Tag: countervailing duty

Secretary Pritzker Forgets About Steel Users

Commerce Secretary Penny Pritzker authored an Aug. 12, 2016, opinion piece in the on-line version of the Cleveland Plain Dealer that emphasizes her desire to protect the steel industry from import competition. She states, “We take seriously our ongoing responsibility to combat unfair trade that threatens the viability of this industry and the good people in our steel-making communities.” Pritzker notes that at the Department of Commerce, “Currently, we are enforcing 161 anti-dumping (AD) and countervailing duty (CVD) cases on steel products to combat the countries, like China, that are trying to dump steel on our market.”

There is no doubt that steel producers are being affected by global steel overcapacity, as I have noted here, here, and here. Much of the overcapacity is due to China’s use of various policy measures to stimulate steel industry expansion. In 1995, China produced 95 million metric tons (MMT) of steel, equal to the amount produced in the United States. Twenty years later in 2015, Chinese production had risen more than eight-fold to 803 MMT. U.S. production decreased 17 percent over that same period, amounting to 79 MMT in 2015. Global production more than doubled, rising from 753 MMT in 1995 to over 1600 MMT today. The boost in China’s output exceeded 700 MMT and accounted for more than 80 percent of the increase for the entire world. It is reasonable to conclude that China’s actions have been the most important factor in glutting the global steel market.

A world marketplace so strongly influenced by government policies can hardly be described as fair. The effects of the steel surplus are felt around the globe, including in the United States. U.S. steel producers have been dealing with relatively low-priced imports from a number of countries. They have responded by filing many AD/CVD petitions, which helps to explain Sec. Pritzker’s statement about her role in “enforcing 161 AD/CVD cases.” Those measures restrict the importation of a variety of steel products from numerous countries. They have succeeded in making the United States a somewhat high-priced island in a world awash with low-priced steel. The AD/CVD restrictions apparently haven’t been sufficient, though, to ensure the profitability of American steel producers. United States Steel Corporation reported a loss of $1.5 billion in 2015.

However, what Sec. Pritzker ignores is that efforts to restrict imports to the benefit of steel producers come at the expense of steel users. U.S. manufacturing firms that use steel as an input have to pay prices that are higher than those paid by competitors located in other countries. This makes steel-consuming manufacturers vulnerable to losing sales to lower-priced imported goods that compete with them in the U.S. marketplace. Economists long have understood that imposing trade restrictions lowers the economic welfare of the country that puts them in place. Since the steel-consuming sector is so much larger than the steel-producing sector, the welfare losses for the overall U.S. economy are magnified.

The Bureau of Economic Analysis (BEA) is part of Sec. Pritzker’s Department of Commerce. BEA data indicate that value added by “primary metal manufacturing” amounted to $59.7 billion in 2014. (Note: Primary metal manufacturing [NAICS 331] includes nonferrous metals, such as copper, aluminum, magnesium, lead, tin, silver, and gold, so is much broader than the steel industry.)  Downstream manufacturers that utilize steel as an input generate value added of $990 billion, more than 16 times larger than primary metal industries. The disparity in employment also is more than 16 times greater. Primary metal manufacturing employed 400,000 people in 2014. Downstream manufacturers employed 6.5 million. Employment by U.S. steel producers is somewhere in the range of 100,000 – 150,000.

The point is not that the U.S. steel industry is small and insignificant, because clearly it is not. Rather, the point is that the problems of the steel industry need to be kept in perspective. The bottom line is that it would be a poor policy choice to attempt to protect steel producers in ways that do much greater harm to steel users. Those who wish to provide policy support for the steel industry should look for approaches that do not involve restricting trade.


Financial Times Offers Wrong Response to China’s Steel Overcapacity

The Financial Times (FT) published a June 9, 2016, editorial titled, “Coping with a world of too much Chinese steel.”  (Link)  The editorial makes the case correctly that China’s steel overcapacity has spilled onto world markets and is having negative effects on steel makers in the European Union and United States.  It appropriately argues against Western governments nationalizing their steel industries or providing “other indefinite state support.” 

