Game On: Highly Subsidized US Solar Panel Industry Preps Anti-Subsidy Case Against China

I wish I could say that this development is in any way surprising, but, well, that's just not true (emphasis mine):

Solar manufacturers including the U.S. unit of SolarWorld AG (SWV) are preparing a trade complaint against imports from China, as they seek help from President Barack Obama to counter subsidies to their competitors, according to people familiar with the matter.

The case, which would be filed at the Department of Commerce and the U.S. International Trade Commission in Washington, would be one of the largest targeting China, with political implications as both nations race to develop clean- energy technologies.

The companies argue that China’s subsidies to solar companies violate global trade rules and provide those manufacturers with an unfair advantage, according to the people, who spoke on condition of anonymity because no complaint has yet been filed....

In the first seven months of this year, China shipped $1.4 billion of solar panels to the U.S., more than the $1.2 billion of panels it sent in all of 2010, according to U.S. International Trade Commission data. Imports from South Korea, the Philippines and India also jumped.

The collapse this month of Solyndra LLC, a California maker of solar panels that had $535 million in U.S. loan guarantees, has renewed demands from lawmakers and union leaders that the Obama administration pursue unfair-trade complaints against China for out-sized subsidies to its clean-energy companies.

“The American solar industry is facing unparalleled challenges, and without the leadership of your administration this industry may disappear,” Senator Ron Wyden, an Oregon Democrat, said in a Sept. 8 letter urging Obama to initiate a countervailing duty case against imports from China or to file a case at the World Trade Organization.

China provided $30 billion in credit to its biggest solar manufacturers last year, about 20 times the U.S. effort, Jonathan Silver, executive director of the Energy Department’s loan program, told a congressional panel Sept. 14...

There are two obvious reasons why this news is anything but shocking for anyone who reads this blog:

• First, because many world governments, including the US and China, have spent tons of taxpayer money"invested" heavily in green technology manufacturers and banked on exports as part of their economic recovery strategies, I've long predicted  - and subsequently reported on - an inevitable spike of domestic and multilateral (WTO) trade disputes over illegal subsidies to "green energy" companies.

• Second, a trade dispute was particularly inevitable in the case of solar panels because of (i) the very public struggles of not just the scandal-plagued Solyndra, but also several other domestic solar technology manufacturers and (ii) the very public blame for these failures that domestic unions, manufacturers and the Obama administration have placed on China.  Heck, I (incorrectly) predicted such a dispute just last week.  (Guess I was just a little too psychic... or something.)

That said, the (possible) case is still pretty astonishing for one reason: its blatant chutzpah.  As alluded to above, the US solar industry, including the aforementioned Solyndra, has received BILLIONS of their own subsidies from the US government.  Under the Department of Energy Loan Program alone (which has dispersed a total of $38.6 billion and counting in subsidies), the following solar companies have received buckets of taxpayer money:

• 1366 Technologies, Inc. - Solar Manufacturing - $150 million
• Abengoa Solar, Inc. (Mojave Solar) - Solar Generation - $1.2 billion 
• Abengoa Solar, Inc. (Solana) Solar Generation $1.446 billion
• Abound Solar - Solar Manufacturing - $400 million 
• Agua Caliente - Solar Generation - $967 million 
• BrightSource Energy, Inc. - Solar Generation - $1.6 billion
• Cogentrix of Alamosa, LLC  - Solar Generation - $90.6 million 
• First Solar, Inc. (Antelope)- Solar Generation - $680 million 
• First Solar, Inc. (Desert Sunlight) - Solar Generation - partial guarantee of $1.88 billion 
• First Solar, Inc. (Topaz) - Solar Generation - partial guarantee of $1.93 billion
• Fotowatio Renewable Ventures, Inc. - Solar Generation - partial guarantee of $45.6 million
• Mesquite Solar 1, LLC (Sempra Mesquite) - Solar Generation - $337 million
• NextEra Energy Resources, LLC (Genesis Solar) - Solar Generation - partial guarantee of $852 million
• Prologis (Project Amp) - Solar Generation - partial guarantee of $1.4 billion
• SolarCity Corporation (SolarStrong) - Solar Generation - partial guarantee of $344 million 
• SolarReserve, LLC (Crescent Dunes) - Solar Generation - $737 million 
• SoloPower - Solar Manufacturing - $197 million 
• Solyndra Inc. - Solar Manufacturing - $535 million 
• SunPower Corporation, Systems (California Valley Solar Ranch) - Solar Generation - $1.187 billion

