China-U.S. Trade Law : International Trade Lawyer & Attorney : Baker Hostetler Law Firm : Trade Remedies, Customs & Export Controls

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This week we present Part Two of “Nothing Unites The United States Congress Like China (And Not In A Good Way): Treating China Like Canada (Maybe Even Worse).” It is entitled, “The Broken Promise To China.” Part One, entitled “Rewriting Subsidies Law To Fit Chinese Facts,” was posted last week.

The Broken Promise To China

Entry into the WTO a decade ago has paid off handsomely for China, enabling its trade to flourish and accelerate its economic growth and development. However, a critical element of China’s accession was acceptance of the rule of law. China was required to accept the arbitral procedures and consequences of WTO membership, but reciprocally was promised the benefits of those procedures. Not long after its accession, the United States and other countries brought cases against China. China quickly joined other countries challenging American safeguards against steel, and soon thereafter began to bring cases against the United States and other countries on its own.

Nothing could be more satisfying to proponents of the international rule of law than to persuade a country operating outside that framework for more than a half-century to change its ways and enlist in the procedures of the international community. China was quick, in the first cases brought against it, to accede. Instead of availing itself of the full and often protracted means of delaying undesirable outcomes, China promptly settled cases, acknowledging with little dispute when the complaints against it seemed justified.

It took longer for China to appreciate that generosity with the rules typically is not reciprocated in the WTO, least of all by the United States. The United States normally resists claims against it through every procedural device and interpretation possible. Perhaps the most celebrated example is the antidumping technique of “zeroing,” which the United States lost before the Appellate Body of the WTO in 2004, yet has found ways to continue the practice, in one form or another and despite more than a dozen WTO cases brought against it, since it first lost before a WTO panel a decade ago. The United States has insisted that it plays by the rules and that China does not. To the extent that China has been playing by the same rules as the United States since its accession to the WTO, it has played by the same rules differently and generally not as characterized by the United States.

The WTO is not the only forum in which China had to be persuaded to participate as a price and privilege of conducting its affairs according to the rule of law. Until November 2006, trade remedy cases against China in the United States did not technically or formally involve the Chinese Government because they were always and only antidumping cases. Antidumping allegations revolve around setting prices, which as a matter of the antidumping law is done by companies, not governments. Once the U.S. Department of Commerce began accepting countervailing duty petitions, however, the Chinese Government could not remain on the sidelines. The allegations necessarily involved government activities and programs, and even were it not to avail itself of legal rights, the Government of the People’s Republic of China would have to answer questionnaires and be involved in the investigations.

China was far more reluctant to avail itself of the judicial institutions and procedures of the United States than it had been of the WTO. For all foreign governments there is a hesitation to be a party in U.S. courts and submit sovereignty to the judgments and authority of U.S. judges. For six years, the Government of China has avoided initiating legal procedures in trade matters in U.S. courts, but with caution and reluctance it has begun to participate, conspicuously as an interested party in the GPX case.

Lawyers representing the Chinese Government in countervailing duty cases have urged the Government to participate in the domestic judicial process of the United States. The WTO is slow and its remedies, prospective only, are limited in time, scope, and character. At best, a prevailing party can impose tariffs on products of a losing party. Because disputes are over imports and exports, the merchandise subject to WTO compensation (commonly called “retaliation”) is not the merchandise subject to the dispute. Consequently, the WTO resolves disputes, when parties do not capitulate, through collateral attacks on other merchandise. Often the consumers of the prevailing country are the losers.

Domestic judicial procedures in the United States can move more quickly than the arbitral procedures at the WTO, and remedies are more generous and comprehensive. Deposits being held can be returned with interest, whereas a WTO order cannot see to the return of deposits at all. Obstacles to trade can be removed swiftly. Agencies can resist judicial orders for a long time but, in most instances, the U.S. market can reopen for subject merchandise more quickly than from decisions at the WTO because all of the procedural protections the agencies enjoy domestically they enjoy at the WTO in addition to the WTO’s own procedural obstacles for a complaining country. At the WTO there can be almost endless contention over remedies, whereas prescribed remedies in domestic law are known early in the process even though it may take a very long time to implement them.

These preferable remedies of the domestic judicial process are valid only when the process is fair and transparent and all the parties have reason to believe that they will be treated equally under the law. In general, U.S. judicial proceedings live up to this promise and, in the GPX case, did so for China.

The promise to China of reward and fair treatment from playing by the rules is being broken and, ironically, it is China standing accused of a disregard for the rule of law. According to the Ranking Member of the House Ways and Means Committee, Sander Levin (D-Michigan), “China is tilting the field of competition by not playing by the rules and this bill restores a key instrument of our nation to hold China accountable.” The Ranking Member of the Trade Subcommittee, Jim McDermott (D-Washington), added to the theme, “China has been breaking international trade rules . . . Now our own courts have naively weighed in . . .” Presumably, then, China naively trusted in the U.S. judicial system. Trade Subcommittee Chairman Kevin Brady (R-Texas) asserted that the legislation “provides a WTO-consistent tool to offset these market-distorting subsidies.” Except that the legislation is not WTO-consistent and the alleged subsidies, according to the United States, have no market to distort.
China challenged the United States at the WTO and won. It joined a suit in U.S. courts and won. Congress then stepped in and, as the White House trumpeted the result, “This legislation overturns that [Court of Appeals] decision,” even though it does not overturn the decision as to the parties in the case. So much for playing by the rules. 

Next: Lessons For China From Canada
 

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We begin today one story in three parts, “Nothing Unites The United States Congress Like China (And Not In A Good Way): Treating China Like Canada (Maybe Even Worse)” by Dr. Elliot J. Feldman. Part One, “Rewriting Subsidies Law To Fit Chinese Facts,” examines the first legislation expressly for trade with China passed by the United States Congress and signed by the President since China’s accession to the WTO a decade ago. Over the years various bills have been introduced aimed at China, especially on currency valuation, but H.R. 4105, mandating the imposition of countervailing duties determined in investigations of subsidy allegations in non-market economies, is the first to win bipartisan and presidential support.

Part Two, which will appear next week, sharply criticizes this legislation because it breaks a promise to China concerning acceptance of the international rule of law and does not conform with WTO obligations. Dr. Feldman demonstrates that the passage of the new law, in deliberately overturning a judicial decision while failing to comply with a related WTO decision, suggests to China that it cannot rely on the rule of law to settle trade disputes with the United States.

Part Three, which will appear two weeks from now, explains that the American treatment of China with respect to the WTO and U.S. domestic law is reminiscent of the American treatment of Canada with reference to NAFTA, the WTO (the GATT at the time) and U.S. law. The United States, after losing trade disputes in the judicial process, changed the law. Dr. Feldman describes the impact of that conduct on trade relations with Canada and predicts that China will react differently and with much greater risk for the international trading system. 
 

 Rewriting Subsidies Law To Fit Chinese Facts 

The Congress of the United States has been gridlocked for years now by partisan bickering on almost every issue to come before it but one – China. And, in confronting China, the suddenly bipartisan Congress usually has presidential support. As Bill Reinsch, President of the National Foreign Trade Council, recently stated, “For the last 20 years, every presidential challenger has run against every incumbent by accusing him of being soft on China. Any intelligent, prepared administration will do its best to inoculate itself, and this administration has chosen to do that by launching much more aggressive enforcement [of trade actions against China].”

The Administration of Barack Obama and all the remaining Republican candidates for President agree that China trades unfairly in the international marketplace. In a stunning bipartisan display, it took Congress less than three months to become seized of a need for a legislative change and to complete the process. The process itself unfolded in less than a week, and it took only a few days for the President to sign into law the congressional action.

What Happened Before Congress Stepped In?
The United States Court of Appeals for the Federal Circuit, as previously reported on this blog, ruled on December 19, 2011 that U.S. law forbids the application of countervailing duties to non-market economies. GPX International Tire Corporation et. al. v. United States. On March 8, 2012, the U.S. House of Representatives completed the process of overturning the decision of the Court of Appeals, rewriting U.S. law.

From 1986 until November 2006, U.S. law on the subject of non-market economies had been governed by a Court of Appeals decision, Georgetown Steel Corp. v. United States, 801 F.2d 1308 (Fed. Cir.1986). By defining “subsidy” to be a financial contribution by a government that distorts a market, there could be no “subsidy” without a market and, as the Georgetown Steel court suggested, non-market economy governments “would in effect be subsidizing themselves.”

Democrats seized control of Congress in the November 2006 mid-term elections and the Department of Commerce, two weeks later, accepted a petition for countervailing duties on imports of coated free-sheet paper from China. It promptly became routine for petitioners to couple countervailing duty with antidumping petitions, and routine for the Department of Commerce to find both dumping and subsidies by applying, in both, non-market economy methodologies that repudiate domestic values in favor of surrogate prices from third countries.