The editorial errs, however, in suggesting that “the best option is a judicious and limited use of trade remedies against subsidized imports.”  Economists have understood for decades that when a nation imposes trade restrictions, it always reduces its own economic welfare.  It is difficult to argue that imposing a policy measure that reduces a nation’s economic welfare is a good thing to do.  The country would have been better off simply by doing nothing.  (“Don’t do something, just stand there!”)

There are two easily understood reasons why imposing trade restrictions won’t help the situation.  The first is that the global overcapacity is so great that market prices for commodity grades of steel are low worldwide.  If imports of hot-rolled steel from China are limited by newly implemented antidumping or countervailing duty (AD/CVD) measures, relatively low-priced hot-rolled coil could easily be imported instead from countries such as South Korea, Brazil, or Turkey.  Curtailing imports from China is likely to provide relatively little relief to domestic steel manufacturers. 

The second reason is that restricting imports in an attempt to benefit steel producers will have the effect of increasing costs of production for manufacturers that use steel as an input.  These downstream users constitute a much larger segment of the economy.  In the United States, for example, data compiled by the Bureau of Economic Analysis (BEA) at the Department of Commerce indicate that economic value added by “primary metal manufacturing,” which includes steel, copper, aluminum, magnesium, etc., amounted to about $60 billion in 2014.  Downstream manufacturers that utilize steel as an input generated value added of $990 billion, more than 16 times larger.  Employment by primary metal manufacturers was 400,000, while downstream manufacturers employed 6.5 million, also 16 times greater.  Use of trade remedies against steel imports amounts to an attempt to benefit the few at the expense of the many.

To elaborate, the United States currently imposes some 150 AD or CVD orders against a large number of steel products from a large number of countries.  These restrictions have had the effect of making U.S. steel prices relatively high, while in the rest of the world they are relatively low.  Still, important portions of the American steel industry have not been sufficiently profitable.  United States Steel Corporation, the country’s largest producer, reported a 2015 loss of $1.5 billion.  So U.S. prices are somewhat high, but not high enough to cure the industry’s commercial problems.


“Leveling the Playing Field Act” Hurts the Broader Economy

The Senate leadership is working hard to find the votes needed to support the trade agenda. Key to progress is passage of trade promotion authority (TPA), also known as “fast track”, which would commit Congress to vote up or down on a trade agreement rather than offering amendments. Opposition to trade liberalization has been a comfortable policy stance for senators beholden to organized labor and to the anti-growth left. Opponents on the right profess concern about the possible loss of national sovereignty and generally are reluctant to give President Obama greater authority of any kind.

Political realities sometimes require offering sweeteners to make a difficult vote more palatable. Trade adjustment assistance (TAA) has been legislated in the past to help workers and firms that are having difficulty dealing with competition from imports. Even though the economic and equity arguments in favor of trade-related unemployment benefits are relatively weak (Why treat people who are unemployed due to international competition differently than those who lose their jobs due to changes in technology, for instance?), the political rationale for TAA at times has been compelling. It’s not surprising that both the House and Senate have been searching for a way to pass both TPA and TAA. The president has expressed his preference to sign them at the same time.

With the outcome of the Senate vote on TPA not yet clear, it’s not surprising that there has been a search for additional sweeteners. The steel industry has pushed to include Sen. Sherrod Brown’s (D-OH) poorly named “Leveling the Playing Field Act” as part of the TAA package.  (My op-ed on the Act is available here.) Given the need to woo as many votes as possible, the Senate leadership has agreed to this request.

It’s not my intention to criticize pro-trade senators who are doing their best to pass TPA. Life can be complex, and political life all the more so. However, it may be worthwhile for free-trade proponents to think carefully about the implications of adding Sen. Brown’s measure as part of this effort to provide the president with negotiating authority.

Here’s the rub: the protectionist provisions of the “Leveling the Playing Field Act” would take effect as soon as the president signs the TAA legislation, but potential trade liberalization (if any ever gets enacted) would not be realized until sometime well in the future. The Trans-Pacific Partnership (TPP) – the first agreement that might be concluded once the president has negotiating authority – would not begin to be implemented until 2017 at the earliest, perhaps much later. Although details of the agreement are not yet public, restrictions on politically sensitive imports are likely to be phased in over perhaps as many as 20 years. Thus, the United States would be making its antidumping/countervailing (AD/CVD) regime more protectionist immediately in exchange for future liberalization that may or may not ever occur.

