Sometime between 2013 and 2015, Congress will likely take up the issue of reforming the rules that allow the International Trade Commission to operate as a specialized patent court for imports.  This is a good thing.  The ITC has seen an explosion in the number of new Section 337 cases brought over the last five years.  Most of these ITC investigations run parallel to district court cases, and many of them are brought by so-called patent trolls, entities that own patents for the sole purpose of litigating them and benefit from the ITC’s quick procedures and powerful remedies.

The need for reform has never been so obvious as it is today.  Unfortunately, the rhetoric used by reform advocates and the scope of their proposals misguidedly call for the ITC to return to its protectionist roots.

Some proposals offered to fix the problem with patent trolls include strengthening the domestic industry requirement and the public interest analysis, both of which would limit who could bring a successful case to the ITC.  The only reason these tests exist at the ITC in the first place is because Section 337 was designed to protect U.S. producers from foreign competition.  Strengthening the tests simultaneously makes the process more protectionist and increases the differences between ITC and district court litigation that have caused the problems reformers are trying to fix.

Perhaps these reforms really will reduce problems caused by patent troll access to the ITC, but they assume that the ITC serves a legitimate function that should be preserved.  Before taking this move, reformers need to ask, “Do U.S. manufacturers really need more tools to enforce patents against importers?”

I answer that question in the negative in this week’s National Law Journal.  Section 337 is not only a bad patent law, it is a bad trade law, because it has no non-protectionist justification:

One argument made in favor [of Section 337] is that district courts may lack jurisdiction to stop foreign patent thieves from flooding the market with counterfeit goods.  A quick glance at the parties of any recent ITC investigation shows just how unrealistic that concern is.  Respondents in currently ongoing investigations include many big-name American companies such as Apple, Motorola and Intel as well as reputable foreign brands such as Nintendo, Nokia and Sony. Section 337 is a solution to a nonexistent problem.

Treating imports differently just because they’re imports is the essence of protectionism.  Section 337 violates the rules of the World Trade Organization because there is no justification for that different treatment, potentially exposing the United States to embarrassing sanctions and diminishing our ability to provide global leadership in international trade policy.

Curtailing the ability of the ITC to decide patent cases is a good idea, but tweaking the law to address specific problems will not end the protectionism and might make it worse.  Leaving the law intact also leaves the door open to further problems in patent policy.  In addition to easier remedies for patent trolls, the ITC has fewer exceptions for process patent infringement and doesn’t follow the new rules in last year’s America Invents Act limiting joinder of unrelated defendants.  The existence of a second enforcement track operating under a different law makes the entire patent system less responsive to unforeseen policy challenges.

What reform advocates fail to realize is that the protectionist impulse keeping Section 337 alive is in fact the underlying cause of all of its problems.  In a recent Cato Policy Analysis, Still A Protectionist Trade Remedy: The Case for Repealing Section 337, I argue that the problems caused by patent enforcement at the ITC cannot be solved by piecemeal reform and that the whole process is not worth fixing anyway.  Partial reform just kicks the can down the road until the next problem boils to the surface of political attention.

Putting all of his China-bashing aside for a moment, Mitt Romney announced the following in a speech on Monday:

I will champion free trade and restore it as a critical element of our strategy, both in the Middle East and across the world.  The President has not signed one new free trade agreement in the past four years.  I will reverse that failure.  I will work with nations around the world that are committed to the principles of free enterprise, expanding existing relationships and establishing new ones.

The point about President Obama not signing “new” free trade agreements is kind of a technicality.  He did sign some, but the negotiations originated with the Bush administration, so they weren’t “new,” according to Romney.

But I’m more interested in Romney’s “championing” of free trade.  Which nations will he be negotiating with?  He mentions countries that “are committed to the principles of free enterprise.”  That kind of sounds like the language used by California Rep. Devin Nunes, which I mentioned last week.  Nunes proposes starting free trade negotiations with the EU and Brazil.  Is this what Romney has in mind as well?  As noted in my earlier post, I’m pretty skeptical of the chances of success for both of these.  But Romney doesn’t get that specific in terms of trading partners, so I’m not sure exactly what he intends.  Even more reason to be skeptical.

Last month, on the day the president was addressing audiences in the auto-parts-factory-rich state of Ohio, the administration filed a formal trade complaint before the World Trade Organization alleging that China is subsidizing exports of automobile parts.

Last week, at the request of domestic tomato producers operating preponderantly in the state of Florida, the Commerce Department agreed to terminate a 4-year-old agreement, which has allowed tomatoes from Mexico to be sold in the United States under certain minimum price conditions.

