Greasing America's Competitiveness Slide

Last week the World Economic Forum announced some distressing, but not unexpected, news about the struggling US economy:

The U.S. extended its slide in competitiveness for a third year by slipping to fifth in the World Economic Forum’s rankings, which Switzerland topped. 

The U.S. fell one place, two years after losing the No. 1 position for the first time since the Geneva-based organization began its current index in 2004. Concern about public debt and deteriorating confidence in policy makers hurt the efficiency of the world’s largest economy even as faith in its financial industry rebounded, the forum said in its study of 142 nations.In the U.S., “urgent efforts need to be made in terms of macroeconomic stabilization and mapping out an exit strategy from debt,” said Jennifer Blanke, the forum’s lead economist who contributed to the annual study.... 

Switzerland, home to companies including drugmaker Novartis AG (NOVN) and food company Nestle SA (NESN), was credited for its innovation and technological skills. Singapore and Sweden trailed, with Finland leapfrogging the U.S. into fourth place. Germany, the Netherlands and Denmark followed with Japan sliding three places to ninth. The U.K., ranked 12th last year, swapped places with Canada to take 10th.... 

China climbed one level to 26th and Brazil rose to 53rd from 58th while India fell five slots to 56th and Russia dropped to 66th from 63rd.... 

The U.S. ranked 89th for macroeconomic stability amid a record budget deficit, while running 50th for trust in its politicians, the forum said. The survey suggested its government wastes resources and regulation has become more burdensome. A gauge of financial-market development indicated improvement, with the U.S. rising to 22nd from 31st last year. It was ninth in 2008.... 

The report -- published each year by the organizers of the annual conference of business leaders, politicians and entertainers in Davos, Switzerland -- is based on measures of competitiveness and an opinion poll of more than 14,000 business leaders.

The full WEF report is available here, and, while it's always a little tricky to talk about "national competitiveness" (rather than companies' competitiveness), the survey is still a valuable way to measure which governments are implementing the best policies to make their domestic companies more globally competitive.  And speaking of such policies, Cato's Dan Ikenson took to the pages of the WSJ over the weekend to explain a simple policy that could instantly improve American companies' ability to compete in the global economy:

If the president is genuinely committed to spurring economic growth and job creation, he will take the lead on reducing or eliminating duties that U.S. producers pay on imported raw materials and components they need for manufacturing. This would instantly boost the competitiveness of U.S. products at home and abroad. 

The same demographics that have created growing foreign markets also mean there are more foreign suppliers of raw materials, industrial inputs, and other intermediate goods used by U.S. producers in their own production processes. Last year, U.S. Customs and Border Patrol collected $30 billion in duties on $2 trillion of imports, 55% of which were ingredients for U.S. production—such as chemicals, minerals and machine parts. Purchases of imported inputs accounted for more than $1 trillion of U.S. production costs, a price tag that was roughly $15 billion higher than it might have been without U.S. import duties. 

What is the point of negotiating a 5% reduction in a foreign tariff on behalf of certain U.S. exporters while ignoring the fact that, to produce those exports as domestic manufacturers, they are required to pay a 50% import tax on the most crucial raw materials? Reducing import barriers has the same effect on profit as does improving market access abroad, but with the added benefit of increasing U.S. competitiveness. And it can be achieved without waiting for consent from abroad....

Now the president should push Congress to reduce or eliminate, on a permanent basis, all tariffs on industrial inputs so that U.S. producers are more competitive in the global economy and so that America is a more appealing destination for foreign direct investment. That approach has produced good results in Canada, where the government has been reducing tariffs on manufacturing inputs for the past few years. 

Meanwhile, some import duties can be eliminated with a stroke of the president's pen. First should be antidumping duties, imposed on inputs needed by U.S. producers. The antidumping law is purported to penalize foreign producers accused of injuring U.S. firms by selling in the United States at lower prices than they charge at home. Some U.S. industries lobby vigorously for such duties simply because they hobble the foreign competition. 

Yet more than 80% of the nearly 300 U.S. antidumping measures in force today restrict imports of raw materials and intermediate goods, thus penalizing U.S. producers. Antidumping duties on magnesium or polyvinyl chloride or hot-rolled steel may allow domestic producers of those inputs to raise prices and reap greater profits. But they hurt many more downstream U.S. producers of auto parts, paint and appliances, who consume those inputs in their own manufacturing processes and who are more likely to export and create new jobs than are the firms that seek trade restrictions.

Unfortunately, Ikenson notes in a separate blog post last week that the Obama administration is actually pondering the implementation of policies that would lead to higher, not lower, tariffs on US imports:

As the president was pitching his jobs plan last night, his current policies were hard at work discouraging job creation and incentivizing layoffs.

One of innumerable such policies concerns the treatment of imported raw materials and other intermediate goods that are subject to antidumping or countervailing duty measures, but needed by U.S. producers to make their final products. It almost defies comprehension that, in a modern, interdependent economy characterized by transnational supply chains and cross-border investment, over 80 percent of all U.S. antidumping and countervailing duty measures are imposed on these ingredients of U.S. production. This policy drives up the cost of production for downstream U.S. industries, making it more difficult for them to compete in the United States and abroad, curtailing profits, investment, and hiring.

