Felling NAFTA

This article appeared on Cato.org on October 24, 2005.
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It is no secret that world opinion of the United States and itspolicies is unfavorable. Yet, the Bush administration -- withcajoling from Congress -- is exacerbating thoseperceptions with anastonishingly antagonistic trade policy posture. The United Stateshas become an international trade scofflaw.

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

Canada claimed that the U.S. authorities failed to demonstratethat the domestic industry was threatened with injury by subsidizedor dumped Canadian imports, and that the subsidy and dumpinganalyses were both illegal and violated international agreements. ANAFTA panel and WTO agreed.

After exhausting and losing every legal and procedural appeal atits disposal, the United States was handed a final loss by thepanel last month. Under NAFTA rules, the United States is expectedto revoke the duties prospectively and refund the duties -- closeto $5 billion -- that have been collected in error over the pastfour years. But how did the world's richest country andself-proclaimed champion of rules-based trade respond? U.S.officials announced that the lumber duties would remain in placedespite the rulings, and that there would be no refunds. So muchfor the rule of law.

The Bush administration cites a revised injury analysis, issuedin November 2004, as the basis for continuing to restrict Canadianlumber and its refusal to refund duties already collected. But thatrevised analysis is invalid under NAFTA. It was rendered only afterthe record was re-opened and new information considered --contravening the NAFTA panel's instructions to render adetermination on the original record and explicitly forbiddingre-opening of the record.

Under NAFTA rules, the United States is obligated to terminatethe restrictions and refund the duties. At the very least, itshould refund the duties collected through November 2004 beforewhich there was not even a modicum of justification for therestraints. But such compliance appears unlikely. Intransigence onlumber is the latest in an emerging pattern of U.S. disregardandantipathy for the trade rules that are so essential to theglobal economy. The United States has failed to comply with severalother 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 theU.S. positions on Byrd and lumber. The Byrd Amendment, formallyknown as the Continued Dumping and Subsidy Offset Act, became lawin 2000. It mandates distribution of antidumping and countervailingduties collected at the border to the domestic industries thatfiled or supported the original petitions in the underlying cases.Previously, duties collected were commingled with funds in thegeneral treasury. Byrd was quickly challenged by several tradepartners in the WTO and was ultimately found to violate U.S. tradeobligations 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 directlysubsidize the U.S. producers (which is not). Despite the ruling,the United States failed to repeal Byrd and last year the WTOauthorized retaliation by the complainants. Thus far, Europe,Canada, Japan, and Mexico have begun or announced that they willbegin imposing retaliatory tariffs against various U.S. exports.But Congress is unmoved by that retaliation. Apparently, as far asCongress is concerned, international trade rules apply to U.S.trade partners only. There is broad bipartisan support in Congressto keep the Byrd Amendment, and why shouldn't there be? Congresshas been able to dole out $1 billion in subsidies between 2001 and2004 under Byrd without having to defend or justify thedisbursements since the funds don't come directly from U.S.taxpayers. But that $1 billion is modest relative to the $5 billionat stake in the lumber case. If the United States were to complywith the lumber rulings and refund the duties, Congress would losethe opportunity to bestow those massive subsidies on itsconstituents. Thus, U.S. willingness to blatantly ignore theoutcomes in two major dispute settlement cases -- inactions thatwill carry profound costs for U.S. interests -- is being driven bythe crassest of political considerations. Trade policy bedamned.

America's growing disdain for its international tradecommitments is a troubling development. It will now be that mucheasier for U.S. trade partners to break the rules and disregardtheir own commitments. Members of Congress who grandstand overChinese trade and currency policies haven't a leg to stand on.

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