During a recent trip to China, I learned a lot about trade-remedies procedures in several counteries, including China. That is, procedures China and other countries follow when, e.g., Chinese domestic industries file petitions seeking protection from unfairly traded imports from around the world. Recent headlines have declared both that China is getting ready for a trade war, and that China is ready to bury the hatchet with the U.S. Among other things, it seems like the headlines have never been misleading -- declaring trade "wars" between China and the U.S. -- at least from the Chinese perspective.
The term "war" really doesn't enter the U.S. psyche when it comes to trade with anyone. In the U.S., whenever a U.S. domestic industry files a petition for an antidumping or countervailing duty investigation, by law, the U.S. Department of Commerce (USDOC) and the U.S. International Trade Commission (USITC) must initiate investigations -- they have no discretion. Although U.S. domestic industries truly find a sympathetic friend at USDOC, trade-remedies actions in the U.S. are entirely industry-driven. The USDOC does not self-initiate investigations, despite having statutory authorization to do so. So, in the U.S. we see our AD/CVD investigations as not politically motivated, and thus, no "war" to speak of between countries.
In other countries, however, there is a strong -- even if unstated or unofficial -- political component to initiating unfair trade investigations. Indeed, governments from various jurisdictions around the world put the brakes on filings by domestic industry representatives in the name of maintaining good relations with trading partners. One way countries can avoid initiating an investigation -- if initiation is required by domestic law whenever a petition is filed -- is not to stamp the petition as "received" when it is filed. Crazy as that may sound to people in the U.S. or E.U., it happens. And if a petition is never officially "received," then no investigation is required.
So what will happen when Trump takes office and increases the heat on China and other countries? I expect that -- to the extent they have a stack of petitions waiting for the "received" stamp -- China and other countries will begin stamping "RECEIVED" on petitions as fast as the administering authorities can handle new investigations.
Trump has stated that he will engage in several controversial trade actions -- including a 45% import duty on any imports from China. While many, if not all, of what Trump has claimed he will do, is inconsistent with the WTO obligations of the United States, Trump can do what he has claimed. There are consequences, however, including WTO-sanctioned retaliation. But Trump can isolate the U.S. from global trade. What the Trump administration must understand, however, is a backlash around the world is poised and ready in the form of AD/CVD investigations that will treat the U.S. as fairly as the U.S. treats other countries. As far as China goes, the reciprocal "fairness" will result for U.S. industries in the same market access as Chinese exporters have in the U.S.: severely restricted, if any access at all.
Many have wondered what will happen with trade-remedies actions once reality-TV personality and real estate developer, Donald Trump, takes the reins of the United States government. Given the people he listens to, trade remedies actions -- antidumping and countervailing duty investigations and reviews -- will at best maintain their present course, but could become more belligerent.
The current trend is bad for China and anyone who buys input materials from China. The U.S. Department of Commerce has just recently begun a new crusade against China -- this time by attacking Chinese-made goods indirectly. A recently enacted law allows the Department of Commerce to apply "any methodology" to calculating dumping margins when Commerce declares that a Particular Market Situation exists.
In the pending reviews of OCTG from Korea and Rebar from Turkey, U.S. steel companies have begun alleging that particular market situations exist where companies under investigation have, or may have purchased significant production inputs from China. The steel companies speculate that anything purchased from China must be dumped in every country in the world, thus the export price of the product under investigation must be distorted, and can not be used to calculate dumping margins. In place of the traditional (predictable and manageable) antidumping duty calculation methodologies, U.S. steel companies suggest using the non-market-economy methodology of determining the factors of production and finding surrogate values for potential Chinese-origin inputs. This methodology was invented to create high dumping margins, and -- if the U.S. steel companies allegations and suggestions are accepted -- will result in higher dumping duties on products from around the world. This new practice is intended to battle with Chinese production, and to compel other countries to join the U.S. in the battle. And, as with all battles, there will be collateral damage in the form of reduced free trade and unhappy trading partners around the world.