However, under the U.S. Foreign Trade Zones program, some of the costs inflicted on downstream, import-consuming firms can be mitigated. (Of course, the program wouldn’t be necessary if U.S. duties were recognized as just another cost of production and set, optimally, at zero.) Among the aims of the FTZ program is to encourage manufacturing activity in the United States (and to discourage manufacturers from shuttering domestic operations and moving offshore as a result of the burden of paying U.S. customs duties).

FTZs are usually manufacturing plants or facilities physically located within the United States, but considered outside U.S. territory for the purpose of customs duty payment. Goods that enter FTZs are not subject to customs duties (including antidumping or countervailing duties) until they leave the zone and are formally entered into the commerce of the United States. If those goods are used as inputs to a further manufacturing process, the rate of duty applicable to the final product is assessed. If the goods are exported from a FTZ, with or without further processing, no duties are imposed because the product never officially “entered” the United States.

With respect to products made from materials and components subject to AD or CVD duties, the standing regulations require FTZ operators to get advance approval from the Foreign Trade Zones Board if the intention is to sell those final products in the United States. That requirement does not apply when the final product is going to be exported from the FTZ, which provides some incentive to downstream U.S. firms to keep production in the United States by operating as a FTZ.

But now the Obama administration—at the behest of the antidumping petitioners’ bar and organized labor, and despite its own exhortations to U.S. companies to double exports, invest in America, and put Americans back to work—is proposing to seal off that channel of sanity and compromise. New regulations would require advance approval even if the final product was going to be exported.

The requirement of advance approval from the FTZ Board, which is administered within the Import Administration—the same agency at the Commerce Department that simultaneously assists protection-seekers in crafting their AD/CVD petitions, while gleefully implementing and administratively adjudicating the antidumping and countervailing duty laws—will tip the balance in favor of outsourcing production for many firms in many industries. Any benefits of continuing to produce in the United States will be diminish next to the rising costs and uncertainty of doing so.

Thus, companies like Dow Corning, which uses silicon metal to produce silicone components for solar panels, will have that much more incentive to shutter operations in Kentucky and set up shop in Canada or elsewhere, where silicon metal is available at lower world market prices, so that it can compete in foreign solar panel markets with Chinese, Japanese, Canadian, and European rivals.

According to the WEF, the United States is currently the fourth-most competitive economy in the world.  I guess the Obama administration's really gunning for Number 5 in 2012.

Trade Remedies and US Competitiveness

Today Cato's Dan Ikenson published a new paper on the US antidumping law and American competitiveness.  Here's the paper's setup in Ikenson's Forbes op-ed on the same subject:

During the decade from January 2000 through December 2009, the U.S. government imposed 164 antidumping measures on a variety of products from dozens of countries. A total of 130 of those 164 measures restricted (and in most cases, still restrict) imports of intermediate goods and raw materials used by downstream U.S. producers in the production of their final products. Those restrictions raise the costs of production for the downstream firms, weakening their capacity to compete with foreign producers in the United States and abroad.

In all of those cases, trade-restricting antidumping measures were imposed without any of the downstream companies first having been afforded opportunities to demonstrate the likely adverse impact on their own business operations. This is by design. The antidumping statute forbids the administering authorities from considering the impact of prospective duties on consuming industries—or on the economy more broadly—when weighing whether or not to impose duties.

That asymmetry has always been insane, but given the emergence and proliferation of transnational production and supply chains and cross-border investment (i.e., globalization)—evidenced by the fact that 55% of all U.S. import value consists of raw materials, intermediate goods, and capital equipment (the purchases of U.S. producers)—it is now nothing short of self-flagellation.

Here's my favorite part:

If you need more evidence that the antidumping status quo is weighted heavily against import-consuming U.S. industries, consider this gem: three of the nine mineral raw materials that are the subject of the U.S. case against China in the WTO (magnesium, silicon metal, and coke) are simultaneously subject to U.S antidumping restrictions. That’s right! With our own import restricitons firmly in place, the United States is suing China to remove its export restrictions on the same products. That sounds like an excellent use of resources.

And here's the paper's basic conclusions:

The NEI should include a serious commitment to antidumping reform. At a minimum, consuming industries should be given legal standing to participate fully in antidumping proceedings, antidumping measures should be rejected if the projected costs of those restrictions on those firms and on the broader economy exceed some reasonable threshold, and any duties applied should not exceed the level found necessary to remedy injury to the petitioning domestic industry.

Be sure to read the whole thing here.

Friday Quick Hits (UPDATED)

Here's some light beach reading for your hopefully-sunny Memorial Day weekend:

• Friday Night News Dump, Holiday Weekend Edition: Treasury once again declines to cite China as a "currency manipulator."  Key line from the new report: "Because inflation in China is higher than it is in the United States, the RMB has been appreciating more rapidly against the dollar on a real, inflation adjusted basis, at a rate of around 9 percent per year."

