Topic: Trade and Immigration

U.S. to Comply with WTO Ruling on Zeroing

I have been warning on this blog that U.S. failure to comply with the latest WTO ruling against the antidumping calculation technique known as zeroing could open a Pandora’s box that could undermine and eventually destroy the rules-based trading system.  Well, in the words of the old Gilda Radner character from SNL, Emily Litella, “Nevermind!”

The U.S. mission in Geneva announced yesterday that, despite its view that the Appellate Body’s decision was intrusive and wrongheaded, the United States intends to comply.  That is very good news, for at least two reasons. 

First, zeroing severely and unjustly inflates antidumping duty assessments and collections, creating bigger trade barriers.  Depriving the Commerce Department of that methodological trick will undoubtedly lead to lower dumping margins overall.

Second, it is important that the United States show some respect for the outcomes of dispute settlement.  Berating and disregarding those outcomes only serves to erode support for the system.  And if the United States expects to get some mileage as a complainant out of its likely string of cases before the WTO (a subsidy case against China was filed two weeks ago, and the Democratic congress is at least rhetorically fixated on enforcement, enforcement, enforcement), it should show some deference to the rules.

Compliance with the zeroing ruling will likely take at least one year (and probably more), so it’s not entirely out of the question that sentiments could change in Congress or the administration before then. 

On the broader question of whether the WTO dispute settlement system is fair, please check out the online debate between Robert Lighthizer and myself, hosted by the Council on Foreign Relations.

What Goes Around Comes Around

Last week’s formal WTO challenge of certain Chinese tax laws by the United States should obviate an important reality. If China is running afoul of its commitments and the United States expects China to make amends, the United States must lead by example. That brings us to the zeroing dispute, with its latest twists and turns.

After much internal deliberation, the Commerce Department announced late last year that it would alter its antidumping calculation methodology by no longer “zeroing” dumping margins under the average-to-average comparison methodology in original investigations (described in this post). This decision was in response to a WTO indictment stemming from a complaint filed by the EC in 2003. January 17, 2007 was to be the effective date of the change, but implementation was postponed at the request of Sen. Max Baucus (D-MT) and Rep. Charles Rangel (D-NY), chairs of the Finance and Ways and Means Committees, respectively, who wanted more time to educate Congress about the ruling, the change in practice, and its implications.

Just before the announced postponement, another indictment was issued by the WTO Appellate Body concerning the zeroing practice in a complaint lodged by Japan in 2004. That ruling was much broader in scope, condemning zeroing under almost every conceivable comparison methodology and in both investigations and administrative reviews.

As a result of that latest ruling, the Ways and Means Committee has been soliciting comments from interested parties on how the United States should respond. Congress and the administration are said to be working closely, exploring U.S. options, one of which is simply NOT to comply. 

Noncompliance is a legitimate option, and that is part of the beauty of the rule of trade law within the WTO. Contrary to the view of some of its detractors, the WTO is not world government. It does not impose the will of some faceless bureaucracy on powerless countries. It does not usurp national sovereignty. On the contrary, the WTO is powerless as a stand-alone entity. Its rules are the product of the consensus of its members, and to establish new rules, consensus among all of its 150 members is required. (This helps explain the slow going of the Doha Round and the eight-year duration of the previously-concluded round of multilateral trade talks — the Uruguay Round). Members do not have to comply with rulings, which are always framed in the benign, “sorry-to-trouble-you” tone that “recommends” that rules or laws or measures be brought into conformity with this or that WTO agreement.

Despite this comply-if-you-will approach, the dispute settlement system has endured 12 years and 358 disputes with compliance or mutually-agreed resolution achieved in every case concluded thus far. One reason for this record of success is that, should members choose not to comply, the complainant whose gripe goes unresolved is often entitled to retaliate or “suspend concessions.” This retaliation often takes the form of raising tariffs, but could include other measures. 