The United States Court of International Trade (“CIT”) had struck down the subsidy finding of the Department of Commerce on GPX tires twice before, in 2009 and in October 2010, but on narrower grounds effectively affirmed by the World Trade Organization on a Chinese appeal in March 2011. These decisions did not conclude that the application of countervailing duties was forbidden by U.S. law, nor by WTO obligations, but that countervailing duty and antidumping cases potentially lead to a double-counting that unlawfully would exaggerate remedies. The CIT had ruled that the Department of Commerce could not pursue both simultaneously without a methodology to solve the double-counting problem.

The Court of Appeals in the GPX case skipped over the double-counting problem and went straight to the underlying premises of Georgetown Steel. The law, the Court of Appeals concluded, does not permit the assessment of countervailing duties against non-market economies.

Congress To The Rescue
The U.S. Congress in 2012 agrees on almost nothing except an antagonism toward China. Maps and globes still display China as a huge land mass, and most Americans believe that some 1.3 billion people are working there to produce goods that will overwhelm American manufacturing and put Americans out of work, all with the aggressive financial support of a centralized Communist Government.

This capitalist image is little changed from the American caricature of China since the founding of the People’s Republic in 1949. The traditional, sympathetic American view of China, captured best, perhaps, by Pearl Buck’s The Good Earth, transformed with the Cold War. In both the Korean and Vietnamese Wars, Americans envisioned Chinese hordes pouring southward into narrow peninsulas, threatening the survival of nascent democracies. Now, Americans envision those same hordes, but hard at work in soulless factories, exploiting child labor, for the advancement of the Communist state against western capitalism.

Successive Presidents have strived to cure Americans of these distorted images, but every two years when it is time to elect a new Congress, the classic demagoguery of conjuring a common foe has fixed China as a popular target. The unanimous Court of Appeals decision from a three-judge panel chaired by the Chief Judge in December 2011 started a clock because, without a successful request for rehearing en banc or a successful writ of certiorari to the Supreme Court – both improbable – all of the pending and prior countervailing duty determinations against China would be stopped or reversed. Only Congress could prevent a chaotic turnabout, a role Congress (now Republican, confirming the bipartisan antipathy toward China) welcomed because of its popular resonance.

The House of Representatives Ways and Means Committee referred the corrective legislation to the full House on the same day it had been introduced to the Committee, February 29. Less than a week later, on March 6, the Committee’s Republican Chair moved to suspend the rules in order to expedite passage of the bill. All on that same day the House suspended the rules, debated the bill, proceeded through various rule technicalities and voted the bill itself 370-39. It went to the Senate the next day.

On March 7, the Senate read the bill twice, considered it, read it a third time, and passed it without amendment by Unanimous Consent. It was sent to the White House one day later, and was signed by the President on March 13. For anyone wondering how often bills go from committee introduction to presidential signature in a fortnight: not often, but not often is there legislation targeting China on which almost everyone agrees.

What The Legislation Does, And Does Not, Do
H.R. 4105 (112th Congress), “To apply the countervailing duty provisions of the Tariff Act of 1930 to nonmarket economy countries, and for other purposes,” statutorily directs the imposition of countervailing duties on merchandise imported from non-market economy countries with one exception, where “the economy of that country is essentially comprised of a single entity.” This language reflects continuity with one aspect of Georgetown Steel (the reference to subsidizing itself), but also supports the rationale offered by the Department of Commerce in 2007 for finding subsidies in China: there is enough of a market in China, according to the Department of Commerce, to find subsidies, but not enough to treat China as a market economy, nor to find any sector sufficiently market-based to be treated as “market oriented.” It is a position probably indefensible in logic or law prior to H.R. 4105, but now provided with some statutory support, albeit still indirect.

In response to an initial Republican resistance to the new legislation, voiced by House Ways and Means Committee Chairman Dave Camp (R-Michigan), the bill contains a second section, “Adjustment of Antidumping Duty In Certain Proceedings Relating To Imports From Nonmarket Economy Countries.” Camp was concerned that the legislation could violate WTO obligations enunciated in the March 2011 Appellate Body decision warning against double-counting. Officially, the Obama Administration has avoided public pronouncements as to whether the legislation accomplishes Camp’s goal. At the very end of his March 13, 2012 White House press briefing, Administration spokesman Jay Carney was asked:
“Also, the China commerce minister believes that the bill that President signed into law today should not only break the WTO rules but also sort of violate the U.S. domestic trade laws, which America -- trade laws.”

Carney answered evasively:

“Well, I haven’t heard those comments. Obviously the President signed the bill because he thought it was -- it merited signing. So I don’t have any comments with regards to that official's statement.”

Privately, nonetheless, the White House appears convinced that this section of the bill assures that the legislation conforms with WTO obligations. Unfortunately, China’s Commerce Minister is right. The legislation does not comply with WTO obligations.

H.R. 4105 directs the Department of Commerce when finding both dumping and subsidies, to “reduce the antidumping duty by the amount of the increase in the weighted average dumping margin estimated by the administering authority [i.e., the Department of Commerce] . . .” This reduction depends, however upon the Department of Commerce’s ability to “reasonably estimate the extent to which the countervailable subsidy . . . in combination with the use of normal value [from the antidumping calculation] has increased the weighted average dumping margin for the class or kind of merchandise.” When it cannot make that estimate, it cannot make the adjustment, but by statute it must still assess countervailing duties. This statutory mandate is not materially different from the CIT conclusion that effectively halted countervailing duty cases against merchandise from China inasmuch as it instructs the Department of Commerce to do something it does not know how to do, but whereas the CIT concluded that the Department of Commerce consequently should not do it, the statute instructs that it must.

The CIT had ordered the Department of Commerce to figure out a solution to the double-counting problem before finding subsidies. The new legislation orders the Department to find subsidies and then figure out a solution. Under this instruction, the Department is no more likely to figure out a lawful solution than before, but now it will, under statutory direction, double-count. Companies in non-market economies will be required to contest the illegal double-counting on a case-by-case basis.

Finally, the new law contains an astonishing provision regarding its effective date because it “applies to . . . all proceedings initiated . . . on or after November 20, 2006.” The Department of Commerce thus is ordered by statute to revisit all countervailing duty petitions filed against China and Vietnam since November 20, 2006 and find subsidies without regard to double-counting and without regard to decisions of the CIT and the Court of Appeals for the Federal Circuit. It then, to the extent it can figure out how, must try to adjust for double-counting. Petitioners are granted the benefit of a law that did not exist when they filed their petitions.

Belt And Suspenders: Request For Rehearing
The United States and its petitioning allies could avoid reversal of the final subsidies determination in GPX International Tire Corporation and other countervailing duty cases against China and Vietnam only by congressional act or by en banc appeal in the Court of Appeals for the Federal Circuit by March 5. As quickly as Congress moved, the legislation was not in place on time.

The U.S. Department of Justice and the petitioners, including above all the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union of the AFL-CIO-CLC, filed separate petitions at the Court of Appeals for rehearing en banc on March 5.  Because the Court of Appeals decision is final (but subject to further appeal), H.R. 4105 could not overturn it as to the parties in the GPX case. Only the court can reverse the specific outcome. The legislation does reach twenty-four existing orders and six pending investigations, none of which went to final decision in the U.S. courts, but only the rehearing petitions can help the GPX petitioners. 

Next Week: The Broken Promise to China 
 

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Two years ago, we reported that China was initiating an investigation, based on dumping and subsidy allegations, into imports of U.S. automobiles. We warned that the published petition was more a political than a legal document, telling a peculiar and nationalistic version of industrial history and concentrating on alleged subsidies, particularly for the development of electric cars, that had nothing to do with the subject merchandise. The petition was a political statement about a rising China and a declining United States.

Although the implementation of the WTO trade obligations into Chinese law sets schedules for antidumping and countervailing duty proceedings, China’s Ministry of Commerce (“MOFCOM”) is not slave to the prescribed deadlines. It does not publish petitions upon receipt, nor even generally make their existence known (although it often leaks information about them to favored Chinese lawyers). It may decide, based on its own judgment of the public interest, whether to initiate an investigation, regardless of a petition’s worthiness. It does not adhere to deadlines to initiate investigations following the receipt of petitions it accepts, nor does it adhere to deadlines to announce results. Consequently, when investigations are initiated, and when results are announced, inevitably arouse suspicions as to whether timing has been political and reactive, and whether outcomes adverse to foreign interests may be retaliatory.

China’s December 14, 2011 announcement that it was imposing antidumping and countervailing duties on certain automobiles from the United States, culminating an investigation begun conspicuously in November 2009 on the eve of President Obama’s arrival in Beijing for a state visit and just after he had imposed safeguard duties on Chinese tires, was equally conspicuous in its timing because it followed almost immediately upon the initiation of American investigations into Chinese solar cells and after China’s appeal of the tires safeguard at the WTO had been denied. According to MOFCOM’s internal schedule, the imposition of duties followed a final determination by more than seven months.