• Cato's Sallie James explains perhaps the biggest reason why free traders should loudly object to the Obama administration's new demand that the price for its submission of pending FTAs with Korea, Colombia and Panama is expanded Trade Adjustment Assistance.  Key line: "What we have here is a reversal of the grand bargain on trade liberalization, that gave extra welfare to workers who lost their job because of freer trade in exchange for support for trade agreements that lowered trade barriers. That ‘grand bargain’ has been tenuous for years now, of course — witness the complete lack of movement on the trade agreements even after the 2009 enhancement of TAA, at least until recent months.  But now, rather than using TAA to buy votes for trade liberalization, the administration and their allies appear to using pretty-much-assured votes for trade liberalization to buy TAA.  As a Wall Street Journal editorial said on Friday, it’s extortion."  I have a little more on this issue in my comments to this post (and, yes, I stole "grand bargain" from Sallie).

• Frank Stephenson notices that "Peter Morici, Lou Dobbs's favorite China bashing economist and an advocate of taxing China to 'bring back US jobs,' has become a pitchman for Kyocera copiers.  And guess where Kyocera copiers are made?  The company has one plant in China and two in Japan."  Am I the only one who's totally unsurprised by this?

• Microsoft's Steve Ballmer denounces "rampant" Chinese software piracy... IN CHINA.  The Middle Kingdom's IPR enforcement problems certainly aren't new, but I can't recall a major CEO so openly discussing them on Chinese soil, can you?  Interesting stuff.

• Although I tend to focus on import benefits here, this great new IBD editorial reminds that exports are pretty great too, and our FTAs certainly help increase them.

• Cato's Dan Ikenson takes the Washington Post's Andrew Higgins to the woodshed for missing the real story behind the US antidumping order on wooden bedroom furniture from China.  Money quote: "At the time this case was initiated, the same U.S. furniture producers who were petitioning for relief from imports from China were investing in furniture operations in other countries. There’s nothing illegal or objectionable about investing in foreign production, but the assertions of the petitioning U.S. producers that their aim was to restore U.S. production and U.S. jobs were clearly false. It is testament to the laughably modest standards for finding a domestic industry injured by reason of dumped imports that duties were ever imposed in the furniture case."

• GOP Presidential Candidate Tim Pawlenty signals a willingness to support reform of America's awful ethanol policies... IN IOWA.  Given the location, this does qualify as somewhat brave.  But, as Brian McGraw explains, let's not go giving Pawlenty the Congressional Medal of Honor just yet. [UPDATE: Meanwhile, Mitt Romney loooooves him some cornfuel.]

• The Kauffman Institute surveys top economics bloggers about US federal government policies, and guess what got the most support?  (Shocking, I know)

Have a great, long weekend, and remember: apply sunscreen 30 minutes before laying out.  It needs time to soak in!

China CVD: Time to Unscramble the Eggs

Yesterday, the WTO's Appellate Body delivered a pretty significant smackdown on the United States in its dispute with China over the US imposition of anti-dumping (AD) duties and countervailing duties (CVDs) on Chinese imports.  The decision follows a string of losses by China at the WTO.  It naturally left the Chinese government quite pleased and the US Trade Representative "deeply troubled," and it's certainly a significant ruling that should have substantial ripple effects.  But it's not the haymaker that some breathless news reports would have you believe - at least, it doesn't have to be.  So let's first go over the decision and then discuss why it's a big deal but not a HUGE deal.

Before we get started, it's important to note that the Appellate Body is basically the "Supreme Court" of the global trading system.  It's decisions are final - there is no appeal, and now all that's left for the United States to do is to figure out how (or, in some unfortunate cases, whether) it will conform its laws or practices to the AB's ruling.  According to that ruling's conclusions, the United States in the four China AD/CVD investigations at issue:

• Erroneously deemed certain Chinese state-owned enterprises to be "public bodies", thus automatically treating the entities as the Chinese government" for the purpose of measuring "government" subsidies;

• Correctly measured the "benefit" conferred by certain Chinese financial contributions, thereby qualifying them as "subsidies" that may be disciplined under the US CVD law;

• Correctly found certain Chinese subsidies to be "specific" and thus countervailable (i.e., deserving of remedial tariffs on the imports receiving those subsidies); 

• Erroneously calculated (by "double counting") the total anti-dumping and countervailing duties to be simultaneously applied to investigated imports from China, which is designated as a "non-market economy" (NME) under the US anti-dumping law.

For us trade lawyers, all of these conclusions are pretty important because they will significantly affect many countries' future CVD actions against China and many other countries.  But for policy purposes, the last conclusion - double counting - is the one that (I assume) sent USTR into "deeply troubled" conniptions, and should have pretty serious implications for US-China trade relations, particularly the two dozen or so completed AD/CVD investigations that relied on the United States' WTO-inconsistent methodology to impose duties on Chinese imports into the US.  But it's not - I repeat, NOT - the death knell for AD/CVD actions against China that some misguided folks have reported.

