Topic: International Economics and Development

More Farcical Trade Remedies Cases at the ITC

The menacing trade remedies laws have done their share to breed cynicism about U.S. free trade rhetoric. But this greeting on the website of the most recent U.S. petitioner is apropos of the tone conveyed by those laws.

Pretty scary, huh? Not as scary as being an importer of Chinese-manufactured, off-road tires, nowadays.

Having been acquainted with that grizzly, you shouldn’t be surprised to learn that Titan Tires, one of the biggest American manufacturers of tires for agricultural machines, went on the offensive Monday, when it (along with several labor unions) filed petitions with the U.S. International Trade Commission and the Commerce Department for relief from allegedly subsidized and dumped import competition from China.

To win trade relief, Titan et. al. will need to demonstrate that the domestic industry is materially injured or threatened with material injury by reason of subsidized or dumped imports. It’s generally not very hard to satisfy the meager statutory thresholds for demonstrating injury, but what is so absolutely stunning to those naïve enough to expect a modicum of justice from the process is how petitioners can distort the truth with impunity before the ITC.

Although most of the crucial economic facts are redacted from the public version of this latest petition (which is accessible on the ITC’s website), here is a sample of the injury argument presented therein. From page 18:

As the table below shows, Titan’s domestic production, capacity utilization, shipments and employment data all demonstrate current material injury.

Then there is a table with the relevant data for the periods 2004-2006 redacted. Then, on page 19:

Titan’s financial data regarding its certain OTR tire operations also indicate the company is experiencing material injury.

 Then there is another table with the financial data redacted.

So how can one know, without seeing those numbers, that petitioners are taking liberties with the truth? Well, beyond the grizzly on Titan’s website is a list of SEC filings, in which the company presents an entirely different assessment of its performance and prospects. Here’s the annual report from 2006, and here are some excerpts:

The Company recorded sales of $679.5 million for 2006, which were 45% higher than 2005 sales of $470.1 million. The significantly higher sales level was attributed to the expanded agricultural product offering of Goodyear branded farm tires and the expanded earthmoving, construction and mining product offering of Continental & General branded off-the-road (OTR) tires… Income from operations was $22.0 million for 2006 as compared to $12.0 million in 2005.

So the company’s sales were 45 percent higher in 2006, and its operating profits were 83 percent higher. The company’s first quarter 2007 10-Q filing reveals continued revenue and operating profit growth in 2007.

Titan is also having difficulty keeping up with growing U.S. demand:

Due to capacity constraints at Titan’s Bryan, Ohio, OTR tire facility, the Company is adding OTR tire capacity at its Freeport, Illinois, and Des Moines, Iowa, facilities.

Capital expenditures for 2006, 2005 and 2004 were $8.3 million, $6.8 million and $4.3 million, respectively. Capital expenditures in 2006 were used primarily for updating manufacturing equipment, expanding manufacturing capacity and for further automation at the Company’s facilities. Capital expenditures for 2007 are forecasted to be approximately $16 million to $18 million and will be used to enhance the Company’s existing facilities and manufacturing capabilities including additional capacity for OTR tire production.

Adding production capacity is not typical behavior for a company that is under assault by injurious imports. Adding capacity to the tune of more than doubling the previous year’s capital investment reflects confidence in the company’s future prospects. And confident, Titan should be:

As of January 31, 2007, Titan estimates $171 million in firm orders compared to $122 million at January 31, 2006, for the Company’s operations.

Titan’s 2006 Annual Report also boasts that $100 invested in Titan in 2001 would have been worth $436.47 at the end of 2006, whereas the same investment in the S&P 500 index would have been worth $135.03. That is some very impressive performance.

Of course, contrasting the dire self-assessments of industries petitioning for trade relief with the upbeat assessments of industries seeking to attract investors has been a favorite pastime of trade remedies’ observers. It’s been a running joke within the international trade bar that lying to the SEC lands you in jail, while lying to the ITC lands you protection from foreign competition.

Farm Subsidies: All You Need to Know

As Congress considers a new farm bill in coming weeks, Cato has launched a web resource, Downsizing the U.S. Department of Agriculture, which offers a menu of cuts to shrink the department’s $89 billion budget by 90 percent.

A nice complement to the Cato pages is an updated farm subsidy database from the Environmental Working Group.

Go to Cato to understand why farm subsidies are bad economics. Go to EWG to find out exactly how much millionaire “farmers” such as Edgar Bronfman and David Rockefeller are receiving.

In winning the House last year, the Democrats portrayed themselves as reformers willing to take on wealthy special interests for the benefit of average families. With the farm bill, they have a chance to prove it by making cuts to subsidies that are strongly supported by both liberal and conservative policy experts. 