The imported cars subject to duties do not boast green technology, but the petition had complained at length about green subsidies, especially for the development of electric cars that China and the United States had pledged, at the time of the announced initiation of the investigation, to develop together. The cases on cars and solar cells, as they refer and relate to green technologies, are linked, at least as much as the cases on cars and tires. China may have decided to impose duties on the American cars most any time during the last seven months or more (regardless of the “official” date now displayed on the record of the case), but it is reasonable to interpret the timing of the announcement, if not of the decision, as retaliatory, whether because of China’s failed appeal on tires, or because of the American investigation into solar cells.

The December 14 announcement is notable in several respects. There is consensus that the duties will have little or no effect on trade in automobiles. The decision has aroused almost universal agreement that it is retaliatory, and many Chinese (experts and former officials) have asserted as much. The Obama Administration and Congress have expressed dismay if not outrage. Although the decision required an injury determination, the paltry importation of cars from the United States, particularly in market niches not served by domestic manufacture in China, could inflict no discernible injury on a Chinese industry. It is the injury determination, above all, that makes the action almost purely political, albeit the subsidy judgment, in particular, is well-founded.

Retaliation
Chinese themselves seem to boast that trade remedy actions against products from the United States are retaliatory. Zhou Shijian, cited as a “senior expert on China-US trade” from Tsinghua University, has been quoted as calling the duty on American cars “proper and equal,” a “counterattack to US trade investigations aimed at China.” Li Zhongzhou, identified as “a former official from the Ministry of Commerce and a WTO expert from the EU-China Trade Project,” has been quoted saying, “China should strike back in its own good time as the US always stirs up investigations targeting China by routinely using trade remedy measures.” China Daily has quoted Zhou Shijian saying, “It’s reasonable self-defense for China. An eye for an eye is a sound way for China to face trade disputes with the US under WTO regulations.”

The South China Morning Post immediately labeled the announcement of duties on American cars as “Beijing’s retaliation after China lost its final appeal to the WTO in September against a 2009 US move to impose anti-dumping duties on tyres imported from China.” Of course, the United States did not impose anti-dumping duties on imported tires, instead relying on the safeguard provisions of China’s accession protocol to the WTO, and China’s WTO appeal never stood any chance of success because it was wrong on the law. The automobiles investigation launched in November 2009 resulted in duties in December 2011 just as the tires safeguard decided by Obama in November 2009 resulted in a WTO appellate decision in September 2011. The initiation dates made the outcome dates linked; there was no need for a calculated retaliation.

Timing, however coincidental, is at the heart of the conspiracy theories about retaliation. “Experts” in both countries assume that officials in the other country control timing. That China does not disclose the receipt and consideration of petitions contributes to the suspicions, and Chinese make assumptions about U.S. control notwithstanding the legal and practical impediments.

The Chinese declarations of retaliation are unfortunate because they assume that the United States orchestrates trade attacks against China. The U.S. Department of Commerce and the U.S. International Trade Commission do not solicit trade remedy petitions, and are bound by law, with minimal discretion, to initiate investigations when petitions satisfy legal requirements. Chinese experts may be skeptical given their experience in China, but trade remedies in the United States reflect a free market for petitioners within a law that has no public interest exceptions: the government must investigate when an identifiable industry files a qualifying petition.

It is not as if the U.S. agencies are taken by surprise by petitions, nor unable to encourage or discourage them. Both trade agencies assist prospective petitioners with drafts so that, when actually filed, a petition is likely to succeed in launching investigations. In the process of providing such assistance, which is undertaken in confidence (thereby preserving a petitioner’s advantage of surprise), the agencies can signal whether a petition is likely to succeed and whether it appears well-founded. Nonetheless, any industry determined to file can do so, whenever it wants. And when it files, its non-confidential version instantly becomes a public document.

In theory, the same rules apply in China. Any industry can file a trade remedy petition whenever it likes. However, MOFCOM does not reveal when it has received a petition, can decide whether to initiate an investigation without explanation, and can decide when to act because no one knows when a petition has been filed. Moreover, MOFCOM does not release full information about a petition and thereby arouses suspicion that MOFCOM itself might sometimes be the author. The petition against American automobiles could have been a MOFCOM document because it could not have been prepared by a private petitioner in the very short interval between the Obama safeguard decision on Chinese tires and MOFCOM’s initiation of the investigation.

Inside U.S. Trade quotes “a U.S. business source” in its December 16, 2011 edition complaining about Chinese “tit-for-tat” because the results on American automobiles were released “just days after the Office of the U.S.Trade Representative announced it would pursue a legal challenge at the World Trade Organization against Chinese AD/CVD on chicken ‘broiler products’ from the U.S.” The same “source” complained about China’s initiation of an investigation of U.S. shipments of polysilicon (essential for solar cell manufacture) right after the U.S. opened its investigation of Chinese solar panels and cells. In the normal course of business, such investigations, which must be based on petitions satisfying WTO rules, could not be launched instantly, but in an environment of mutual suspicion the normal course of business is regarded as captive to government control, and MOFCOM can act on petitions without warning and whenever it likes.

Subsidies
The United States is accustomed to accusing other governments of subsidizing industries exporting to the United States in violation of world trade rules. Not all subsidies contravene the rules of the World Trade Organization, but subsidies deliberately in support of exporting industries usually are. The routine American complaint is that American companies are the best in the world, able to compete with anyone, but not able to compete with foreign governments.

Because Communist countries made state enterprises their global competitors, the United States passed special laws to deal with them. For all that China has done to make itself a capitalist competitor, it does not deny Communist Party control and does not hide state enterprises behind private cloaks. The United States insists, therefore, that China is a non-market economy and that all of its state enterprises are effectively subsidized by the state.

The dilemma for the United States, amplified in the most recent decision of the U.S. Court of Appeals for the Federal Circuit, is that petitioners cannot challenge subsidies in non-market economies because subsidies are countervailable (contrary to international trade rules) only when they distort markets. Non-market economies have no markets to distort. The Court of Appeals therefore has ruled that countervailing duty cases cannot be brought against non-market economies, while state control of the economy implies that almost everything is unfairly subsidized.

Americans have grown so accustomed to perceiving foreign governments as subsidizing industry that they have become close to unconscious about the manifold subsidies in the U.S. economy. What they often see as illegal in other countries, such as European or Canadian farm subsidies, they see as innocently in the public interest in the United States. For many years, for example,the United States imposed countervailing duties on Canadian provincial crop insurance even as American crop insurance was more extensive and generous. The only difference was that Canadian agriculture was exported to the United States while little American agriculture made its way into Canada. No one seemed to observe that foreign agriculture would have difficulty competing in the United States against the heavily subsidized domestic product.

Americans became especially unaccustomed to foreign governments challenging American subsidies, but the Chinese challenge in 2009 was made inevitable by the American Recovery and Reinvestment Act. The United States had begun countervailing alleged Chinese subsidies in 2006, targeting especially Chinese bank loans because of state ownership of the banks. All Chinese state enterprises became targets because they were state enterprises. Now, the U.S. Government had acquired majority shares in many U.S. banks and in much of the automobile industry. The United States insisted this state ownership was temporary, but in no other significant way was there a distinction between Chinese and American ownership. If the United States were to countervail Chinese state ownership and bank loans and guarantees, China (and other countries) inevitably would begin to countervail American government ownership.

The solution to this escalation in world trade antagonism and protectionism, triggered by global recession and government rescues,was to reconsider the countervailing duty regime and what was to be considered an illegal subsidy. Instead, the United States was introduced to countervailing duties from the other side, at the very moment, albeit coincidentally, when it learned that this weapon was no longer available to the United States in its trade contests with China.

Symbolic Results And Injury
China assesses a 25 percent tariff on all imported automobiles, a price that has been very effective in persuading foreign manufacturers to produce in China. Consequently, only the most expensive cars for which buyers are relatively price-insensitive are manufactured elsewhere and imported into China. Manufacturers cannot afford to export to China cars that need to compete on price.

The additional tariffs China is now imposing on automobiles manufactured in the United States will have little practical effect. Chinese buyers interested in BMW sport utility vehicles from South Carolina that already cost upwards of $70,000 in China will not be deterred by a 2 percent surcharge, nor will buyers of Mercedes M-Class, R-Class, and GL-Class SUVs choose something else because of a 2.7 percent surcharge. Besides, only about 29,000 BMW and16,000 Mercedes in these classes were exported to China last year.

General Motors will have shipped in 2011 only around 11,000 SUVs and large vehicles, particularly the Buick Enclave, the Cadillac STS and the Cadillac Escalade. Even with a 21.8 percent duty the impact on sales probably will be negligible. Honda, selling 362 TL Model Acuras in China into December 2011, can hardly be concerned about a 4.1 percent antidumping duty. Only Chrysler, perhaps, needs to be concerned, with a 15 percent overall surcharge and substantial exporting ambitions, but for now the only vehicles it is shipping that are affected include the Jeep Grand Cherokee and, in future, its 300 Model large sedan. In the first ten months of 2011, Chrysler sold 13,686 Jeeps in China.

