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

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 As An Echo Of Japan

Many Americans worry today about China much the way they worried about Japan over a quarter century ago. Then, Harvard scholar Ezra Vogel’s Japan As Number One: Lessons for America, extolled the virtues of a controlled economy in a tightly-wound bureaucracy. Vogel exhorted Americans to copy Japan, whose students recorded higher scores on standardized tests, whose companies exported the larger part of their production with ever better quality, whose economy seemed to be growing exponentially as the economy in the United States was suffering stagflation.

Japan loved Vogel’s message. The Japanese translation of his book is still the best-selling non-fiction work in Japanese history. Yet, of course, he was wrong.

Japan’s controlled economy and centralized Ministry of International Trade and Industry triggered much of the philosophy and design behind changes in the countervailing duty laws to account for predatory targeting of foreign markets. The trade remedy tools for antidumping did not seem adequate to take on the wealth and power of the Japanese government. American concerns had focused on semiconductors and steel, but there were many other products ranging from portable typewriters to the most sophisticated computers. The slogan was that American companies could compete with any foreign private enterprise, but not with foreign governments. The perceived solution was to concentrate on challenging Japanese subsidies that were intended to put foreign (American) competition out of business.

Ironically, American producers rarely took advantage of these new tools under the countervailing duty laws to address concerns about imports from Japan. Instead, they continued to rely almost exclusively on the antidumping law, using these countervailing duty tools, originally created with Japan in mind, against other countries, most recently China. The sloganeering, however, remains the same – that it is one thing to compete with foreign private enterprise, and quite another to compete with a foreign government.

Japan was determined to move up the production value chain, from the manufacture and export of cheap knick-knacks to the premier rungs of automobiles and electronics. Generally, Japan succeeded under state direction, but the move up led to offshoring jobs for assembling and finishing sophisticated goods, and to the loss of jobs related to lower-cost production in textiles, transistor radios, and other items that had contributed to the reputation of “Made in Japan.”

There were many congressional calls in the United States for tough enforcement of the trade laws in order to guarantee a “level playing field” for American manufacturers. It was not the retaliatory trade laws, however, that slowed the Japanese engine. Instead, it was the stultifying bureaucracy, the government’s replacement of the market to pick winners and losers, the dominance of imitation over innovation favored by the students with high standardized test scores. It was the cost associated with graduating from cheap to more expensive and sophisticated goods. The robust economy turned stagnant, and lost years became lost decades. No one today in the United States would want to have been emulating Japan, even before the devastation of the 2011 earthquake and tsunami.

There are echoes from Japan in today’s global response to China, whose astonishing growth and achievement during the very period when Japan’s economy was failing has challenged some American beliefs in the free private enterprise system. China’s major producers are state-owned enterprises; the economy is subject to central control and management. China has proved Milton Friedman as wrong as Vogel: democracy is not a sine qua non for successful capitalism. An authoritarian state with a centralized economy can, at least under some circumstances and for some period of time, prosper.

Some, including many Chinese, argue that Americans should be learning from China how to recover from recession and manage an economy. Many Chinese are as enamored of the image of a surging China as the Japanese had been with the Vogel version of Japan. Two years of aggressive foreign policy at the end of the last decade meant, at least in part, to suggest to the United States that China had plenty of muscle of its own, a new self-confidence and independence.

Japan Not Then And China Not Now

Exponential extrapolation has always been seductive to social scientists. Uri Dadush and William Shaw, in Juggernaut: How Emerging Markets Are Reshaping Globalization, project annual 5 percent growth for China for the next forty years, neglecting the exercise of looking back forty years to ask whether anything predicted then would make sense now. China in 1970, in a Cultural Revolution banishing intellectuals and celebrating peasants, becoming the world’s leading exporter of manufactured goods, with more than 300 million people lifted out of poverty and expanding cities? The Soviet Union, instead of the great nuclear rival and threat to western capitalism, going out of business altogether? The type of predictions in Juggernaut rightly scare Americans. Some, who think they must compete with the juggernaut, consider imitation more than flattery.