But before I get into all that, let's define "double counting" and lay out what the AB actually decided.  As I've previously explained, the Department of Commerce's (DOC's) NME AD methodology (and any resulting AD duties) address and remedy the effects of China's subsidies on the subject imports, yet its current CVD methodology offsets these exact same subsidies, thus imposing duties on Chinese imports in excess the level of dumping and/or subsidization that's actually occurring.  In short it "double counts" the subsidies and thus imposes more than "remedial" tariffs on the investigated Chinese imports.  In the WTO case at hand, the AB overturned the Panel's conclusions that the US "double counting" methodology didn't violate WTO rules and instead ruled that double counting was inconsistent with Article 19.3 of the WTO's Subsidies (SCM) Agreement, which requires that countervailing duties be levied in "appropriate amounts":

582. In sum, based on all of the above, we consider that the Panel erred in its interpretation of Article 19.3 of the SCM Agreement and failed to give meaning and effect to all the terms of that provision. Under Article 19.3 of the SCM Agreement, the appropriateness of the amount of countervailing duties cannot be determined without having regard to anti-dumping duties imposed on the same product to offset the same subsidization. The amount of a countervailing duty cannot be "appropriate" in situations where that duty represents the full amount of the subsidy and where anti-dumping duties, calculated at least to some extent on the basis of the same subsidization, are imposed concurrently to remove the same injury to the domestic industry. Dumping margins calculated based on an NME methodology are, for the reasons explained above, likely to include some component that is attributable to subsidization.

583. We, therefore, reverse the Panel's interpretation of Article 19.3 and, in particular, its findings that "the imposition of anti-dumping duties calculated under an NME methodology has no impact on whether the amount of the concurrent countervailing duty collected is 'appropriate' or not" , and that Article 19.3 of the SCM Agreement does not address the issue of double remedies. We find instead that the imposition of double remedies, that is, the offsetting of the same subsidization twice by the concurrent imposition of anti-dumping duties calculated on the basis of an NME methodology and countervailing duties, is inconsistent with Article 19.3 of the SCM Agreement.

Next, the AB found that DOC was under an affirmative obligation to ensure that its AD/CVD methodology for China and other NMEs didn't result in double-counting:

602. In the same way, therefore, as an investigating authority is subject to an affirmative obligation to ascertain the precise amount of the subsidy, so too is it subject to an affirmative obligation to establish the appropriate amount of the duty under Article 19.3. This obligation encompasses a requirement to conduct a sufficiently diligent "investigation" into, and solicitation of, relevant facts, and to base its determination on positive evidence in the record. We recall our finding above that, among the factors to be taken into account by an investigating authority, in establishing the "appropriate" amount of countervailing duty to be imposed, is evidence of whether and to what degree the same subsidies are being offset twice when anti-dumping and countervailing duties are simultaneously imposed on the same imported products. We also recall that such double remedies are "likely" when the concurrent anti-dumping duties are calculated on the basis of an NME methodology.

The AB then ruled that DOC had totally flubbed its affirmative WTO obligation by not even trying to prevent double counting from occurring; thus, its AD/CVD determinations were inconsistent with Article 19.3:

604. Thus, the USDOC made no attempt to establish whether or to what degree it would offset the same subsidies twice by imposing anti-dumping duties calculated under its NME methodology, concurrently with countervailing duties. We recall that, in the investigations at issue, the USDOC dismissed China's claim of double remedies on the ground that inter alia it had no statutory authority to make adjustments in the context of countervailing duty investigations. Therefore, the USDOC did not initiate any examination of whether double remedies would arise in the four investigations at issue and refused outright to afford any consideration to the issue or to the submissions pertaining to the issue that were presented to it.

605. In our view, by declining to address China's claims concerning double remedies in the four countervailing duty investigations at issue, the USDOC failed to fulfil its obligation to determine the "appropriate" amount of countervailing duties within the meaning of Article 19.3 of the SCM Agreement.

Finally, the AB concluded (emphasis mine):

606. Consequently, we find that, in the circumstances of the four sets of anti-dumping and countervailing duty investigations at issue, by virtue of the USDOC's imposition of anti-dumping duties calculated on the basis of an NME methodology, concurrently with the imposition of countervailing duties on the same products, without having assessed whether double remedies arose from such concurrent duties, the United States acted inconsistently with its obligations under Article 19.3 of the SCM Agreement.

The AB also found that this violation resulted in consequent violations of Article 10 and 32.1 of the Subsidies Agreement, and it recommended that the WTO Dispute Settlement Body "request the United States to bring its measures, found in this Report, and in the Panel Report as modified by this Report, to be inconsistent with the SCM Agreement, into conformity with its obligations under that Agreement." (This request includes the inconsistent US determinations on "public body" also mentioned above.)

So now that we have that out of the way, let's examine the possible implications of the AB's ruling.  As noted above, they're pretty big:

• Assuming the the United States decides to comply with the AB's ruling (and not simply accept Chinese retaliation), DOC will need to go back and amend its existing determinations in the four AD/CVD investigations at issue in order to ensure that they are consistent with the AB's ruling.  This means that DOC will have to develop a new AD/CVD methodology that somehow addresses the double counting issue (and "public body"), and the US re-determinations will almost certainly be scrutinized by the WTO to ensure that they comply with the AB's ruling.