BMW, Mercedes, and Honda were all found free of countervailable subsidies, presumably because they were not part of the Obama bailout. The likelihood that they are dumping these large and expensive vehicles in China is small. The message of the Chinese decision, then, is that foreign manufacturers wishing to sell cars in China should manufacture them in China, not in the United States, because they could face harassment, if not legitimate duties, coming from the United States. China apparently wants to make the likes of BMW and Mercedes and Honda think again before they expand manufacturing in the United States. They should prefer, China seems to be telling them, to create manufacturing jobs in China.

For the American companies, the message was also indirect. Ford was investigated even though it does not export U.S.-made vehicles to China at all. The point seems to have been that Ford turned down federal rescue funds in 2009 and so was found in the investigation to be free of countervailable subsidies – even though there was no product to countervail. Investigating Ford was another way of sending a message to General Motors and Chrysler, who were found with countervailing duty rates of 12.9 percent and 6.2 percent respectively.

In order to impose antidumping and countervailing duties, China had to find that the American imports caused injury to a Chinese industry. MOFCOM raised the standard, dutifully declaring that the dumped and subsidized imports “substantially damaged China’s auto industry,” even though China’s auto industry does not manufacture any vehicles of the size, style, or price range of the subject merchandise and the number of imports is almost negligible. The injury determination thus was not credible, seeming to confirm MOFCOM’s political intent.

The U.S. Reaction
The American reaction to the new Chinese tariffs was predictably as exaggerated as China’s triumphalism about finding countervailable subsidies and dumping. U.S. Trade Representative Ron Kirk called China’s decision part of a “disturbing trend.” In a joint, bipartisan statement (nothing rallies congressional unity like China), House Ways & Means Committee Chairman Dave Camp (R-MI), Ranking Committee Member Sander Levin (D-MI), Trade Subcommittee Chairman Kevin Brady (R-TX), and Trade Subcommittee Ranking Member Jim McDermott (D-WA), saying they were “extremely concerned,” declared, “China’s actions are unjustifiable, and unfortunately, this appears to be just one more instance of impermissible Chinese retaliation against the United States and other trading partners.” They added, “This action appears to violate China’s WTO commitments, and we urge the Administration to exercise all available options to enforce U.S. rights, including, as appropriate, enforcing U.S. rights at the World Trade Organization.” Fortunately, Ambassador Kirk refrained from claiming the Chinese action violative of WTO obligations, and new Commerce Secretary John Bryson, in a coincidental speech criticizing China, said nothing about the automotive tariffs.

Policies to save the American automobile industry from extinction in the recession exposed exported vehicles to unfair subsidy claims. China was entirely justified in challenging those subsidies. China probably was less justified, however, in finding dumping of a handful of third country luxury vehicles, and arguably not justified at all in finding “serious damage” to a Chinese industry in the absence of a like competitive product. Yet, the specifics of this case are not what the case is about. Instead, the case appears to be about messages, subliminal and blunt, about state aid for green technologies and about domestic and foreign manufacture, affecting trade policy more than trade, and sales attitudes more than sales.

The House of Representatives leaders who issued the joint statement probably should be “extremely concerned,” but more by the competitive messaging than by competition, and more by outspoken boasting about retaliation than about the effectiveness of the WTO. The cars case is troubling, not because it will impede trade in cars, but because it threatens to impact trade relations and competition more generally and in the long term.
 

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The Plan To Make The Planet Green In Cooperation With China

President Barack Obama committed his Administration soon after his election in November 2008 to the development of green technologies. He posited that investment in the creation of systems and equipment that would roll back climate change would create jobs while saving the planet, and as everyone in every country ultimately would share the mission of saving the planet, an American lead in green technologies would fuel exports. President Obama decided in the depths of the Great Recession that doubling American exports in five years was a key to recovery. He could see before him a coherent agenda: saving the planet and the economy at the same time by creating new jobs in new industries.

President Obama’s plans for green technology were compatible with China’s, whose published green technology plan in 2007 addressed the problems of energy dependence and severe, deadly pollution from coal. On the occasion of a state visit just one year after his election, in November 2009, President Obama enlisted China in his plan, although arguably it was the other way around. With agreement that “a green and low-carbon economy is essential and that the clean energy industry will provide vast opportunities for citizens of both countries in the years ahead,” China and the United States, according to the White House, committed “to strengthen cooperation in promoting clean air, water, transportation, electricity, and resource conservation” in a Ten Year Framework on Energy and Environment Cooperation. A new U.S.-China Energy Efficiency Action Plan was to be the vehicle for “the United States and China [to] work together to achieve cost-effective energy efficiency improvements in industry, buildings and consumer products through technical cooperation, demonstration, and policy exchanges. Noting both countries’ significant investments in energy efficiency, the two Presidents underscored the enormous opportunities to create jobs and enhance economic growth through energy savings.”

In pursuit of these goals, China and the United States created a joint “Clean Energy Research Center” to develop energy efficiency in buildings. They launched the “U.S.-China Renewable Energy Partnership” to “chart a pathway to wide-scale deployment of wind, solar, advanced bio-fuels, and a modern electric power grid in both countries and [to] cooperate in designing and implementing the policy and technical tools necessary to make that vision possible. Given the combined market size of the two countries,” proclaimed the White House Press Statement of November 17, 2009, “accelerated deployment of renewable energy in the United States and China can significantly reduce the cost of these technologies globally.”

China and the United States both understood well in 2009 what it meant for the two governments to commit to the development of green industries. Both contributed abundant research and development funds, China relying on its traditional state apparatus and Obama tapping into the $734 billion from Congress in the American Recovery and Reinvestment Act. In both countries, local, state, county and provincial governments are competing to attract industry and jobs, so where central or federal government funds have been available, non-central and non-federal financial incentives have been supplemental and generous. Once the Presidents of both countries declared their respective and joint commitments to this sector, the money flowed.

Collaboration Collapses

Less than a year after the announcements of collaboration between China and the United States, on October 15, 2010, the United States Steelworkers filed a petition, under Section 301 of the trade law, containing “allegations relating to a variety of Chinese practices affecting trade and investments in the green technology sector.” The United States Trade Representative (“USTR”) investigated and resolved a number of the allegations, primarily through Chinese commitments to terminate programs (and hence retard the global move to green technologies to which the two countries had pledged just a year earlier), but in December 2010 the United States formally requested consultations at the World Trade Organization (“WTO”) concerning China’s “Special Fund for Wind Power Manufacturing,” which the United States alleged was an illegal import substitution subsidy. Some other allegations remained under investigation at USTR.

Import substitution subsidies are decidedly protectionist, expressly to protect jobs by restricting inputs to domestically manufactured products. They are forbidden under WTO rules. They do not increase the dissemination of a finished product, and to the extent they are perceived as necessary, they may be substituting a less competitive component whose jobs, consequently, belong in the country most efficient in production. The United States certainly had a legitimate complaint, but the bigger picture remains the bilateral commitment to green technologies and the U.S. initiative to question China’s pathway to accomplishment of the commitment.

The Chinese programs, like many similar programs in the United States, were designed to “accelerate deployment of renewable energy,” although sometimes the Chinese programs expressly favored Chinese products. They were a logical response to the agreement, in 2009, that “climate change is one of the greatest challenges of our time.” According to the White House, “The two sides [China and the United States] maintain that a vigorous response is necessary and that international cooperation is indispensable in responding to this challenge.” Both countries interpreted “vigorous response” to mean, at a minimum, substantial financial aid to nurture infant industries. Pursuit of jobs meant, at least for China, favoring Chinese production.

Commitments of funds, whether through grants or loans or loan guarantees or tax breaks, are made through public policy choices. Deliberate decisions are made when money is spent or taxes forgiven. Even as some economists may discourage the state from exercising such choices and prefer the market to pick all winners and losers, no modern economy functions without governments offering incentives for some industries. Indeed, even the trade laws have provisions for “infant industries.” Nonetheless, the trade laws generally oppose government subsidies in a quest for “pure” competition.
 

The trade laws, especially in the United States, delegate to private interests rights to countermand public policy. They are designed to encourage competition and inhibit government aid. However much the Chinese and American governments may have agreed to collaborate in green technologies and support the development of related industries, the trade laws, particularly in the United States where there is no public interest exception, would limit their ability to do so.

The WTO challenge in 2010 against China’s green technology sector arose from a petition of a powerful trade union that had contributed significantly to President Obama’s 2008 election. It was the same trade union that had induced the President’s action a year earlier on low-cost tires. Whatever the President’s sincerity to collaborate with China in the development and accelerated deployment of low-carbon and renewable energy technologies, special interests and the trade laws had even more to say about the direction in which the President could go.

