Poster Child for Reform: The Antidumping Case on Bedroom Furniture from China

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Introduction

Last October, an association of U.S. manufacturers of woodenbedroom furniture and some unions representing workers in theindustry filed an antidumping petition with the U.S. InternationalTrade Commission and the U.S. Department of Commerce seeking relieffrom injury allegedly caused by unfairly priced import competitionfrom China.

After an extended evaluation as to whether there was sufficientsupport for the petition within the domestic industry, aninvestigation into the allegations was initiated in December 2003​.In January 2004, the ITC rendered a preliminary determination thatthere is a reasonable indication that less‐​than‐​fair‐​value importsfrom China are causing material injury to the domestic industry.The DOC is expected to announce its preliminary findings regardingthe levels of dumping and the application of antidumping duties byJune 17, 2004.

Whether the DOC will calculate affirmative antidumping duties isnot much of a mystery. It almost always does – particularly in casesinvolving China, where it utilizes a calculation methodology thathas no foundation in logic or fairness. What remains a mystery iswhether policymakers will continue to sit idly by as theantidumping law is misused once again to impose trade restrictionsunder false pretenses.

The case of Wooden Bedroom Furniture from China hasnothing to do with unfair trade and is a perfect example of theneed for antidumping reform. The filing of this case was a tacticalmaneuver by one group of domestic producers that seeks to exploitthe gaping loopholes of the antidumping law to get a leg up on itsdomestic competition. Domestic producers realize that the only wayto compete and offer their customers variety is to source at leastsome production from abroad. Instead of preserving or returningdomestic jobs (which is the public justification for the petition)import restrictions will cause a shift in sourcing from China toplaces like the Philippines, Indonesia, Brazil, and Vietnam – placesfrom which many of the petitioners have begun or are poised tobegin importing themselves.

This case demonstrates the ease of access to a commerciallydisruptive weapon that is presumed naively to be reserved for casesof unfair trade. In reality, the antidumping law as written andapplied is incapable of identifying unfair trade and is used withincreasing frequency to hamper legitimate competition, both foreignand domestic. The unfortunate end result is a greater cost burdenfor import‐​using industries and higher prices for consumers.

An Industry Divided

From the outset, the furniture case has involved extraordinarycircumstances. Domestic furniture producers were closely split onthe issue of bringing and supporting the initiation of this case.The law requires that the petition be filed on behalf of thedomestic industry, which means that domestic producers or workerswho support the petition must account for at least 25 percent ofdomestic production, and they must account for more than 50 percentof the production of all those expressing support for or oppositionto the petition. In this case, the 25 percent threshold was met,but the 50 percent threshold was not. Under the law, the DOC canpoll the industry to gauge whether sufficient supportexists – presumably by attempting to ascertain the positions ofthose producers and workers who had not registered an opinion oneway or the other.

After polling and reviewing the data, the DOC concluded thatproducers supporting the petition accounted for more than 57percent of the value of production by that portion of the industryexpressing support for, or opposition to, the petition. Hence,industry support requirements were met and the case wasinitiated.

One can only wonder how much influence the Byrd Amendment andits potential to reward only supporters of the petition affectedthe level of industry support.[1] Quite conceivably, if the prospect of ByrdAmendment money persuaded even one of the estimated 125 domesticproducers of wooden bedroom furniture to support the petition, theprovision’s existence – despite its being ruled a violation of WTOrules – might have tipped the balance in favor of initiating thiscase. This situation might provide one possible basis for a WTOchallenge should definitive duties be imposed eventually.

Irrespective of the influence of the Byrd Amendment, sinceinitiation, Hooker Furniture, an original supporter of thepetition, changed its position of support to neutral. Under thelaw, however, there is no revisiting the question of industrysupport once a case has been initiated. Whether the value ofHooker’s sales was significant enough to have prevented initiationhad it been neutral at the outset is unknown, but the evidence iscompelling that the domestic industry is deeply divided on thiscase.

Underlying Market Distortions

Defenders of the antidumping status quo argue that the law isnecessary to restore a “level playing field” in cases where foreignproducers have an unfair competitive advantage as a result of somemarket‐​distorting policy or policies of their government. Hightariffs or other trade barriers, regulations that restrictcompetition, nonexistent or inadequate regulations to punishanti‐​competitive behavior, price controls, and other forms ofintervention are often identified as the types of market‐​distortingpolicies that could give rise to dumping. By operating in aprotected or sanctuary market, foreign producers can reapsupernormal profits on their home market sales and then use theproceeds to cross‐​subsidize low‐​priced export sales.