• As mentioned above, the AB's ruling (again, assuming the US decides to comply) should eventually affect the dozens of other AD/CVD investigations that have been initiated against China since the US first decided to apply its CVD law to NME imports back in 2006.  Although none of those cases was specifically challenged here, each involved the same illegal double counting methodology (or, more precisely, the lack of any methodology).  So it seems quite likely that, assuming the US doesn't voluntarily amend all of these determinations and recalculate (and refund!) existing duties, China will challenge these determinations at the WTO based on the AB's ruling in this case.  And it should win.

• Finally, the AB's ruling could - could - effectively end DOC's messy 5-year "CVD NME" experiment altogether.  As you'll recall, the US Court of International Trade (CIT) has already ruled that DOC's CVD NME methodology, as applied in a case against Chinese offroad tires (which was also one of the cases at issue in the WTO dispute), violated US law.  That case is currently under appeal at the Court of Appeals for the Federal Circuit, and if the CAFC upholds the CIT's very aggressive decision, you'll now have both the US courts and the WTO's Appellate Body finding major problems with DOC's current CVD NME policy (which, again, has been followed in many completed and pending AD/CVD investigations against China and other NMEs like Vietnam).  The result of all of these adverse rulings could be one of three things: (i) DOC adopts a new CVD NME methodology that dramatically limits (or offsets altogether) the concurrent application of anti-dumping and countervailing duties against Chinese and other NME imports (although the CIT seemed to preclude this option); (ii) DOC no longer allows for concurrent AD/CVD investigations of NME imports; or (iii) DOC deems China to be a "market economy" and thus uses standard AD/CVD methodologies in all future cases.  This last option seems pretty unlikely because domestic petitioners just love the NME methodology, but it's actually the simplest and most reasonable solution (especially when you consider the silly fact that Russia is a "market economy," while China isn't).  Regardless of the (hypothetical) option chosen, however, the end result would be pretty much the same: the diminished (or eliminated) value of petitioners' shiny new CVD NME weapon against Chinese imports. 

That said, the AB's ruling should not be overstated for two big reasons, both of which I mentioned above:

• Most obviously, the AB's ruling did not rule that DOC was absolutely prohibited from conducting concurrent AD and CVD investigations against China or other NMEs.  All the AB said was that double counting violated WTO rules, and that DOC's "imposition of anti-dumping duties calculated on the basis of an NME methodology, concurrently with the imposition of countervailing duties on the same products, without having assessed whether double remedies arose from such concurrent duties" was WTO-inconsistent.  In short, DOC ran into trouble because it didn't even try to prevent double counting in its AD/CVD investigations of Chinese imports.  Thus, DOC could perfectly comply with the AB's ruling where it developed a methodology that (i) "assesses whether double remedies arose from concurrent AD/CVD duties" and, where such double remedies are indeed found, (ii) removes any instances of double counting.  This, of course, is easier said than done, but there are some pretty smart folks over at DOC, and I'm confident that they could develop such a methodology if their bosses in the White House were absolutely determined to keep the AD/CVD NME process alive.  China certainly could challenge this new methodology at the WTO or in US courts, but both bodies are pretty deferential to such administrative minutiae.  (They're not so deferential where, such as here, DOC doesn't even try to adopt a methodology to avoid the legal problems raised.)  As noted above, this approach wouldn't perfectly comply with the CIT's aggressive ruling, but, even assuming the CAFC upholds it, Congress could always intervene to make this approach legal under US law (thereby mitigating the court rulings).

• Second, in the (unlikely, I think) event that DOC decides not to create a fancy AD/CVD NME methodology, it still could allow for an anti-dumping or countervailing duty investigation to proceed against Chinese (or other NME) imports.  Such an "independent" approach would avoid the double-counting issue altogether, maintain the AD NME methodology, and still let certain US petitioners attack Chinese subsidies through CVD cases.

Of course, neither of these approaches will change the fact that DOC likely has to re-do all of those completed AD/CVD determinations against Chinese imports that were based on its faulty double counting.  That's a lot of omelet-unscrambling.  And, as noted above, neither contemplates the easiest and most logical approach to solving the problems raised by the Appellate Body and the CIT - simply designating China a market economy and applying a standard, perfectly legal AD/CVD methodology in future investigations of Chinese imports.

But hey, this is what happens when bad trade politics trumps good trade policy: you get messy rulings that require ample administrative clean-up.  As I said at the time of the CIT ruling against double counting:

[B]ack in 2006-07 when my colleagues and I litigated the first US AD/CVD investigation of Chinese imports (on coated paper), one of our main arguments against a big and sudden change to DOC's longstanding CVD/NME policy was the serious can of worms (note: not a legal term) that would be opened for both US trade law and US-China trade relations. We argued that any CVD/NME changes should be slow, deliberate, and pursuant to formal notice-and-comment procedures in order to avoid endless litigation and unnecessary trade frictions. Our warnings, obviously, were ignored. Now, with two adverse CIT cases, an "illegal" DOC remand redetermination, a pending WTO case, messy congressional currency/CVD legislation and hearings, and more than two dozen completed CVD cases which rely on an "illegal" DOC methodology, I hate to say "I told you so," but......

