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

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The new Chairman of the U.S. Consumer Product Safety Commission (“CPSC”), Inez Moore Tenenbaum, plans to attend the third biennial consumer product safety summit from October 21 through 26, 2009 in three Chinese cities, Beijing, Wuxi (Jiangsu Province), and Jinhua (Zhejiang Province). The CPSC delegation will meet its Chinese counterpart agency, the General Administration of Quality Supervision, Inspection, and Quarantine (“AQSIQ”), and manufacturers and exporters.

China’s commercial reputation in the United States was seriously damaged in 2007 because of safety problems with food and toys. China’s subsequent domestic scandal over infant formula in 2008 heightened the concerns of American consumers. The public response revealed, however, that the CPSC was underfunded, with a limited mandate to inspect and enforce safety rules. The policy of the Bush Administration had been to favor voluntary compliance with industry-defined safety standards instead of mandatory laws and regulations.

There has been much anticipation of how the Obama Administration, committed to “change,” might change the ways and means of the CPSC, especially in dealing with China. In May, President Obama included in his budget a 71 percent increase in CPSC funding. Consequently, the Tenenbaum visit to China could be particularly important. It could lead to policy changes affecting access to the U.S. market for Chinese products.

Officially, the CPSC and the AQSIQ expect to help U.S. importers and Chinese suppliers “establish a comprehensive and systemic approach” to meet both voluntary standards and U.S. laws and regulations. Recent regulatory developments in the United States under the Obama Administration already are impacting Chinese manufacturers and exporters of toys, bicycle parts, jogger strollers and youth electronic devices, as John Burke discussed in two previous blog posts (“CPSC Issues Exemptions To Lead Content Requirements” and “Recent Changes To U.S. Consumer Protection Laws Affect Chinese Exporters”).

Tenenbaum, nominated by President Obama on June 9, 2009 and confirmed by the Senate ten days later to serve as the ninth Chairman of the CPSC, was not an obvious appointment to this specialized agency. Her background is in education, not consumer safety, but her early endorsement of Obama and support during the primary elections could give her direct access to the White House. According to Newsweek columnist Howard Fineman, the first person Obama embraced (after his wife) on primary night in South Carolina was Tenenbaum. The appointment may have been more important to Obama politically than substantively, but Obama understands the importance of consumer safety both for his own stature and for relations with China, in particular.

President Obama also nominated Robert S. Adler and Anne M. Northup as CPSC Commissioners, which is part of the White House’s effort to expand and strengthen the agency. For more than fifteen years, CPSC operated with only three Commissioners, and in the final years of the Bush Administration frequently was without even three. Confirmed by the Senate on August 7, 2009, Adler and Northup expand the agency’s leadership to five and bring important professional and political resources: Adler spent eleven years (1973 – 1984) as an attorney-advisor to two CPSC Commissioners, and Northup, an experienced Republican politician, represented the 3rd congressional district of Kentucky in the United States House of Representatives, from 1997 to 2007, where she served on the powerful House Appropriations Committee. The combination of moves – the appointment of an early and ardent supporter of the President as Chairman; the expansion of the number of Commissioners from three to five; bipartisan appointments mixed with experience and expertise in consumer safety; early regulatory reform – all suggest a serious presidential commitment. The trip to China, four months after Ms. Tenenbaum’s appointment, signals a primary commitment to improved consumer safety regarding Chinese products.
 

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Members of the Baker Hostetler International Trade practice have been quoted in numerous media outlets regarding the Chinese tire trade dispute, including: 

The Hill: China Tires A Deal For Steelworkers Union (9/16/09)

Bloomberg News: Obama Says Chinese Tires Decision Isn't Provocative (9/14/09)

Bloomberg News: U.S. Steel Pushes Obama to Choose Workers Over Trade (9/9/09)

Forbes.com: Obama Faces Tire Trade Dispute (9/2/09)

Forbes.com: Tire Trade Dispute Rolls On (8/18/09)

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Senior trade officials are meeting in Geneva the week of September 14, 2009 following a meeting of 35 WTO member countries in New Delhi on September 3 and 4, 2009. The September 3 and 4 meetings demonstrated a willingness of member countries to re-engage in the negotiations that have been at a relative standstill for more than one year and to re-affirm their commitment to a 2010 conclusion to the Doha Round. However, a positive conclusion to the Doha Round would require the key players, and, among them, especially India, China, and the United States, to bridge significant differences. India has emerged as a leader in the Doha Round, and China’s alignment with India during the July 2008 talks as well as during the September 3 and 4 discussions demonstrates an important and possibly formidable alliance between the two countries.

India is a leading voice in the Doha Round negotiations. Some have argued that voice led to the July 2008 stalemate, when then-Commerce Minister Kamal Nath declared that he would not risk the livelihoods of millions of farmers. Although there were a host of reasons for the ultimate failure of the Doha Round in July 2008 (see "New Focus Of International Business: Asia, The Centre Stage - The Future Of International Trade"  for an insightful perspective on the reasons for the breakdown), the final stand-off in July 2008 was triggered by disagreements – primarily among the United States, India, and China - regarding the special safeguard mechanism threshold that would allow developing countries to impose a tariff on imports of heavily subsidized agricultural products from the developed world. China had remained on the sidelines of the discussion until the very last moment, when it sided with India against the United States.

