States and China have exchanged accusations of dumping for years and imposed tit-for-tat duties.  All along, though, China has generally come out on top: Its trade surplus with the United States rose to $273 billion in 2010…more than three times the level of a decade earlier.

Is the reader to conclude, then, that more antidumping measures against Chinese products are integral to reducing the trade deficit and, ultimately, “com[ing] out on top”?  That conclusion doesn’t really dovetail with the point about how antidumping does nothing to restore U.S. production.  But I digress.

The main problem with the article is that it escorts readers to the incorrect conclusion that it was Chinese furniture producers who initiated efforts to get around the U.S. antidumping duties.  Implied throughout the article is that a man named Lawrence Yen, president of a Chinese furniture company, was the architect of some crafty plan to avoid U.S. duties.  It reports that during a meeting of Chinese furniture makers in Dongguan: “[Yen] told them [he] would set up a factory in Vietnam,” which was presented in the article as though it were the idea’s genesis.  The caption to the inset chart of furniture imports in the article reads:

To avoid a 2005 U.S. tariff on Chinese-made wooden bedroom furniture, Chinese furniture companies moved operations to other Asian countries, thwarting U.S. efforts to curb “dumping,” the export of goods at unfairly low prices.

This presentation of events may serve the clichéd theme that Americans are in a pitched battle with the Chinese, who are willing to stretch and break the rules to “win,” but it fails to give readers critical parts of the story.  The fact is that this strategic tariff aversion plan, which is as legal and common as off-the-shelf tax minimization software at Best Buy, was the brainchild of the U.S. domestic furniture industry before it filed the case in 2004.

Here’s where my 2004 paper would be useful to readers interested in a fuller accounting of the details:

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.

At the time this case was initiated, the same U.S. furniture producers who were petitioning for relief from imports from China were investing in furniture operations in other countries.  There’s nothing illegal or objectionable about investing in foreign production, but the assertions of the petitioning U.S. producers that their aim was to restore U.S. production and U.S. jobs were clearly false.  It is testament to the laughably modest standards for finding a domestic industry injured by reason of dumped imports that duties were ever imposed in the furniture case.  Consider this:

The petitioners’ argument that the U.S. furniture industry is being hurt by Chinese imports is similarly suspect. In the 1990s, U.S. producers began to supplement their domestic production with furniture made in China. The import surge from China did not begin until years after U.S. producers began to cultivate the Chinese industry.

Consider the experience of Vaughan-Bassett Furniture Company, one of the largest U.S. producers and a petitioner in this case. In the late 1990s Vaughan-Bassett invited one of the largest Chinese producers, Lacquer Craft, to its factory to videotape production of bedroom furniture so that it could produce bedroom furniture in China for Vaughan-Bassett to import and resell. According to testimony before the ITC, U.S. producers turned to China to “supplement their product line because they had ideas, they had designs, they were the professionals in our industry, and they knew after traveling to China and seeing the infrastructure there that they could make certain bedrooms in China, bring it here, mark it up 30 to 40 percent to a retailer and still sell it for less than they could have made it for.”

Some producers invested directly in Chinese manufacturing facilities, while others simply imported from unrelated Chinese producers. U.S. retailers soon caught on, recognizing the many benefits of purchasing from China. They could cut out the middlemen (U.S. producers) who were simply importing, marking up, and profiting; they could produce a greater variety of designs (including hand carvings and inlays) that are cost-prohibitive in the United States; they could respond to high levels of defects in U.S. production by switching to alternatives; and they could have custom designs mass-produced and labeled under their own brand names.

While imports of wooden bedroom furniture from China have increased considerably over the past few years, domestic producers (including many of the companies that brought or at least supported the antidumping petition) have played a major role in that increase. In 2000, 6 percent of domestic producers’ U.S. shipments were sourced from China. By 2002, that figure increased to 19.6 percent, and through the first half of 2003, that figure stood at 26.6 percent.

According to the ITC’s own preliminary report in this case:

As an initial matter, we note that the record indicates it has become common practice for members of the domestic industry to import the subject merchandise from China as a means of supplementing their domestic production in the market place. For example, the record shows that 20 of the 40 responding domestic producers imported Chinese merchandise during the period and that the 12 largest domestic producers of wooden bedroom furniture all imported reasonably substantial and increasing volumes of merchandise from China during the period of investigation. In fact, the *** companies within the petitioning group all have imported increasing volumes of subject merchandise from China during the period of investigation.

