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U.S. Posturing for a Fight at the WTO
Regarding the antidumping dispute concerning “zeroing,” which I’ve argued could shake the very foundations of the multilateral trading system, we have this development (see last item). It is becoming evident that the United States will attempt to discredit the WTO Appellate Body’s logic in its latest rebuke of U.S. zeroing practices.
It may take a year or more before we get there, but we appear to be headed for a confrontation with the dispute settlement system that could leave that institution weakened and U.S. credibility further damaged. And that could invite consequences far worse than a stalled or derailed Doha Round.
More to come.
Trade Showdown Looks Inevitable
Yesterday I argued that Congress’s unflinching devotion to the antidumping law poses a real threat to the world trading system. As the WTO dispute settlement mechanism renders more decisions against U.S. antidumping actions and procedures, Congress will grow more inclined to question the efficacy and legitimacy of the WTO in public. And that is a slippery slope.
I wrote:
To Congress, trade remedy laws are not the problem. Dumping and subsidization are. And the latest Appellate Body decision against zeroing makes it that much harder to combat “unfair” trade.
Accordingly, Congress is highly unlikely to go quietly into the night after the WTO’s latest indictment of zeroing. Thus, confrontation–perhaps intractable confrontation–between the United States and the WTO dispute settlement system may be in the cards later this year.
Well, judging from this news release and letter, written by the two highest ranking legislators on trade issues, “later this year” is here. Stay tuned.
Trade is Much Bigger Than the Doha Round
There have been whispers of late regarding prospects for a last minute resurrection of the WTO’s Doha Round of multilateral trade talks. My colleague Sallie James does a great job discussing those prospects with polite skepticism in a recent Cato podcast. Let me be a little more direct: Doha’s dead, yadda yadda yadda, now let’s move on!
Ok, that sounds a bit cavalier. So please allow me to clarify. To be more precise, Doha is not dead permanently; it is in a cryogenic state, available for resuscitation under different circumstances.
Antidumping Reformers Rejoice
Antidumping policy moves incrementally in the right direction only on rare occasions. In that regard, last week was nothing short of historic. In addition to the U.S. International Trade Commission deviating from its conventional script and revoking 15 longstanding antidumping measures on key steel products (described here), the Office of the U.S. Trade Representative announced to Congress the administration’s decision to implement a critical change to the Commerce Department’s antidumping calculation methodology, which, if implemented in good faith, will likely reduce the incidence and disruptive impact of antidumping measures henceforth.
In response to a series of rulings from the dispute settlement body of the World Trade Organization, which found a U.S. methodological practice known as “zeroing” to violate Article 2.4.2 of the WTO’s Antidumping Agreement, Commerce decided (albeit, grudgingly) to change it’s policy. I have described zeroing and its impact in a few previous papers and in this blog post, but here’s a brief summary.
In a typical antidumping investigation, the sales and cost data of each foreign company under investigation are subject to a series of calculations before the bottom line “dumping margin” is produced. Usually, the Commerce Department calculates average net prices for each product (i.e., widget model 1, widget model 2, etc.) sold in the U.S. and home markets. The average U.S. and average home market prices of widget model 1 are compared, the average prices of widget model 2 are compared, and so on. In some cases there may be few comparisons, and in others there may be hundred or even thousands of comparisons. Some of those comparisons may generate positive dumping margins (when average home market price exceeds average U.S. price) and some may generate negative dumping margins (when U.S. price is higher).
Commerce then calculates from all of these model-specific comparisons an overall weighted-average dumping margin. But before calculating the overall average, Commerce tinkers with the mathematics by zeroing. Zeroing refers to the practice of assigning a value of zero to all of the comparisons that generate a negative dumping margin. Only after zeroing does Commerce calculate the average dumping margin. So, in other words, zeroing precludes the negatively dumped sales from having the proper impact on the “average” dumping margin. Thus, if 99 of 100 comparisons generate large negative dumping margins and 1 of 100 produces a positive dumping margin, zeroing ensures that the average dumping margin calculated is positive. Pretty fair, huh?