India again has signaled its desire to take a leadership role, this time in resurrecting the Doha Round by hosting the September 3 and 4 discussions. China expressed its full support for the meetings and was an active participant in the discussions. China’s willingness to follow India’s lead during the July 2008 negotiations as well as during the recent meetings in New Delhi is not surprising, even though China’s economic heft is greater than India’s. India was one of the original contracting parties to the General Agreement on Tariffs and Trade (GATT) in 1947 and was a founding member of the WTO in 1995.  It is a savvy negotiator and frequent complainant in WTO disputes. China’s more recent entry into the WTO makes it perhaps more tentative in the multilateral forum, at least until recently. China has been a complainant in only six disputes since its accession, three of which have been filed in just the past 6 months

The position taken by China in the Doha Round indicates its recognition that it may have more to gain by aligning itself with India than the United States. The relationship between the two “Asian giants” historically has been marked with political disputes and economic rivalry. However, since 2005, there have been frequent exchanges of high-level visits and intensified bilateral meetings, including a visit by India’s Prime Minister Manmohan Singh in early 2008 that culminated in both sides signing "A Shared Vision for the 21st Century of China and India."

China and India have shared challenges on the trade front. The two countries combined account for approximately 35 percent of the world’s population and they each need to feed populations of over a billion people. The majority population of both countries is rural. Thus, they both have an interest in protecting their poor farmers from heavily subsidized agricultural imports. India also presents a huge opportunity for China. Trade between the two countries has been growing by more than 30 percent each year. 70 percent of India’s population is under the age of 35, which makes it an attractive market for Chinese consumer goods. Indeed, during the 2008-2009 fiscal year, China emerged as India’s largest trading partner, a position previously held by the United States.

The meeting in New Delhi was important because it was the first such meeting since July 2008, with ministers from practically all major blocs in attendance, including the G-10, G-33, G-20, NAMA 11, Least Developed Countries, Small and Vulnerable Economies, African Group, Cotton 4 and others. However, despite claims from New Delhi of a breakthrough in the negotiations and by other countries that the negotiations were in the “endgame,” critics have noted that there were no actual developments during the September 3 and 4 meetings. India’s Minister Sharma acknowledged in his opening remarks that “even the unequivocal expression of political resolve has not yet been translated into action.”

Not much changed at the end of the two day discussions, other than a commitment by participants to continue talks the week of September 14. Statements issued by key players also highlighted important differences, including on how the talks should progress. Minister Chen stated on September 4 that China would continue to play a constructive role in working for an early conclusion of Doha, but that the focus should be on multilateral talks rather than bilateral talks as the core channel of the negotiations. This position is in direct contradiction to USTR Kirk’s statement on September 4 that bilateral talks are the best way to continue hard-line negotiations.

An alliance between India and China may mean that a successful conclusion to the Doha Round will require greater compromise by the United States. However, although USTR Kirk has not ruled out making further concessions on agricultural subsidies, a key issue for India and China, critics say there is little indication that the United States will change its approach in the negotiations.

Trade also is likely to be on the backburner while the Obama administration focuses on domestic priorities, particularly health care. President Obama is expected to give a speech regarding his position on trade, but critics say that such a speech on trade likely will focus on the importance of trade for economic growth in general terms, rather than a detailed statement on the framework for trade policy.

The discussions in Geneva this week may shed some light on whether a conclusion to the Doha Round by 2010 is a realistic goal.

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The United States Trade Representative (“USTR”) published a notice in the Federal Register on September 1, 2009 requesting comments and announcing a public hearing on China’s compliance with its WTO commitments. This notice is part of an institutional mechanism the United States created to monitor and enforce other countries’ compliance with their WTO obligations. That mechanism is deployed with particular vigilance when it comes to China.

USTR is requesting these particular comments and holding a public hearing because Section 421 of the U.S.-China Relations Act of 2000 requires USTR to submit annually a report to Congress on China’s compliance with commitments made in connection with its accession to the WTO. Thus, the Obama Administration is following the law as written by Congress, where there is continuous skepticism about China’s fidelity to international trade rules.

The United States is not nearly so vigilant, unfortunately, when it comes to its own WTO obligations. The most glaring example of this double standard is the United States Commerce Department’s continuing refusal to give up its “zeroing” practice, notwithstanding more than seven WTO Appellate Body decisions over the last five years finding the practice inconsistent with WTO obligations. “Zeroing” is a technique used in antidumping cases that increases the likelihood of finding dumping, and inflates the “margins” – the amount of duties to be charged on imports – once dumping has been found. In the most recent WTO decision, United States – Measures Relating To Zeroing And Sunset Reviews - Recourse To Article 21.5 Of The DSU By Japan, issued August 18, 2009, the WTO Appellate Body found that the United States had failed to comply with the WTO Dispute Settlement Body ruling, dated January 23, 2007, that the U.S. practice of zeroing in administrative reviews is contrary to the WTO Antidumping Agreement. The WTO Appellate Body has ruled, repeatedly, that zeroing is not permissible, whether for original investigations or for administrative reviews.