If possible, Senate leaders should remove the Leveling the Playing Field Act from TAA and let adjustment assistance be considered on its own merits. If that isn’t feasible, the effective date of Sen. Brown’s legislation should be changed so that it does not become operational until the eventual implementing legislation for TPP also becomes effective. That way there will at least be some growth-promoting liberalization to help offset the reduced economic welfare caused by the Leveling the Playing Field Act.


Managing Sugar Markets Gets Even Messier

In a previous blog post I discussed the implications of the proposed agreement to settle the antidumping and countervailing duty (AD/CVD) cases brought by U.S. sugar producers against imports from Mexico.  That article amounted to a lament on the difficulties of trying to balance sugar supply and demand by government fiat.  Market managers employed by the U.S. Department of Agriculture (USDA) and the Department of Commerce (DOC) have a really hard job, as do their counterparts in the Mexican government.  Not only do the supply, demand, and price of sugar tend not to stay quiet and well behaved, but important firms involved in the business also can prove (from the perspective of the program managers) to be vexing and disputatious.

Such is the case with Imperial Sugar Company and AmCane Sugar, both of which are U.S. cane refiners that rely on ample supplies of raw sugar to run their operations.  Much of that raw sugar comes from other countries; in recent years Mexico has been the largest supplier to the United States.  It now appears that U.S. cane refiners were not too happy with either the original proposed settlement that was announced on October 27, 2014, or the final suspension agreements announced December 19 that set aside the underlying AD/CVD investigations. 

One source of that unhappiness seems to have been that the initial proposal would have allowed 60 percent of imports from Mexico to be in the form of refined sugar rather than raw.  The U.S. and Mexican governments acknowledged that concern in the December 19 agreement by reducing the allowable level of refined sugar imports to 53 percent.  Another issue bothering U.S. refiners likely was the relatively narrow spread between the original proposal’s import reference prices, which were 20.75 cents per pound for raw sugar and 23.75 cents per pound for refined.  U.S. refiners may have feared suppression of their processing margins, if imported refined sugar from Mexico could have been sold at only 3 cents per pound above the price of raw sugar imports.  The December 19 version increased that price spread to 3.75 cents (22.25 cents for raw and 26.0 cents for refined).  From the standpoint of the refiners, that margin still may be uncomfortably narrow.


Leveling the Playing Field?

Sen. Sherrod Brown (D-OH) introduced a bill on Wednesday called the “Leveling the Playing Field Act.” According to the accompanying press release, the proposal would “restore strength to antidumping and countervailing duty laws” via a “crack down on unfair foreign competition.” The bill includes several provisions relating to practices used by the Department of Commerce to determine dumping and subsidy margins (i.e., the extent to which imported products are unfairly underpriced). It also contains modest changes to procedures used by the U.S. International Trade Commission (ITC) in deciding whether domestic industries have been “materially injured” by imports.

Since I have had only indirect exposure to the role of Commerce in antidumping and countervailing duty (AD/CVD) investigations, I will leave analysis of those proposed changes to others. However, my 10 years of experience as chairman and commissioner at the ITC provide a reasonable basis for commenting on the bill’s suggested modifications to the injury determination.

The existing AD/CVD statutes instruct the ITC to “evaluate all relevant economic factors” that relate to the effects of imports on the industry under consideration. A number of those factors are specifically mentioned, including the industry’s profits. Not being satisfied with just having the commission examine profits in general, the Brown bill adds, “gross profits, operating profits, net profits, [and] ability to service debt.” As a practical matter, the commission already looks in detail at an industry’s profitability and its ability to repay debts, so this additional wording would contribute nothing of substance.

The Brown bill would add a provision to the effect that an improvement in the industry’s performance over the period of investigation (normally about three years) should not preclude a finding that the industry has been materially injured by imports. Yes, there can be circumstances in which an industry’s results are strengthening, yet it is still being held back by import competition. However, the commission’s existing practice already considers this possibility, so the new language would not really change anything.