Trump's trade policies are heavily influenced by the former president and CEO of one of the steel companies that is pushing the new practice, so you can be sure that the Trump administration will further support application of the Particular Market Situation methodologies wherever they can be applied.
But more than Particular Market Situation, Trump has signaled graver trade policies. Among other things, Trump has proposed spending $1,000,000,000,000 (One Trillion Dollars) to rebuild U.S. infrastructure using U.S. produced steel, among other U.S. produced products. This campaign promise -- if it excluded products produced in other countries -- would likely run afoul of the WTO obligations under the procurement agreement. That the United States would be acting inconsistently with its WTO obligations does not mean that the United States will refrain from that conduct, it only means that adversely affected countries will likely have to take the U.S. to the Dispute Settlement Body at the WTO to enforce their rights vis-a-vis the US. In the end, given Trump's apparent attitude toward U.S. courts, one can imagine that the U.S. may not immediately comply with the recommendations of the DSB. Thus countries will need to plan for effective retaliation strategies under WTO sanction that will place maximum pressure on the U.S. to comply, while at the same time providing for maximum recovery of benefits at a minimum of expense to their own citizenry.
Powerpoint from Presentation to the Beijing Attorneys Association, August 20, 2016: A Review of China-US WTO Disputes
The U.S. steel industry continued its assault on global steel trade by filing a petition for AD and CVD investigations into Carbon and Alloy Cut-to-Length Steel Plate. This petition casts a wide net, including 12 countries: Austria, Belgium, Brazil, China, France, Germany, Italy, Japan, Korea, South Africa, Taiwan, and Turkey. This petition is the eighth recent AD/CVD action against steel from around the world filed in the last nine months -- 60 individual antidumping or countervailing duty investigations!
Certainly, the International Trade Commission and Department of Commerce are earning their paychecks based upon the volume of work they have (which adds to the work they already had). The U.S. steel industry has been able to convince the ITC that it is being injured "by reason of" each of the imports. More to come -- what petitioners are connected to which petitions? How much of their production is being kept alive by AD/CVD actions?
Many assumed that China would automatically graduate to market-economy ("ME") status in 2016. The big deal with ME status is that antidumping (AD) calculations must be made based upon a comparison of prices and costs, and cannot use a methodology that requires an assessment of factors of production ("FOP") and substitution of prices with surrogate values ("SV"). This so-called non-market-economy ("NME") methodology for calculating AD duties with FOPs and SVs has resulted in high AD margins when no margin would exist under the normal ME methodology used for nearly all other countries in the world. But the first petition filed against Chinese goods treats China as a non-market economy ("NME"). When will China graduate to ME status? I believe it is still years off.
The recent petition for antidumping (AD) and countervailing duty (CVD) investigation into "Certain Off-The-Road Tires" from China maintains the status quo. In that petition, Titan Tire bases its entire AD margin calculation on China as an NME country. It asserts, "By statute, Commerce’s determination of NME status remains in effect until a contrary determination is made, and Commerce has not since that time published any notice of a determination that China is a market economy."
Unfortunately for Chinese producers, China's WTO Accession Agreement does not appear to require otherwise; even though China and others may have thought 2016 would be its year for market-economy status. Specifically, the Agreement allows members to treat China as an NME until Chinese producers under investigation "can clearly show that market economy conditions prevail." China WTO Accession Agreement, para. 15(a)(i). Until that time, "importing WTO Member[s] may use a methodology that is not based on a strict comparison with domestic prices or costs in China." China WTO Accession Agreement, para. 15(a)(ii) (emphasis added). These provisions are the basis for allowing the U.S. to use the NME methodology for calculating AD duties (requiring factors of production and surrogate values).
Paragraph 15(d), first sentence, of the Accession Agreement states affirmatively what must be done if China establishes that it is not a market economy country -- the importing WTO Member must then treat China use direct price comparisons because "the provisions of subparagraph (a) shall be terminated." Paragraph 15(d) thus means that once China proves it is an ME to a particular importing WTO Member, the WTO Member must, from thenceforth, use direct price comparisons. Significantly, the language does not say that all other importing WTO Members must also treat China as an ME. Thus, although other countries have graduated China to ME status, the United States has not.