In research that Brink Lindsey and I conducted a few years ago, we found that zeroing is highly distorting. In a sample of 18 actual antidumping determinations, we found that calculated dumping margins would have been on average 86% lower had zeroing not been employed. Five of those 18 cases would have resulted in the cases being dropped, and antidumping measures never having been imposed. So the change in policy is laudable and potentially very significant.
I say “potentially” because zeroing reform remains incomplete. The policy change announced last week pertains to zeroing in what are called average-to-average comparisons. In some cases, the Commerce Department compares average prices to transaction-specific prices and in others it compares transaction-specific to transaction-specific prices. It is possible that Commerce will use these methodologies more frequently now and continue to zero (at least until zeroing under these comparison methodologies is found in violation of our WTO commitments as well).
And there is one other possible obstacle on the road to implementing this change: Congress. Although zeroing is not mandated by law, the practice has been in use for a very long time. Cases have been heard in the Court of International Trade and the Court of Appeals for the Federal Circuit concerning the question of whether zeroing is even permitted under the statute. Both courts have ruled that zeroing is a permissible interpretation of the statue, which has been taken by some in Congress to mean, wrongly, that zeroing is a requirement of the statute.
Congress, which is bipartisan in its broad support of a strong (i.e., menacing and unfair) antidumping law, may seek a fight with the administration over the propriety of changing the zeroing practice without input from the legislative branch. But, by and large, last week’s zeroing announcement was another rare victory for antidumping reform.
Signs of Sanity at the International Trade Commission
Today is a pretty good day, as far as trade policy goes.
This morning, pursuant to a five-year “Sunset Review,” the U.S. International Trade Commission voted to revoke longstanding antidumping and countervailing duty restrictions against imported carbon steel plate and corrosion-resistant steel from 15 different countries. The ITC also voted to continue the measures against corrosion-resistant steel from Korea and Germany for at least another five years.
While not perfect, today’s outcome is something to rejoice. Revocation of trade remedy restrictions is rare, indeed, and rarer still where steel is concerned.
As described in this recent paper, the U.S. steel industry is doing phenomenally. And given the dramatic growth in demand for steel in other regions of the world, today’s decision is unlikely to produce a significant surge in U.S. steel imports. But at least now, U.S. steel consuming industries, which have been forced to endure some of the highest steel prices in the world on account of the limited competition, will have greater flexibility and negotiating leverage to counter the growing market power of the domestic steel industry.
Schumer-Bloomberg on Sarbanes-Oxley
Apparently I am not alone in the skepticism I expressed last week concerning an oped by Sen. Chuck Schumer (D-NY) and New York City mayor Michael Bloomberg, in which the duo decries the ill effects of regulation and frivolous lawsuits on New York’s financial services sector. Four of the five letters to the editor in today’s Wall Street Journal expressed incredulity that these two pols could possibly expect to be taken seriously on the subject, given their otherwise steadfast support for government intrusion into our lives.
I don’t know the newspaper business, but I have an inkling the WSJ ran their piece not so much for the good ideas it contained, but because it knew that the juxtaposition of those ideas with that by-line would elicit a spankfest from its readership that would lend itself to today’s title of the Letters to the Editor section: ”Schumer and Bloomberg Are For Less Regulation? Is This a Joke? (sorry, subscription required).
There was one letter, however, that actually defends Sarbanes-Oxley and the huge regulatory burdens imposed upon financial services firms operating in New York because it “gives our New York financial market a distinct competitive advantage [relative to London].” Come again? Yes, this letter argues that, ”while it is quite true that there are more regulatory bodies and higher fines in New York than overseas, that is only a temporary situation.” The author argues not that those U.S. regulations will be relaxed, but that the regulatory burden on firms operating in the London market will be just as heavy in the future, and that New York firms are lucky to have a head start on the learning curve.
To put this all in context, the author of the pro-regulation letter is a vice president at Orchestria Corporation (a New York company), which is an entity that “helps companies achieve compliance and good governance through electronic communication control.” Orchestria is in the business of helping it’s customers “to efficiently manage the burden of regulation and ensure compliance.” In other words, Orchestria (and probably hundreds of companies like it) is the Frankenstein of Sarbanes-Oxley. Although people like Schumer and Bloomberg are recognizing rhetorically the damage caused by regulatory overkill, righting the ship will be more difficult than just publishing an oped.