By my (admittedly lawyer-esque) math, that's about $16 billion in total or partial loan guarantees (read: subsidies) to the solar industry as part of the DOE loan program alone.  I'm not sure where Mr. Silver's getting his numbers, but they definitely seem low (shocking, I know).  And those DOE loans are definitely not the only subsidies out there: according to the United Steelworkers Union's 2010 "Section 301" petition requesting a WTO complaint against China's solar industry subsidies, the United States government had doled out more than $100 billion in subsidies to the US solar industry.  And that was back in 2010, so the number's certainly even higher now.

So, for the direct and indirect recipients of all of this sweet, sweet government cash to turn around and complain about their competitors receiving - yep - sweet, sweet government cash is pretty much the height of hypocrisy.  Or, as I stated back in 2010 regarding the USW complaint:

Obvious translation [of the union complaint]: Sure American manufacturers received $100 billion worth of green subsidies in order to crush their foreign competitors, but China's producers received lots more, and theirs have been far more effective! No fair! In essence, the USW is openly complaining that the Chinese are better cheaters than we are, and the union thus wants the US government to call in the WTO's referees in order to stop China's cheating.  Talk about chutzpah.  

Exit question: if USTR ends up filing a WTO dispute on the USW's grounds, does that mean we'll have our first ever official case of "subsidy envy"?

The answer to that cheesy question was clearly "yes," and the solar industry's, ahem, green envy obviously  hasn't subsided since then (nor has my cheesy sense of humor).  And, as the DOE's recent statements make clear, the industry's Blame China strategy appears to have very vocal and eager supporters in certain parts of the Obama administration.  Perfect.

Furthermore, and as if this all weren't sketchy enough, the Bloomberg article points other things that should cause us all to question the solar industry's little ol' Blame China plan.  Most importantly, the article shows that solar imports from other countries are also on the rise, so even if the US industry's new anti-subsidy petition against Chinese is successful, the most likely result - along with, obviously, higher solar panel prices for US consumers - isn't the resurgence of US solar manufacturers but instead the very common "trade diversion" (i.e., a simple shift in imports from China to these other low-cost suppliers).  So we'll all pay more, and no new net jobs will be created.  Sweet.

In a similar vein, the fact that a German-owned company with plants all over the world (and which has just cut 200 jobs in California) is leading the US anti-subsidy charge against only Chinese imports should definitely give us pause.  As Cato's Dan Ikenson has explained repeatedly, US-based companies with major foreign operations have often used US trade remedies actions to cripple their foreign competition and bolster their own import sources, rather than to increase domestic output and employment.  I have no idea if that's what SolarWorld or any other members of the US industry are up to, but it's definitely something to keep in mind.

So to recap: the highly-subsidized and seriously-struggling US solar panel industry - led by a German-owned manufacturer with global sourcing operations - is targeting highly-subsidized Chinese solar panel imports which, along with imports from several other non-targeted countries, have surged in the last few years.

Welcome to the Green Subsidy Game, folks.  Be sure to grab a good seat; the show's just getting started.

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.

Monday Quick Hits (World Champion Dallas Mavericks Edition)

I'm sure that you, like me, are still tired from celebrating the Mavs' ridiculously unexpected victory last night. So here's a little pick-me-up:

• Sec. Clinton: Free trade is great for everyone (except Americans!).  In all seriousness, if you've ever wondered whether the Obama administration's free trade foot-dragging reflects political opportunism or a sincere-yet-misguided misunderstanding of basic economics, wonder no longer.

• WTO Director General Pascal Lamy explains that, because of global supply chains, value-added is a much better way to measure trade flows, and old school trade stats "give us a distorted picture of trade imbalances between countries." A full WTO report on this issue gives us a detailed understanding of the abject absurdity of politicians' breathless claims about global trade imbalances based on the old metrics.  For example, on our elected officials' currency demagoguery, Lamy stated: "When products include many parts made in many other countries, the effect of an isolated exchange rate appreciation or depreciation to the selling price in export markets will be reduced to the domestic content of these exports, to its 'value added content'. This may explain why empirical studies about the impact of exchange rate changes on imbalances tend to show they only have limited or ambiguous effects."  Translation: the demagoguery is pretty much baseless.  Heritage's Bryan Riley has more on our misleading trade stats here.