Well, that "pending WTO case" is now yet another strike against the United States' existing China CVD policy.  And the "I told you sos" are only getting louder.

Tuesday Quick Hits

Since I was traveling last week, you might be behind on your reading. Here are some headlines to catch you up:

• NC State University Report: North Carolina ports support more than 65,000 jobs across the state and provide an economic impact of $7.5 billion.

• Doing business in China can really stink for US companies; investor/buyer/seller beware.

• GMU's Russ Roberts absolutely dismantles Paul Krugman's (and others') latest nonsense about the omnipotence of America's "rich".

• Geithner: Chinese inflation is driving the real US-China exchange rate and altering companies' business decisions.  (Yes, this should all sound very familiar.)

• Hyundai and Kia are dominating in Alabama and Georgia, respectively, and bringing American manufacturing jobs with them.  (And Cafe Hayek's Don Boudreaux provides some great additional commentary.)

• In the Solyndra debacle comes further proof that the US government's record on "investing" in green manufacturing is abysmal, and that private (aka "real") investment and government (aka fake) "investment" are two very different things.

• EU-Korea FTA clears its final hurdle in Europe.

• US to China: invest in our debt, not our companies.

• Ikenson: Tony Soprano meets the US antidumping law.  And Simon Lester adds some helpful anonymous commentary. 

Enjoy.

Monday Quick Hits

Lots of interesting stuff went down while everyone was vacationing.  Here's a quick rundown:

• The Wall Street Journal's editorial board explains how a US antidumping order on magnesium has destroyed American manufacturing jobs in industries that rely on the metal to produce downstream inputs.  The money lines: "In 2005, at the behest of America's monopoly magnesium producer—U.S. Magnesium of Utah—the Commerce Department imposed antidumping duties on magnesium from Russia and magnesium alloy from Russia and China. Five years later magnesium alloy is in short supply in the U.S., leading to much higher prices than in the rest of the world and a crisis for die casters, alloy producers and recyclers.... In a December 6 letter to the ITC, Arkansas Congressman Mike Ross spelled out the problem: 'U.S. manufacturers pay $2.30 per pound on average for magnesium alloy while manufacturers in Mexico, Canada and Europe pay $1.50 per pound and Chinese manufacturers pay $1.36 per pound.' Die casters who have tried shifting to aluminum have lost orders to overseas producers."  Cato's Dan Ikenson piles on by citing the magnesium case as a prime example of US trade policy's cognitive dissonance.

• The Chinese are starting to really hammer home the fact that, as your humble correspondent keeps screaming aboutcalmly mentioning, global supply chains have rendered old school trade stats obsolete tools for measuring actual tradeflows and the efficacy of existing trade policies.  Most of the information cited here is old news for readers of this blog, but here's a new one: "Sheng Guangzu, head of China's General Administration of Customs, told Xinhua in an interview in April that much of China's trade surplus was 'transferred' from foreign-funded enterprises operating in China. In the first 11 months this year, exports of foreign-funded enterprises totaled 779.14 billion U.S. dollars, accounting for 54.7 percent of China's total exports, according to China's customs authorities.  The data also showed that, during the same period, foreign-funded firms generated 112.51 billion U.S. dollars of trade surplus, accounting for 66 percent of China's total surplus."

• In case you missed it, GMU's Walter Williams deftly explains that (a) trade is among individuals, not countries, and (b) free trade is by definition "fair trade."

• The WSJ's Liam Denning discusses why "national rivalry always lurks around an industry as dependent on government support as renewable energy."  His first example: the heavily subsidized United Steelworkers's "Section 301" petition against Chinese green subsidies.  Sounds familiar, eh?

• Heritage's Jim Roberts gives us a quick reminder that free trade is a prime contributor to the dramatic increase in all Americans' living standards over the last 50 years.

• Behold, the stunning incompetence of the federal government: "The U.S. Government Accountability Office said it could not render an opinion on the 2010 consolidated financial statements of the federal government, because of widespread material internal control weaknesses, significant uncertainties, and other limitations.... [Acting Comptroller General] Dodaro also cited material weaknesses involving an estimated $125.4 billion in improper payments, information security across government, and tax collection activities. He noted that three major agencies — the DOD, the Department of Homeland Security, and the Department of Labor — did not get clean opinions. Nineteen of 24 major agencies did get clean opinions on all their statements."

• Cato's Dan Griswold destroys the canard that US multi-nationals corporations' overseas hires are responsible for high domestic unemployment.  In short, companies follow economic growth, not lower wages; and the US still benefits when they do. I'd only add that we'd be even better off if the US adopted more pro-growth tax and regulatory policies.  (More on that point in a great IBD editorial here.)

• It's time for the US to stop futzing around and implement the US-Colombia FTA.  Seriously.

• The US manufacturing sector is cranking.  Fearmongering American politicians were shockingly unavailable for comment.

• A free trader's new year's resolution.

• This is absolutely hilarious (mild content warning).  So is this.

Enjoy.

Here Comes the Chinese Retaliation?