Another incentive to comply is that noncompliance could be contagious. It’s nice to have the theoretical option of disregarding the verdict, but exercising that option can be costly and risky. If the United States chooses to ignore the Appellate Body’s findings in the Japanese zeroing case and fails to revise its zeroing practice, the Chinese may be more inclined to take this approach if and when its tax laws are found to violate its WTO commitments. One of the major justifications for encouraging and welcoming China’s membership in the WTO was that membership would improve prospects that Chinese policies going forward would be transparent, predictable, and fair. And that would encourage greater commercial engagement. If China comes to view its WTO obligations as optional, the economics of the trading system and the political support for it will suffer immensely.

Endorsing the U.S. Trade Complaint Against China

On Friday, the U.S. Trade Representative initiated a formal challenge of various Chinese tax programs within the dispute settlement system of the World Trade Organization. It was only the third formal challenge of Chinese policies since that country joined the WTO in 2001.

Specifically, the United States alleges that Chinese tax policies that encourage production for exportation and that discourage the use of imported materials and components in the production process constitute subsidies that harm U.S. interests and violate the obligations China undertook when it joined the WTO in 2001.

I have been critical of the administration’s various trade policy errors of commission and omission over the years. Last week I lamented U.S. trade representative Susan Schwab’s failure to articulate the broad case for trade.  Today, I have only kudos for the USTR. Not only was the United States well within its rights to bring this case, it was the right thing to do, politically and economically. 

Free trade purists might disagree, arguing that if China wants to subsidize its exports to the United States, Americans should write the Chinese thank you letters for financially supporting our consumption. And accordingly, we shouldn’t intervene if the Chinese want to squander their resources that way. I think that argument holds water up to a point — a point that we are well beyond and where the costs of the status quo outweigh its benefits. 

Yes, we benefit as consumers from subsidized Chinese production, but only until the consensus for a liberal trading order collapses. At that point, retrograde protectionism threatens not only the benefits of that subsidized consumption, but the benefits of trade more generally, and the conditions that make relatively freer trade possible. Furthermore, the U.S. trade relationship with China is wealth-creating in both countries without need of subsidization. Safeguarding continuation of the flow of the benefits of trade to both countries by expecting China (and the United States) to play by the established rules seems a reasonable compromise to me.

The rules-based trading system has been remarkably successful at promoting trade and investment, and its continued success depends upon adherence to its rules and respect for its institutions — particularly by the world’s large economies.

China has demonstrated that it doesn’t respond well to bilateral threats — if for no other reason than its desire to avoid the appearance of being bullied. China knows what its obligations are. But it also knows that one of the many benefits of its membership in the WTO is that its policies are above board unless and until the dispute settlement body of the WTO finds against them. If China wants to drag its feet with respect to compliance and reform, bringing cases against China within the WTO might become fashionable.  

We are already witnessing a deterioration of support for trade and its institutions in the United States precisely because of perceptions that policymakers are doing too little to enforce the existing rules. I don’t advocate knee-jerk invocation of our rights to dispute settlement — there is plenty of room for deliberation and consultation (which is perpetually in play under the radar). 

To the extent that Friday’s actions serve as a release valve for some of the political pressure that has been building in Congress for unilateral actions against China, it is already a success. By bringing the case through formal WTO channels, Congress will see that there are, in fact, alternatives to dangerous, unilateral sanctions. In that sense, this case could reduce the likelihood that Congress intervenes and mucks everything up and it could actually improve long-term prospects for the U.S.-China trade relationship.

With Trade Advocates Like These…

My colleague Dan Griswold salutes President Bush for ditching the traditional script and touting the broader benefits of trade in a speech yesterday in New York City. I would like to emphasize how rare, refreshing, and late-in-coming the President’s comments were.

One explanation for the growing resistance to trade liberalization in the United States is that the Bush administration’s “pro-trade” message has been weak, even self-defeating. Typically, when the President or members of his administration take to the podium, the message on trade is monothematic: exports are great and our trade agreements promote them.

The following is an excerpt from a speech the President gave at the headquarters of Caterpillar, Inc. in Peoria, Illinois on Tuesday:

Last year we exported a record $1.4 trillion worth of goods and services. Now, in order to export something, somebody has to make it. In other words, when I talk about numbers, behind the numbers is [sic] people who are providing the service and/or making the product. So the more one exports, the more likely it is people are going to be working.