Sarbanes-Oxley has created a whole new industry that benefits from the status quo. I wonder if they know any politicians who would enjoy their financial support.
Schumer’s Epiphany?
I had to do a double take of the by-line of an unabashedly pro-capitalism op-ed (subscription required) in today’s Wall Street Journal. Yes, indeed, that was Sen. Chuck Schumer (D-NY) who co-authored a piece with New York City mayor Michael Bloomberg on the need to rethink stifling regulation of America’s financial services industries, and to consider tort reform.
Lamenting the relative decline of NYC as the world’s financial capital, Schumer and Bloomberg identify stifling regulation and frivolous law suits in the United States as major factors contributing to London’s and Hong Kong’s relative ascent as premiere locations for initial public offerings in recent years. Among the facts they cite is that in 2005, only one out of the top 24 IPO’s was registered in the United States, while four were registered in London. Moreover, “next year more money will be raised through IPOs in Hong Kong than in either London or New York.”
Schumer and Bloomberg cite regulatory costs that are 15 times higher in the United States than in Britain, an adversarial relationship between “tough cop” regulators and business in the United States, and the surging costs of securities-related class action suits as key factors driving business away from New York’s financial houses. The auditing expenses associated with the requirements of Sarbanes-Oxley are deemed to have grown “beyond anything Congress had anticipated.”
These are indeed serious problems, but it’s hard not to laugh about the irony. Schumer’s never met a regulation he didn’t like. He’s never been a friend of business. Of course he voted for Sarbanes-Oxley, along with all of his colleagues in the Senate, but he also led the charge against Kelloggs, General Mills, and the other cereal companies in the 1990s, when the price of Lucky Charms became unacceptably high to him. Just last summer, Schumer urged federal regulators to examine the behavior of oil companies to make sure they weren’t holding back production. And Schumer has been quick to ascend the podium to decry America’s growing trade deficit, urging, at times, government intervention to “correct” that growing problem.
That Schumer is suddenly opposed to stifling regulation and is saying things that are sure to upset the trial lawyers is welcome news. But it is likely just a fleeting flirtation with enlightenment. Let’s see what happens when someone points out to the Senator that New York’s capacity to attract IPOs, and the foreign investment that follows, is more a cause of the U.S. trade deficit than any “unfair trade” practices he assails. Which cause will he champion then?
The Upside of Nature’s Wrath
Fourteen months after Katrina devastated large swaths of the Gulf Coast, the Commerce Department has finally gotten around to promulgating new regulations that could relax antidumping and countervailing duty restrictions for a temporary period after the next national emergency.
In the weeks following Katrina, some observers (including this one) pointed to the absurdity of maintaining restrictions on foreign cement, lumber, and steel when the costs of those crucial building materials comprised a substantial chunk of the projected reconstruction bill. Of course, trade restrictions raise the cost of production to U.S. businesses and the cost of living for U.S. citizens everyday. But the effects of the hurricane provided an extreme example of the lunacy of trade restrictions, which is what was necessary to get the Commerce Department to acknowledge that its protectionist trade policies carry real costs.
The scope of circumstances that will trigger temporary lifting of trade remedy restraints prospectively is a bit unclear, but it requires the president to authorize Commerce “to permit the importation of supplies for use in ‘emergency relief work’ free of antidumping and countervailing duties.” Considering that emergencies are typically met with a costly (and often mismanaged) federal response, a regulation that actually mandates loosening the federal noose is welcome news indeed.
Now, all we need is a president who will consider it “emergency relief work” to educate policymakers about the predictable impact of constrained supply on price.
Lemon Lawsuits
Sunkist Growers, the wholesome name you probably associate with that morning swig of orange juice, has stolen a page from the playbooks of its more traditionally protectionist agricultural brethren.
Last month Sunkist filed an anti-dumping petition alleging that Argentine and Mexican producers are selling lemon juice in the U.S. market at “unfairly low prices.” Heavens! The petition alleges dumping margins in excess of 100 percent, which means that Sunkist believes the U.S. prices of lemon juice from Argentina and Mexico should be more than double what they are today. (Maybe the U.S. prices of U.S. lemon producers would be half as much if our restrictive immigration policies didn’t drive up the cost of labor at harvest time.)