• In a must-read editorial, George Will absolutely destroys the White House's refusal to submit pending FTAs to Congress without congressional assurances on expanded Trade Adjustment Assistance.  My favorite lines: "A government borrowing $58,000 a second cannot afford Obama’s policy of Stimulus Forever, and there is this problem with TAA at any level: It is unjust to treat some workers as more entitled than others to protection from the vicissitudes of economic dynamism. Consider a hypothetical Ralph, who operated Ralph’s Diner until Applebee’s and Olive Garden opened competitors in the neighborhood. With economies of scale and national advertising budgets, those two franchises could offer more choices at better prices, so Ralph’s Diner went out of business. Should he and his employees be entitled to extra taxpayer subventions because they are casualties of competition? Why should someone be entitled to such welfare just because he or she is affected negatively by competition that comes from abroad rather than down the street? Because national trade policy permits foreign competition? But national economic policy permits — indeed encourages, even enforces — domestic competition. In 2001, when approximately 80,000 people worked in 7,500 music stores, the iPod was invented. Largely because of that and other technological changes, today only about 20,000 people work in 2,500 music stores. Should those 60,000 people be entitled to extra welfare because they are “victims” of technology? Does it matter if the 60,000 have found work in new jobs — perhaps making or selling electronic devices? In 2008, Americans bought 1.4 billion books made of paper and 200 million e-books. Soon they will buy more e-books than paper books, and half the nation’s bookstores will be gone. Should the stores’ former employees be entitled to special assistance beyond unemployment compensation? Reactionary liberalism holds that existing jobs must be protected with policies that reduce the economic dynamism that would mean a net increase in American jobs. So the dreary probability is that even if the TAA entitlement were re-enriched to stimulus levels, Democrats would again move the goal posts, concocting new objections to the trade agreements."  Yep. 

• Speaking of TAA, I quite enjoyed this NYT op-ed from former Bush official Matthew Slaughter and former Clinton official Robert Lawrence about how to resolve the White House's self-imposed TAA/FTA impasse.  Their solution: (i) pass the FTAs as soon as humanly possible, and then (ii) scrap TAA and the current mishmash of other federal unemployment benefits and replace the ancient, broken programs with a more streamlined and rational system that is market-friendly and doesn't discriminate against Americans who lost their jobs due to technology or something other than (allegedly) trade policy.  I don't agree with everything they propose, but I love this idea (and have advocated something similar for a few years now): "enabling unemployed workers to make penalty-free withdrawals from savings accounts like 401(k)’s and I.R.A.’s to finance costs like occupational retraining and relocation."  Sadly, the chances of this deer-in-the-headlights White House actually doing something as rational and economically-beneficial as the Slaughter/Lawrence plan are, well, not good.

• Is the, ahem, "Chicago way" coming to Geneva?  The Peterson Institute's Gary Clyde Hufbauer reports on what he sees as a very troubling development at the WTO: USTR's attempt to block Appellate Body member Jennifer Hillman from serving a second term on the world's most important arbiter of trade disputes: "The United States has never before blocked its Appellate Body appointee from serving a second term. Since the USTR has offered no explanation for blocking Hillman, suspicions are bound to arise that the United States is displeased with her decisions on the AB and wants to name a judge who is more attentive to US positions in future cases. These suspicions are bound to erode confidence in the WTO judicial system, and create a chilly reception for Hillman’s successor appointee. 'Judicial independence' is a hallowed American concept, now enshrined in the WTO.... But as a member of the bar, as well as President, Obama should seriously reconsider this damaging precedent."

• Does CNBC get just how contradictory this ridiculous news story about the Japan tragedy and the US trade deficit is?  Compare and contrast (emphasis mine): "The after-effects from the March earthquake and tsunami in Japan left behind one on the US economy: An unexpected shrinking in the massive trade deficit. But that improvement may not last long….  Most of the $3.1 billion decline came from Japan and a $2.5 billion drop in auto-related imports. The tsunami devastated the Japanese auto industry, slowing parts distribution and production essential to US car manufacturing and sales."  So to recap: choking off essential inputs for US manufacturers is a "positive impact."  Riiiiight.  (h/t Bryan Riley) 

• The Mises Institute's Jeff Tucker explains how US treatment of Vietnamese catfish basa and swai is an "archetype of disgusting protectionism."  Yep.

