Tag: imports

Trade Law, Trade War, and the Case of Multilayered Wood Flooring from China

Public angst over China’s rise and the threat of populist currency legislation have prompted speculation about a U.S.-China “Trade War.” With the 2012 elections still a whole year away, there is ample opportunity for campaigning politicians to ignite that fuse.

But pyrotechnics aren’t necessary. Rather than a 1930s-style free-for-all, a trade war—if one were to begin—is more likely to be of the lowercase, “rules-based” variety, where trade restrictions are imposed in compliance (or under the pretense of compliance) with global trade rules. Many of the battles would be waged behind the façade of so-called trade remedy laws.

Antidumping and countervailing duty measures are the most commonly invoked forms of “contingent protectionism” permitted under World Trade Organization rules. Those rules allow member governments to maintain and administer national antidumping and countervailing duty laws to remedy—through the imposition of customs duties—the effects of imports determined to be sold at unfairly low prices (antidumping) or determined to be unfairly subsidized by a government (countervailing). But imposing “remedies” under these laws is contingent upon certain conditions being met. Two core conditions are that the administering authorities need to demonstrate that the imports in question are being dumped or subsidized, and that those dumped or subsidized imports are causing or threatening material injury to the domestic industry.

A determination expected tomorrow from the U.S. International Trade Commission offers a case in point. The Commission will vote on the question of whether dumped and subsidized imports of multilayered wood flooring (MLWF) from China are causing or threatening material injury to the U.S. MLWF industry. An affirmative determination could invite Chinese retaliation because the evidence of a causal connection between imports from China and injury to the U.S. industry is weak to non-existent. If the U.S. government is going to stretch or skirt the evidentiary standards established by domestic law and international treaty, the Chinese government may be inclined to do the same. (In fact, the Chinese government is already alleged to have broken those rules – and the United States is seeking recourse in the WTO – when it imposed antidumping and countervailing duties on U.S. chicken exports in 2010.)

Multilayered wood flooring is a floor covering product—used for the same practical purposes as hardwood flooring, tile, and carpeting. Sales of MLWF are highly dependent upon new housing starts and remodeling expenditures, both of which tanked when the housing bubble burst in 2008. As a result of U.S. housing starts declining from a seasonally adjusted annual rate of 1.1 million units in February 2008 to just 505,000 units in March 2009, as well as the large decline in remodeling activity over the same period, MLWF industry prices, shipments, revenues, and profits declined substantially, as did imports from China and other countries. But since the second quarter of 2009, housing starts have been stable at about 600,000 units per year and remodeling activity has been steady at about $112 billion per year.

Importantly for the injury analysis, this period of stability in housing starts and renovation activity enables an analysis that isolates the effects of imports on the domestic industry. And what is evident is that, as domestic consumption of MLWF picked up, so did U.S. imports, producer shipments, revenues, and profits (from -9.9 percent in 2009 to -1.0 percent in the first half of 2011). Increasing volumes of subject imports correlate with an improving condition of the domestic industry. Throughout the period of stabilization, prices in the U.S. market have been steady, as well. If imports from China were to have an injurious effect on the domestic industry, one would expect the increasing volume of such imports to drive down prices in the United States. But imports from China, on average, do not underprice domestic MLWF. According to the public version of the USITC Staff Report in this matter:

…prices for MLWF from China were below those for U.S.-produced MLWF in 60 of 110 instances; margins of underselling ranged from 1.5 to 36.4 percent. In the remaining 50 instances, prices for MLWF imported from China were above those for U.S.-produced MLWF; margins of overselling ranged from 0.1 to 30.4 percent.

An affirmative finding of injurious dumping and/or subsidization from the USITC tomorrow would require disregard of these and other crucial facts and would warrant closer scrutiny of the antidumping regime. It would also invite similar actions from Chinese trade remedies authorities and then who know where it will lead.

More on the Ex-Im Bank

Last week I blogged about Sen. Dianne Feinstein’s (D-CA) proposal to devote $20 billion of the Export-Import Bank’s funds to promoting manufacturing exports, and why that was a bad idea.

But I realize that my recent call to “X Out the Ex-Im Bank” will be facing some very entrenched interests in Washington, and some well-funded lobby groups. The Bank has historically attracted bipartisan support, and a renewal of its charter sailed through the House Committee on Financial Services earlier this year. The Washington establishment loves this program.

