Commentary

Felling NAFTA

It is no secret that world opinion of the United States and its policies is unfavorable. Yet, the Bush administration — with cajoling from Congress — is exacerbating thoseperceptions with an astonishingly antagonistic trade policy posture. The United States has become an international trade scofflaw.

Consider the U.S. position in its long-running softwood lumber dispute with Canada. The United States initially imposed antidumping and countervailing duties on Canadian lumber in 2001. Canada responded by challenging the legal and analytical propriety of those measures in the dispute settlement systems of the North American Free Trade Agreement (NAFTA) and the World Trade Organization (WTO), both bodies whose rules governing trade and dispute settlement were coauthored by the United States.

Canada claimed that the U.S. authorities failed to demonstrate that the domestic industry was threatened with injury by subsidized or dumped Canadian imports, and that the subsidy and dumping analyses were both illegal and violated international agreements. A NAFTA panel and WTO agreed.

After exhausting and losing every legal and procedural appeal at its disposal, the United States was handed a final loss by the panel last month. Under NAFTA rules, the United States is expected to revoke the duties prospectively and refund the duties — close to $5 billion — that have been collected in error over the past four years. But how did the world’s richest country and self-proclaimed champion of rules-based trade respond? U.S. officials announced that the lumber duties would remain in place despite the rulings, and that there would be no refunds. So much for the rule of law.

The Bush administration cites a revised injury analysis, issued in November 2004, as the basis for continuing to restrict Canadian lumber and its refusal to refund duties already collected. But that revised analysis is invalid under NAFTA. It was rendered only after the record was re-opened and new information considered — contravening the NAFTA panel’s instructions to render a determination on the original record and explicitly forbidding re-opening of the record.

Under NAFTA rules, the United States is obligated to terminate the restrictions and refund the duties. At the very least, it should refund the duties collected through November 2004 before which there was not even a modicum of justification for the restraints. But such compliance appears unlikely. Intransigence on lumber is the latest in an emerging pattern of U.S. disregard andantipathy for the trade rules that are so essential to the global economy. The United States has failed to comply with several other verdicts of the WTO dispute settlement body in recent years, including a 2003 indictment of the so-called Byrd Amendment.

A little digging reveals a scandalous relationship between the U.S. positions on Byrd and lumber. The Byrd Amendment, formally known as the Continued Dumping and Subsidy Offset Act, became law in 2000. It mandates distribution of antidumping and countervailing duties collected at the border to the domestic industries that filed or supported the original petitions in the underlying cases. Previously, duties collected were commingled with funds in the general treasury. Byrd was quickly challenged by several trade partners in the WTO and was ultimately found to violate U.S. trade obligations because it punishes foreign exporters twice — first, by imposing the duties as a remedy to dumping or subsidization (which is acceptable), and then by using those funds to directly subsidize the U.S. producers (which is not). Despite the ruling, the United States failed to repeal Byrd and last year the WTO authorized retaliation by the complainants. Thus far, Europe, Canada, Japan, and Mexico have begun or announced that they will begin imposing retaliatory tariffs against various U.S. exports. But Congress is unmoved by that retaliation. Apparently, as far as Congress is concerned, international trade rules apply to U.S. trade partners only. There is broad bipartisan support in Congress to keep the Byrd Amendment, and why shouldn’t there be? Congress has been able to dole out $1 billion in subsidies between 2001 and 2004 under Byrd without having to defend or justify the disbursements since the funds don’t come directly from U.S. taxpayers. But that $1 billion is modest relative to the $5 billion at stake in the lumber case. If the United States were to comply with the lumber rulings and refund the duties, Congress would lose the opportunity to bestow those massive subsidies on its constituents. Thus, U.S. willingness to blatantly ignore the outcomes in two major dispute settlement cases — inactions that will carry profound costs for U.S. interests — is being driven by the crassest of political considerations. Trade policy be damned.

America’s growing disdain for its international trade commitments is a troubling development. It will now be that much easier for U.S. trade partners to break the rules and disregard their own commitments. Members of Congress who grandstand over Chinese trade and currency policies haven’t a leg to stand on.

U.S. credibility on trade issues is waning at a time when strong leadership is desperately needed. With the Doha Round of WTO talks fast approaching in what experts believe to be a do-or-die meeting in Hong Kong in December, U.S. mockery of the rules could not come at a worse time.

Daniel J. Ikenson is the associate director of the Center for Trade Policy Studies at the Cato Institute.