An entrepreneurial politician is someone who, despite the public’s demand for greater accountability and transparency, persists in exploiting hidden channels to dole out pork and subsidies to favored constituents. That many politicians aspire to this status explains the enduring popularity of the U.S. antidumping law in Washington.
Remove the patriotic, noble-sounding rhetoric that cloaks the antidumping law and what you see is an expensive racket that benefits the few.
Sold by its supporters through an unquestioning media to a gullible public as a tool necessary to protect upstanding American producers and their workers from the ravages of predatory foreigners hell-bent on stealing the U.S. market, the antidumping law escapes the scrutiny it deserves. By encouraging price fixing and other forms of collusion among domestic suppliers and between domestic and foreign suppliers, the antidumping law victimizes U.S. consumers and downstream U.S. firms under the guise of promoting “fair trade.” Moreover, certain unique features of the U.S. antidumping regime — its retrospective assessment of final duty liability under the direction of a biased and discretion-wielding administering agency — gives domestic protection-seeking industries license to extort.
Two antidumping matters recently in the news — Fresh Tomatoes from Mexico and Wooden Bedroom Furniture from China – make good cases in point. Fresh tomatoes from Mexico have been subject to antidumping restrictions since 1996. But those restrictions have taken the form of “suspension agreements,” which essentially suspend the antidumping investigation and the imposition of antidumping duties in exchange for an agreement from the foreign exporters to sell their products in the United States above a certain minimum price.
A few months ago, I had this to say about the Mexican tomatoes case:
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, where under the duties assessed upon importation are final. And this brings us back to Mexican tomatoes.
The suspension agreement terminated [in September 2012] 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 $0.22 per pound between October 23 and June 30. (That agreement was actually the third suspension agreement governing the terms of Mexican tomato sales in the United States since 1996. The previous two were terminated at the request of the Mexican producers, presumably because market conditions had changed, and they were seeking better terms.)
The advantage of a suspension agreement is that it brings a degree of certainty — even if prices are higher. It would be collusion but for the fact that the deal is struck between foreign producers and the Commerce Department and not between foreign producers and U.S. producers.
Over this past weekend, the Commerce Department (acting on behalf of U.S. tomato growers) inked a new suspension agreement with the Mexican producers. Instead of two reference prices ($.22 per pound in winter and $.17 per pound in summer), the new agreement creates four categories of tomatoes, each with its own winter and summer reference price. The winter prices range from $.31 to $.59 (a 41-168 percent increase) and the summer prices range from $.25 to $.47, (a 47-176 percent increase).
Not only will consumers pay more for foreign and domestically grown tomatoes at the grocery store and for salads and hamburgers at restaurants, but the new price-floor terms provide a strong indication that the specter of uncertainty associated with antidumping administration provides the necessary leverage to induce foreign producers into pricing schemes indistinguishable from collusion and price-fixing.
An even more onerous set of circumstances surrounds the latest developments in the Bedroom Furniture case. In that case, the unseemly arrangements also were induced by the uncertainty associated with the retrospective duty assessment system. Two years ago I wrote about the wholesale extortion taking place in a piece called “Tony Soprano Meets the Antidumping Law.”
If the American public were familiar with all of the sordid details of the antidumping case concerning wooden bedroom furniture from China (which I called a Poster Child for Refor back in 2004), they would be angry and ready to change the law. Well, on Tuesday, the Wall Street Journal did its part by running a story about how U.S. producers of wooden bedroom furniture have been extorting cash from their Chinese competition in exchange for dropping pursuit of even higher antidumping duty rates at the Commerce Department.
The Journal reported that about $13 million was paid to a group of 20 U.S. furniture makers between 2006 through 2009, and that a much larger, but unspecified, amount of money went to pay the U.S. firms’ lawyers.
Surprisingly, this practice is not illegal. Charlotte Lane, one of six commissioners at the U.S. International Trade Commission, which presides over antidumping investigations and sunset reviews, said, “I cannot figure out for the life of me how they are legal.” And her colleague, Commissioner Dan Pearson added that these settlements create “additional costs and distortions” in furniture trade, “with little evidence that these distortions have yielded any benefits to the industry overall, the U.S. consumer, or the U.S. taxpayer.”
This pay-to-play scheme is made possible by the peculiarities of the U.S. antidumping system. The United States has the distinction of being the only major economy in the world that uses a “retrospective” system for collecting final antidumping duties on imports. That means that importers pay estimated antidumping duties on goods when they enter the United States, but the final liability is not known until much later—often 18 months to several years later. This system creates enormous uncertainty for importers and works effectively to supercharge the impact of U.S. antidumping measures.
Every year the Commerce Department invites parties involved in antidumping cases to request reviews of the most recent year’s imports to determine the actual amount of dumping for that year, and to set new deposit rates going forward. (More detailed description here.) Neither petitioners nor the respondent companies are required to request a review, and if no requests are made within a given time frame, the duty rates already in effect continue.
So, if a foreign exporter has a 10 percent antidumping duty rate on his products, but is managing to continue making sales in the United States, he might not want to request a review of the previous year’s sales, which could establish a higher final liability and a higher deposit rate going forward. But petitioners can request a review of those sales. In the furniture and shrimp cases, petitioners requested reviews of dozens of companies that “could live with” the rates they were paying, thereby introducing the specter of greater uncertainty, more legal and other expenses, and the risk of higher duties. That’s when petitioners offered to rescind those review requests in exchange for payments.
Now, if that doesn’t amount to extortion, I’m not sure what does.
Last month (January 2013), the Commerce Department issued its preliminary determination in the 7th annual administrative review in the Furniture case, which includes a discussion about the Chinese companies reviewed in the proceeding. One year ago, the U.S. producers had requested that Commerce conduct administrative reviews of 198 Chinese furniture exporters. But by August 2012, review requests had been rescinded with respect to 100 of those companies after payments estimated to be collectively in the $50 million range were received by the domestic petitioners.
As in the past, the U.S. petitioners — company executives and their lawyers in Washington — who harp on about the imperative of hitting cheating, predatory foreigners with duties to bring furniture production and its jobs back state-side have revealed a less salutary motive behind the law. Remove the patriotic, noble-sounding rhetoric that cloaks the antidumping law and what you see is an expensive racket that benefits the few.