In a carefully crafted petition designed to minimize damage to Sunkist’s public image, only lemon juice used as an ingredient in the production of other products (i.e., not concentrated lemon juice or lemonade purchased directly by consumers) is subject to the anti-dumping investigation.
Sunkist notes in a press release that: “The anti-dumping duty, if assessed, will not result in increased prices to consumers.” Obviously, that’s a lie. What Sunkist really means is that consumers won’t be able to attribute to Sunkist’s litigation the higher prices they will have to pay for the dozens of everyday food items that contain lemon juice. The prices of soda, fruit juice, ice cream, cake mix, seasonings, salad dressings, microwave dinners, frozen vegetables, hair coloring, candy, chewing gum, cough syrup, and many other items will be affected by any prospective anti-dumping duties.
And, as has been the case in the sugar-using industries, lemon juice-consuming industries will have greater incentive to move their operations to Canada or Mexico or any number of other countries where the price of lemon juice is market-based. Whenever the supply of upstream products is choked off by protectionist measures, jobs, revenues, and profits in downstream industries suffer. And contrary to Sunkist’s feeble rationalization, consumers flip the bill.
Does Big Steel Still Dominate U.S. Trade Policy?
The chart above depicts the operating performance of the industry that is most protected by U.S. antidumping and countervailing duty restraints. As that chart demonstrates, the U.S. steel industry is in robust health–well outperforming overall manufacturing (i.e., its customers) for the past few years.
Should one conclude that that performance is a reflection of the insulation from competition it has been afforded? That’s likely to be one of the steel industry’s arguments before the U.S. International Trade Commission, which is holding a hearing tomorrow concerning the question of whether 13-year old antidumping and countervailing duty restrictions against imported corrosion-resistant steel from six countries should be continued for at least five more years. (This paper explains why revocation in these so-called Sunset Reviews is rare).
But those restrictions, as well as the 160 other trade remedy restraints currently in place to protect the steel industry, date back to the 1990s and earlier, when the industry’s performance was much closer to the first four bars than the last three. If anything, longstanding trade protection delayed the day of reckoning for many inefficient mills by discouraging them from exiting the market and encouraging continued inefficient operation.
From an operating perspective, the year 2004 stands out as a clear dividing line between the steel industry of old, and the new, revitalized industry of today. But the dramatic industry renaissance that has bestowed market power, record profitability, and insulation from any significantly adverse effects of foreign competition on U.S. steel producers began in 2002, after the government assumed $9 billion in the industry’s unfunded pension and health care obligations.
By wiping those liabilities off of the books of several major bankrupt steel producers, that intervention paved the way for mergers and acquisitions and new labor agreements that have enabled the industry to retire inefficient capacity, cut its fixed costs, and consolidate production decisions. In 2003, the top three producers of flat-rolled steel (the steel used in autos, appliances, and construction) controlled 25 percent of flat-rolled steel production capacity. Today, the top three control 70 percent.
That concentration has given the domestic industry a high degree of market power, which enables it to prop up prices and weather downturns in demand by curtailing output. There’s nothing objectionable about that (with the exception of the government-assisted jumpstart) unless, of course, steel is a major component of the products you manufacture. What is objectionable, then, is buttressing this emerging oligopoly with continued trade restraints. Consumers of steel should be expected to adapt to the effects of greater concentration of steel production, but that adaptation requires having access to imported substitutes and supplements.
Taxpayers, steel-using industries, and consumers have subsidized this industry for too long.
The ITC’s decision, expected in December, will speak volumes to the question of whether that agency continues to be a rubber stamp for the steel lobby’s protectionist agenda.
Be(trade)
As we enter the last quarter of what feels like the tenth year of a two-term presidency, the Bush administration’s trade apologists have yet another setback to rationalize. Last week, in an effort to overcome limited opposition to a bill that would grant Vietnam “permanent normal trade relations” (PNTR) status ahead of that country’s accession into the World Trade Organization, the administration announced it would “self-initiate” antidumping cases against Vietnamese exporters of clothing should conditions warrant.
Under the law, only domestic industries producing the product in question, unions representing workers producing the product in question, or the Commerce Department itself can initiate antidumping investigations. Rarely has the executive branch—and never has this administration—initiated an antidumping case on behalf of an industry or its workers. Almost every one of the thousands of U.S. antidumping cases over the years was initiated by industry, and that is why last week’s concession is significant.