The essence of this case, then, is well summarized by representatives of Furniture Brands International, Inc., the largest U.S. producer and an opponent of the petition. This case boils down to “a request by domestic producers who are significant importers of the subject merchandise to impose duties on imports that they have voluntarily made on the ground that their very own actions have caused them injury.”

Are petitioners really calling on the federal government to stop them before they import again? The actual story looks more complicated. Evidence presented during the ITC proceeding indicates that certain petitioners have begun or are poised to begin importing from alternate sources should antidumping duties be imposed on Chinese furniture.

The ITC preliminary report confirms this trend is likely underway:

U.S. imports of wooden bedroom furniture from Indonesia, Brazil, Malaysia, and Thailand, the fifth, sixth, eighth, and tenth respective largest foreign country suppliers of wooden bedroom furniture to the United States, increased by a total of $100.4 million during 2000-02 and by another $26.7 million in January-June 2003 from the same period in 2002. Although still a small supplier of wooden bedroom furniture to the U.S. market, U.S. imports of these products from Vietnam increased by a total of $8.5 million during 2000-02 and by another $11.6 million in January-June 2003 from the same period in 2002.

A brief submitted to the ITC by the Furniture Retailers Group indicated that petitioners “have been busy helping to set up operations in numerous third countries, such as Indonesia and Vietnam, where costs are lower than in China. In fact, this week representatives of Vaughan-Bassett are in Vietnam meeting with Vietnamese furniture companies.”

The brief went on to question why the petition named only China and not any of the other low-price third-countries since source-shifting is a common response to country-specific antidumping duties. The answer, of course, was implied.

Although  the antidumping law is hailed by its supporters as a tool to ensure “fair trade” and to “level the playing field” and to protect American firms and workers from “ill-intentioned foreigners,” the fact is that the law is frequently used by U.S. companies seeking advantage over other U.S. companies, with hapless consumers and consuming-industries the collateral damage.

But when media give scant and selective coverage to the topic, they are abetting the status quo, which depends on the continued inscrutibility of the operation of this costly canard.

The Arab Revolutions — Monday at Cato

Jack Goldstone, who will speak Monday at a Cato Forum, “Civil Resistance and Revolution in the Arab World,” has two interesting articles published today in Foreign Affairs and the Washington Post.

In the Post, Goldstone, who is the Hazel Professor and director of the Center for Global Policy at George Mason University, suggests that China’s rapid economic growth is going to slow down. In Foreign Affairs, more relevantly for Monday’s forum, his topic is “Understanding the Revolutions of 2011” (reg. req.). The magazine’s summary:

Revolutions rarely succeed, writes one of the world’s leading experts on the subject — except for revolutions against corrupt and personalist “sultanistic” regimes. This helps explain why Tunisia’s Ben Ali and Egypt’s Mubarak fell — and also why some other governments in the region will prove more resilient.

At the Cato Forum — 4:00 p.m. Monday — Goldstone will join Peter Ackerman to discuss similar questions:

What explains the swift collapse of what were considered some of the most stable regimes in the Arab world? Drawing on scholarship and his Center’s experience in supporting pro-democracy activists in Egypt and around the world, Peter Ackerman will describe factors — such as strategy and careful planning — that are common to successful civil resistance movements. According to Ackerman, nonviolent campaigns have a better record at bringing down dictators than violent confrontations. Jack Goldstone will describe the conditions that give rise to revolutions, highlight the vulnerabilities of “sultanistic” dictatorships, and identify which Middle Eastern regimes are most likely to retain power.

Register now!

Do We Need China to Fund Our Mortgage Market?

Earlier this week I repeatedly heard the claim that if the federal government does not guarantee credit risk in the mortgage market, foreigners won’t buy U.S. mortgage-related debt.  Before we test whether that claim is true, let’s first determine just how important are foreign investors in the U.S. mortgage market.

For the most part, foreign investors do not hold U.S. mortgages directly, but either hold Fannie and Freddie debt and mortgage-backed securities (MBS) or hold private-label MBS.  As the private-label securities lack a government guarantee, we can ignore that segment of the market.  The chart below depicts the percentage share of foreign ownership of these securities in recent years:

The chart illustrates that, at times (particularly around the peak of the recent housing bubble), foreign investors have been large providers of capital to the GSEs.  In 2007, over 20% of GSE debt was held outside the United States, double the percentage from only a few years earlier.  The increase was driven almost exclusively by purchases by foreign governments (mostly central banks for the purpose of currency manipulation).  In 2007, this amounted to just over $1.5 trillion. 

