Under the statute, “market disruption” exists “whenever imports of an article like or directly competitive with an article produced by a domestic industry are increasing rapidly, either absolutely or relatively, so as to be a significant cause of material injury, or threat of material injury, to the domestic industry.“3 And the term “significant cause” refers to “a cause which contributes significantly to the material injury of the domestic industry, but need not be equal to or greater than any other cause.“4
If the ITC renders an affirmative finding (which is decided by majority vote) or if there is an even split among commissioners, the affirming commissioners must submit recommendations for relief to the president and the U.S. Trade Representative within 20 days of the determination. The USTR then has 55 days to advise the president about the ITC’s findings‐a period during which it must hold hearings on the matter and solicit views from importers, exporters, and other interested parties. It is also authorized to pursue negotiations to address the underlying market disruption with the Chinese government during this period.
Unless an agreeable settlement is reached, the president must announce import relief by the 150th day after the petition’s filing unless he determines that “provision of such relief is not in the national economic interest of the United States or, in extraordinary cases, that the taking of action … would cause serious harm to the national security of the United States.“5 If the president chooses to grant import relief, it must become effective within 15 days of his decision.
It is also important to appreciate what Section 421 is not. It is not an “unfair trade” statute. Unlike the antidumping and countervailing duty laws, a Section 421 case does not include allegations of prices at less than fair value or prices that benefit from countervailable government subsidies. The evidentiary threshold is much lower. All that is alleged‐and all that has to be established‐in a 421 petition is that imports from China are increasing in such a manner as to be a cause of market disruption (or threat thereof) to the domestic industry.
Section 421 is not intended to remedy any wrongdoing on the part of Chinese exporters, but is intended rather to give U.S. producers the opportunity to holler “time out!” as they catch their breath, assess prospects, and attempt to adjust to a new level of competition. Of course there are huge costs to this kind of intervention in the marketplace, thus the president is granted discretion, under the law, to deny relief if he determines that the costs to the broader economy clearly exceed any benefits to the petitioning industry. While such discretion provides some comfort that the law’s relaxed evidentiary standards won’t be routinely abused by domestic interests seeking to stifle competition, there are no guarantees that the president’s discretion will be based exclusively on considerations of the national economic interest. If there were, it would be nearly impossible to conjure a scenario in which the concentrated, temporary benefits to a specific industry receiving protection were not overwhelmed by the costs of that protection on the broader economy. Political considerations always influence decisions that lead to protection.
During the Bush administration (the first administration under which the law was in effect), there were six Section 421 cases filed by domestic parties, and in four of those the ITC found market disruption and recommended import restrictions. In each of those four cases, President Bush exercised his discretion to deny relief. Thus, trade restrictions have never been imposed under this statute.
Some Specifics of the Tires Case
The tires case is noteworthy in several respects, starting with the fact that it is the first Section 421 case initiated during the Obama administration. Petitioners came to regard the law as a dead letter under President Bush, but have been anxious to test its viability under a new president, who promised last year to decide Section 421 cases “on their merits, not on the basis of an ideological rejection of import relief like that of the current administration.“17
The petition in the tires case was filed by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union‐the United Steel Workers, for short‐on behalf of workers in the U.S. tire industry. However, the USW represents workers accounting for only 47 percent of U.S. tire production capacity, so most workers in the industry are not officially supporting the petition.7 Furthermore, this is the first 421 case that does not have a domestic producer as the petitioner. Out of the 10 firms determined to comprise the entire domestic tire industry, none supports the union’s petition for import restraints. Thus, this case, initiated on behalf of no producers and less than half of the industry’s workers, and given the acrimony it has engendered within the U.S. tire‐supply chain, is probably not the kind of case that President Obama idealized when he promised to decide these issues “on their merits.”
