Commentary

Bull in a China Shop

Just as the Bush administration is finding its free trade footing, the president faces a decision by Jan. 17 that could again endanger his trade agenda. Under a U.S. trade statute reserved for China, the president must decide whether to restrict imports of a product used to adjust the height of mobility scooter seats, which are used by those who are physically disabled. Unless Bush exercises his discretion to deny restrictions, he will send a terrible signal to other industries that face Chinese competition — and also to China as it struggles to open up its economy to foreign competition.

Last October, the U.S. International Trade Commission (ITC) determined that, in accordance with Section 421 of the Trade Act of 1974, imports of pedestal actuators from China are causing “market disruption” to U.S. producers of the same merchandise. The ITC also recommended that the president impose quotas.

This is the first case brought under this China-specific statute. The president’s decision will set a precedent and could undermine U.S.-China trade relations at a delicate stage of the ongoing World Trade Organization negotiations.

The facts of this case are intriguing. It turns out that the petitioning “industry” is Motion Systems Corp., the only U.S. company that manufactures pedestal actuators. One of its largest customers, Electric Mobility (EMC), a producer of mobility scooters, ended its relationship with Motion Systems for a variety of reasons. EMC requested bids from other producers around the world — there are no other viable U.S. sources — and chose a Chinese manufacturer, CCL Industrial Motor (CIM), with whom it had cultivated a successful relationship purchasing other parts since 1998.

When Motion Systems was EMC’s supplier, imports of pedestal actuators from China were nonexistent. Imports from China increased only after Electric Mobility terminated its contract with MSC and commenced business with CIM. “If Motion Systems had been more responsive to our needs, we would not have made the decision to stop purchasing from them — a decision that was made prior to our decision to purchase actuators from the Chinese,” wrote EMC’s president.

A private dispute between a company and its supplier has thus been transformed into an international trade dispute. Yet, three ITC commissioners concluded that imports from China are causing a market disruption in the United States. This suggests that either the law is poorly designed or that the affirming commissioners ignored certain facts. Nonetheless, the ITC’s affirmative finding requires an extraordinary interpretation of causation.

In her dissenting opinion, Commissioner Lynn Bragg concluded: “This is not a situation in which subject producers in China targeted the U.S. market with rapidly increasing imports in order to capture sales from domestic producers; instead, this investigation presents the limited circumstance of one supplier in China responding to a specific request from a preexisting customer.”

In its remedy determination, the commission acknowledged the “possibility” that Electric Mobility would not resume purchasing from Motion Systems, but gave the following rationalization: “Motion Systems is not the only domestic firm that appears capable [emphasis added] of producing pedestal actuators. Should Electric Mobility turn to another domestic firm for the pedestal actuators it needs, this would benefit the domestic industry.”

But Commissioner Deanna Okun, the other dissenting commissioner, offered the following view: “I do not think that the trade laws are meant to force a company to purchase from the domestic industry, and in this case from a single domestic supplier.”

Clearly the ITC is at odds over this case, and possibly with the statute itself. How this case comports with Congress’ intent that Section 421 be used only in extraordinary circumstances is difficult to comprehend. It is imperative that the president deny relief to the domestic industry, which in this case is one company whose financial well-being appears largely dependent upon the customer it seeks to punish.

Statutorily, to deny relief, the president must conclude that granting it would be contrary to the national economic or national security interest of the United States. And it is contrary to the national economic interest “only if the president finds that the taking of such action would have an adverse impact on the United States economy clearly greater than the benefits of such action.” That case can be made.

The cost of mobility scooters dropped from $4,100 to $3,800 after Electric Mobility switched to the Chinese supplier of pedestal actuators. By impeding this supply chain, the remedy would have a direct, adverse impact on the physically disabled, as well as the country’s ailing health care insurance industry. No wonder that leading representatives of the disabled community filed comments with the USTR opposing the quotas. Increasing EMS’ costs would also damage its ability to compete with foreign producers of mobility scooters. The prospective costs must outweigh the benefits of a “remedy” that in no way guarantees the resumption of Motion Systems’ sales or profits. Government meddling to pick winners and losers is bad enough; it is a travesty when such meddling produces only losers.

Unless the president denies relief, a flood of frivolous Section 421 cases is likely to be unleashed, undermining the administration’s efforts to revive its free trade reputation and causing unnecessary strains with China. At a time when WTO negotiations are delicate and acutely sensitive to protectionist undertakings, this development could subvert the administration’s entire trade policy agenda.

Dan Ikenson is a trade policy analyst with the Cato Institute.