The bill also adds a section addressing the possible effects of a recession on the ITC’s injury analysis. It states that the commission may extend its period of investigation to begin at least a year before the recession started, which would allow before and after comparisons of how the domestic industry has performed. The ITC already has authority to adjust the period of investigation under special circumstances, but it relatively seldom does so.


U.S.-Mexico Sugar Agreement: A Tribute to Managed Markets

The U.S. Department of Commerce (DOC) announced Oct. 27 that it had reached draft agreements with Mexican sugar exporters and the Mexican government to suspend antidumping and countervailing duty (AD/CVD) investigations on imports of sugar from that country.  Commerce has requested comments from interested parties by Nov. 10, with Nov. 26 indicated as the earliest date on which the final agreements could be signed.  Given the obvious level of consultation by governments and industries on both sides of the border leading up to this announcement, it’s reasonable to presume that the agreements will enter into effect within a few weeks.

Suspension agreements that set aside the AD/CVD process in favor of a managed-trade arrangement are relatively rare.  They sometimes are negotiated when the U.S. market requires some quantity of imports, and when the implementation of high AD/CVD duties would be expected to curtail trade severely.  This would have been the case, assuming the duties actually had entered into effect.  However, as this recent blog post indicates, it’s not at all clear that the U.S. International Trade Commission (ITC) would have determined that imports from Mexico were injuring the U.S. industry.  A negative vote (a vote finding no injury) by the ITC would have ended these cases and left the U.S. market open to imports of Mexican sugar. 

What are the key provisions of the agreements?  There are restrictions on both the price and quantity of imports from Mexico.  Sugar will only be allowed to be imported into the United States if it is priced above certain levels:  20.75 cents per pound (at the plant in Mexico) for raw sugar, and 23.75 cents per pound for refined sugar.  (For comparison, U.S. and world prices for raw sugar currently are about 26 cents and 16 cents, respectively; for refined sugar about 37 cents and 19 cents.)  Additional price controls on individual Mexican exporters based on their alleged prior dumping (selling at a price the DOC determines to be less than fair value) will further raise the prices at which they will be allowed to sell.


Managed Trade for Sugar from Mexico?

Mexican Economy Secretary Ildefonso Guajardo was in Washington this week arguing on behalf of an agreement to suspend the U.S. antidumping/countervailing duty (AD/CVD) investigation against imports of sugar from Mexico.  The case will soon enter its final phase, with the U.S. International Trade Commission (ITC) expected to determine early next year whether the U.S. sugar industry has been injured by imports from Mexico. 

In the context of North American sugar politics, an agreement to suspend the AD/CVD process and implement a managed-trade arrangement makes some sense.  Both U.S. and Mexican sugar industries already are more or less wards of the state, or at least are very heavily guided and controlled by their respective governments.  Both governments have given indications that they are interested in settling this dispute.  The history of bilateral sugar trade has been dominated by government intervention rather than by free-market economics.  It seems almost natural to take the next obvious step by allowing Mexican sugar to enter the United States only under terms of a suspension agreement (i.e., with the quantity limited or the price set high).

It’s worth mentioning that Mexican sugar growers are the only ones in the world currently allowed to sell as much sugar as they wish in the U.S. marketplace.  Even U.S. growers are not permitted to do so.  Years ago they gave up that right in exchange for retaining an almost embarrassingly high level of price support.  That strong price incentive was inducing them to grow more sugar than the market could absorb.  Under the provisions of the U.S. sugar program, that excess sugar could end up being owned by the U.S. Department of Agriculture at considerable expense to taxpayers.  So U.S. sugar growers made the decision to sell less sugar, but keep the price high.

Mexican growers, on the other hand, obtained unfettered access to the U.S. market in 2008. That followed a contentious period of bilateral trade in sugar and high-fructose corn syrup (HFCS) dating to 1994, which was when the North American Free-Trade Agreement (NAFTA) began to be implemented.  In a nutshell, the United States adopted a much more restrictive approach to imports of Mexican sugar than Mexico thought had been negotiated, and the Mexicans reciprocated regarding imports of HFCS. 

Given that historic context, the open access to the U.S. market enjoyed by the Mexicans since 2008 seems to be rather an anomaly.  Why not go back to the good old days of closely managed trade?