The two primary areas of new, green technology, apart from electric cars (which involve their own story discussed previously on this blog and to be revisited in a separate article following this one), are energy derived from wind and the sun. The United States complained to the WTO about China’s support of wind turbines; the U.S. Department of Commerce and the U.S. International Trade Commission now have taken on, one year after the WTO request for consultations on wind, China’s support for solar energy. China’s decision to impose duties on U.S. cars fairly completes the collaboration celebrated in the 2009 summit. Rather than collaborate to protect the planet against climate change, the United States and China are in a trade war over government support for the very public interest objectives they mutually endorsed.

Subsidizing Solar Power

Nothing illustrates President Obama’s coherent plan, China’s long-term plans, and the difficulty for the United States to collaborate with China on saving the planet, more than solar cells and solar power plants. The President understood the mass production of affordable solar cells would mean the development and expansion of a new industry, creating potentially thousands of new jobs, exactly as envisioned by the White House in November 2009. The product would replace carbon consumption with clean energy free of carbon emissions, reducing dependence on foreign oil and on coal. Inasmuch as almost every country would like to be free of dependence on oil and coal -- because of their direct costs, foreign policy implications, and environmental and health impact -- solar cells (like wind turbines) would be attractive to almost every human being, especially if they were produced at an affordable price. Harnessing the natural and renewable energy of sun and wind seemed far more sensible than the consumption of non-renewable natural resources, ultimately, and if for no other reason, because oil (and gas) and coal are potentially finite; the energy of the sun and wind are infinite.

Although a policy of subsidizing green technologies began with President George W. Bush, it accelerated and enlarged under Obama because of conviction, ideology, and the recession. Obama wanted to prove he was not beholden to big energy interests in the oil, gas and coal industries. He believed in the superiority of clean energy. And he believed a commitment to clean energy could help pull the economy out of recession – reducing fuel costs, lowering the trade deficit by reducing dependence on foreign resources, creating jobs to produce a domestic energy alternative and to export a universally desirable product.

There are many ways for governments to encourage industries. In the United States, the preferred way historically has been through the tax code. Companies can defer taxes, or take research and development credits, or enjoy particularized amortization, or receive many other special benefits, especially depending on the level of government. Local governments can defer or forgive property taxes, for example; state governments can exempt companies from sales or excise taxes, and can order public utilities to buy power from renewable sources on long-term contracts that benefit the energy producers more than consumers, who may pay a premium for the privilege of using green energy. The only apparent limitation on the ways in which companies can benefit from tax breaks and other subsidies is the imagination of the companies and their tax lawyers.

Solar energy, and solar cells in particular, have become the poster children for creative subsidies, not only in the tax code and regulations. The New York Times has offered the example of NRG Energy in California, which the Times estimates has received a “banquet of government subsidies valued at more than $5.5 billion,” beginning with below market construction loans and loan guarantees and including cash grants from the Treasury Department. California provides a perpetual property tax holiday, while mandating public utilities to buy a substantial portion of their energy from solar suppliers, usually at a premium passed on to ratepayers. Accelerated tax depreciation then completes the corporate savings.

The banquet is not limited to American companies, but is restricted to projects in the United States. The Times reports on Brookfield Asset Management, a Canadian investment firm, collecting enough in subsidies for a New Hampshire wind farm to cover between 46 and 80 percent of its entire cost in a $229 million project.

The backdrop for this bonanza for renewable energy producers is Solyndra, erstwhile manufacturer of the kinds of solar cells destined to populate “solar cities,” vast areas of solar power generation. Solyndra was trying to develop new and better solar cells that do not rely on the polysilicon whose export from China has been controlled by the Chinese government. Solyndra is the celebrated start-up on which the Obama Administration lost $528 million in loan guarantees when the company went bankrupt, proving that loan guarantees can be meaningful subsidies by transferring risk from the private sector to the government, and proving that governments, too, can lose bets.

The Solar Cells Case

When U.S. solar manufacturers could not agree to petition for tariffs against Chinese imports, a breakaway group of eight formed a new coalition, led by a German subsidiary, filing on October 19, 2011 what may be, according to World Trade Online, “the largest trade remedy petition ever brought against China and the first on a renewable energy product.” The coalition, led by the German-owned SolarWorld Industries (the other companies have refused to disclose their identities), alleged both dumping and illegal subsidies, notwithstanding that the U.S. Court of International Trade (“CIT”) has ruled that the two cannot be brought together against China as long as the United States treats China as a non-market economy (“NME”), and the U.S. Court of Appeals for the Federal Circuit (“CAFC”) has upheld the CIT and gone further, ruling that countervailing duty cases against NME countries are forbidden altogether. Tianjin United Tire & Rubber v. United States, December 19, 2011. The methodology of NME status, the CIT ruled, guarantees double-counting unfair trade; the CAFC has added that the governing statute forbids applying the countervailing duty law to NME countries because it incorporates earlier judicial rulings, particularly in the case of Georgetown Steel Corp. v. United States. And, at the heart of the countervailing duty (subsidy) allegations in the petition against solar cells is a complaint about Chinese currency valuation, a subject the Department of Commerce has refused repeatedly to consider in petitions against Chinese imports. The countervailing duty complaint, pursuant to the CAFC decision, must now be abandoned, and with it the complaint about currency valuation.

For duties to be imposed once dumping is found, the trade law requires only that “an industry” in the United States be materially injured or threatened with material injury by reason of the dumped or subsidized imports. In this case, there is more than one industry impacted by Chinese imports. One could not reasonably doubt that the wave of Chinese imports since 2007 has been inundating the U.S. market and driving down the price for U.S.-manufactured solar cells (and solar cells from other countries; it is not merely coincidental that the leading petitioner is the wholly owned subsidiary of a German company that also exports to the United States and is challenged by Chinese imports). But even as the Chinese imports are competing successfully with the domestic product (as demonstrated by the increasing market share), the Chinese competition probably does not impact net jobs negatively because the manufacture of solar cells does not generate as many jobs as their installation. SolarWorld, the largest producer in the United States and the leader of the petitioning coalition, has boasted that labor is less than 10 percent of its costs. As Matthew Wald has reported in The New York Times, because solar cells are made substantially by robots, and there are no moving parts to service once they are up and running, they “may be an odd choice for job creation.”

The more solar cells are available, and the more their price falls, the more the installing industry generates jobs. Conversely, were the price of solar cells to stay high (as the petition seeks), fewer would be sold and there would be fewer jobs for installing them.

The different impact on different industries is substantial. Wald discloses a 2011 report from the Solar Foundation, which advocates for solar manufacturers, that there are only about 24,000 jobs in solar manufacturing in the United States. By contrast, there are 52,500 jobs in installation, up 6.8 percent since 2010. The implication, although not thoroughly examined by anyone to date, is that Chinese imports may be hurting domestic manufacturers (and employment in that industry may be declining), but they are increasing jobs for installers while lowering energy costs with renewable energy. Until this surge in Chinese imports of solar cells, renewable energy came at a premium, with customers paying extra to receive electricity from wind or solar sources instead of coal, oil, or gas.

Because there is no public interest exception in U.S. trade law, there is no way for the agencies or courts to consider the competing interests of related industries. The U.S. manufacturers want the price of solar cells to go back up. They prefer unit profits to bulk sales. The companies that install solar cells, however, want the price to continue down. It is less important who sells them solar cells, although they are concerned about quality. More important is a price so attractive that energy produced from the sun is competitive with hydrocarbons. The price stimulated by the surge of Chinese imports has been creating that direct competition.

Of course, more jobs for solar installers potentially mean fewer jobs for oil, gas, and coal workers, because as more energy is generated with renewable energy, the less may be required from traditional natural resources. Notwithstanding an overall global growth in demand for energy, in the United States the competition seems to support one industry at the expense of others.

Solar wattage has grown more than 70 percent/annum in the United States since 2008. China’s share of that market has grown from close to nothing in 2006 to 50 percent in 2011. In 2008, the average price of solar panels was $3.30/solar watt of capacity. When the U.S. manufacturers filed their petition, the price had fallen to $1.00-1.20. It has been good for consumers, and good for a related industry. Inevitably it is not so good for domestic solar cell manufacturers, some of whom have been moving, themselves, to manufacture in China, while China’s largest producer, SunTech, has put up a factory in Arizona to assemble parts coming from China.

The very nature of the solar cell industry makes it a poor candidate for job creation, and the Chinese competition has limited its promise for exports. Of course, the U.S. industry could try to imitate the Chinese industry, committing to huge volumes at low prices. But, the U.S. industry has preferred innovation, which seems to carry more risk. Solyndra was innovating, and it failed. Nonetheless, China, too, has problems, apparently over-producing for a consumer market that, despite rapid adoption and conversion, still cannot keep demand up to the supply.

The Hypocrisy Of The Trade Law And Its Application

President Obama could not have been clearer in defining the public interest: convert from carbon-intensive to green energy production. The public policy would combat climate change, clean up the environment, improve public health, welcome innovation, create new jobs, increase exports and improve trade balances. Collaborating with China would be important because the United States, without China, could not reverse the direction of climate change, and with China the potential market ought to accommodate the full productive capacity of both. The United States could continue to be a center of innovation; Chinese adoption of American innovation could mean a continuing and ever-expanding market for American ideas.