Socialists in Bulgaria Pondering Flat Tax or Tax Rate Reductions

American politicians, even supposed conservatives, are timid about embracing tax reform, yet left-wing parties in Eastern Europe are slashing tax rates and adopting simple and fair flat taxes. The latest example comes from Bulgaria, where the Socialist Party is trying to decide between across-the-board tax cuts and a 10 percent flat tax:

Bulgarian socialists will discuss plans to impose a flat tax rate at the party congress that starts on Saturday, the event’s agenda shows. …The Socialists are the senior partner in the three-way ruling coalition and hold half of the 16 ministerial portfolios. The party has singled out lowering the individual tax burden as one of its main priorities and will consider two proposals to achieve that goal. The first option is to lower the tax brackets to 10%, 16% and 24%, respectively. The second is to impose the 10% flat tax for all income above a certain tax-exempt amount.

The United Kingdom Now Has a Bigger Government than Germany

The Financial Times reports that the German Finance Ministry has produced a study showing that the burden of government spending in Germany is on track to fall below the level in the United Kingdom. Indeed, if OECD data is reliable, the UK became a bigger welfare state this year.

This is mostly a poor reflection on British PMs Tony Blair and Gordon Brown, who have presided over an explosion in the size of the state sector. But German politicians deserve a small pat on the back for imposing at least a modest bit of discipline on the growth of government spending:

Public spending in Germany, as a percentage of total economic output, has fallen sharply in the past three years and is fast approaching British levels, according to a finance ministry study. The report, obtained by the Financial Times, shows state expenditures reached 45.6 per cent of gross domestic product last year, compared with 44.1 per cent in the UK, which is generally thought of as a low-tax, low-spending economy.

…Instead of focusing on the fiscal deficit — the difference between state expenditures and revenues — the report concentrates solely on spending. The [German] spending-to-GDP ratio fell from 47.1 to 45.6 per cent between 2004 and 2006, making Germany the fourth-smallest spender in the eurozone. The same ratio rose from 42.7 to 44.1 in the UK over the same period.

…”Good progress has been made in the recent past, mainly in cutting public sector headcounts,” said Winfried Fuest, economist at the business-funded IW economic institute. But he expressed worries about government being tempted “to spend more now that the economy is doing better”.

You Mean It Could Get Worse?

The House Agriculture Committee yesterday released its preliminary discussion draft of the commodity section of the Farm Bill (the section that deals with the subsidy programs). But the changes proposed by Rep. Colin Peterson (D, Minn.), House Agriculture Committee chairman, are precisely the wrong sort of changes needed to avoid legal challenges to its farm programs and inject life into the Doha round of global trade talks.

Chairman Peterson has suggested increasing most of the price-linked subsidies, and paying for the increase out of the money currently allocated for direct subsidies that farmers receive regardless of production or market prices.

When farmers are paid according to the amount they produce, this encourages overproduction and depresses world market prices. That infuriates our trade partners, and we can expect more of the type of legal challenge to U.S. farm programs as the cotton case (more here) and the new case against U.S. farm subsidies brought by Canada (background here).

While paying farmers “money for nothing” may be fiscally irresponsible, it is less market distorting than the types of subsidies that Chairman Peterson is proposing to increase. It makes no sense to increase the types of payments that are causing legal trouble. And if commodity prices fall from the current historic highs, then these subsidies would have a necessarily higher budgetary impact than the current setup.

My colleage Dan Griswold and I have proposed bribing farmers to let us scrap the whole thing altogether.

Bark Dwarfs Bite in China Currency Legislation

Yesterday, THE much-anticipated, passable-with-a-veto-proof-majority, WTO-consistent, legislative response to Chinese intransigence over its undervalued currency was introduced in the Senate.  As it turns out, “much-anticipated” and “legislative” appear to be the only apt adjectives.  It is unlikely to pass with a veto-proof majority, and my initial analysis leads me to conclude that its provisions would likely contravene U.S. WTO commitments. 

That being said, I am heartened by the bill because, despite all the hostile rhetoric and hand wringing on Capitol Hill, it seems to reflect a surprising degree of realism and rationality that I assumed was missing in Congress.  It quietly acknowledges that precipitous currency adjustment could be destabilizing and that U.S. WTO obligations are, in fact, worthy and worthwhile commitments to honor. 

On the continuum of prospective proposals under consideration ranging from innocuous to the nuclear 27.5% across-the-board-tariff, the “Currency Exchange Rate Oversight Reform Act of 2007” is relatively tame.  It has its problems and it is unnecessarily intrusive, but if this represents the final word of Congress on the matter, I’ll take it. 

Here is the gist of the bill. 

First, it makes “currency misalignment” instead of “currency manipulation” the trigger for action, which effectively lowers the threshold, and is thus not good.  Changing the designation effectively strips the Treasury Secretary of the discretion to determine whether currencies are manipulated intentionally for purposes of gaining a trade advantage.  Under the new rule, a formula will be used to determine automatically whether a conclusion of misalignment is rendered.  The precise formula is still a bit unclear to me, though. 

Depending on the degree of misalignment, countries will either be put on notice and consultations requested or priority action will be considered right away.  As far as I can tell, it would be a minimum of six months after the designation of misalignment before any punitive action can be taken against a priority country.   