In reaching its affirmative conclusion of market disruption in June 2009, the USITC cited the 215‐percent increase in the volume of tire imports from China between 2004 and 2008 as a cause of material injury to the domestic industry. The conclusion of material injury was based on evidence of declining industry capacity, production, shipments, employment, wages, and financial results.8
The argument put forward by respondents in the case (i.e., various producers, exporters, and importers) during the ITC proceeding, which was ultimately rejected in the majority’s determination, is that tire production is stratified among three quality “tiers,” and that competition across tiers is mitigated. Most of the increase in imports from China was of the lowest tier, while most of the tires produced in the United States are of the top two tiers.
Furthermore, 7 of the 10 U.S. tire producers also manufacture tires in China, as well as in other countries.9 And of those 7 firms, 4‐Goodyear, Michelin, Cooper, and Bridgestone‐account for almost 90 percent of U.S. production. Thus, the change in composition of domestic and imported tires in the U.S. market is a function of the decisions of these U.S. producers. And it was a deliberate decision of U.S. producers to reduce production of Tier‐3 tires‐the lowest‐end, lowest‐profit‐margin tires‐at their U.S. plants, and increase sourcing of that tier in China and elsewhere, where lower production costs enable the realization of some profit, which in turn helps support continued production of Tier‐1 and Tier‐2 tires in the United States. Thus, the declining employment, production, capacity, and shipments are all attributable to intentional, conscious planning on the part of profit‐maximizing firms.
For a law that is characterized by its champions as a tool to support our producers vis‐à‐vis Chinese producers and to ensure a level playing field, this test case for Obama pits American workers against American producers, and American workers against American workers. By going after Chinese producers, petitioners ensnare their own employers, as well as fellow American workers, organized or otherwise. Although the lightning rod is China (with all of the negative perceptions that have been cultivated about its trade practices), this case has little to do with China per se, and everything to do with organized labor begrudging U.S. producers for pursuing profit‐ maximizing strategies in a globalized world. In seeking sanctions, petitioners are asking Obama to indict globalization.
Whom Will Protectionism Help, and How
Duties on imports of tires from China are more likely to lead to greater production in other developing countries than to greater production in the United States. U.S. producers have chosen to outsource production of their lower‐tier tires to China because producing those tires in that location makes the most sense economically. But raising the costs of producing in China by imposing trade restrictions would not make U.S. production more attractive. It would not bring back U.S. jobs. It would make Indonesian or Mexican or Brazilian production more attractive, and would likely divert jobs from China to those countries.
According to data compiled by the ITC staff, the average unit price (based on the customs value) of a tire imported from China in 2008 was $38.98.10 A 55‐percent tariff would drive up the unit value to $60.42. But, in 2008, U.S. producers sold 159 million tires, valued at $11 billion, for an average price of $68.60.11 Factoring in mark‐up of the Chinese price, it is reasonable to conclude that prices of American‐ and Chinese‐produced tires might retail for about the same price. But that outcome is highly unlikely to be incentive enough for globalized tire producers to divert production from China to the United States. Instead, producers are much more likely to shift production to Mexico, Brazil, or Indonesia, where the unit prices in 2008 (based on customs value) were $56.26, $48.93, and $32.10, respectively.12
Furthermore, the ITC’s recommended remedy would be in place for three years. The statute expires in four years. What kinds of changes should be expected during the interim that would make the United States a more cost‐effective place to produce Tier‐3 tires, or any tires for that matter? There are no changes‐short of technological advances that raise productivity and reduce the demand for labor‐that could make the United States a better place to produce tires. But this case is about jobs and nothing else, so even that outcome wouldn’t satisfy petitioners. Three years of “relief” will do nothing but perhaps defer the day of reckoning, while imposing heavy costs on the rest of the economy, taxing our relationship with China, and further sullying America’s international standing.
Adverse Economic Impact Is Clearly Greater Than any Benefits
Formal economic models, testimony, anecdotes from representatives of industries in the tire‐supply chain, and common sense analysis all reveal an excessive cost burden on the economy from the proposed remedy of 55‐percent duties in year one; 45‐percent duties in year two, and; 35- percent duties in year three.
In their dissenting opinion, ITC Vice Chairman Daniel R. Pearson and Commissioner Deanna Tanner Okun concluded: