Politicians and protectionists have been served by the enduring myth that the United States is the most open market in the world and its government earnestly adheres to the rules of trade, while others, intent on exploiting U.S. naivety, cheat and pursue state-sponsored mercantilism. Ohio Senator Sherrod Brown is both a politician and a protectionist, so he was probably twice as tickled by Friday’s U.S. Department of Commerce determination that South Korean exporters are dumping “Oil Country Tubular Goods” (OCTG) — a class of steel products used primarily in oil and gas well projects — in the U.S. market. He intoned:
Today’s ruling is an important step toward ensuring a level playing field for our workers and businesses. Ohio’s steel tube manufacturers are among the strongest in the world. But their ability to compete is undermined when countries violate trade law by subsidizing their producers or when exporters dump their products in the U.S. market. By levying trade tariffs against countries like South Korea, we can protect local jobs and strengthen our economy, creating new jobs along the way.
Let’s begin with the hypocrisy, which won’t even include discussion of the numerous subsidies bestowed upon Ohio producers or whether Sen. Brown worries that dumping by Ohio exporters may have “undermined” workers and businesses in a variety of foreign countries, who subsequently did less business with other U.S. companies.
Let’s set aside the fact that the far greater number of U.S. jobs in oil and gas well projects that would be created by the revolution in fracking and horizontal drilling is now threatened by the imminent increase in the price of steel those projects require.
Let’s not even discuss how it is impossible to “strengthen our economy” by choosing political over economic means and forcing the economy’s real value creators to pay more than their international competition does for raw materials and intermediate goods.
And let’s not ask the senator to wonder whether longstanding U.S. antidumping and countervailing duty restrictions on hot-rolled steel — the main ingredient in OCTG — might give foreign OCTG producers, with abundant access to low-priced hot-rolled, a leg up over its U.S. competitors in Ohio.
No, let’s just set all of those points aside and focus on a different grade of hypocrisy.
Though, under global trade rules, governments are permitted to have and to use antidumping laws, those laws and their administration must comport with certain standards, including those governing procedural fairness, transparency, and methodology. The World Trade Organization’s Antidumping Agreement (ADA) exists so that governments do not impose antidumping restrictions on a whim — or at least to ensure that deviation from accepted protocol is minimized and corrected.
Despite all of its sanctimonious rhetoric, the U.S. government has not always toed the line with respect to its obligations under the ADA. In fact, the United States, with its often results-oriented antidumping administration, has run afoul of the ADA more often than any other WTO member and has been found in violation of its broader WTO obligations more frequently than any other member, including China. Perhaps even more revealing of an “above-the-rules” attitude is the fact that no other WTO member is out of compliance (i.e., has not brought its offending actions, laws, policies or procedures into conformity with its WTO commitments) on more matters or has been so for a longer duration than the United States. Regrettably, these data paint a fairly compelling picture of the United States as the world’s primary trade scofflaw.
The world seems to have taken note. Earlier this week, two WTO dispute panels, again, found that the United States overstepped rules spelled out in the Agreement on Subsidies and Countervailing Measures — this time with respect to actions it took against China and India under the U.S. countervailing duty law. A Reuters story on those WTO rulings indicated there was “widespread concern in the 160-member WTO over what many see as illegal U.S. protection of its own producers.” Well, that concern has been further legitimized by the Commerce Department determination on OCTG that elicited Senator Brown’s statement, above. Here’s what happened in that case.
Back in February, Commerce ruled preliminarily that exporters from eight countries were dumping OCTG in the U.S. market. Though one might expect such an outcome to be embraced by U.S. producers seeking to thwart foreign competition, the ruling was considered an epic failure because South Korean exporters — the largest foreign source named in the case by far and the U.S. industry’s primary target — were found not to be dumping under Commerce’s calculation methodology.
Fast forward to last Friday, July 11. On that day, Commerce issued its final determination (not yet available on line) in the case, which found dumping of OCTG by exporters from all nine countries named in the petition, including South Korea. So what happened in the span of five months to change the outcome?
In a nutshell, domestic OCTG producers and the Congressional Steel Caucus reminded Commerce that the antidumping regime was custom designed by the U.S. steel industry for the U.S. steel industry, and that administration of the law was shifted from the national-economic-interest-minded Treasury Department to the U.S.-industry-captured Commerce Department so that protection would be granted even in cases where evidence of dumping was weak.
If you doubt how vested the steel industry is in the antidumping regime, consider that there are 245 U.S. antidumping measures in place, and more than half of them (127) restrict imports of steel products. That’s one industry, and it accounts for slightly more than 1 percent of GDP.
Capture of the levers of antidumping administration by the steel industry was documented in this 2010 Cato paper, from which the following passage (citing a 2000 book published by the American Institute for Iron and Steel titled “Paying the Price for Big Steel”) was culled:
According to interviews with former congressional and Commerce Department staff conducted by the Office of the Inspector General: “This [pro-steel industry] bias is illustrated by the actions of career Commerce Department officials through whom must pass all Department of Commerce [antidumping] determinations in steel cases. The members and staff of the congressional Steel Caucus meet with them regularly to discuss ongoing antidumping and countervailing duty proceedings pending before the Department of Commerce. At some of these meetings, these officials have shared advance draft investigation results with the congressional Steel Caucus well before they were announced in final form, allowing the Steel Caucus to “comment” on them. Time and again high level officials within the agency have exerted pressure on lower level Department of Commerce staff conducting investigations of foreign steel producers to rerun calculations and alter methodologies, resulting in increased AD/CVD tariffs.
That sounds awfully similar to what seems to have transpired in the present OCTG case. According to numerous case submissions from both petitioners and respondents, the Commerce Department’s “Issues and Decisions” memorandum dated July 11, 2014, this memorandum documenting a meeting between Commerce officials and Senate staff, and the following press release issued by two Korean OCTG exporters, there was an unprecedented number of correspondences (for an antidumping proceeding) between the legislative branch (speaking, writing, or appearing on behalf of the domestic industry) and the executive branch (specifically, Commerce Department officials working on the case) during the period of February through July. That didn’t sit well with the Koreans:
Joint Statement of NEXTEEL Co., Ltd. and Hyundai HYSCO Regarding the Department of Commerce’s Final Determination in the Investigation of Oil Country Tubular Goods from Korea
July 14, 2014
NEXTEEL Co., Ltd. and Hyundai HYSCO are appalled by the U.S. Department of Commerce’s final determination in the antidumping duty investigation of Oil Country Tubular Goods (OCTG) from the Republic of Korea. Despite assurances that the final determination would be based on an objective assessment of the facts and the law, Commerce issued a determination that was clearly influenced by politics. Commerce’s antidumping duty investigations are quasi-judicial proceedings in which politics have no role. However, since Commerce’s February 2014 preliminary determination, which properly determined that neither NEXTEEL nor HYSCO engaged in dumping, the U.S. industry has engaged in an unprecedented lobbying campaign, rife with misrepresentations and half-truths, resulting in over 200 members of Congress contacting Commerce on the U.S. industry’s behalf. Unfortunately, the U.S. industry’s tactics have succeeded, to the detriment of fair trade and U.S. consumers. Commerce on Friday announced a final determination that NEXTEEL and HYSCO engaged in dumping, completely reversing its earlier findings in this case. NEXTEEL and HYSCO take their international pricing obligations very seriously. The fact is that, under any lawful methodology for assessing alleged dumping, and as Commerce properly found in its preliminary determination, NEXTEEL and HYSCO are fairly pricing their U.S. imports. In order to now reach the opposite conclusion, Commerce disregarded the law, the facts, and decades’worth of its own precedent with respect to the calculation of constructed value profit. Such actions will inevitably result in irreparable harm to Commerce’s reputation for impartiality in administering U.S. antidumping law. NEXTEEL and HYSCO will pursue all options available to correct this arbitrary and politically-influenced decision.
Some of the specific topics under discussion included consequential methodological issues about which the Commerce Department changed its position between the preliminary and final determinations. The importance of most of those issues is a tough thing to grasp for the antidumping uninitiated. Readers fitting that description who are interested (and have a high tolerance for methodological shenanigans) should read this Cato primer on the devilish details of Commerce Department antidumping procedures. Otherwise, here’s what went down.
First, it is not unusual for calculated dumping margins to change between the preliminary and final analyses. Changes to some of the reported expenses, costs, prices, product characteristics, customer codes and other information on the record are not uncommon, as supplemental questions from petitioners channeled through Commerce elicit new information from respondents, and adjustments are made to data after verification (a formal audit) of the information placed on the record is conducted. It is not unusual to see revised dumping margins on account of these factors, and in this case, according to the “Issues and Decisions” memorandum, some of these factors were present.
However, the case for Korea turned on a judgment call that has no practical bearing whatsoever on whether and to what extent these companies are actually dumping OCTG in the U.S. market. Most people who have given this relatively inscrutable process any thought assume that dumping is deemed to have occurred when a foreign firm sells at prices in the United States that are lower than the prices he gets in his home market. But what if there aren’t any home market sales? That is the case for Korea, which is not an oil- or gas-rich country, so home market demand for OCTG is limited.
Well, if there is no home market with which to compare prices, Commerce turns to third country sales to serve as surrogates for determining “normal value.” But if Korean sales to third country markets are insufficient (usually, but not always, defined by Commerce as less than 5 percent of the volume of sales to the U.S.), a third comparison methodology is adopted, which bases normal value on a cost-based construction of what the price in Korea likely would have been had there been a viable market. (Yes, this kind of make-believe is prevalent throughout the antidumping determination process.)
This “constructed value” methodology takes the cost of production — from the respondents’ cost data, usually — and adds to it estimates for selling and other expenses, as well as an estimate for profit. But how do you estimate profits if there were no sales (or insufficient sales) in the home market or a third country market? While noting in its “Issues and Decisions” memorandum that “[t]he statute does not establish a hierarchy for selecting among the alternatives for calculating CV profit,” Commerce cites three alternatives identified in the statute:
(i) the actual amounts incurred and realized by the specific exporter or producer being examined in the investigation or review ... for profits, in connection with the production and sale, for consumption in the foreign country, of merchandise that is in the same general category of products as the subject merchandise, (ii) the weighted average of the actual amounts incurred and realized by exporters or producers that are subject to the investigation or review (other than the exporter or producer described in clause (i)) ... for profits, in connection with the production and sale of a foreign like product, in the ordinary course of trade, for consumption in the foreign country, or (iii) the amounts incurred and realized ... for profits, based on any other reasonable method, except that the amount allowed for profit may not exceed the amount normally realized by exporters or producers (other than the exporter or producer described in clause (i)) in connection with the sale, for consumption in the foreign country, of merchandise that is in the same general category of products as the subject merchandise; [(i.e., the "profit cap")].
With those criteria in mind, for the preliminary determination, Commerce estimated CV profit for one Korean company (HYSCO) by using the profit from the company's sales of non-OCTG pipe products. For the other investigated Korean company (NEXTEEL), Commerce used the 2012 audited financial statements of six Korean OCTG producers.
But for the final determination, "after considering the record evidence and the arguments in the parties' briefs and rebuttal briefs," Commerce recalculated CV profit for both HYSCO and NEXTEEL using the 2012 audited consolidated financial statements of an Argentine OCTG producer called Tenaris. Petitioners were pushing Commerce to use Tenaris, not because it reflected the most objective measure of profit available, but because the profit rates were estimated to be a whopping 26.11 percent — well in excess of the profit figures used for the preliminary determination, as well as U.S. OCTG producer experience, according to profit figures from the International Trade Commission. Sure, Tenaris is an alternative that seems to comport with the criteria cited above. However, this is how Commerce characterized the Tenaris data in the preliminary determination:
While the Tenaris profit information reflects predominantly OCTG sales, it represents neither production nor sales in the market under consideration. In addition, it is based on a research paper containing a disclaimer statement regarding its accuracy (my emphasis).