Not once in the speech did the President allude to the benefits of imports, which are also important to Caterpillar, as sources of components and raw materials. Certainly, the mention of $1.4 trillion worth of exports in the context of the relationship between exports and jobs might invite the slightly curious to scratch their heads and wonder whether last year’s record $2.2 trillion worth of imports had an adverse impact on jobs.

Indeed, that is the central premise of many of trade’s opponents: exports create jobs, thus imports destroy them. By not mentioning that our record level of imports last year occurred alongside economic growth of 3.4 percent, the creation of 2 million net new jobs, and an unemployment rate that ended at a slim 4.5 percent, the President sacrificed an opportunity to drive home the point that imports do not undermine economic growth or job creation.

In fact, Dan Griswold has written extensively on the strong positive relationship between import growth and the growth of U.S. manufacturing output. (Here’s one of his offerings.) Basically, U.S. businesses account for about half of all U.S. imports. If you want to curtail imports, all we need is a handsome recession.

Now consider Exhibit 2. In response to the President’s announcement that he will seek extension of trade promotion authority, which expires at the end of June, U.S. Trade Representative Susan Schwab, yesterday, offered: 

The agreements enacted under TPA have helped us dramatically increase exports, which are likely to be an engine that drives the American economy to continued strong growth this year. U.S. exports to the 10 countries with which we implemented free trade agreements between 2001 and 2006 grew twice as fast as U.S. exports to the rest of world.

Okay, perhaps U.S. exports to those countries have increased faster. But is that all there is to tout?  What about the fact that we can purchase fresh grapes and blueberries, imported from Chile, in the middle of winter, at about the same price we purchase the same fruit from U.S. growers in the summertime?  (Just check the origin labels at your local grocer). By focusing exclusively on export potential, our trade advocates reinforce the myth that trade is exclusively a boon to business (“BIG BUSINESS,” of course), which comes at the expense of ordinary, “middle class” Americans.

Still, worse than the failure of policymakers supportive of trade to articulate its full benefits is when policymakers betray their own ignorance in a way that gives fodder to those counseling retreat from the global economy. Ways and Means Committee Ranking Member Jim McCrery (R-LA) claimed yesterday that “Our free trade agreements since TPA went into effect have reduced our trade deficit by $5.5 billion.”  I’m not sure how that was calculated or what exactly the figure represents, but presumably the comment is intended to demonstrate that trade agreements are good. I think it backfires.

If the exclusive purpose of trade policy is to promote exports, then it’s pretty easy for trade’s detractors to point to the massive and growing trade deficit and conclude we are losing grievously at trade. Our $800+ billion trade deficit is larger today than when TPA was enacted in 2002.  Using McCrery’s logic, trade is thus a menacing plague. I don’t know, maybe this is just a naïve thought but if you base the thrust of the case for trade on the export side, then the massive and growing trade deficit is all of a sudden an albatross around the necks of liberalizers. But the truth is that the trade account has virtually nothing to do with trade policy and efforts to somehow connect the two cannot serve a pro-trade agenda.

It’s no wonder we are having a national debate on the merits of trade, despite the overwhelming evidence of the relationship between greater openness and economic growth. Policymakers who claim to favor trade liberalization have been incapable or unwilling to articulate the complete and proper argument. That will have to change soon.

Tax-Funded Media Bias

This morning on Anti-Marketplace Radio–heard on tax-funded NPR stations–there was a fine example of the quiet, unconscious liberal bias that pervades NPR and other mainstream-liberal media. Host Scott Jagow interviewed Jody Heymann, director of the McGill Institute for Health and Social Policy, who had just published a report on paid leave around the world. The segment began, “The U.S. lags far behind the rest of the world when it comes to workplace policies such as paid maternity or sick leave.”

Then Jagow asked, “Where else is the U.S. falling short?” Noting that no federal law mandates paid vacations or sick leave, he asked, “How much are states picking up the slack and how much is the private sector picking up the slack?”