Over the last few weeks, I've cautioned that America's absurd ethanol policies and the new US WTO complaint against Chinese "green subsidies" (which arose from the United Steelworkers' Section 301 petition) could spark new trade disputes targeting US exports.  Today comes news that China might be getting the ol' retaliation ball rolling with an anti-dumping investigation that fits both of my criteria perfectly (emphasis mine):

China, the world’s biggest grains user, has started an anti-dumping investigation into U.S. shipments of dried distillers’ grains, an animal feed ingredient, adding to tensions in ongoing trade disputes.

The government will probe for unfair trade practices on products imported in the year ended June 30 after receiving complaints from four domestic ethanol producers, the Ministry of Commerce said on its website today. Distillers’ grains, commonly known as DDGS, is a by-product from making corn-based ethanol.

The probe is likely to further strain commercial ties with the U.S. a month before President Hu Jintao is scheduled to visit Washington. China’s surging livestock production has spurred imports of animal feed ingredients including corn, soybeans and DDGS.

“This case against U.S. DDGS probably isn’t an isolated incident and must be observed in the context of the two sides’ trade relations,” Li Qiang, managing director at Shanghai JC, said by phone. “The investigation outcome may not support the charge because prices of imported DDGS have been higher, so it’ll be difficult to establish damages based on price,”

Imports of DDGS may jump nearly fivefold to over 3 million metric tons this year, according to Li. Still, the probe “may not have significant impact beyond the initial concern.”...

The investigation comes after the U.S. last week filed a complaint at the World Trade Organization against China over support for its wind-energy manufacturers. A government fund for wind manufacturers requires recipients to use domestically made parts, violating WTO rules, the U.S. Trade Representative’s office said. China responded by saying its policies were in line with the regulations.

Last month China said it would extend an anti-dumping probe on U.S. sports utility vehicles and large sedans and in October it said it would consider appealing a WTO decision to reject the bulk of its complaints against U.S. duties on imports of steel pipes....

The ministry will begin the investigation today and will likely conclude the probe within a year, the ministry’s statement said. The probe may be extended under exceptional circumstances to June 2012, it said.

Yes, this new investigation could just be a big coincidence.  Then again, the last time that the United States announced that it was targeting China in response to a USW petition under an arcane provision of US trade law (Section 421), the Chinese immediately responded with two new anti-dumping (and countervailing duty) investigations of US chicken and automobile exports.  And with US ethanol tariffs and subsidies angering producers around the world, it's no surprise at all that China's Ministry of Commerce (MOFCOM) had this petition the Chinese industry sitting around. (Unlike the more transparent US system, AD/CVD petitions are submitted confidentially in China, and MOFCOM has complete discretion re: whether and when to initiate an investigation.)  So you can draw your own conclusions as to whether this qualifies as "retaliation," or whether it's just a long-overdue Chinese response to bad US behavior on ethanol.  Either way, it's not good for US exporters of DDGS.

And speaking of naughty US ethanol policies, I must admit that I didn't foresee the DDGS case itself and instead was warning about potential countervailing duty investigations of subsidized US ethanol.  But the Chinese DDGS anti-dumping case is hardly surprising because, while it wasn't the direct result of US ethanol tariffs and subsidies, it's almost certainly the indirect result of these policies, as they inevitably increase domestic production (and thus lower prices) of the ethanol byproduct DDGS.  So while other DDGS cases could be on the way, we still could also see new investigations targeting US exports of the subsidized ethanol itself.  We shall see.

One last trade-lawyerly point: I'm not exactly sure what Li Qiang means when he/she says that the case might not result in anti-dumping duties against US exports because DDGS import prices are higher than domestic prices.  This could be a legitimate point if we're talking about proving that US DDGS imports materially injured the Chinese injury, but injury cases are very complex, and simple average unit value (AUV) comparisons are a pretty poor indicator of a "material injury" determination (and those import volume increases provide strong support for an injury finding).  On the other hand, Li is mistaken if he/she thinks an affirmative dumping finding will be difficult in this case because DDGS import prices are higher than domestic prices.  (Recall that the imposition of anti-dumping duties requires affirmative findings of both dumping and injury.)  Dumping occurs when import prices are lower than prices in the home (US) market or cost-of-production (aka "Normal Value"), so domestic (Chinese) prices are inapposite.  Li probably means the former scenario, but it's impossible to tell.  Chalk it up to shoddy reporting, I guess.

Changes Afoot for US Trade Remedies

Two recent developments at the United States Department of Commerce (DOC) could have rather significant implications for American manufacturers, importers and consumers.  One move strongly favors domestic manufacturers who might want government protection through US anti-dumping (AD) or anti-subsidy ("countervailing duty" or CVD) laws, while the other benefits the importers and consumers who are typically harmed by these same laws.