The Tenaris profit information is based on a research paper prepared by a student at the University of Iowa School of Management.
And the footnote associated with that commented was more illuminating still:
This report was created by a student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa's Tippie School of Management and contains several disclaimers. The intent of the report is to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers, or officially licensed financial professionals. The investment opinion contained in the report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts, and figures included in this report are from publicly available sources. The report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report.
So there you have it. The number against which the U.S. price is compared to measure the extent of a specific company's margin of dumping includes estimates — often inflated, but never precise — which themselves determine the margin of dumping calculated. The quality of those estimates, it turns out, is less important than who is advocating their use.
For anyone who was still clinging to the notion that U.S. antidumping administration is conducted objectively, apolitically, and with deference to the rule of law, the OCTG final determination has presumably cured that delusion. The antidumping law is not rooted in the rule of law, but the exercise of administrative discretion. And that discretion is not exercised with much fealty to objectivity.
This is not a new phenomenon. The OCTG case is merely the latest example. In 2005, this Cato paper was published with the purpose of demonstrating how the Commerce Department has abused its administrative discretion to favor petitioner interests, especially steel producers. It gives a flavor for the lack of consistency to Commerce's rationale — different decisions and outcomes stemming from identical fact patterns — and documents the frequency with which the U.S. courts have had to rein in discretionary decisions found to be inappropriate or illegal. This extract from the Executive Summary of that 2005 paper is just as apt today:
Administration of the U.S. antidumping law has been a significant source of friction in international trade in recent years. Since the establishment of the World Trade Organization in 1995, various aspects of U.S. antidumping practice have been subject to dispute settlement in 26 different cases. Most of the issues raised in those cases concern the discretionary practices of the U.S. Import Administration, an agency within the Department of Commerce that administers part of the antidumping law.
At present, the United States remains noncompliant with several WTO determinations that certain U.S. antidumping methodologies violate the rules established by WTO members. Compliance in some of those cases could be achieved simply by changing the offending discretionary practices and would require no actions by the U.S. Congress. IA routinely exploits gray areas in the law to favor the domestic interests that seek protection—and, according to the verdicts of U.S. courts, sometimes violates the law in the process.
In the 18-month period ending in June 2005, IA published 19 antidumping redeterminations pursuant to court orders to revise its assumptions or calculations to become compliant with the law. In 14 of those redeterminations, the revised antidumping rates were lower than those originally calculated. The imposition of antidumping orders and the inflation of antidumping duty rates based on erroneous judgments have profound adverse effects on trade and trade relations.
It is time for U.S. antidumping policy to be brought into the fold of broader U.S. trade policy objectives. Its administration must be disciplined and calibrated with the efforts of other U.S. agencies to open markets abroad and to demonstrate that the United States believes in the merits of free trade. Accordingly, policymakers should consider the merits of establishing an oversight board, comprising representatives from various agencies with jurisdiction over trade policy, to review IA’s antidumping determinations before they are published. Such a body could help buffer antidumping decisions from the results orientation and politicization to which they are currently so prone.
In the coming weeks, the U.S. International Trade Commission (ITC) will issue its final determination concerning the question of whether those “dumped” OCTG imports have caused or threaten to cause “material injury” to the domestic industry. An affirmative findings from the ITC in conjunction with the DOC’s affirmative findings will result in the imposition of antidumping duty orders.
Whether the Koreans or anyone else takes this matter to the U.S. Court of International Trade for violations of U.S. law or the WTO for violations of the Antidumping Agreement remains to be seen. But what should be crystal clear is that the U.S. government is not some upstanding citizen fighting for trade justice and the proverbial level playing field, while everyone else cheats. The United States is still expected to lead, so on antidumping, subsidies, protecting chosen producers, buy local provisions, selective compliance with the rules, and more, the rest of the world is watching and learning bad habits.