Summoning the Ghosts of Smoot and Hawley

Members of the 110th Congress haven’t been shy about expressing their disdain for trade. No fewer than two dozen trade-related bills, almost all of which are antagonistic toward U.S. trade partners or outright protectionist, were introduced in the first seven months of this Congress. While some of those bills were crafted mostly for political effect, it is pretty clear that some hostile trade legislation will at least make it to the floors of both chambers this session or next. With Congress adjourned for August recess, here’s where things stand.

For all intents and purposes, the completed bilateral trade agreements with South Korea, Colombia, Peru, and Panama have been shunted aside to consider, instead, enforcement-oriented legislation and the expansion of trade adjustment assistance legislation. Although House Ways and Means Committee Chairman Charles Rangel of New York has stated his intention to promote the Peru Agreement, it is doubtful that he will take to the task with much vigor or any success. His colleagues have different plans for trade policy.

Consider the names of some of the bills before Congress: The Trade Prosecutor Act; The Trade Enforcement Act; The Trade Law Reform Act; The Japan Currency Manipulation Act; The Balancing Trade Act; The Trade Adjustment Assistance Improvement Act, and the still-nameless legislation that would revoke normal trade relations status for China. Implicit in all of this: trade liberalization is bad, our trade partners cheat, and the folly of our embrace of globalization is evidenced by its massive human toll.

The Chinese “currency issue” has dominated trade discussions on the Hill. In the Senate, the currency bill most likely to make it to the floor is S.1607 (the Baucus-Grassley-Schumer-Graham Bill). It requires the Treasury Department to issue semiannual reports on the currencies of our trade partners, with action triggered against countries whose currencies are found to be fundamentally misaligned. If a currency is designated as such (and the country has been tagged for “priority action” because its central bank has engaged in “protracted, large-scale” exchange market intervention with partial or full sterilization) the country would have 90 days to take corrective measures. If insufficient measures are taken on the part of the offending country, a series of actions by the U.S. government would be triggered.

Most problematically, the bill mandates that all subsequent antidumping calculations (for products that are subject to antidumping measures) would require the conversion of foreign prices into U.S. dollars using the rate of exchange that would be observed if the currency weren’t misaligned. It is still unclear how the “would be observed” rate would be determined, but it’s crystal clear that such actions would be found to violate the WTO Antidumping Agreement.

If after one year, the currency is still misaligned, the legislation mandates the U.S. Trade Representative to lodge a formal complaint within the WTO. Again, it’s unclear which provision of the WTO agreements would be violated by the action or inaction of the foreign government.

The House’s currency bill contains similar provisions, but is more aggressive and more problematic. It would treat currency misalignment as an export subsidy, and mandates application of countervailing duties to offset those “subsidies.”

But currency isn’t the only topic on the congressional trade agenda. They’re thinking enforcement and reparations, too.

The Trade Adjustment Assistance Improvement act would broaden the scope for compensating workers and communities adversely affected by import competition. Financial assistance would be made available to primary and secondary service workers who can demonstrate that they lost their jobs to outsourcing.

On August 1, Senate Finance Committee Chairman Max Baucus of Montana introduced S.1919, The Trade Enforcement Act of 2007, which is a bill that consolidates his favorite provisions from the various stand-alone bills introduced earlier in the year. Among other things, it would:

• create a Chief Enforcement Officer at the USTR to identify, investigate, and prosecute cases where trade partners are not in compliance with their obligations;
• establish a panel of retired federal judges to review adverse WTO decisions, and to advise Congress on the efficacy of those decisions before any steps toward compliance are undertaken;
• eliminate presidential discretion to not impose tariffs or quotas recommended by U.S. International Trade Commission in so-called China Safeguard cases;
• eliminate presidential discretion to not apply the countervailing duty law to so-called non-market economies;
• lower the evidentiary threshold for finding “material injury” in antidumping cases, which would encourage the initiation of more antidumping cases.

In the House, the inclination toward mischief is even greater than in the Senate. While versions of most of the provisions specified in S.1919 exist in various House bills, there is also legislation that would reverse U.S. implementation of a prior WTO ruling regarding the antidumping calculation practice known as zeroing. There are also provisions in the Trade Law Reform Act that would result in the calculation of higher antidumping duties by the Commerce Department.

There seems to me a huge inconsistency in all of these provisions. On the one hand, it says, let’s beef up our enforcement and prosecutorial capacity and bring more WTO cases. On the other hand, it says, let’s enact provisions that are likely WTO-inconsistent, and while we’re at it, show defiance of the WTO by affirming our belief that its rulings are beneath us. In other words, Congress wants to rely on the WTO to compel other countries to act in accordance with their commitments, while Congress decides on a case- by-case basis whether such WTO rulings against U.S. policies have merit.

This Congress, more than any in my lifetime, is apt to upset the apple cart in ways we may regret for years to come.