Of course it would be cynical to believe that these actions have anything to do with an incumbent candidate wielding Executive branch authorities to curry favor with special interests in major swing states before an election. So let’s make this latest episode a teaching moment about the perils of the antidumping status quo.

The long-standing – but vaguely understood – “trade agreement” between the United States and Mexico that was terminated last week was an agreement between Mexican tomato producers and the U.S. Department of Commerce to “suspend” an antidumping investigation that had been initiated at the request of U.S. tomato producers back in 1996. At the time, U.S. producers alleged that they were being materially injured by reason of tomatoes imported from Mexico and sold at “less than fair value.” The U.S. International Trade Commission agreed, preliminarily, on the issue of injury and the Commerce Department had calculated that the Mexicans were, in fact, dumping – selling in the United States at prices below “fair value.” (Here and here are two of many Cato exposés of what passes for objective administration of the antidumping law at the Commerce Department.)

But instead of carrying the investigation through to the final stage which likely would have included the imposition of duties, a “suspension agreement” was reached under which the Commerce Department would suspend the antidumping investigation if the Mexicans agreed to certain terms – most importantly, that they sell their tomatoes above a minimum benchmark price.  Understanding why the parties would agree to suspend an investigation – and why there are only seven suspension agreements among 240 active antidumping measures – is important to understanding one of the most anti-consumer, anti-competitive aspects of the U.S. antidumping law.

In an antidumping investigation, the Commerce Department calculates a dumping “margin,” which is purported to be the average difference between the foreign producer’s home market prices and his U.S. prices of the same or similar merchandise sold contemporaneously, allocated over the average value of the producer’s U.S. sales, which yields an ad valorem antidumping duty rate. That rate is then applied to the value of imports, as they enter Customs, to calculate the amount of duty “deposits” owed by the importer.

So, if a Mexican tomato producer’s rate has been calculated to be 14.6% and the value of a container of tomatoes from that producer is $100,000, then U.S. Customs will require the U.S. importer of those tomatoes to post a deposit of $14,600. Why is it called a deposit? Because the final duty liability to the importer is still unknown at the time of entry. The 14.6% is an estimate of the current rate of dumping based on sales comparisons from the previous year. But the actual rate of dumping for the current period – and, thus, the actual cost of importing tomatoes from Mexico – is unknown until completion of an “administrative review” of the current period’s sales by the Commerce Department, which occurs after the period is over.

In other words, because of the unique retrospective nature of the U.S. antidumping law, importers DO NOT KNOW the amount of antidumping duties they will ultimately have to pay until well after the subject products have been imported and sold in the United States. The final liability might be larger, much larger, smaller, or much smaller than the deposit. If smaller, the importer gets a refund with interest. If larger, the importer owes the difference plus interest.

How many business ventures would be started – or even qualify for a loan – with so much uncertainty about its operating costs? Imagine your local supermarket operating on the same principles. Imagine ringing up your basket-full of groceries, paying $122.45, and then waiting a year to find out whether you get a rebate or have to issue a supplemental check. Gamblers might enjoy the thrill, but this kind of uncertainty is anathema to business. Most grocery shoppers would buy their groceries somewhere else, where the prices are final.  Likewise, importers and other businesses in the supply chain are likely to stop doing business altogether with exporters who are subject to antidumping measures.

Such is the consequence of our ”retrospective” antidumping system. Every other major country that has an antidumping law has a “prospective” system, whereunder the duties assessed upon importation are final.  And this brings us back to Mexican tomatoes.

The suspension agreement terminated last week had been in effect since 2008 and required Mexican producers to sell their tomatoes at prices above $0.17 per pound between July 1 and October 22 and above $0.22 per pound between October 23 and June 30.  (That agreement was actually the third suspension agreement governing the terms of Mexican tomato sales in the United States since 1996.  The previous two were terminated at the request of the Mexican producers, presumably because market conditions had changed, and they were seeking better terms.)

The advantage of a suspension agreement is that it brings a degree of certainty – even if prices are higher.  It would be collusion but for the fact that the deal is struck between foreign producers and the Commerce Department and not between foreign producers and U.S. producers.  Occasionally, domestic producers desire certainty because its always possible that antidumping rates will decline in subsequent years. But foreign producers are more inclined to covet the certainty of a suspension agreement because the uncertainty that would otherwise confront their customers – U.S. importers – is often enough to chase them away entirely. And that helps explain the dearth of suspension agreements.

The retrospective nature of the U.S. law is just another example of how the antidumping regime is punitive and not remedial.