But even if imposing duties is a proper response to this type offoreign market distortion, serious problems remain. Mostfundamentally, antidumping petitions are not even required tocontain allegations of the underlying market distortions the soughtremedy is intended to address. Likewise, the administeringauthorities never even investigate – much less confirm – theexistence of any market‐​distorting policies that could give rise todumping. In other words, the existence of such policies (i.e., thepredominant justification for the antidumping law) is simplyassumed by evidence of price discrimination or sales belowcost.[2] As aresult, the antidumping law usually misses its target: companiesengaging in normal commercial conduct are penalized for sellingproducts at different prices or at prices below the cost ofproduction even though such pricing strategies are commonplace,rational, often profit‐​maximizing, and perfectly legitimate in apurely domestic context. [3]

The furniture case has absolutely nothing to do withmarket‐​distorting policies or any competitive advantages they couldbestow on foreign producers. It is simply a complaint about thelegitimate advantages of producing wooden bedroom furniture inChina by some U.S. producers who have been less successful incapitalizing on those advantages. Consider the dubious logic of thepetitioners’ own argument for antidumping relief:

A recent article on a Chinese industry website, ChinaInternational Furniture Network, observed that the most importantfactor explaining China’s rise in the world furniture market isthat Chinese furniture is “of high quality and low price.“Interestingly, in August of this year, when the press began toreport that an antidumping petition might be filed against importsof wooden bedroom furniture from China, Jia Qingwen, the Directorof the China National Furniture Association, acknowledged thatthese products are being sold at low prices, stating: “Chineseexporters can afford (to sell) at low prices because of the lowproduction costs in China.…” Accordingly, there is everyindication that the unfair and declining prices of subject importswill continue to encourage demand for further subject imports inthe near future. [4]

How do you get from high quality and low production costs tounfair prices? This non sequitur reflects the petitioners’understanding that there are no serious evidentiary standards towhich their argument must be held. Since when are low pricesautomatically reflective of underlying market distortions? Why arelow prices unfair? The fact is that wage rates in China are muchlower than they are in the United States – hardly breaking news – andas a result wooden bedroom furniture production costs, whichinvolve highly labor‐​intensive hand carving and inlaying, aredramatically lower there. This fact was recognized and acted uponseveral years ago when U.S. producers themselves began sourcingsome of their product lines from China.

Injury Causation – The Full Picture

The petitioners’ argument that the U.S. furniture industry isbeing hurt by Chinese imports is similarly suspect. In the 1990s,U.S. producers began to supplement their domestic production withfurniture made in China. The import surge from China did not beginuntil years after U.S. producers began to cultivate the Chineseindustry.

Consider the experience of Vaughan‐​Bassett Furniture Company,one of the largest U.S. producers and a petitioner in this case. Inthe late 1990s Vaughan‐​Bassett invited one of the largest Chineseproducers, Lacquer Craft, to its factory to videotape production ofbedroom furniture so that it could produce bedroom furniture inChina for Vaughan‐​Bassett to import and resell. According totestimony before the ITC, U.S. producers turned to China to“supplement their product line because they had ideas, they haddesigns, they were the professionals in our industry, and they knewafter traveling to China and seeing the infrastructure there thatthey could make certain bedrooms in China, bring it here, mark itup 30 to 40 percent to a retailer and still sell it for less thanthey could have made it for.”[5]

Some producers invested directly in Chinese manufacturingfacilities, while others simply imported from unrelated Chineseproducers. U.S. retailers soon caught on, recognizing the manybenefits of purchasing from China. They could cut out the middlemen(U.S. producers) who were simply importing, marking up, andprofiting; they could produce a greater variety of designs(including hand carvings and inlays) that are cost‐​prohibitive inthe United States; they could respond to high levels of defects inU.S. production by switching to alternatives; and they could havecustom designs mass‐​produced and labeled under their own brandnames.

While imports of wooden bedroom furniture from China haveincreased considerably over the past few years, domestic producers(including many of the companies that brought or at least supportedthe antidumping petition) have played a major role in thatincrease. In 2000, 6 percent of domestic producers’ U.S. shipmentswere sourced from China. By 2002, that figure increased to 19.6percent, and through the first half of 2003, that figure stood at26.6 percent.[6] According to the ITC’s own preliminary report inthis case:

As an initial matter, we note that the record indicates it hasbecome common practice for members of the domestic industry toimport the subject merchandise from China as a means ofsupplementing their domestic production in the market place. Forexample, the record shows that 20 of the 40 responding domesticproducers imported Chinese merchandise during the period and thatthe 12 largest domestic producers of wooden bedroom furniture allimported reasonably substantial and increasing volumes ofmerchandise from China during the period of investigation. In fact,the *** companies within the petitioning group all have importedincreasing volumes of subject merchandise from China during theperiod of investigation.[7]