• In case you're wondering, inflation and rising labor costs aren't isolated to China.  According to the WSJ, India's facing similar issues: "Maruti Suzuki India, the local unit of Suzuki Motor, is facing what's become a familiar hazard in the country: labor action. On Wednesday, a strike by about 2,000 workers at one plant entered the fourth day. With $9 million of potential revenue lost each day from the closure, the total is about $32 million, or close to 1.5% of last quarter's revenue. Maruti's troubles are the latest reminder of the effect of labor unrest as workers demand better wages and benefits, triggered partly by high inflation. Last month, a similar protest by the employees of national carrier Air India lasted nine days, causing a revenue hit of $30 million. In 2010, Hyundai Motor India had to rehire most of the employees it had sacked after a two-day protest that cost a similar amount."

• Slate's Bryan Palmer explains why Europe "sucks" at innovation.  The intro reads like an article from The Onion: "The French government has banned television reporters from using the words Twitter and Facebook when referring generically to social media, because all that free advertising gives the companies an unfair advantage." Sacre bleu! 

• Bloomberg's editors go back to basics, explaining why protectionism is politically attractive yet economically stupid.  The whole thing is worth reading, but I really enjoyed this quote: "Furthermore, the benefits of free trade do not require reciprocity. Avoiding tariffs and quotas is good for us whether China, Japan or Europe follow suit."  Exactly.

• In case you need further evidence of the White House's secret understanding of free trade's myriad benefits, here's video of CIA Director (and current Secretary of Defense nominee) Leon Panetta explaining the strategic importance of free trade, especially with our allies in Korea, Colombia and Panama (start at 6:04, with Sen. Rob Portman's smart line of questioning):

Panetta: Senator, I think that when it comes to protecting our security there are number of areas that have to be addressed and one of those obviously is not just the military responsibility but there is an economic side of this that plays a very important role in terms of promoting better security. The ability of these other countries to develop trade with us to develop their economies creates greater stability within those countries. I think that’s a fact and to the extent that we can help promote that kind of trade, that we can promote that kind of economic development, I think it assists these nations in their ability to achieve stability. Columbia is a good example. They have done a great job going after narco trafficking. If we can help, you know be able to help them develop their economy, that could become another added factor in providing greater security in that region and the same thing is obviously true for Korea.

That's all for tonight.  Go Mavs!

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!

On Protectionism's Alleged "Conservativism"

A few weeks ago, I documented - in admittedly excruciating detail - the many failings of Donald Trump's anti-China trade policy.  Given Trump's magically evaporating poll numbers, the man himself is quickly becoming an afterthought in the US political discussion (thank goodness), but unfortunately his protectionist trade policy isn't making a similarly hasty retreat.  In fact, several misguided souls have taken to the interwebs to loudly defend Trump's indefensible (and hilariously hypocritical) stance on free trade.  I think that my original post and others like it handle a large majority of these defenses, so I won't rebut them here.  However, one new defense deserves further discussion because it comes from someone who really, really should know better - current trade lawyer and former USTR official (under Reagan) Robert Lighthizer - and whose argument rests not on the economic, strategic or moral strengths of Trump's grand plan, but instead on its alleged "conservativism" - something I superficially addressed in my original blog entry.

In today's Washington Times, Lighthizer argues that, while Trump's support for eminent domain abuse and universal health care might be liberal, his trade policy is actually quite "Republican" and "conservative":

Mr. Trump’s GOP opponents accuse him of wanting to get tough on China and of being a protectionist. Since when does that mean one is not a conservative? For most of its 157-year history, the Republican Party has been the party of building domestic industry by using trade policy to promote U.S. exports and fend off unfairly traded imports. American conservatives have had that view for even longer.

Lighthizer's op-ed essentially trots out two arguments to support his thesis that anti-China protectionism is a "conservative" policy.  First, he notes that lots of Republicans and Founding Fathers - like Hamilton, Clay and Lincoln, McKinley, Taft, Coolidge, Nixon and Reagan - supported protectionist policies, while liberals like FDR and Woodrow Wilson supported free trade.  Second, Lighthizer argues that anti-China protectionism is really, deep-down a "core conservative" principle:

On a purely intellectual level, how does allowing China to constantly rig trade in its favor advance the core conservative goal of making markets more efficient? Markets do not run better when manufacturing shifts to China largely because of the actions of its government. Nor do they become more efficient when Chinese companies are given special privileges in global markets, while American companies must struggle to compete with unfairly traded goods.