Opposition to the bill was mostly confined to the textile industry, which is always opposed to measures that would expand the freedom of Americans to engage in commerce with the world at large. That opposition was expressed as a hold over a vote on the PNTR bill by two Republican senators from textile states, Elizabeth Dole of North Carolina and Lindsey Graham of South Carolina. Their opposition could have been overcome with a far less intrusive concession, if the administration was unwilling to stand on principle. After all, Senator Jim DeMint (R-SC) won his seat by a vast margin in 2004, running unapologetically on a free trade ticket against a candidate hand-picked and financed by South Carolina’s textile magnates.
Instead, the administration delivered to the textile industry it’s most coveted prize. You see, the U.S. textile industry does not have standing in antidumping cases involving imported clothing. Textile producers make the threads, yarns, and fabrics that are used in the manufacture of clothing, but they don’t make clothing. In fact, other than high-end fashion and uniforms made for the military, there isn’t much of a domestic clothing industry to speak of. Apparel producers left long ago, setting up shop in the Caribbean, Mexico, and Central America. Producers remaining in the United States generally don’t compete with imports, and most of those that do are also importers of clothing, and have no interest in impeding access of foreign producers to the U.S. market. In other words, there is no industry in the United States that could actually bring a consequential antidumping case against foreign producers.
The administration’s concession changes all that. If the administration is willing to initiate such cases, U.S. textile producers are that much closer to cordoning off the U.S. market for their own customers and keeping the Vietnamese, the Chinese, and other Asian suppliers at bay, while Americans pay more than they should have to for clothing.
Tongue in cheek, Bush apologists will argue that the administration outsmarted the opposition by agreeing only to take antidumping actions without specifying the conditions that would trigger such actions. But by even indulging in talk of self-initiating antidumping actions, the Bush administration makes crystal clear the insincerity of its own rhetoric about the virtues of free trade. And, it has set a terrible precedent that future administrations and policymakers will have a tougher time disavowing. You can bet your last dollar that presidential candidates stumping through textile country over the next two years will be pressed to honor this unforgivable commitment made by the Bush administration. And as the textile industry’s recourse to special safeguard measures against Chinese clothing imports expires at the end of 2008, it’s a virtual guarantee that its lobby will push for a similar antidumping commitment with respect to Chinese imports. And who knows, other industries might also line up for such treatment.
Prospects for significant trade liberalization were already hanging on by a thread, and the best we could hope for was for the administration holding the line. Last week’s “compromise” constitutes a colossal breach in that line. And none of it makes any sense from a political or diplomatic perspective anyway. The concession was made to improve prospects that the Vietnam PNTR bill would pass in a lame duck session ahead of the president’s visit to Hanoi next month. But does anyone in the White House think the Vietnamese are going to roll out the red carpet for a president bearing such a tainted gift: unfettered access to the U.S. market for all but their most important exports?
Speak with Forked Tongue; Carry Large 2×4
The next time you meet a Canadian at a cocktail party and consider invoking fuzzy feelings of fraternity by toasting our countries’ recent softwood lumber accord, better to just smile, nod your head, and stare intently at your shoes. Calling the U.S.-Canada Softwood Lumber Agreement (2006) an “agreement” mocks the fact that the Canadians had no viable alternative but to sign on the dotted line.
One option was to endure the cost and uncertainty of continuous litigation, continued restrictions on their lumber exports, and the specter of never again seeing the $5.3 billion in duties collected illegally by U.S. Customs on previous exports. The other option was for Canadians to agree to impose export restraints (in the form of export taxes or quotas) on their lumber and see the return of about 80 percent of that $5.3 billion.
The U.S.-Canada softwood lumber dispute dates back many decades, but the most recent spate of protection, rulings, and edicts relates to litigation that began in the early 1980s, evolved into the Softwood Lumber Agreement of 1996, and then produced new trade remedy cases and a string of litigation beginning in 2001, when SLA 1996 expired. (This paper attempts to present a chronology of events—but the most recent events are not documented therein.)
Make no mistake: the United States is the villain in the lumber dispute. Read the rest of this post »
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