My friend and long-time Ex-Im Bank supporter Gary Hufbauer of the Peterson Institute for International Economics published a critique a few weeks ago of my analysis, and calls for a doubling of Ex-Im’s authorization cap (from $100 billion to $200 billion). His piece is a fair characterization of my arguments, and at least Gary tries to counter them with actual facts and analysis (not always a given in an increasingly poisonous trade policy environment).  But it seems to me that Gary focuses his critique on my assessment of the effectiveness of the Bank. That’s fair enough, of course, but I tried in my paper to make the point that the efficiency or efficacy of the Ex-Im Bank’s activities is kind of irrelevant. The important point, which Gary did not address, is that it is simply not the proper role of the federal government to be in this business at all, even if they can operate “efficiently” (which I do not concede in any case). Where in the Constitution is the federal government authorized to be involved in the export credit business (a business, by the way, that benefits mainly large, profitable companies)?

My opposition to the Bank, in other words, is at a more fundamental level.  On an empirical level—and this is where Gary’s critique is focused—can markets work well enough in trade finance, and if not, can government intervention work better? Gary points to the Bank’s low default rate as evidence that private markets are missing good opportunities:

These figures suggest that the Ex-Im Bank plays a large role in facilitating exports to countries that encounter reluctance from private banks but nonetheless are not ‘bad risks.” Judging by its low default rate, the Ex-Im Bank’s risk assessment seems more correct than the private market.

But I would argue that its low default rate suggests the Ex-Im Bank’s backing is unnecessary. We don’t know that private credit wasn’t available to finance those exports. And even if it wasn’t, private credit not always being available on terms that the trading partners would like does not necessarily signify market failure. So a finance company missed an opportunity that may have paid out. So what? Maybe they had even better opportunities available to them that we (and bureaucratic Washington) don’t know about, or they simply wanted to hold on to their capital for future investment or to meet new reserve standards. The would-be exporter might miss out, but government intervention to direct that private capital (either through mandates, or siphoning it through the Ex-Im Bank) would come at another producer’s or bank shareholders’ expense.

Gary argues that:

Ex-Im’s capability should be strengthened so that the United States can respond when official finance offered by other countries violates the principles of fair competition…Successful multilateral negotiations…are certainly a superior option to tit-for-tat retaliation…[but]…without sufficient leverage…it is difficult to see what will bring China and India to the negotiating table.

But will China and India (and others) see higher Ex-Im funding as “leverage” to bring them to the table, or will it be seen as just the next step in the escalating arms race of subsidized export credit? I suspect, and fear, the latter.

Gary rejects my call to dismantle the Ex-Im Bank, and in fact suggests the government increase the scope of Ex-Im financing to cover 5 percent (rather than the current 2 percent) of total U.S.exports. That seems pretty arbitrary to me. Why stop at 5 percent? Heck, with the Ex-Im Bank being “self-financing” and all, why not go for 100 percent?

Lastly, Gary repudiates my “orthodox free-market reasoning” and the suggestion, attributed to me, that “… the dollar exchange rate alone determines the volume of U.S. exports or the size of the U.S. trade deficit.”  Exchange rates do not equilibrate to keep trade balances at zero, but to keep them in line with the savings and investment balance. The United States has been running persistent deficits because savings has fallen short of investment for many years.

Similarly, Gary takes issue with my analysis on the net effect of Ex-Im financing on jobs:

 …nor do we agree that free markets are sufficiently self- regulating to ensure a constant and low rate of unemployment…If [that proposition] described the American economy, the United States [unemployment would not be stuck at 9 percent-plus.

Here Gary seems to ignore the many interventions in labor markets that can keep unemployment high, no matter what the exchange rate. I’m certainly not under any illusions that the U.S. economy would be totally free market were it not for the existence of the Ex-Im Bank, and I don’t think my paper implied that, either.

Gary and I, not to mention others who study the Ex-Im Bank, will no doubt continue to debate these issues as the Ex-Im Bank’s charter expiry date comes closer.

Trade Agreements Promote U.S. Manufacturing Exports

Do trade agreements promote trade? The answer appears to be yes. In a new Cato Free Trade Bulletin released today, I examine the record of trade agreements the United States has signed with 14 other nations during the past decade.

The impact of those agreements on U.S. trade is a timely subject because Congress may soon consider pending free-trade agreements (FTAs) with South Korea, Colombia, and Panama. Opponents of such deals often argue that they open the U.S. economy to unfair competition from low-wage countries, displacing U.S. manufacturing. Advocates argue the agreements do open the U.S. market further to imports, but they open markets abroad even wider for U.S. exports.