First up is news that the DOC has begun "zeroing" again in original AD investigations through a seldom-used form of dumping analysis called "targeted dumping."  As I've discussed many times, zeroing inflates dumping margins (and thus the remedial tariffs imposed on the imports targeted in AD investigations) and is very controversial - despite having been repeatedly ruled illegal by the WTO, zeroing is still used by the United States in annual reviews (much to the consternation of our trading partners).  The US had, however, abandoned zeroing in original investigations several years ago.  Well, DOC's new targeted dumping case - Polyethylene Retail Carrier Bags from Taiwan: Final Determination of Sales at Less than Fair Value, 75 Fed. Reg. 14569 (Mar. 26, 2010) ("Taiwan Bags") - changes that and resurrects the practice, as a good summary article by Bob LaFrankie and Alicia Winston explains:

Commerce has refused on numerous occasions and under different scenarios to fully abide by the WTO's decisions declaring zeroing unlawful. In fact, Commerce has used several legal technicalities to evade compliance with adverse WTO zeroing decisions. One such tactic has been its use of a "targeted dumping" analysis, like that employed in the Taiwan Bags decision. "Targeted dumping" is when an exporter is not dumping to all customers or during all time periods, but is instead limiting (i.e., targeting) its dumping to a specific region, time period, or customer. The theory behind a targeted dumping analysis is that an exporter can use targeted dumping on a few sales to hide or "mask" its overall dumping.

Importantly, if Commerce uses its targeted dumping methodology, it calculates dumping rates with zeroing; this calculation typically increases the dumping margins. Commerce used its targeted dumping methodology in Taiwan Bags, thereby enabling it to use zeroing to increase the exporter's amount of dumping. In Taiwan Bags, however, Commerce went a step further. In that decision, Commerce revised its targeted dumping methodology to use zeroing on virtually every sale, regardless of the extent of any actual targeted dumping. This is in contrast to its past practice of zeroing only the identified targeted sales. Through its expanded zeroing practices, Commerce appears to have essentially resumed its use of zeroing in dumping calculations without regard to WTO decisions declaring the practice unlawful.

While Commerce has used targeted dumping previously, it has never used it as broadly as was done in Taiwan Bags. This is a sharp departure from Commerce's past practice and it remains to be seen whether this new targeted dumping methodology survives any legal challenges....

It is not yet clear whether Commerce will use the Taiwan Bags targeted dumping methodology in other antidumping cases. Nevertheless, this decision provides Commerce with a potential avenue to resume its use of zeroing in virtually all new antidumping investigations in the future.... A concerted effort by Commerce to use the Taiwan Bags methodology in other antidumping cases would greatly increase the chances that Commerce would find that a company had engaged in dumping, and such an effort would likely increase overall antidumping duty rates. U.S. importers and foreign exporters should remain mindful of this possibility in future antidumping cases and be prepared to challenge both the U.S. industry and Commerce when such a methodology is used or considered.

This is something definitely worth watching over the next several months.  As you may recall, the Obama administration has repeatedly hinted that it would soon abandon zeroing in annual AD reviews.  Although they haven't officially done that yet (and thus the WTO-sanctioned retaliation threats keep mounting), it's quite odd that administration officials are proposing to close one zeroing door there, while opening a new one with the targeted dumping case here. Obvious exit question: Is this a case of crossed wires at the White House, or a cynical game of misdirection?

Next up is the "good news" for US importers and consumers.  On April 26 DOC finally completed its remand redetermination resulting from the US Court of International Trade (CIT) case, GPX International Tire Corp. v. United States, which found that DOC had illegally calculated antidumping and countervailing duties for off-road tires from China.  In its final remand results, DOC announced that it was complying with the CIT’s order (under protest) and issuing amended AD and CVD final determinations that would "offset" the CVDs against GPX’s calculated AD duty deposit rate.

This is obviously pretty complicated stuff, but the basic gist is that it's a very good development for US importers and consumers by dramatically shrinking AD/CVD duties on Chinese imports.  For those of you who are masochistic enough to want to know more, keep reading.  After an affirmative AD/CVD ruling in 2008, GPX appealed the determination to the CIT, arguing that the application of both the CVD and AD law using the Department's "non-market economy" (NME) methodology resulted in a double-counting of duties. Essentially, GPX argued that the NME AD methodology already takes subsidies into account, so anti-subsidy duties (CVDs) on subject imports that are also part of a concurrent AD investigation would result hitting those imports twice with some of the same remedial tariffs.

The CIT agreed. On September 18, 2009, CIT Chief Judge Jane Restani sided with GPX and found that DOC must account for the possibility of such double counting against the same imports or ditch the whole CVD NME thing altogether.

DOC in its remand determination reluctantly calculated revised AD and CVD rates for GOX by subtracting the CVD rate from the AD rate. In GPX's case, the AD rate for its Chinese producer (Starbright) was adjusted to include an "offset" for the calculated CVDs (14%). As a result, GPX’s AD rate was reduced from 29.93 percent to 15.93 percent.

The result of DOC's remand is pretty clear: GPX's potential import liability dropped from 44% to 30% - still a big number but a whole lot better than what they previously faced.  If the remand holds up, and if other US importers and Chinese exporters demand similar offsets, the impact could be quite a significant improvement for their bottom lines in any future AD/CVD investigation.  There are still a lot of hurdles to clear before that becomes a reality, but this is certainly a good start for them... and, of course, for US consumers.

Ok, that's it with the arcane trade remedies stuff for now.  I promise to get back to blogging on simpler and more entertaining issues tomorrow.