However, if we went back and looked at a year prior to the super-heated housing market — say 2003 — then this total is about $650 billion.  Given that U.S. commercial banks now have about $1 trillion in cash sitting on their balance sheets, it appears that domestic sources could completely fund the U.S. mortgage market without any foreign funds.

But let’s say we want to keep the option of living beyond our means and have the rest of the world fund a large part of our mortgage market.  Would they?  Given that foreign investors currently hold over $5.4 trillion in U.S. corporate bonds and equities (not all guaranteed by the U.S. taxpayer), I think it’s fair to assume that these foreign investors have some appetite for U.S.  assets. 

Now does that mean foreigners would buy the debt of massively leveraged, mismanaged mortgage companies subject to constant political-cronyism, without some guarantee?  Probably not.  But then, it strikes me that a better way to attract foreign investment into the U.S. mortgage market is to deal with those issues, rather than paper over those problems with a taxpayer-funded guarantee. 

It is also worth noting that when we most needed foreign support for the U.S. mortgage market, in 2008, foreign investors were dumping Fannie and Freddie debt in significant amounts.  And obviously I think we’d prefer that the Chinese Central Bank stop using the purchase of Fannie and Freddie debt to depress the value of their own currency.

China Cracks Down on Ideas. And Music. And Advertising.

The government of China finally confirmed that it has detained the artist Ai Weiwei. Meanwhile, Evan Osnos writes from Beijing for the New Yorker about China’s “Big Chill”:

Step by step—so quietly, in fact, that the full facts of it can be startling—China has embarked on the most intense crackdown on free expression in years. Overshadowed by news elsewhere in recent weeks, China has been rounding up writers, lawyers, and activists since mid-February, when calls began to circulate for protests inspired by those in the Middle East and North Africa. By now the contours are clear: according to a count by Chinese Human Rights Defenders, an advocacy group, the government has “criminally detained 26 individuals, disappeared more than 30, and put more than 200 under soft detention.”

Indeed, everywhere I turn today, there’s news about Chinese censorship and fear of dissent, of ideas, of art, of words like “luxury.” The Washington Post has a major article on Bob Dylan’s concert Wednesday night in Beijing. Dylan, the troubadour of the peace movement and the Sixties and civil rights, in the capital of the world’s largest Communist party-state. How’d that go? Ask Keith Richburg, whose Post article is titled “The times they are a-censored”:

Rock music icon Bob Dylan avoided controversy Wednesday in his first-ever appearance in Communist-led China, eschewing the 1960s protest anthems that defined a generation and sticking to a song list that government censors say they preapproved, before a crowd of about 5,000 people in a Soviet-era stadium.

Keeping with his custom, Dylan never spoke to the crowd other than to introduce his five-member band in his raspy voice. And his set list – which mixed some of his newer songs alongside classics made unrecognizable by altered tempos — was devoid of any numbers that might carry even the whiff of anti-government overtones.

In Taiwan on Sunday, opening this spring Asian tour, Dylan played “Desolation Row” as the eighth song in his set and ended with an encore performance of “Blowin’ in the Wind,” whose lyrics became synonymous with the antiwar and civil rights protest movements.

But in China, where the censors from the government’s Culture Ministry carefully vet every line of a song before determining whether a foreign act can play here, those two songs disappeared from the repertoire. In Beijing, Dylan sang “Love Sick” in the place of “Desolation Row,” and he ended his nearly two-hour set with the innocent-sounding “Forever Young.”

There was no “Times They Are a-Changin’ ” in China. And definitely no “Chimes of Freedom.”

Meanwhile, NPR reports that Beijing has banned words such as “luxury,” “supreme,” “regal,” and “high-class” on billboards:

The city’s new rules state that ads must not glorify “hedonism, feudal emperors, heavenly imperial nobility” or anything vulgar, according to the Global Times newspaper. They also should not violate “spiritual construction” standards or worship foreign products — leading some to believe the campaign could be targeting foreign luxury goods.

“The truth is that the party has very clearly started what is very clearly a campaign against ostentation in China,” says David Wolf of Wolf Group Asia, a communications advisory agency. “There is a pushback against things Western. And there is the desire to see those Western things take a lesser role in the development of Chinese culture.”…

China Daily reports that the campaign is aimed at protecting social harmony, quoting a sociologist who says advertisements that promote the belief that “wealth is dignity” could upset low-income residents.

Now there’s some good old-fashioned communist thinking! Of course, communists with the courage of their convictions would ban the products, not just the ad copy. But it’s nice to see the old values survive.