China proceeded more quickly and effectively than industries in the United States. There is little to separate them in terms of subsidies. The United States has been pouring money into solar development and has taken over most if not all the risk from the private sector. President Obama complained, on October 6, 2011, “the Chinese government will say, ‘We’re going to help you get started, we’ll help you scale up, we’ll give you low-interest loans or no-interest loans, we will give siting, we will do whatever it takes for you to get started here.’” Yet, most of what he said the Chinese government would say to solar start-ups the United States has been saying, too. And when he added, on November 2, that there are “questionable competitive practices coming out of China” in clean energy, he might have heard a similar complaint in the United States from the oil, gas, and coal industries. Their difficulty in complaining, however, arises from the special place they have enjoyed in the tax code for many decades.

In cases such as solar cells, the trade law works directly against the public interest. The public interest must be for more, affordable solar power, not less. Yet, the trade law requires that a petition from an industry demonstrating material injury or threat of injury to that industry from dumped foreign imports must lead to dumping duties, raising the price of the imports or even excluding them from the U.S. market. The U.S. government cannot prefer its notion of the public interest to the automatic commands embedded in the trade law obligations to respect the elements of a properly executed petition presented by private parties. Nor can it weigh the interests of another industry against the determination of the petitioner. Indeed, it is the absence of a public interest provision in the trade law that prevents the government from having a trade policy.

In the solar cells case, as in the low-cost tire safeguard a year ago, the public interest is determined by narrow private interests empowered even to produce a trade war. The United States Department of Commerce and the International Trade Commission must now, by law, check off a list of criteria leading to tariffs on Chinese imports that are more likely to cost American jobs installing solar power, increase prices for consumers of clean energy, and consign millions of people to continuing exposure to degraded and polluted air, all to assist an industry that may not have a significant manufacturing future and, if it did, would not likely create many jobs.

Rhetorically, China reacted angrily and quickly on news of the petition and the initiation of investigations. Practically, China announced the imposition of dumping and countervailing duties on U.S. cars, which the Financial Times promptly characterized as “retaliatory.” Mercedes, BMW, GM, Ford, Chrysler and Honda were all hit for cars manufactured in the United States and exported to China.

The complaining solar cells industry is a beneficiary of extraordinary, possibly unprecedented public largesse. Now it has turned to the trade law for still more help, and has forced the Obama Administration to question the Chinese effort to accelerate the deployment of clean energy, the very policy to which China and the United States agreed just two years ago. The United States has gone to the WTO to stop the Chinese from doing almost exactly what the United States and China agreed both should do, and is now also trying to stop China from fulfilling its promise within U.S. law. The trade law thus champions narrow private interests and forces the Administration to contradict what it had defined as the public interest, both at home and in its foreign commercial policy.

 

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This blog reported on August 30, 2009 that Chief Judge Jane Restani of the U.S. Court of International Trade (“CIT”) ordered the U.S. Department of Commerce (“Commerce”) to revoke the countervailing duty ("CVD") order on pneumatic off-the-road tires from the People’s Republic of China in a case titled GPX International Tire Corporation v. United States.  Her reasoning was that Commerce was unable to eliminate the double-counting inherent in imposing CVDs while at the same time imposing antidumping duties calculated by using Commerce's non-market economy ("NME") methodology. Commerce appealed the CIT’s decision to the U.S. Court of Appeals for the Federal Circuit (“Federal Circuit”). On December 19, 2011, the Federal Circuit upheld the CIT’s decision but for different reasons than those offered by Chief Judge Restani. 

The Federal Circuit held that the U.S. CVD statute prohibits applying countervailing duties to NMEs. It found:

that when amending and reenacting [the] countervailing duty law in 1988 and 1994, Congress legislatively ratified earlier consistent administrative and judicial interpretations that government payments cannot be characterized as “subsidies” in a non-market economy context, and thus that countervailing duty law does not apply to [non-market economy] countries.

This finding, as a matter of U.S. law, definitively prohibits Commerce from applying CVDs even in cases without a companion antidumping investigation where there is no risk of double-counting. It has much broader impact than the CIT decision that Commerce appealed because the CIT would have permitted CVD investigations and orders, denying only CVD investigations and orders simulaneous and on the same goods as antidumping orders. It also has much broader impact than the WTO ruling in China’s favor on the application of countervailing duties in non-market economy cases, as reported on this blog on April 25, 2011, because the WTO challenge was based exclusively on the issue of double-counting.

Commerce determined that the CVD law could not apply to NMEs in a 1983 steel case against Czechoslovakia.  The petitioners appealed.  The Federal Circuit agreed with Commerce and established the rule that CVD petitions could not be filed against NMEs in Georgetown Steel Corp. v. United States.

In GPX Tire Corporation, the Federal Circuit reviewed the legislative history and concluded that Congress was well aware that Commerce and the courts were interpreting the CVD law as being inapplicable to NMEs when Congress amended the CVD law in 1984, 1988 and again in 1994. The Federal Circuit held that congressional awareness of this interpretation, when it amended the statute, constitutes legislative ratification of that interpretation. The court reasoned that in the face of this legislative ratification of Commerce’s previous determination that the CVD laws do not apply to NMEs, Commerce is no longer free to change its mind. The Federal Circuit concluded that:

Although Commerce has wide discretion in administering countervailing duty and antidumping law, it cannot exercise this discretion contrary to congressional intent. We affirm the holding of the Trade Court that countervailing duties cannot be applied to goods from [non-market economy] countries. As we concluded in Georgetown Steel, if Commerce believes that the law should be changed, the appropriate approach is to seek legislative change.

Commerce must now wish it had never appealed Judge Restani’s decision. Under the U.S. judicial system, Judge Restani’s decision only bound Commerce in the specific case that she had decided. Commerce was free to continue to apply countervailing duties in other NME cases because the CIT does not set precedent and its decsions only govern specific cases. By contrast, the Federal Circuit’s decision is precedent that binds the lower courts and Commerce not only in the specific case before the court, but in all future cases. 

Judge Restani’s decision was based on the double-counting problem and had left Commerce free to use the CVD law in any cases in which there was not a companion antidumping case. It also had left open the possibility that Commerce, in a future case, might find a solution to the double-counting problem and impose both antidumping and countervailing duties on the same product. Because the Federal Circuit’s decision is based on its finding that the U.S. statute prohibits applying countervailing duties to NMEs, it will take an act of Congress before Commerce can again impose countervailing duties on a non-market economy.

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China requested a WTO panel on October 13, 2011 challenging the U.S. practice of zeroing in the 2004 antidumping investigation involving warm water shrimp and the 2006 antidumping investigation of diamond saw blades. This challenge to the U.S. Department of Commerce’s (“Commerce”) practice of zeroing to inflate dumping margins is the 10th such challenge since the WTO Appellate Body first condemned the practice in 2004.

The United States apparently recognizes that China likely will succeed in its challenge. The two countries agreed to procedures to accelerate the panel process in which the United States agreed not to contest China's claim that the measures identified in the Panel Request are inconsistent with Article 2.4.2 of the Anti-Dumping Agreement, on the grounds stated in United States - Final Dumping Determination on Softwood Lumber from Canada.

Commerce computes a company’s dumping margin in an original investigation by calculating a weighted average U.S. price and Normal Value for each model of the investigated product, then comparing the two to create model specific dumping margins. Commerce subsequently weight-averages all of those product-specific margins to calculate a single dumping margin for the company. However, before performing this last calculation, Commerce resets all “negative” margins (i.e., cases in which the U.S. Price was higher than the Normal Value) to zero. This practice of “zeroing” results in higher dumping margins than would occur had Commerce calculated a true weighted-average. In some cases, it results in a dumping order being imposed on a company when overall that company was not dumping and no dumping margin otherwise could have been found.

The WTO Appellate Body repeatedly and consistently has condemned the U.S. practice of zeroing beginning in 2004 with cases brought by the European Union involving 15 anti-dumping investigations and Canada involving softwood lumber. In those cases, the United States came into compliance for the specific investigation by making a new determination without the use of zeroing. However, until 2006 the United States refused to change its practices for subsequent and future investigations and systematically limited the application even in the immediate cases (limiting them to investigations instead of administrative reviews, for example). Thus, the United States continued to zero and the affected countries were required to bring a fresh WTO challenge in each case and even in each phase of each case. Worse, unless the amended final determination resulted in a finding of “no dumping” (as opposed to a lower dumping margin), Commerce would use zeroing to calculate the actual dumping duties to be imposed in subsequent administrative reviews. (Under the U.S. retrospective assessment system, the original investigation only sets a rate for cash deposits of estimated duties; the amount of actual duties collected is determined after importation in separate annual administrative reviews.)

