Tag: trade war

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.

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.

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.

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.

Good News on Cotton

We’re another step closer to putting a shameful chapter of America’s trade policy behind us, with the good news that the House today approved (by a margin of 223-197, roll call here) an amendment offered by Rep. Ron Kind (D-WI) and Rep. Jeff Flake (R-AZ) to prohibit the use of funds in the appropriations bill to provide payment to the Brazil Cotton Institute: the administration signed a deal last year with Brazil to send $147 million a year of taxpayers money to Brazil so they would look the other way while the United States continued to subsidize our cotton farmers illegally. Mr Kind and Mr Flake rightly argued that was an egregious use of taxpayer money. Some lawmakers agitated against stopping the payments in case it sparked a trade war, but the answer to that, of course, is to bring U.S. cotton policy into compliance with WTO rules (and rulings). More background here.

Someone in Europe Is Talking Sense on Carbon Tariffs

The nominee for EU Trade Commissioner Karel de Gucht has taken the brave step of opposing carbon tariffs, called for by many European politicians (including, notably, French President Nicolas Sarkozy).

In the first day of his confirmation hearings, Mr. de Gucht expressed concern that carbon tariffs were a possible first step in a “trade war” and implied that they were in any event inconsistent with current trade law. (I agree.) He also called for abolishing tariffs on goods beneficial to the environment as a trade-friendly way to reduce greenhouse gases, and expressed support for the Doha round of multilateral trade talks. (More here.) While the Trade Commissioner’s influence over actual trade policy in the EU is arguably limited, it is good to have someone in the post who is instinctively suspicious of green protectionism and friendly towards the WTO.

The European Parliament is due to vote on the European Commission nominees (en masse) on January 26.