So where’s the bias? Let us count the ways. First, of all the studies in the world, only a few get this kind of extended publicity. It helps if they confirm the worldview of the producers. For instance, I don’t believe Marketplace covered this Swedish study (pdf) showing that the United States is wealthier than European countries (perhaps most provocatively, that Sweden is poorer than Alabama – perhaps because Europe has the kinds of laws the Heymann study advocates). Second, Heymann was allowed to appear without a critic. Third, the interviewer never asked a critical question. He never noted that the countries that Heymann was praising are poorer than the United States and in particular that many are suffering from high unemployment brought on by such expensive labor mandates. Fourth, look at the language of the questions: “lags behind,” “falling short,” “picking up the slack.”

The unstated, perhaps unconscious, premise is that countries should have mandatory paid leave and other such programs. If we don’t, we’re “falling short” and someone must “pick up the slack.” Language like that, which is very common in the media, posits government activism as the natural condition and then positions any lack of a government program as a failure or a problem.

President Bush Answers Critics on Trade

President Bush has gone on the offensive this week, touting the generally solid performance of the U.S. economy and the danger posed to our market-driven prosperity by rising protectionist sentiments in Congress.

In a speech yesterday in the historic Federal Hall in New York City, the President sounded a clear trumpet in defense of free trade. In a rarity for politicians of any stripe, he not only extolled the virtues of exports but also of imports, and bluntly warned against “walling off America from world trade.”

Here are a few highlights from the speech:

“As we improve free trade, consumers get lower prices.” 

“Since World War II, the opening of global trade and investment has resulted in income gains of about $9,000 a year for the average American household.” 

“The Doha Round … is a great opportunity to lift millions of people out of poverty around the world.” 

“I know there’s going to be a vigorous debate on trade, and bashing trade can make for good sound bites on the evening news. But walling off America from world trade would be a disaster for our economy. Congress needs to reject protectionism, and to keep this economy open to the tremendous opportunities that the world has to offer.” 

Of course, the President will need to work with skeptical Democrats in Congress to pass pro-trade legislation and stop any anti-trade measures.

In the meantime, the President can put his pro-trade words into action unilaterally. A recent article in The Weekly Standard cites several good ideas from your favorite libertarian think tank on actions President Bush could take independently of Congress to expand the freedom of Americans to trade in the global economy.

Doha, TPA Extension, and the Farm Bill: the Axis of Frustration

President Bush went to Illinois yesterday, asking for Congressional renewal of his authority (called “Trade Promotion Authority”) to negotiate trade agreements and send them to Congress for an up-or-down vote without amendment. The present TPA expires at the end of June 2007. For those of us who have strong doubts about the ability of members of Congress to take the broad view when considering trade agreements, TPA is a necessary–but not sufficient–condition for the United States to pursue trade liberalization in partnership with other nations, including the ailing Doha round of world trade negotiations and other preferential trade agreements like those underway with South Korea and Malaysia. (This Washington Post article has a good overview of the stakes and politics behind the battle for TPA.)

(Side Note: it was surely no accident that President Bush chose to make his case at the headquarters of a successful exporter [a sterling company Caterpillar may be] rather than, as Grant Aldonas suggests in the Post article, a company that delivers cheap imports to consumers. Mercantalism is alive and well, in case there were any doubts.)

Basically, the bind is this: without TPA, Doha is dead. But many are suggesting that lawmakers will be reluctant to extend TPA if no Doha deal is imminent. Similarly, the new Farm Bill, due for enactment in September, may be an extension of the unsatisfactory 2002 Farm Bill if the Doha round does not exert significant pressure to reform, even though reform of U.S. agricultural policy would go a long way to helping the round succeed.

Don’t look to key members of Congress for their support in unraveling this knot, though. An article at the Delta Farm Press website contains some worrying statements from the new House Agriculture Committee Chair Colin Peterson. The money quote:

There’s pressure on us to change the farm bill because “that’s the only way we can get a trade deal,” said Peterson, a Minnesota Democrat. “Now, I’m sorry, but I’ve had enough of these trade deals. And unless we can get something good out of, I don’t give a darn if we get one.”

Something tells me that Chairman Peterson’s statement was not meant to be a be read as an endorsement of unilateral trade liberalization.