Thus, Lighthizer concludes:

When viewed in this context, the recent blind faith some Republicans have shown toward free trade actually represents more of an aberration than a hallmark of true American conservatism. It’s an anomaly that may well demand re-examination in the context of critically important questions facing all conservatives on trade policy.

Given the current financial crisis and the widespread belief that the 21st century will belong to China, is free trade really making global markets more efficient? Is it promoting our values and making America stronger? Or is it simply strengthening our adversaries and creating a world where countries who abuse the system - such as China - are on the road to economic and military dominance? If Mr. Trump’s potential campaign does nothing more than force a real debate on those questions, it will have done a service to both the Republican Party and the country.

Now, leaving aside some of Lighthizer's more dubious assumptions - such as China's inevitable dominance or the pro-tariff motivations of certain conservative leaders - do either of his two primary arguments really hold water?  Is protectionism - in particular aggressive, unilateral trade action against China - really a policy that "true conservatives" should inherently embrace?

In short, no.  Of course not.

First, the idea that conservatives and Republicans should support protectionism - or any other policy for that matter - because certain of their former leaders did so is laughably misguided.  For example, President Nixon also supported economy-crushing wage and price controls, so should Republicans support those too?  President Eisenhower was a pretty big fan of the New Deal, so should conservatives support similar progressive expansions of the American welfare and regulatory apparatus?  (And let's not even get into some of the misguided policies of our antebellum conservative founders.)

Indeed, conservatives rightly advocate the exact opposite of such an approach to policy - a government, as arch-conservative John Adams famously quipped, "of laws and not men."  In that sense, conservativism and libertarianism, unlike progressivism, are not about discrete, ephemeral policies or individual leaders but instead about fundamental principles.  The policies and leaders change, but the principles are constant.  Among them are devout commitments to limited government, economic liberty, the free market and the rule of law.

Yet Lighthizer's anti-China protectionism reflects none of these principles.  As Dan Ikenson and I wrote a few months ago:

[V]oluntary economic exchange is inherently fair, benefits both parties, and allocates scarce resources more efficiently than a system under which government dictates or limits choices. Moreover, government intervention in voluntary economic exchange on behalf of some citizens necessarily comes at the expense of others and is inherently unfair, inefficient, and subverts the rule of law. At their core, trade barriers are the triumph of coercion and politics over free choice and economics. Trade barriers are the result of productive resources being diverted to achieve political ends and, in the process, taxing unsuspecting consumers to line the pockets of the special interests that succeeded in enlisting the weight of the government on their side.

Protectionism is akin to earmarks, but it comes out of the hides of American families and businesses instead of the general treasury. Policymakers on the right should support free trade because it is consistent with their principled opposition to higher taxes on American businesses and consumers and to big government telling people how and where they should spend their money. A vote for free trade is a vote to cut taxes and to get government out of the business of picking winners and losers in the market....

[W]hen people are free to buy from, sell to, and invest with one another as they choose, they can achieve far more than when governments attempt to control their decisions. Widening the circle of people with whom we transact brings benefits to consumers in the form of lower prices, greater variety, and better quality, and it allows companies to reap the benefits of innovation, specialization, and economies of scale that larger markets afford. Free markets are essential to prosperity, and expanding free markets as much as possible enhances that prosperity.

I recently applied these arguments to the very protectionism -  Trump's anti-China tariffs - that Lighthizer so vigorously defended:

[Protectionism is] the height of statist redistributionism. Trump forgets that American consumers are buying Chinese goods voluntarily - last time I checked China wasn't loading missiles with TVs and launching them into the US (although that would be kinda awesome). And he freely admits that the goal of his policy is to force American businesses and families to subsidize (by paying higher prices) that small minority of American manufacturers who directly compete with China. So not only is Trump saying that he knows better than us about what we should be consuming, but Trump's also saying that because we just can't help ourselves but buy cheap Chinese goods ("ooh, they're so cheap and pastic-y"), he has no choice but to enlist the full force of the US government to stop us from harming ourselves. President Trump will tell us to pay more for less in order to line the pockets of a select few because we're just too dumb and helpless, and we can't be trusted to make the decisions that he, and he alone, deems "right."

It's for our own good, you see. Now please someone, anyone, explain to me how this is the policy of a fiscal conservative?

(Answer: it's not.)

