Commentary

The Stealth Trade War

The lethal combination of job attrition and the dawn of a new election season have conspired to generate a ferocious strain of anti-trade rhetoric in the United States. U.S. presidential aspirants and other demagogues decry trade agreements as corporate scams that line the pocket of rich executives, while hollowing out America’s manufacturing base.

The lightening rod for this animus has been China, with its $100 billion bilateral trade surplus and undervalued currency. Calls for trade restrictions are en vogue on the campaign trail and on Capitol Hill, where legislation to impose a 27.5 percent across-the-board tariff on Chinese products was introduced recently.

Last November, the Bush administration announced plans to cap imports of Chinese brassieres, nightgowns, and knit fabrics. Days later, China cancelled plans, announced just weeks earlier, to make big purchases of U.S. agricultural products. Some worry the heated rhetoric and this tit-for-tat may mark the beginning of a trade war. How naïve. A U.S.-China trade war has been underway for years, and the United States has been firing almost all the shots. Its weapon of choice: the obscure but highly protectionist antidumping law.

The United States maintains 54 of its outstanding 288 antidumping measures against products from China. In 2003, new cases against China were initiated at the brisk pace of one per month. These actions, which often yield trade-halting duties at the U.S. border, hit consumable products like honey, apple juice concentrate, mushrooms, and pencils, as well as raw material inputs like creatine monohydrate, polyvinyl alcohol, barium carbonate and ferrovanadium.

Supporters contend that the antidumping law is necessary to ensure “fair trade,” and to “level the playing field.” The ability of foreigners to sell products in the United States at prices lower than those they charge at home, or at prices below their full cost of production, could be the result of foreign government policies — like high tariffs, weak bankruptcy rules, failure to enforce anti-competition laws, etc. — that distort competitive conditions in that market, allowing certain producers to reap supernormal profits with which they can cross-subsidize cheap exports. But this claim is dubious at best.

U.S. antidumping determination methodology does not even include an investigation into whether any presumed market-distorting policies exist. Instead, the U.S. Department of Commerce interprets any price differences as compelling evidence of their existence. However, charging different prices to different customers and selling below cost are legitimate, routine, commercially rational strategies of competition.

Accordingly, antidumping determination methodology is entirely divorced from its theoretical justification, as normal commercial conduct is routinely punished under the guise of combating unfair trade. In U.S. cases involving China, the standards are even more absurd.

If Chinese exporters are selling at prices in the United States that are lower than some arbitrary benchmark — a figure concocted by valuing Chinese production inputs like labor, materials, and energy at the prices prevailing in some third country, like India, and then adding a fictional amount for imaginary profit — affirmative dumping margins are made. This so-called non-market economy method routinely generates triple-digit antidumping duties.

During the same week as the administration’s textile announcement, the Commerce Department levied antidumping duties on Chinese color television receivers. In the 12-month period leading up to the initiation of that case, imports of color television receivers from China totaled $245 million. While this amounts to only about half of the value of the affected textile products, the television case will have a more adverse effect on Chinese exporters and U.S. consumers.

The recent textile action aims only to restrain the rate of import growth. By contrast, the evidence shows that once an antidumping order is applied, trade drops off considerably. In 2001, antidumping duties were slapped on Chinese honey. Import value from China subsequently declined by 65 percent, from $22.3 million in the year prior to the order to $7.7 million in the year following. In a case involving steel concrete reinforcing bars, imports from China declined from $31 million in 2000 to just $10,241 in 2002 — a drop of 99.9 percent.

In less than four months, the United States has announced new antidumping restrictions against five different products from China and has initiated four new investigations. While antidumping protectionism operates with relative stealth in the United States, the Chinese are well aware of the menace. One Chinese industry after another has fallen victim to rampant, indiscriminant antidumping abuse.

As the world’s fastest growing economy, responsible in large part for the economic recovery underway in Asia, China could exert some of its enormous and growing leverage. Exporters do not want to be shut off from this explosive growth. But as Chinese calls for antidumping reform and restraint have gone unheeded by the United States, the next move may be for China to launch of few high-profile cases of its own against U.S. exporters. At that point, the current, one-sided trade war may experience a nasty and dangerous escalation.

Dan Ikenson is a trade policy analyst with the Cato Institute and coauthor of the recent book, Antidumping Exposed: The Devilish Details of Unfair Trade Law.