In December 2006 Commerce changed its practice for new antidumping investigations initiated after that date and no longer zeros in original investigations. However, it did not go back to undo zeroing in investigations initiated prior to that date. Thus, China had to bring another WTO challenge for warm water shrimp and diamond saw blades notwithstanding nearly a decade of rulings. Moreover, Commerce continued to zero in subsequent administrative reviews, notwithstanding several WTO Appellate Body rulings that zeroing in administrative reviews is no more consistent with WTO obligations than zeroing in original investigations. Thus, even after China succeeds in its WTO challenge in these two cases, eliminating zeroing would help the companies involved only if the elimination of zeroing were to result in a finding of “no dumping” and a revocation of the antidumping order for that company. Were the new calculation to result only in a lower dumping margin, the order would be continued and the actual duty assessment would be determined in the administrative reviews in which Commerce could continue to zero. Surprisingly and without explanation, although China included subsequent administrative reviews and the recent sunset review in its request for WTO consultations with the United States earlier this year, it did not include those reviews in its request for a WTO dispute resolution panel.

China and the United States agreed to expedited procedures in which the panel would issue its decision within three months of its composition and the United States would bring itself into compliance within eight months of the Dispute Settlement Body adopting the panel’s report. As compliance in this case merely requires a recalculation, the eight months to comply is consistent with an American pattern to take as long as possible to comply with WTO decisions whose effects are strictly prospective.

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        U.S. Trade Representative Ron Kirk announced, on October 20th, 2011, that the United States, pursuant to World Trade Organization (“WTO”) rules, is requesting China to provide more information on its Internet restrictions. More than a week passed with Chinese media and the public paying the request little attention.

        It is not surprising that China is giving this sensitive request the silent treatment. Although Kirk claimed that the WTO request relates “specifically to commercial and trade impact of the Internet disruptions,” China is likely to perceive it from a geopolitical point of view. Public communications, or propaganda, is one of the three pillars of the ruling Chinese Communist Party. Moreover, the timing of this request, whether deliberate or coincidental, is less than ideal – submitted in the wake of the Arab Spring, in which the mass public was mobilized by social media via Internet and mobile phones. Most importantly, China has little if anything to lose in extending this process, even if it could lead to a WTO dispute settlement proceeding.

Why China?

        According to Google’s White Paper – Enabling Trade in the Era of Information Technologies: Breaking Down Barriers to the Free Flow of Information, more than 40 governments engage in broad-scale restriction of online information. Yet, the Office of U.S. Trade Representative (“USTR”) singled out Chinese Internet restrictions for a WTO request.

        Internet based services companies, such as Apple, Facebook and Google, are playing a central role in the U.S. economy and probably in the submission of this request. Apple reported $6.62 billion in third-quarter profits, slightly below quarterly earnings expectations for the first time in years. Google’s third quarterly earnings soared to $9.72 billion and rebounded to its highest growth rate since before the 2008 financial crisis. It also added more than 2,500 jobs in the same period.

        Expanding overseas is crucial to these companies’ growth. For instance, more than half of Google searches come from outside the United States, and revenues from abroad totaled $5.3 billion, representing 55 percent of its total revenues in the third quarter of 2011.

        China is the largest market in terms of Internet population. The number of China’s Internet users has exceeded 500 million, according to the Economist Intelligence Unit’s data, which is larger than the total population of the European Union, and roughly twice the size of the U.S. market. More importantly, the Chinese number has been growing at double-digit rates since 2008, far exceeding the 2.5 percent to 4.5 percent U.S. growth rate. 

        No other market will be able to reach the size of the Chinese market any time soon. For instance, the second most populous country, India, has only 83 million Internet users, less than one third of the U.S. size. The growth rate of India’s Internet population is lagging behind the Chinese as well.

        U.S. companies face challenges from Chinese Internet entrepreneurs in the Chinese market. A Silicon Valley venture capital investor – Dave McClure – recently praised his Chinese hosts as “most likely smarter and more aggressive” than their U.S. competitors. He probably went too far because the best-known Chinese Internet companies are copies of the leading U.S. high-tech companies. RenRen, which was modeled after Facebook, went public this year and is now valued at $2.25 billion as reported by the Financial Times’ Kathrin Hille. But McClure responded that, due to the vast size of the Chinese market, “it would be foolish not to copy” an idea that works.

China’s Internet Great Wall

        USTR stated that the WTO request focuses solely on “commercial and trade impact of the Internet disruptions,” but it also pointed out that “the United States believes that economic and social development of the Internet globally is best served by policies that encourage the free flow of information and prioritize individual empowerment and responsibility” in its letter to the Chinese Ambassador to the WTO. Thus, the United States is aware that it is pressing China on one of its most sensitive policy issues. 

        Richard McGregor, Washington Bureau Chief and former Beijing Bureau Chief of the Financial Times, and author of the widely acclaimed book The Party: The Secret World of China's Communist Rulers, has written, “[t]he party is like God. He is everywhere [in China]. You just cannot see him.” He pointed out, at a Washington, DC seminar last July, that the Chinese Communist Party actively utilizes “3Ps” – personnel (the Central Organization Department, the world’s most powerful human resources outfit), propaganda, and PLA (the People’s Liberation Army) to maintain its power. The Party has fully realized the importance of the Internet in the digital era. Not surprisingly, outsiders have complained that “China has devoted extensive resources to building one of the largest and most sophisticated filtering systems in the world.” 

        The United States has been actively advocating human rights abroad and sees Internet freedom as an extension of traditional human rights contained in the universal declaration of human rights: free speech, free assembly, free association and freedom of the press. Secretary of State Hilary Clinton last year stepped in when Google clashed with the Chinese government over its Internet restrictions. After Google briefed the State Department, Secretary Clinton issued a statement: “[w]e look to the Chinese government for an explanation.” Despite USTR’s reference to commerce and trade, U.S. policy on human rights is bound up with the Internet.

        As propaganda plays such an important role in China, Chinese policy makers most likely would perceive the Google incident and the USTR request as events in a series of plots against China orchestrated by the U.S. government. China looks warily upon the destabilizing implications of the Arab Spring for authoritarian governments. In both China and the United States these revolutions are thought to have been fueled by Google and Facebook. It would be foolish to think that the Chinese government perceives the WTO request related only to the commercial and trade impacts of its Internet policies.

What’s Next?

        USTR submitted its informational request under paragraph 4 of Article III of the General Agreement on Trade in Services (“GATS”): “Each Member shall respond promptly to all requests by any other Member for specific information on any of its measures of general application or international agreements within the meaning of paragraph 1.” According to the BNA International Trade Daily, this request could lead to a formal consultation request, which is the first step toward a WTO Dispute Settlement Body (“DSB”) proceeding. Paragraph 1 of GATS Article XXIII says: “If any Member should consider that any other Member fails to carry out its obligations or specific commitments under this Agreement, it may with a view to reaching a mutually satisfactory resolution of the matter have recourse to the DSU.”

        China has little if anything to lose if it were not to respond to the U.S. request promptly. As we pointed out in previous blog articles, both the United States and China tend to exaggerate the significance of WTO DSB proceedings, and the United States treats every WTO defeat as sui generis, applicable to the immediate case and no others. Consequently, although the DSB Appellate Body issued a panel report favoring the United States in the case of market access to foreign audiovisual products (WTO DS363), China stalled for four years before taking action that would satisfy the United States. There is nothing to stop China from doing the same thing again were the United States to prevail, eventually, in an Internet case.

        WTO DSB proceedings are notoriously prolonged. For instance, in Brazil’s challenge of U.S. upland cotton subsidies (WTO DS267), it took the two sides almost eight years to enter a framework for a mutually agreed solution. In the case of China, the United States spent four years trying to tackle China’s restrictions on market access of foreign audiovisual products. The United States submitted a consultation request in April 2007, and the WTO Appellate Body did not circulate its report until December 2009. In the following months, the United States “expressed concern over the lack of any apparent progress by China in bringing its measures into compliance” at DSB meetings. It was not until April 2011 that the two sides reported to the DSB their agreed procedures to implement the panel recommendations. 

        The United States-based Internet services companies are not likely to gain much while waiting four years for a favorable outcome, and they are not waiting. Instead, Silicon Valley venture capitalists are continuing frequent visits to China seeking investment opportunities. The WTO case may create political theater, but is not likely to achieve a legal resolution to a political problem. 
 

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Editor’s Note: Dr. Elliot Feldman on October 5, 2011 presented the following speech at China-U.S. Investment Forum 2011.

Our firm has published a treatise, in English and Chinese, entitled Mergers & Acquisitions in the United States: A Practical Guide for Non-U.S. Buyers. I am one of the authors and the overall editor. My status as Senior Partner in the firm has made me a book peddler.

The treatise contains twenty chapters covering how to make a deal, how to paper it, how to arrange for the best tax situation, due diligence for labor, pensions, intellectual property and government contracts, dealing with national security issues and reviews, the Foreign Corrupt Practices Act, export controls, trade, customs, immigration, tax and bilateral investment treaties, Sarbanes-Oxley, antitrust, products liability – all focusing on issues arising from foreign ownership of corporations and subsidiaries in the United States. We have paid special attention to Chinese investors. One might say that this treatise has been written for you.