But hey, Presidents Taft and Nixon opposed free trade, so who cares about all those crazy principles, right?!

Lighthizer's second, "intellectual" argument in support of Trump-style, unilateral protectionism - that conservatives should support it because China is cheating at trade and destroying the American economy thereby - is equally problematic.  Leaving aside the economic illiteracy of this argument (cleverly captured today by Cafe Hayek's Don Boudreaux and also shown in my original blog post on Trump) or the fact the term "fairness" is a loaded term routinely championed by progressives and derided by conservatives (including Milton Friedman in this classic video), I'm frankly surprised that Lighthizer, an accomplished trade lawyer, would so freely allege that China is rampantly and wantonly engaging in "unfair" and "injurious" trade.

As he well knows, such terms have very precise meaning under US law, and by that metric - one that's extremely favorable for American companies, by the way - only a small minority of Chinese imports into the United States are "unfairly traded."  And according to the Petersen Institute's Gary Clyde Hufbauer and Jared Woollacott, the level of trade disputes between the US and China is quite "normal" given the nations' rapidly growing commerce (about 12% of total bilateral trade, similar to the US-Canada relationship in the late 1980s).  If Lighthizer and his clients would like to challenge the "fairness" of any of the other Chinese imports that American families and companies are voluntarily purchasing each year, they are certainly free to do so under the US anti-dumping or countervailing duty law (and, of course, they can challenge fairly-traded, surging Chinese imports under Section 421).  Heck, they can even lobby Congress to have US trade laws changed (again) to make findings of injury or unfair dumping or subsidization even easier.  Questionable economics aside, such actions are at least arguably "conservative."  But what clearly isn't conservative are public demands (or backroom lobbying requests) that our political leaders circumvent US law and global trade rules to implement protectionist tariffs by fiat based on unsupported allegations of "unfair" and "injurious" trade.

Even when such demands invoke the dear old ghost of William McKinley.

China CVD, ctd: The Wasted Opportunity

Yesterday, I took the first of what will likely be many looks at the Appellate Body's new "US-China CVD" decision and concluded that, from a legal perspective, the decision would have pretty significant (and likely adverse) implications for the United States Government.  From a policy perspective, however, it appears that Friday's ruling has cost the US as much, if not more, and the Obama administration only has itself to blame.

I stated yesterday that the Appellate Body's decision could have the following effects on the United States' current policy with respect to simultaneously imposing anti-dumping (AD) duties and countervailing duties (CVDs) on imports from "non-market economies" (NMEs) from China:

Finally, the AB's ruling could - could - effectively end [the Department of Commerce'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.

The effects of this diminished (or eliminated) CVD NME tool are not just limited to petitioners in trade remedies cases; they also affect the broader trade negotiating positions of the US and Chinese governments when it comes to the NME issue altogether.  Before Friday, all of those existing AD/CVD orders against China as an NME, as well as the threat of future cases, were a very big pain for China and a very big weapon for the United States (especially considering that it had an extremely favorable WTO panel ruling in its back pocket).  Thus, the removal of China's NME designation (thereby "graduating" it to "market economy" status for anti-dumping cases) was a very big carrot that the United States could have used to negotiate Chinese concessions on important market access issues like China's indigenous innovation policies, its problematic stance on intellectual property rights, or its reluctance in the Doha Round.

Now, the Appellate Body's ruling will force major changes to the United States CVD NME policy and has totally flipped-the-script (as the kids say) on the US-China negotiating dynamic.  As I noted yesterday, there is no easy fix for the United States to comply with the AB's decision - there are dozens of AD/CVD determinations that will need to be re-done; USTR and the Commerce Department are going to have to do some serious legal gymnastics to develop and defend any new CVD NME methodology; and full compliance might even require an act of Congress (which should just go swimmingly).  So now, China's graduation to a market economy is in both its own and the United States' interest.  China would benefit by ditching the "non-market economy" stigma, and its exporters (and US consumers, natch) would benefit from the predictability of the market economy methodology for AD/CVD investigations and reviews.  But the United States also will benefit by forgoing all of the pain that will inevitably accompany its WTO compliance efforts.

Put simply, United States held on to its NME negotiating stock too long, and it just crashed.  It's certainly not worthless, but it'll never again be as valuable as it was last week.  Never.

