Bull in a China Shop: Assessing the First Section 421 Trade Case

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Just as the Bush administration is finding its free-tradefooting, the president faces a decision later this month that couldthrow his trade policy agenda off track once again. Under a U.S.trade statute never before tested, the president must decidewhether to impose restrictions on imports from China of "pedestalactuators," a product used to adjust the seat height of mobilityscooters used primarily by the physically disabled.

Last October, pursuant to authority under Section 421 of theTrade Act of 1974, the U.S. International Trade Commissiondetermined by a vote of three to two that imports of pedestalactuators from China were causing "market disruption" to U.S.producers of the same merchandise. The ITC recommended that thepresident impose import quotas. Under the law, however, impositionof the recommended trade restrictions is a matter of presidentialdiscretion.

Section 421 is a special statute that applies only to importsfrom China, and the pedestal actuators case marks the first timethat it has ever been invoked. Accordingly, the outcome of thiscase has important implications for the future of U.S.-China traderelations. If President Bush surrenders to protectionist pressurein this case, he will send a terrible signal to other U.S.industries that face Chinese competition--and also to China as itstruggles to open its economy to foreign competition.

Section 421 of the Trade Act of 1974

Section 421 was added to the Trade Act of 1974 by the U.S.-ChinaRelations Act of 2000 (H.R. 4444), which established permanentnormal trade relations (PNTR) with China and paved the way forChina's accession to the World Trade Organization. The provisionaimed to assuage protectionist fears of PNTR by establishing aspecial "safeguard" to deal with increased imports from China forthe first 12 years after China's entry into the WTO.[1]

The normal U.S. "safeguard" law, Section 201 of the Trade Act of1974, authorizes the imposition of temporary trade barriers againstincreased imports that are a "substantial cause" of "seriousinjury" to American producers. The China-specific safeguard ofSection 421, by contrast, sets a lower threshold for grantingprotectionist relief. Specifically, the statute provides:

If a product of the People's Republic of China is beingimported into the United States in such increased quantities orunder such conditions as to cause or threaten to cause marketdisruption to the domestic producers of a like or directlycompetitive product, the President shall, in accordance with theprovisions of this section, proclaim increased duties or otherimport restrictions with respect to such product, to the extent andfor such period as the President considers necessary to prevent orremedy the market disruption.[2]

Under the statute, "market disruption" exists "whenever importsof an article like or directly competitive with an article producedby a domestic industry are increasing rapidly, either absolutely orrelatively, so as to be a significant cause of material injury, orthreat of material injury, to the domestic industry."[3] And the term"significant cause" refers to "a cause which contributessignificantly to the material injury of the domestic industry, butneed not be equal to or greater than any other cause."[4]

If the ITC renders an affirmative finding (which is decided bymajority vote) or if there is an even split among commissioners,the affirming commissioners must submit recommendations for reliefto the president and the U.S. Trade Representative within 20 daysof the determination. The USTR then has 55 days to advise thepresident about the ITC's findings, a period during which it musthold hearings on the matter and solicit views from importers,exporters, and other interested parties. It is also authorized topursue negotiations to address the market disruption with theChinese government during this period.

Unless an agreeable settlement is reached, the president mustannounce import relief by the 150th day after the petition's filingunless he determines that "provision of such relief is not in thenational economic interest of the United States or, inextraordinary cases, that the taking of action . . . would causeserious harm to the national security of the UnitedStates."[5]If the president grants import relief, it must become effectivewithin 15 days of his decision.

The Pedestal Actuators Case

In this case, the petitioning industry is a single company,Motion Systems Corporation (MSC),[6] which produces pedestal actuators. One ofits largest clients, Electric Mobility Corporation (EMC), aproducer of mobility scooters, decided to terminate its businessrelationship with the petitioner for a variety of reasons. Itrequested bids from other producers of pedestal actuators aroundthe world (there were no other domestic producers selling on theopen market) and decided on a Chinese manufacturer, CCL IndustrialMotor (CIM), with which it had cultivated a successful relationshipthrough purchasing other parts since 1998.