In the Japanese case, the United States Commerce Department made new determinations for the specific administrative reviews without zeroing, but subsequently assessed antidumping duties on certain of the affected customs entries at the rates found in the original determinations using zeroing. It also refused to implement the results going forward, claiming that the reviews at issue had been superseded by subsequent administrative reviews in which the Commerce Department again used zeroing. The Appellate Body found that, because of these actions, the United States had failed to implement the 2007 ruling and remains in continuing violation of its obligations under the WTO Antidumping Agreement.

In our view, China should comply faithfully with its WTO obligations and the scrutiny of its actions required by U.S. law should give it no problems. However, China, and other WTO members, should hold the United States to the same high standard the United States expects of China and all other countries. It is important for the rule of law to apply to everyone equally.

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Political pressures have led the U.S. Department of Commerce to launch countervailing duty investigations against China while insisting that it cannot use market information from within China to measure the alleged subsidies because China is a non-market economy. That political reality contravenes the principles embodied in U.S. law. Subsidies are found and measured according to the market distortion they cause. Where there is no market, there can be no market distortion. It is not possible for China to have developed markets sufficiently to be subject to subsidies allegations and investigations, yet have no markets by which to ascertain and measure the subsidies.

The problem that pervades the United States’ countervailing duty investigations of China is an attitude, which has at least three manifestations.

1. There is the Department’s confusion of methodologies used in dumping and countervailing duty investigations. In dumping cases involving non-market economies, the law expressly allows the Department to seek out surrogate values from other countries. In theory, at least, this exercise is fairly precise: the cost of a nail in India might substitute for the cost of the same nail in China. The Department, however, has taken to utilizing this methodology in countervailing duty cases where the law does not authorize it and the measurements are not remotely so precise.The consequence is that the Department ignores prevailing market conditions within China in favor of data from hand-selected countries to determine the existence and amount of a countervailable subsidy in China. The Department is having the market issue both ways: China is enough of a market economy for government subsidies to cause distortions, but not enough of one – in any sector – to resort to prices in China that are less likely to show the existence of a subsidy.
2. There is a lack of recognition and appreciation of China’s radical transition to a market economy. The People’s Republic is privatizing, and creating competition, at a feverish pace. Its central planning is indicative and no longer directive; its collectives are giving way to individual entrepreneurs and its controls are yielding to markets. The Department verified that state-owned enterprises are operating autonomously, for profit, without government direction. They are seen as benefiting the people collectively instead of a small group of private owners, but contrary to the Department’s preconceived notions, that collective benefit makes them no less market-driven than privately-owned entities. Many of the changes in China’s economy are taking place in weeks and months, not years or decades. Countervailable subsidy allegations of a practice in June quickly become outdated as the practice disappears in September. The United States’ failure to recognize and appreciate these changes is a bad policy toward China because it carries all the wrong incentives: offsetting programs that have been abolished or expired creates liabilities that discourage abandoning the programs, or beg for replacements. It teaches all the wrong lessons about opening markets, because what it really communicates is that the United States is closing its own.
3. There is the allegation that officials of the People’s Republic of China do not always cooperate with the Department or do all they could to answer questions and assist with the Department in its investigation. The allegation is worse than undiplomatic. It violates the comity of nations by refusing to respect the acts of foreign sovereigns within their own jurisdictions. By presuming that China must collect and have information that, within its own jurisdiction it says it does not collect and does not have the Department violates a principle respected formally by the United States since the Supreme Court first pronounced on it in 1797. This third manifestation of attitude – the willingness to deny the veracity of official testimony without contrary information or evidence – tarnishes the Department’s investigations. As a matter of comity, the Department owes good faith respect to Chinese officials as it would expect them to respect officials of the Department.

Comity is not merely an element of diplomacy. It is an obligation of international practice and a legitimate expectation of our friendly trading partners. Chinese officials are entitled to be believed absent strong evidence to the contrary. The Department breaches its trust when it makes decisions based on nothing more than hostile beliefs. Insisting something must exist when told it doesn’t, and having no evidence to the contrary, is nothing more than a hostile belief. What is at stake is much more than the fate of any particular exported product. What is at stake is the good faith of American trade relations with China.

Hostile attitudes ought not to interfere with respect for the law and sound policy. In this instance, there is an additional concern. Much of the American objection to alleged Chinese subsidies could now be said, at least since September 15, 2008, about the United States. It probably has been necessary to combat global rececession with massive government economic interventions, but it has made much more of the American economy dependent on government support. We analyzed those troubling contradictions in formal comments filed with the United States Trade Representative in January 2008 on Applying the CVD Laws to China.
 

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