And, not to rub any salt in the Obama administration's wounds with yet another I-told-you-so, but here's what Dan Ikenson and I tried to advise them on this issue back in 2009:

The time has come to seriously consider carrots and not just sticks—particularly since the pain from the sticks is not limited to its intended targets, but is felt in the United States and in other countries, given the transnational nature of supply chains. President Obama would invigorate the relationship if he were to grant China “market economy” treatment in anti-dumping cases.While such a reform would take very little out of petitioning industries’ hides, the gesture would win vast sums of goodwill from the Chinese—goodwill needed to resolve more important issues going forward. Indeed, repeal of the non-market economy (NME) designation presents a “win-win” scenario for several reasons. 

First, graduation from NME status is one of the Chinese government’s top international trade priorities. China wants to be treated like all other major economies, and accordingly, the Chinese government is likely willing to make important concessions in other contested areas of trade policy to achieve market economy status.  But the longer we wait to grant market economy status to China, the less valuable that concession becomes. Under the rules governing China’s accession to the WTO, the United States must repeal China’s NME designation by 2016. Thus, the value of that “concession” will be greater in 2009—seven years early—than it will be in 2010 or 2012. Much beyond 2012, and the concession looks a bit like Confederate money.

Second, China’s NME designation has drawn intense criticism from domestic consuming industries, trade policy experts, and U.S. trade partners because of its incongruous application (for example, Russia was deemed a “market economy” in 2002, yet still is not a WTO member, while China became a WTO member in 2001) and the latitude for abuse of administrative discretion it affords. Also, the relatively recent change in policy that opened the door to countervailing duty cases against China has sparked controversy about whether NME treatment in anti-dumping cases should still be permissible. U.S. revocation of China’s NME status would alleviate many of those domestic concerns at virtually no cost to domestic petitioning industries, but petitioners value NME because of the trade-suppressing uncertainty the process
engenders.

It is important that President Obama understand that our trade relationship with China has been mutually beneficial, that the rhetoric about the impact of unfair Chinese practices has been highly exaggerated, and that unnecessary provocation could open a Pandora’s Box of economic problems.

Alas.

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.

Is DOC's Zeroing Announcement a Strong Hint That the US Is Getting Serious about Doha?

Last week, while most of us were buying champagnesparkling wine and taking down our Festivus poles, the US Department of Commerce quietly announced in the Federal Register that it was exploring the elimination of "zeroing" in annual reviews of US anti-dumping duty orders.  The announcement is pretty big news for several reasons, but first let's get through the basics, courtesy of the WSJ:

The Commerce Department, hoping to head off retaliation by the European Union, Japan, and other trading partners has proposed ending a controversial method of calculating penalties on trade dumping cases.

The proposal, disclosed quietly last week in the Federal Register, could resolve a long-running fight between the U.S. and several of its largest trading partners. The dispute could spill out into a broader trade battle, with the EU and Japan threatening hundreds of millions of dollars in trade sanctions against U.S. goods in retaliation.

The EU, Japan and other countries have successfully challenged the practice at the World Trade Organization.

The dispute centers on the a method of calculating antidumping duties, a type of penalty in trade cases. This type of calculation, known as "zeroing," doesn't take into account imported goods that are priced higher than domestic goods. Other countries complain the method artificially lowers the average price of the imports.

Since early 2007, the U.S. has stopped the practice in calculating new penalties, now weighing the dumped goods against high-priced imports from the same country.

But the practice of zeroing has continued in reviews of whether to keep existing duties in place, despite several WTO rulings against the U.S.

On Dec. 28, the Commerce Department issued for public comment a plan to extend the ban on zeroing to reviews and a limited number of new investigations that weren't already covered. The comment period runs through Jan. 27, but a final decision will come later, a senior Commerce Department official said....

For those of you interested (or suffering from insomnia), DOC's formal announcement is here.  I've discussed zeroing and why it's been a black mark for US trade policy several times over the last couple years.  In short, the WTO's Appellate Body (and multiple dispute settlement panels) has consistently ruled that all forms of zeroing are inconsistent with WTO rules because zeroing leads to dumping margins (and duties) that are higher than the actual level of dumping; yet DOC continues to zero in administrative reviews and has made no efforts, until now, to change the practice.  Thus, WTO Members continue to bring new WTO cases (which the US continues to fight and lose), and, armed with adverse WTO rulings authorizing retaliatory tariffs against the US, they keep threatening to impose steep tariffs on US exports until DOC stops the WTO-illegal practice.  Moreover, the artificially (and illegally) inflated dumping margins caused by zeroing lead to higher tariffs on subject imports, thus making those goods more expensive for American consumers.  And finally, the United States' consistent refusal to comply with adverse WTO rulings on zeroing undermines its credibility at the WTO and provides other nations with an excuse to shirk their own WTO obligations (including those with respect to US exports).  It's a classic case of what I like to call "bad trade parenting": do as I say, not as I do, WTO Members.