The essence of this case, then, is well summarized byrepresentatives of Furniture Brands International, Inc., thelargest U.S. producer and an opponent of the petition. This caseboils down to “a request by domestic producers who are significantimporters of the subject merchandise to impose duties on importsthat they have voluntarily made on the ground that their very ownactions have caused them injury.”[8]

Are petitioners really calling on the federal government to stopthem before they import again? The actual story looks morecomplicated. Evidence presented during the ITC proceeding indicatesthat certain petitioners have begun or are poised to beginimporting from alternate sources should antidumping duties beimposed on Chinese furniture. The ITC preliminary report confirmsthis trend is likely underway:

U.S. imports of wooden bedroom furniture from Indonesia, Brazil,Malaysia, and Thailand, the fifth, sixth, eighth, and tenthrespective largest foreign country suppliers of wooden bedroomfurniture to the United States, increased by a total of $100.4million during 2000-02 and by another $26.7 million in January‐​June2003 from the same period in 2002. Although still a small supplierof wooden bedroom furniture to the U.S. market, U.S. imports ofthese products from Vietnam increased by a total of $8.5 millionduring 2000-02 and by another $11.6 million in January‐​June 2003from the same period in 2002.[9]

A brief submitted to the ITC by the Furniture Retailers Groupindicated that petitioners “have been busy helping to set upoperations in numerous third countries, such as Indonesia andVietnam, where costs are lower than in China. In fact, this weekrepresentatives of Vaughan‐​Bassett are in Vietnam meeting withVietnamese furniture companies.”[10] The brief went on to question why thepetition named only China and not any of the other low‐​pricethird‐​countries since source‐​shifting is a common response tocountry‐​specific antidumping duties. The answer, of course, wasimplied.

Imposing restrictions on imports of wooden bedroom furniturefrom China would amount to nothing more than picking winners andlosers. Those who have invested in Chinese facilities and those whohave developed relationships and nurtured their Chinese supplychains successfully will effectively be penalized for theirsuccess. Those whose business models were less successful and whohave begun cultivating relationships with suppliers in othercountries will be granted a head start in the inevitable process offoreign source‐​shifting. Whatever happens, production is highlyunlikely to return to the United States.

Conclusion

This case is a perfect example of how porous antidumping rulesare abused for commercial gain. The evidentiary burden for provingdumping is so minimal that petitions can cite high quality and lowproduction costs as evidence of unfair trade. Further, they cancite their own decisions to source from China as evidence of injuryto themselves. The existence of the Byrd Amendment, whichcompensates petitioners and supporters of petitions, only tilts theequation further in favor of using trade remedies to gain acommercial advantage. In the words of one of the respondents inthis case, the U.S. trade laws “are not intended to protect U.S.producers from the folly of their own failed businessplans.”[11] Perhaps not, but that is how they operate inpractice.


[1] For adetailed discussion of the Byrd Amendment, see Dan Ikenson,“ ‘Byrdening’ Relations: U.S. Trade PoliciesContinue to Flout the Rules,” Cato Free Trade Bulletin no. 5,January 13, 2004.

[2] InChinese (or other “non‐​market economy”) cases, there isn’t even abasis for this presumption since home market prices are ignoredcompletely and instead represented by surrogate values based oninput prices from different countries.

[3] Forgreater detail concerning the failure of antidumping practice tolive up to the justifications of its supporters, see Brink Lindseyand Dan Ikenson, “Reforming the AntidumpingAgreement: A Road Map for WTO Negotiations,” Cato Trade PolicyAnalysis no. 21, December 11, 2002. See also Brink Lindsey andDaniel J. Ikenson, Antidumping Exposed: The Devilish Details of Unfair TradeLaw (Washington: Cato Institute, 2003).

[4] AmericanFurniture Manufacturers Committee for Legal Trade, Petition for theImposition of Antidumping Duties against Wooden Bedroom Furniturefrom China to the U.S. International Trade Commission, October 31,2003, p. 35.

[5] JeffreySeaman, CEO, Rooms to Go, Testimony before the U.S. InternationalTrade Commission in the Matter of Wooden Bedroom Furniture fromChina, Preliminary Conference Report, November 21, 2003, p.149.

[6] U.S.International Trade Commission, Wooden Bedroom Furniture fromChina, Investigation 731-TA-1058 (Preliminary), Publication no.3667, January 2004, Table IV‑2.

[7] ITCPreliminary Report, p. 11.

[8] FurnitureBrands International, Post‐​Conference Brief before the U.S.International Trade Commission, December 4, 2003, p. 2.

[9] ITCPreliminary Report, p. II-11.

[10]Furniture Retailers Group, Post‐​Conference Brief before the U.S.International Trade Commission, December 4, 2003, p. 13.

[11]Furniture Brands International, p. 11.