Paragraph 15(d), second sentence, appeared to offer a slight glimmer of hope if China were not able to convince a WTO Member that it has a market economy. But, properly read (that is, through the eyes of the U.S. Department of Commerce ("USDOC") and U.S. industries which hold significant influence over USDOC interpretations), paragraph 15(d), second sentence does not provide much hope. That sentence states, "In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession."
Unfortunately for Chinese companies, USDOC will not read the 15-year expiration (that is, after the end of 2015), as they hope. The view of the USDOC will almost always be in favor of the U.S. domestic industry. Here, the 15-year expiration only applies to paragraph 15(a)(ii), and does not apply to Paragraph 15(a) or 15(a)(i), which allows WTO Members to use a methodology "that is not based upon a strict comparison with domextic prices or costs in China," and that only requires that a strict price comparison be used if Chinese producers can demonstrate that market economy conditions prevail in the industry producing the like product." China WTO Accession Agreement, Para. 15(a) and 15(a)(i) (emphasis added).
Thus, I believe USDOC will claim that the 15-year expiration mentioned in paragraph 15(d), second sentence, does not affect its treatment of China as an NME or its use of the NME methodology to calculate AD duties on products from China. USDOC will claim that it merely eliminates the express provision allowing NME treatment, but does not prohibit NME treatment of China.
I expect China will bring an action against the United States at the WTO, and -- if China prevails -- the United States will only implement (graduate China to ME status) if it loses at the Appellate Body, and USDOC will ask for the maximum Reasonable Period of Time it can before implementing. China's chance of winning is uncertain given the ambiguity of the language and the general WTO attitude favoring the United States. China will only win if a significant number of other WTO Members side with China.
Even so, as my earlier post explained, I believe USDOC will continue to use a methodology like the NME methodology (requiring factors of production and surrogate values), but under the guise of the Particular Market Situation.
The one difference will be, however, that companies that are not individually investigated should no longer be required to demonstrate that they are separate from the government of China via the submission of Separate Rate Applications and Separate Rate Certifications. Instead, they should receive the all-others rate -- the weighted average of the rates calculated for individually investigated companies -- without any additional filing requirement beyond any required Quantity & Value questionnaire response.
American Trade Enforcement Effectiveness Act makes U.S. trade laws unfair for U.S. importers & foreign producers/exporters.
The "American Trade Enforcement Effectiveness Act" is terrible for U.S. importers and foreign producers/exporters, and ultimately will have negative consequences for U.S. exporters. The new law is old-fashion protectionism. It addresses discreet areas of the law where the U.S. Department of Commerce (DOC) has been frustrated by limitations imposed by the AD/CVD law and enforced by the courts. The sure consequences for U.S. domestic industries will the form of retaliatory trade measures that make it harder for U.S. companies to export merchandise to other countries.
The law has five substantive sections. First, the new law functionally converts the AD/CVD law from remedial to punitive. Second, the new law makes finding injury easier. Third, the new law develops a mechanism will be used to extend application of the non-market-economy methodology for calculating antidumping duties (NME AD) in China well beyond the end of 2015 (when China is scheduled to be designated a market-economy country). Fourth, the new law increases the cost on foreign producers/exporters to defend themselves. And, fifth, the new law eliminates any requirement that the U.S. Department of Commerce select voluntary respondents. While each of the substantive sections may appear reasonable, they will be used for unreasonable ends. Mark my words!