Given all of this, it's obvious why DOC's announcement is pretty big news, and any final DOC rule that ends zeroing would be a very welcome development (although probably not the end of zeroing altogether).  The United States' obduracy on zeroing (i) wastes government resources through pointless and embarrassing WTO litigation that the US always loses; (ii) illegally raises anti-dumping duty rates on subject imports (and thus the prices that American businesses and families must pay for those and other like products); (iii) threatens US exporters with WTO-sanctioned retaliation in important foreign markets; and (iv) undermines US credibility on the global stage.  Thus, US efforts to end zeroing should be applauded, and they should scare the bejeezus out of the domestic industries and unions that have relied on zeroing to unfairly tilt the playing field in their favor (at American consumers' expense, natch).

Yet DOC's zeroing notice is big news for another reason: it could be further proof that the Obama administration is getting serious about concluding the WTO's Doha Round this year.

As I've noted previously, zeroing is one of the most contentious "lesser issues" (i.e., issues other than farm subsidies and industrial tariffs) in the Doha Round.  The debate on zeroing takes place as part of the Round's negotiations on "rules" (i.e., WTO disciplines on anti-dumping, subsidies and countervailing measures, and safeguards), and the United States has been fighting (with almost every other WTO Member) to amend the WTO Anti-Dumping Agreement such that it expressly permits zeroing.  I've wildly speculated that the United States' refusal to end zeroing in annual reviews - and the resulting beatdowns USTR keeps getting at the WTO - is (among other things) part of a sneaky US strategy in the Doha Round rules negotiations.  In short, the United States, as the only country in the world that's still zeroing, has been keeping the issue ripe for future negotiation by refusing to change its policies and admit defeat.  Thus, USTR keeps getting dragged before the WTO to face an inevitable, embarrassing and much-deserved flogging just to keep the zeroing hope alive.  (Great use of taxpayer money, eh?)

And that brings me back to DOC's formal announcement that it might eliminate zeroing in annual reviews and the announcement's potential impact on the Doha Round.  Because the Round is a "single undertaking," all negotiations - not just those on subsidies and market access - must be completed simultaneously.  (Although some Members have suggested that this approach be abandoned for an "early harvest" on low-hanging fruit like trade facilitation and trade in evironmental goods, this idea has thus far been rejected.)  Thus, if you want to finish the Doha Round, you need to complete all negotiations, including those on rules, which, again, are being held up by the contentious debate on zeroing.  If the US is serious about changing DOC's policy on zeroing, then it also could be quietly planning to do the same in the Doha Round, with DOC's announcement as a first sign of "good faith" on the issue.  In the WSJ article quoted above, a US official steadfastly asserts that DOC's notice has absolutely nothing to do with the Doha Round, but of course he has to say that - no sense in tipping your negotiating hand and angering constituents before it's absolutely necessary to do so, right?  Moreover, American reps at the WTO (and USTR's General Counsel) months ago hinted that a change in the United States' position on zeroing was in the works, so this move is certainly not out of the blue.  Thus, DOC's announcement could be a very strong hint that the United States is quietly angling to remove one of the larger impediments to completing the Doha Round and, more broadly, is serious about completing the Round in 2010.

AEI's Phil Levy and I recently laid out a basic roadmap of how the Obama administration could lead the renewed global charge to complete the Doha Round.  We hit on the "big issues" - farm subsidies (including those for cotton) and developing country market access.  A revised US position on zeroing would be a fantastic addition to our suggestions and could be the first signs that the President really is serious about concluding the Round in 2011.  Of course, if American labor unions and other protectionists stymie US efforts on zeroing, or if the administration thinks that its zeroing proposal alone will be sufficient to advance the Doha Round, then DOC's announcement could end up being a big fat nothingburger.

Guess we'll find out over the next few months.

UPDATE: Looks like Simon Lester over at the IELP blog is pondering the same thing (and beat me to the punch by a few hours!).  Great minds...

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.