Based on actual post-agreement trade flows, I found that both total imports and exports with the 14 countries grew faster than overall U.S. trade since each agreement went into effect. For politicians obsessed with manufacturing exports, the study should be especially encouraging. Here is a key finding:

Politically sensitive manufacturing trade with the 14 FTA partners has expanded more rapidly than overall U.S. manufacturing trade, especially on the export side. U.S. manufacturing exports to the recent FTA partners were 10.5 percent higher in 2010 compared to our overall export growth since each agreement was signed. That represents an additional $8 billion in manufacturing exports.

I’ll be discussing the three pending trade agreements alongside William Lane of Caterpillar Inc. at a Cato Hill Briefing on Wednesday of this week. Along with the new study on the past FTAs, I’ll be talking about our recent studies on the Columbia and Korea agreements.

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.

Media Miss Real News in Latest Trade Report

This morning’s report from the U.S. Department of Commerce that the pesky trade deficit shrank unexpectedly in October is being hailed in the media as “good news” for the economy, while the real news behind the numbers remains buried.

According to the latest monthly trade report, exports of U.S. goods rose in October compared to September, while imports declined slightly. Rising exports are good news in anybody’s book, but according to the conventional Keynesian and mercantilist logic, falling imports must also be good for the economy because that means consumers are spending more on domestically produced goods, right? Wrong.

In the real world, that assumption is almost always false, as I did my best to document a few weeks back in an op-ed titled, “Are rising imports a boon or bane to the economy?”

The real news in the report is the spectacular rise of U.S. exports to China. Year to date, U.S. exports to China are up 34 percent compared to the same period in 2009. That compares to a 21 percent increase in U.S. exports to the rest of the world excluding China. China is now the no. 3 market for U.S. exports, behind only our NAFTA partners Canada and Mexico, and by far the fastest growing major market.

The politically inflammatory bilateral trade deficit with China is also up 20 percent so far this year, but our trade deficit with the rest of the world excluding China is up 38 percent.

Yet Sens. Chuck Schumer, D-N.Y., and Lindsey Graham, R-S.C., are still talking about pushing a bill during the lame-duck session that would authorized the same Commerce Department to assess duties on imports from China because of its undervalued currency. A cheaper Chinese currency relative to the U.S. dollar supposedly inhibits U.S. exports to China while tempting American consumers to buy even more of those useful consumer goods assembled in China. [For the record, U.S. imports from China so far this year have grown, too, but at a rate slightly below imports from the rest of the world.]

To anyone taking an objective look at the numbers, this morning’s trade report shows that whatever the wisdom of China’s currency policy, it has not been a real obstacle to robust U.S. export growth, nor has it fueled an extraordinary growth in our bilateral trade balance with China. Members of Congress should drop their obsession with China trade and move on to more urgent matters.

China Bill All about Saving Lawmakers’ Jobs

The House is expected to vote today on a bill that would allow U.S. companies to petition the Commerce Department for protective tariffs against imports from countries with “misaligned currencies.” Everybody knows the bill is aimed squarely at China.

Advocates of the legislation say it is about jobs, and they are partly right. The bill is about saving the jobs of incumbent lawmakers who are desperate to appear tough on China trade, which they blame for the loss of U.S. manufacturing jobs.

As my colleague Dan Ikenson and I have argued at length, in blog posts, op-eds, and longer studies,

Let’s hope cooler, wiser heads in the Senate and the White House save us from this election-season folly.

Prominent Economists Debate Trade Deficits

Following Dan’s and David’s recent posts on the trade deficit and its (ir)relevance, allow me to draw readers’ attention to the Economist’s “By Invitation” blog, where invited prominent economists debate topical economic issues.

One of their current questions is: Should governments take any steps to boost exports? That’s an important topic, and an especially timely one given the Obama administration’s ‘National Export Initiative,’ a five-year plan to double U.S. exports. All of us here at Cato’s trade center have previously expressed skepticism about the feasiblity and/or wisdom of that plan, and Dan Ikenson blogged earlier today about the administration’s apparent incoherence in pursuit of that goal

The Economist’s debate talks about industrial policy and export promotion in the abstract, rather than the NEI per se, but I recommend checking it out. Scott Sumner and Laurence Kotlikoff make especially good sense.