1. PUNITIVE, NOT REMDIAL. First, the new law functionally converts the U.S. AD/CVD law from "remedial" to punitive. Section 502 of the new law removes the requirement that Commerce make any adjustments for information that an uncooperative party would have provided. While this seems reasonable on its face, it will be applied by Commerce in an unreasonable manner. I expect that DOC will completely verify several aspects of a foreign company's response, but then find errors elsewhere that cause DOC to label the company as uncooperative. Once the company has this label, DOC will then discard all information previously verified as complete and accurate, and apply "adverse facts available" (AFA) as adversely as possible. Further, section 502 eliminates the reins used to temper the adverse effect of AFA: it eliminates any need to corroborate the margin calculated on the basis of adverse information, reference an estimate of what the uncooperative party's margin would have been if they had cooperated, or tether the AFA rate to any concept of "commercial reality." Corroboration, estimated margins, and commercial reality have been bedrock principles protecting foreign exporters from DOC's otherwise unbridled protectionism.
Indeed, a DOC official once said that AFA - as incentive to the foreign exporter to cooperate in the future - provides more incentive to cooperate as the rate is raised higher. Thus, despite industry dumping margins ranging from 5% to 15%, the official advocated an AFA rate significantly higher than 100%+ rate already proposed! All such a rate does, however, is close the U.S. market to the foreign exporter involved, thus providing more protection to the U.S. industry. While there are occasional extreme cases of truly uncooperative foreign exporters, those occasions are few and far between. This new law will be quoted, however, every time the severity of the AFA rate is questioned in court. Indeed, I doubt there will ever be another successful challenge to an AFA rate on the basis that it is unfairly punitive.
A side effect of this shift in application of AFA is that courts may no longer give DOC the benefit of administering a "remedial" law, rather than a "punitive" law. The distinction may remove some of DOC's discretion in its future rule-making. But that remains to be seen.
2. Easy Injury. Next, the new law makes it much easier for U.S. industries that are not hurting to claim, successfully, that they are injured. Specifically, if a U.S. industry has 30% profit margins, they are going bananas! How can an industry making so much profit be injured? It doesn't matter. Now, the ITC "may not" decline to find injury just "because the performance of that industry has recently improved." So, despite the fact that the U.S. industry has weathered economic downturn or competition from foreign producers, and is increasing production, employment, profitability, etc., these economic improvements may not be used by foreign exporters to argue against the imposition of AD/CVD duties -- even if the U.S. industry dominates the market, holding 80% or 90% market share!
3. NME AD Methodology Lives On. Third, the new law develops a mechanism will be used to extend application of the non-market-economy methodology for calculating antidumping duties (NME AD) in China well beyond the end of 2015 (when China is scheduled to be designated a market-economy country). DOC does this by amending the definition of "Particular Market Situation" to include any time when DOC believes that "the cost of materials and fabrication or other processing of any kind does not accurately reflect the cot of production in the ordinary course of trade." Essentially, if DOC does not believe that the value of factors of production are market-based, it will throw them out and use "any other calculation methodology" (read: the NME AD methodology). So, abandon hope of DOC calculating Chinese dumping margins fairly - it's not going to happen.
4. Unnecessary Additional Costs. Fourth, the new law increases the cost on foreign producers/exporters to defend themselves by requiring an investigation into whether the exporter is selling its goods at above the cost of production. This is a "cost investigation," which requires a response to a DOC questionnaire. To respond to the DOC questionnaire about costs requires the services of an accountant with specialized expertise. Before this law, cost investigations only occurred if the U.S. industry alleged that sales were made at below the cost of production. The new law means demand for cost-accountant services has skyrocketed, but the number of qualified cost accountants has not increased. Whereas good cost accountants charged $50,000 to $75,000 before, now they charge $100,000 to $150,000. That is just the iron-clad law of supply and demand. How does this law improve the effectiveness of the AD/CVD law? It doesn't. It just makes it more expensive for companies that are required to participate.
5. No More Voluntary Respondents. Finally, the new law will eliminate voluntary respondents. Under DOC is only required to accept voluntary respondents if it would not be "unduly burdensome." But now "unduly burdensome" can mean that the total number of investigations and reviews conducted by the DOC is too great. With this excuse, if it applies in one case, it applies in all. In my view, this means it will be a rare case when DOC accepts voluntary respondents in the future.