In some ways the government’s confirmation that it has detained Ai Weiwei is the most chilling indication of the new climate. It came in an editorial in Global Times, a vigorous presenter of the government line. Just listen to the combative language:

Ai Weiwei likes to do something “others dare not do.” He has been close to the red line of Chinese law….

The West ignored the complexity of China’s running judicial environment and the characteristics of Ai Weiwei’s individual behavior. They simply described it as China’s “human rights suppression.”

“Human rights” have really become the paint of Western politicians and the media, with which they are wiping off the fact in this world.

“Human rights” are seen as incompatible things with China’s great economic and social progress by the West. It is really a big joke. Chinese livelihood is developing, the public opinion no longer follows the same pattern all the time and “social justice” has been widely discussed. Can these be denied? The experience of Ai Weiwei and other mavericks cannot be placed on the same scale as China’s human rights development and progress.

As I’ve written before, China faces a dilemma. They have opened up their economy and reaped huge benefits, perhaps the largest advance in human well-being in the history of the world – as the editors of Global Times defiantly argue. But if China wants to become known as a center of innovation and progress, not just a military superpower or a manufacturer, it will need to open further. Investors want to put money into a country with the rule of law. Creative people want to live in a country that allows them to read, write, think, and act freely.

Way back in 1979, David Ramsay Steele, author of From Marx to Mises: Post-Capitalist Society and the Challenge of Economic Calculation, wrote about the changes beginning in China. He quoted authors in the official Beijing Review who were explaining that China would adopt the good aspects of the West–technology, innovation, entrepreneurship–without adopting its liberal values. ”We should do better than the Japanese,” the authors wrote. “They have learnt from the United States not only computer science but also strip-tease. For us it is a matter of acquiring the best of the developed capitalist countries while rejecting their philosophy.” But, Steele replied, countries like China have a choice. “You play the game of catallaxy, or you do not play it. If you do not play it, you remain wretched. But if you play it, you must play it. You want computer science? Then you have to put up with strip-tease.”

How much freedom can China’s rulers tolerate? How much repression will its citizens tolerate? How many ambitious, creative Chinese will leave the world’s largest market to find more creative freedom elsewhere? These may be the most important questions in the world over the next generation.

Why Trading with China is Good for Us

Back in February, more than 100 House members introduced a bill that would make it easier to slap duties on imports from China. I explain why picking a trade fight with China would be a bad idea all around in an article just published in the print edition of National Review magazine.

Titled “Deal with the Dragon: Trade with the Chinese is good for us, them, and the world,” the article explains why our burgeoning trade with the Middle Kingdom is benefiting Americans as consumers, especially low- and middle-income families that spend a higher share on the everyday consumer items we import from China.

We also benefit as producers—China is now the no. 3 market for U.S. exports and by far the fastest growing major market. Chinese investment in Treasury bills keeps interest rates down in the face of massive federal borrowing, preventing our own private domestic investment from being crowded out.

The article also argues that, “As the Chinese middle class expands, it becomes not only a bigger market for U.S. goods and services, but also more fertile soil for political and civil freedoms.”

You can read the full article at the link above. Better yet, pick up the April 4 print edition of the magazine, the one with Gov. Rick Perry on the cover. My article begins on p. 20. (It might be a holdover from my newspaper days, but I still get an extra kick out of seeing an article printed in a real publication.)

P.S. For a fuller treatment of our trade relations with China, you can check out my 2009 Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization. China takes center stage in several places in the book, which—did I mention?—was just named a runner-up finalist for the Atlas Foundation’s 22nd Annual Sir Antony Fisher International Memorial Award for the best think-tank book of 2009-10.

Despite Huawei’s Experience, America Is Open to Chinese Investment

After several days of defiance, Chinese telecom equipment manufacturer Huawei announced Monday that it would abide a recommendation from the Committee on Foreign Investment in the United States (CFIUS) that it divest of U.S. technology company 3-Leaf. CFIUS is an inter-agency group charged with reviewing the national security implications of proposed foreign investments in U.S. companies and assets and advising the president about whether or not he should block those transactions on security grounds. CFIUS is composed of representatives from 16 different U.S. government departments and agencies and is chaired by the Secretary of the Treasury.

Last week, CFIUS issued a recommendation that the president block Huawei’s $2 million purchase of assets—including certain patents—from 3-Leaf on the grounds that the transaction presented a risk to national security. (Technically, the recommendation was for the president to compel Huawei to divest of 3-Leaf, since the transaction was consummated in May 2010, before CFIUS was made aware of the deal). Apparently, CFIUS was concerned about Huawei’s ties to the Chinese government—specifically the Chinese military.