The overwhelming message of this conference is that your investments are welcome in the United States. People here, people you may engage to help you, want you to succeed. We all understand and recognize the importance of your mission for you and for us.

Good wishes and good will count a great deal in producing success, but business is business. It is competitive and it can be tough. As China has embraced capitalism it has come to understand competition. In every business dealing, your adversary is potentially your friend, and your friend is potentially an adversary. Because of this paradox, we memorialize just about everything in legal documents.

Perhaps more than in any other country, the American tradition has been to rely on legal systems to prevent, or alternatively, to resolve business disputes. An inability to appreciate this aspect of American culture can become a competitive disadvantage, even a liability.

For these reasons, I want to begin our discussion with three things the treatise does not say, at least not explicitly, and I want to present these points as questions:

First, welcome to the United States. Do you have a lawyer? In the United States, business is not conducted without lawyers. My partners, in writing the treatise, constantly wanted to say, “Don’t try this on your own,” or “You need a lawyer to understand the labor laws,” for example. I removed all of that language in editing because I thought it obvious that, in a book written about law by lawyers, once a corporate decision-maker understands generally the subject matter, he would know to get a lawyer. The decision-maker would know that there is a wide range of legal issues that may affect the success of an acquired investment – the point of the book—and he would ask informed questions of a lawyer so he could understand the impact of those issues on his particular investment. He then would make well-informed decisions and would know that it is most efficient for the lawyer, first, to provide counsel, and then to handle the details and documents necessary to execute decisions. My experience, however, at least with China, has been that these conclusions are not so obvious. So, I am telling you. You can’t enter complex transactions – you can’t make deals here – without a lawyer.

A recent issue of the China Business Law Journal makes this point. Entitled “Culture Clash,” the article notes, “Chinese businesspeople may still prefer to do deals on a handshake and a prayer, rather than to do their homework,“ and “our research suggests that foreign and even Hong Kong companies are more likely than their Chinese counterparts to engage advisers to tackle pre-merger due diligence. They are also more likely to seek external help with issues involving human resources, and other matters that can be the key to the success or failure of a merger or acquisition.” Your partners and your competitors for investment opportunities in the United States seek competitive advantages based in large part on the knowledge and advice they take from lawyers. You will miss opportunities for success if you are not equally well informed and advised.

Second question, in two parts: do you have a lawyer in China? Do you trust her? I ask these questions because there is an important cultural difference between China and the United States when it comes to lawyers. Here, lawyers owe a fiduciary duty to their clients. They take an oath to be loyal to their clients, and they take their oath seriously. It is not only a business matter. It is a matter of ethics. Lawyers here frequently tend to be trusted advisers and confidantes because information provided to the lawyers typically cannot be disclosed to the government, and because the more information the lawyer has, the more accurate, insightful and valuable is the advice that the lawyer can give. In China, in our experience, at least, lawyers are treated more like employees. They are used for technical purposes, not as trusted advisers. The relationship, and the expectations, are different here.

Third question: If you were to be dissatisfied with the legal services your lawyer might provide, would you expect to pay the lawyer’s bill? For lawyers, time is money, and when you use your lawyer’s time, even if you don’t like the result, you need to pay for it. Chinese companies unfortunately have acquired a reputation in the United States for not paying their legal bills, even when the agreed upon advice has been given. Perhaps because of the different relationships and expectations that I mentioned, Chinese companies do not seem to value legal advice as much, and agreements to pay for such advice are given less significance. There are exceptions of course, but it is the overall impression that may matter most. In the United States, engagement of counsel is a contract and bills must be paid. Over time, it will become more difficult for Chinese companies refusing to pay bills to find good counsel, which will become a critical problem for companies seeking valuable advice to keep pace with their competitors.

These are candid, perhaps even tough, opening remarks, especially on a panel of lawyers. But, as you can see, I have been around for awhile, and I am devoted to the proposition that China and the United States must understand each other, learn from each other, and work closely together for the prosperity of the whole world.

Too often, now, I have seen contracts major Chinese corporations have entered with Americans in which the Chinese either engaged inadequate counsel, or no counsel, or did not trust their counsel enough to achieve agreements favorable for their objectives. Such failures lead to resentments, misgivings, and missed opportunities for Chinese corporations to succeed. They are not necessary. So, as you consider investing in the United States, get a lawyer, preferably a legal team of many specialties, and trust them.

I urge you to think strategically about your investments, and for the long term. Even as the United States population is only about 25 percent the size of yours, we continue to be the world’s greatest consumers. Until recently, you have been making things we have been buying, but enormous pressure has built up that Americans need to be making more of the things that Americans are buying. In capitalism, profits still go to the owners of the means of production. There is no reason why Chinese cannot be the owners of some of the means of production in the United States, making things for Americans to consume, and to sell to other parts of the world.

The first wave of Chinese foreign investment has concentrated on the natural resources of other countries, buying and shipping them back to China. China must now embark more seriously on a second wave, not in a race to control the resources of others, but to invest in the long term for everyone’s prosperity. The opportunities for such investment and engagement are without limit.

You must start your quest by determining what it is you want to buy, and how it will fit with who you already are and what you or your company want to be. Americans – lawyers, investment bankers, consultants – can all help you identify specific targets of acquisition or merger, but only when you are able to articulate what you want, why you want it, the form you want it in, and what you can afford to pay for it.

Most of those first considerations are internal to your companies, but if you want a lawyer to understand fully what you are trying to do, you should include a lawyer in the discussions from the beginning. In negotiating the deal and packaging it with proper and legally complete documents, lawyers are not merely draftsmen decorating your thoughts with the right phrases. They are craftsmen making sure your interests are protected under the law. You cannot negotiate agreements and sign documents without lawyers who appreciate fully what you are trying to do.

There is a lot to do before getting to a handshake. We have encountered Chinese companies that understand taxes to be an important part of a deal, but few who have appreciated that the domicile of an enterprise and its structure (whether wholly foreign-owned or a subsidiary or sheltered through an offshore holding company, or a number of other possibilities) can determine whether the deal will be profitable or will lose money and fail. Taxes should not decide whether to make a deal, but certainly must be part of the consideration as to where and how to make it.

In deal-making a favorite phrase is “due diligence.” Conventionally, it refers to examining the financial books of a company – assets in buildings and equipment, liabilities in loans and accounts due, inventory on hand and in the pipeline. Traditional Mergers & Acquisitions lawyers concentrate on these considerations. In our treatise, we think of due diligence a little differently. A great attraction to investing in the United States is the presence of a highly educated and skilled work force. However, the work force can also be a serious liability. You need to know, before entering a deal, whether the labor force is unionized, whether there are health and pension plans that must be honored. There is a law in the United States – the WARN Act -- that prevents you from taking over a company and firing all the workers. Due diligence requires knowing all about the work force and its contractual and legal entitlements.

As the United States has become a service-based economy, the value and importance of intellectual property has become so important that it often exceeds, by far, the value of factories and inventory. In our view, potentially the greatest value in a deal will be found in intellectual property. However, intellectual property can also be contested. Before you invest, you need a complete inventory of the intellectual property. You need to know who owns it, whether and how it will convey in a merger or acquisition, and whether it is subject to pending or potential patent or trademark or trade secret lawsuits. Losing such lawsuits can destroy the value of a company.

Foreign ownership can mean the termination of contracts with the U.S. government. You need to know whether the company in which you are considering investment does business with the government, how dependent it is on that business, and whether the kind of business it is doing will be impacted by your financial intervention. A thorough examination of government contracts is also part of the due diligence process.

China is not unfamiliar with proposed projects implicating national security in the United States. There is a myth in China, however, that these projects always and must turn out badly. In fact, they can and usually do succeed, but there must be proper preparation, not only as to the legal process known as “CFIUS,” but the political process that lines up popular support. My partner Mike Oxley dealt with these issues intensively in Congress, and has written a chapter for our treatise all about them.

There is much more, of course, but I have no more time. I urge you to leap the first hurdle and get lawyers you trust and will engage from the very first steps in your journey. Then, start the journey with a detailed check list of what you need to know in order to make a deal. Finally, be prepared to make the deal. Become an investor here. Share in the profits of operating in the most technologically and economically advanced place in the world.

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This blog occasionally posts articles regarding international trade issues with respect to India that are connected to China - US trade issues.  In that spirit we wish to bring to our readers' attention a recent call for papers to be presented at the 3rd Government Law College International Law Summit, organized by the Students for the Promotion of International Law (SPIL), Mumbai, in association with the Indian Merchants Chambers. The Summit is scheduled to take place from the 3rd - 5th February, 2012. SPIL Mumbai is calling for papers across the full spectrum of the Summit's theme, which this year is International Trade Law and Economic Policy. In particular, they are looking for papers on international trade law, international investment law, international taxation, and competition law. Please click here for more information on this call for papers.
 

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