Imports of pedestal actuators from China were nonexistent untilafter EMC decided to terminate its contract with MSC. According totestimony by the president of EMC: "If Motion Systems had been moreresponsive to our needs, we would not have made the decision tostop purchasing from them--a decision that was made priorto our decision to purchase actuators from the Chinese. . . . Inlate 1999, EMC approached several suppliers, receiving informalbids from three of them, including CIM. EMC solicited CIM to quoteon the Seat Lift Actuator, not vice versa."[7]

Despite the fact that this case boils down to a dispute betweentwo U.S. companies with a Chinese company caught in the crossfire,three ITC commissioners found that rapidly increasing imports ofpedestal actuators are causing market disruption and recommendedquotas on Chinese imports despite acknowledging the possibilitythat EMC might not resume purchasing from MSC--in which case therelief would provide no benefit at all to the domesticindustry.

In her dissenting opinion, Commissioner Lynn Bragg took issuewith her colleagues: "This is not a situation in which subjectproducers in China targeted the U.S. market with rapidly increasingimports in order to capture sales from domestic producers; instead,this investigation presents the limited circumstance of onesupplier in China responding to a specific request from apreexisting customer. Thus, any injury experienced by the domesticindustry in this case is directly attributable to a singlepurchaser's perception of the sustained inadequacy of an existingsource of supply."[8]

Even more to the point, Commissioner Deanna Okun, the otherdissenter, wrote, "I do not think that the trade laws are meant toforce a company to purchase from the domestic industry, and in thiscase from a single domestic supplier."[9]

Conclusion

The inclusion of Section 421 in the PNTR legislation may havebeen a political necessity, but there is no good reason to stretchit to fit the facts of this case. The law should be used sparingly,as a last resort--and certainly not to punish innocent bystandersto a domestic contract dispute.

The president should exercise his discretion to deny relief. Todo so, he needs to find that imposing trade barriers "would have anadverse impact on the United States economy clearly greater thanthe benefits of such action."[10] That case can be made.

The cost of mobility scooters dropped from $4,100 to $3,800after EMS switched to the Chinese supplier of pedestalactuators.[11] By disrupting EMS's supply chain, the remedywould have a direct, adverse impact on the physically disabled.Increasing EMS's costs of production would also damage its abilityto compete with foreign producers of mobility scooters. There arestrong grounds for concluding that those costs would far outweighthe benefits of a remedy that in no way guarantees the resumptionof sales and profits for MSC. Government meddling to pick winnersand losers is bad enough; it is a travesty when such meddlingproduces only losers.

If the president grants relief in this first, weak case underSection 421, it will only encourage other U.S. industries to fileadditional cases of their own. Standing firm now will save him manyheadaches in the future. When making his decision, President Bushneeds to remember the compelling U.S. national interest inencouraging China's opening of its markets pursuant to its new WTOobligations. And he needs to ask himself this question: How can weexpect China to resist protectionist pressures if we are willing toclose markets to Chinese competition at the slightestprovocation?


[1] Chinaacceded to the WTO in December 2001.[2] 19 U.S.C.§ 2451(a).

[3] 19 U.S.C.§ 2451(c)(1).

[4] 19 U.S.C.§ 2451(c)(2).

[5] 19 U.S.C.§ 2451(k)(1). Note that in cases in which the ITC is evenlysplit, the president has complete discretion about whether or notto accept the affirming commissioners' recommendations forrelief.

[6] Actually,there are technically three companies in the industry. One is avertically integrated company that produces pedestal actuators forits own use in the production of mobility scooters; the otherperforms certain fabricating and assembly work on the petitioner'sproduct.

[7] MikeFlowers, president, Electric Mobility Corporation, Testimony beforethe Office of the U.S. Trade Representative, December 18, 2002.

[8] U.S.International Trade Commission, Pedestal Actuators fromChina (Investigation No. TA-421-1), Determination and Views ofthe Commission, USITC publication no. 3557, November 2002, p.51.

[9] Ibid., p.42.

[10] 19U.S.C. § 2451(k)(2).

[11]Flowers.