Despite assurances from Huawei’s vice president of government affairs, William Plummer, that the company “is 100 percent employee-owned and has no ties with any government, nor with the PLA,” Huawei’s ownership structure is opaque. A letter submitted to administration officials from U.S. Senators Jim Webb (D-VA) and Jon Kyl (R-AZ) alleged that Huawei has a “history of illegal behavior and ties with the People’s Liberation Army, Taliban and Iranian Revolutionary Guard.” The letter also accused Huawei of various patent and trademark infringements and suggested that the small scale of Huawei’s acquisition ($2 million) was designed to enable the transaction to avoid scrutiny—a theory that is lent credibility by Huawei’s decision not to inform CFIUS of its intention to purchase 3-Leaf.

Huawei’s decision this week to abandon the deal spares the president from issuing a formal opinion on the matter, and in all likelihood spares Huawei the added humiliation of a formal rejection from the U.S. president. Meanwhile, Huawei and officials of the Chinese Ministry of Commerce are lambasting the CFIUS decision as further evidence that the United States is closed to Chinese direct investment, and implying that U.S. investors might expect similarly shoddy treatment in China. What to make of all of this?

First, as I’ve argued before (e.g., here, here, and here), the United States should be open to foreign direct investment from all countries and the rules and regulations governing investment should be transparent, consistent, straightforward, and applied equally to suitors from all countries. That being said, state and local governments should be aggressively courting Chinese investment, for the reasons I gave in a paper published 14 months ago:

If it is desirable that China recycle some of its estimated $2.4 trillion in accumulated foreign reserves, U.S. policy … should be more welcoming of Chinese investment in the private sector. As of the close of 2008, Chinese direct investment in the United States stood at just $1.2 billion—a mere rounding error at about 0.05 percent of the $2.3 trillion in total foreign direct investment in the United States. That figure comes nowhere close to the amount of U.S. direct investment held by foreigners in other big economies. U.S. direct investment in 2008 held in the United Kingdom was $454 billion; it was $260 billion in Japan, $259 billion in the Netherlands, $221 billion in Canada, $211 billion in Germany, $64 billion in Australia, $16 billion in South Korea, and even $1.7 billion in Russia.

Some of China’s past efforts to take equity positions or purchase U.S. companies or buy assets or land to build new production facilities have been viewed skeptically by U.S. policymakers, and scuttled, ostensibly over ill-defined security concerns. But a large inflow of investment from China would have an impact similar to a large increase in U.S. exports to China on the value of both countries’ currencies, and on the level of China’s foreign reserves.

In light of China’s large reserves, its need and desire to diversify, America’s need for investment in the real economy, and the objective of creating jobs and achieving sustained economic growth, U.S. policy should be clarified so that the benchmarks and hurdles facing Chinese investors are better understood.

Since 2008, Chinese direct investment in the United States has increased from $1.2 billion to perhaps as much as $6.5 billion last year. If only President Obama’s speech last week at the Chamber of Commerce exhorting U.S. business to invest and hire were given at the Guandong Business Club…

Second, I am no security expert, so I cannot comment on the credibility of CFIUS’ concerns or the senators’ allegations about Huawei. But I think it is entirely reasonable to have a process, like that conducted by CFIUS under the Foreign Investment and National Security Act, to vet transactions to ensure that those presenting risks to national security are brought to the attention of the president, who can then exercise his discretion to block them. Like some prospective export transactions, some prospective purchases of U.S. assets present legitimate security risks that may warrant intervention. Is the process completely apolitical and immune from insider maneuvering? No. Is there scope for politically driven decision making? Yes. Can the process be used to steer a transaction away from the foreign suitor and toward a politically favored domestic entity? Sure. But so far there have been few accusations of that nature, so why make the perfect the enemy of the good?

Finally, in the immediate case, Huawei acted clumsily, if not irresponsibly, and in defiance of a process with which it should by now be quite familiar. In 2008, Huawei had to withdraw its bid for American company 3Com after CFIUS found national security problems, some of which could have been resolved had Huawei been more forthcoming about its ownership structure and business dealings. Likewise, Huawei was excluded from participation in a major network upgrade by Sprint Nextel over similar concerns about the company’s ties. That the company thought it could just circumvent CFIUS carrying that kind of historical baggage and quietly purchase 3-Leaf last May speaks to a profoundly amateurish decision making process at Huawei, or an imperative to conceal something.

Despite the sour grapes expressed by Huawei and its patron, the Chinese Ministry of Commerce, the United States is open and ready to welcome Chinese investment