Punitive action includes a cessation of U.S. government purchases of goods and services from the offending country; U.S. denial of support for multilateral institution or OPIC financing of projects in the offending country; U.S. denial of support for proposals and other items of interest to the “offending” country within multilateral institutions; adverse consideration of proposals to graduate the offending country from non-market economy status to market economy status for purposes of the antidumping law, and perhaps most significantly; adverse treatment of exchange rate conversions for purposes of calculating antidumping deposits and owings.  That would lead, inevitably, to higher dumping duties.  

Ultimately, if insufficient action is taken by the offending country to bring its currency into alignment, the
United States can lodge a formal complaint in the WTO (although it is unclear to me exactly what WTO provision the offending country would be violating). WTO-consistency was one of the driving considerations of this bill.  But I rather doubt that the antidumping provision would pass muster with a dispute panel, since Article 2.3 of the Antidumping Agreement seems to require that currency conversions be made using the exchange rate on the date of the U.S. sale.  The new legislation would allow the
U.S. authorities to substitute its estimate of the market-based exchange rate for the official exchange rate. Finally, and very importantly, as is the case with respect to Section 421 trade cases (the China-specific safeguard, agreed as part of China’s accession protocol), the president has the authority under this bill to reject any remedial/punitive measures on national economic security grounds.  That’s a very important safety net because the executive branch is typically much less willing to engage in the sort of punitive actions that Congress tends to demand reflexively. 

Thus, at the end of the day, even though the legislation is banal and unnecessary, something was going to materialize legislatively.  Congress talked itself into a corner with its continuous complaining about the administration’s failure to address “unfair” Chinese practices.  Congress promised to get tough if the administration continued to fiddle.  So it had to walk the walk.   

Despite some harsh provisions, it could have been worse.  Practically speaking, at the end of the day, there might not be much difference between this legislation and the gradual, negotiations approach to the Chinese currency issue that is favored by the administration, and to which this legislation is supposed to be an alternative.  Here’s why. 

By the time the bill introduced yesterday makes it through conference, passes both chambers of Congress, gets vetoed by the President, and then secures two-thirds majorities in both chambers to override the veto to become law, and then the new regulations are promulgated, it will likely be too late for the statutory September 15 Treasury report to be issued.  The earliest report that could identify Chinese currency misalignment would be the March 2008 report, and the earliest that countervailing action could take effect would be September 2008.  The Yuan has appreciated against the dollar by nearly 8.5 percent since July 2005.  Since the Chinese government allowed for a wider band of daily fluctuation and appreciation two months ago, the Yuan is now on a steeper trajectory of appreciation.  By then—15 months from now—the Yuan is likely to have appreciated considerably more.  It could very well have appreciated “between 15 and 40 percent,” which has been the estimate of undervaluation for the past few years.  If that is the case, there should be no need for action.  

But, finally, given the feature of executive override and precisely because sanctions are a long way off under this bill, I can’t see it passing Congress with a veto-proof majority.  But a more hostile, impose-sanctions-first-ask-questions-later bill is also unlikely to pass with a veto proof majority.   

Thus, the preferable and much wiser gradual approach it is, by default. 

Does Globalization Undermine Redistribution?

An article in the UK-based Guardian notes that wealthier regions within nations and wealthier nations within Europe are increasingly unhappy with the amount of money being used to subsidize less productive areas. The article suggests the growing unease is a function of globalization, though it is more plausible to argue that the high tax rates associated with redistributionist policies are becoming more untenable because of globalization:

…disputes over public money and how to spread it fairly are rife across large tracts of Europe, eroding national solidarity, feeding separatism, encouraging populism, and generating friction between Europe’s wealthy centres of excellence and their less fortunate national hinterlands. The rich bits of Europe are revolting. And it is some of the most successful and attractive cities on the continent that are in the revolutionary vanguard. From the fashion and finance mecca of Milan to the hi-tech centre of Munich, from the world’s diamond capital, Antwerp, to the vibrant coastal hub of Barcelona, Europe’s most dynamic cities and regions are increasingly rebelling against “subsidising” the poorer parts of their countries, demanding to keep their home-grown wealth, and causing headaches for central governments. … In Italy, the centre-left government of Romano Prodi has just received a drubbing in local elections, particularly in the north, not least because the north perceives Rome as the agent pilfering its hard-earned cash only to hand it over to the “spongeing” south where the Mafia and Camorra soak up the subsidies. …In Belgium, Flemish nationalists complain that the public sector payrolls in Wallonia are twice the size of those in Flanders. “It’s majority socialist in the south, the last Soviet republic in Europe,” says Filip Dewinter, the Vlaams Belang leader. “They’re stealing our money with the collaboration of the government in Brussels. We’re a hard-working people, very prosperous, low unemployment, and we’re giving them €12bn (£8bn) every year to finance their social security. We can stand alone.” In Germany, the wealthy southern states of Bavaria and Baden-Württemberg balked at the Berlin government’s health service reforms last year because they had to pay more into the national kitty than poorer parts of Germany. In Britain, in the debate over Scottish devolution or independence, the wealthy south-east appears increasingly aggrieved over the Barnett formula that ordains higher per capita public spending in Scotland than in England.