Americans should no more consider imitating China today than they should have been learning many lessons from Japan in the 1970s and 1980s. It does not diminish the Chinese accomplishment to conclude that it should not be emulated, and that it will not last, in this form and this way, forever (nor even forty years). Japan’s great growth and achievement was a sustained progression from the devastation of World War II. It took around thirty years. China’s growth follows the Cultural Revolution. Once launched by Deng Xiao Ping it, too, took around thirty years.

This assessment does not mean that China has run its course, but it does mean that there is much that should (and does) worry China. There is much that is not right in the economy, and many warning signs immediately ahead.

Fragile China

There has been much commentary about China’s fears of instability. The Government reports tens of thousands of protests around the country every year, many violent and involving masses of people. Such protests seem surprising in an authoritarian state with a growing middle class and manifest materialism. From the outside looking in, the Chinese government is in control and the state is not legitimately threatened. The Chinese Government, however, does not see the protests that way.

China is on the precipice of a demographic challenge unlike any ever seen on such a scale by any country before, especially one induced by government policy. While the population is graying rapidly, there are few replacement workers because the one-child policy formalized in 1980 still applies. Its enforcement has been fitful, and there have been tens of thousands of breaches, but China estimates having prevented as many as 400 million births. Less apparent to authorities, however, are the consequences.

The Chinese population between 15 and 24 years old has been falling precipitously since 2000, to barely 12 percent of the population in 2011. The population over 65 is only 8 percent in 2011, but it will rise to 20 percent by 2040 while the population between 15 and 24 will be just over 10 percent. In a state that provides almost no social welfare net -- no pensions, no health care – the growing prosperity that is producing an aging population will evaporate for the elderly, who will depend on a diminishing population to care for and support them.

There are economic forces that will compound this demographic challenge. China is determined to move up the value chain in production, just as Japan did in the 1960s and 1970s. Such movement, however, carries at least two consequences: wages rise, and the number of jobs declines. It already is well-known that Chinese enterprises, and foreign enterprises operating in China, have been offshoring jobs to Bangladesh and Indonesia and Malaysia and Vietnam because of soaring labor costs. The growing middle class is expanding a gap leaving the poor behind, making it more difficult for China to raise the next 100 million from poverty, and the rate of enterprises opening or expanding in China in order to benefit from cheap labor is in decline.

To keep the economy growing and an increasing population (despite the one-child policy) housed and fed, China is becoming the leading consumer of energy and the leading producer of carbon emissions on the planet. It will take a long time for China to catch up to the United States as a per capita consumer and polluter, but not to be the leader in both in sheer volumes and values.
The Chinese Government is very aware of the dangers presented by this twin challenge. It is addressing the carbon emissions problem aggressively by subsidizing the development of alternative fuels and power, but for the medium if not long term it cannot escape a dependence on coal for which there seems to be no technical fix as a source of significant pollution. China, like most other countries, has been discouraged by events in Japan from pursuing nuclear alternatives.

The energy challenge has been the focus of Chinese foreign direct investment. China is using accumulated foreign reserves to buy natural resources around the globe and ship them back to China. Not a small amount of resentment is building, however, against this raid on the rest of the world’s natural resources.

China faces a revolution of rising expectations that requires ever-growing quantities of energy, and a permanent challenge to create more jobs and increase wages simultaneously, another feat that appears impossible to sustain. The numbers of protests inevitably will rise in this environment that puts a premium on jobs and private responsibility.

There is also a fear of international contagion. The revolutions of colors (orange, lavender) have bled into seasons (the Arab spring). While outsiders may see no palpable threat to China, Chinese authorities are taking no chances. There is instability all around the Chinese neighborhood, from Chechnya to North Korea to Thailand to Pakistan. There are potential challenges on the peripheries (Tibet, Uighurs); there is a domestic Moslem population. There are daily battles over the seizure of land from peasants for speculation and development, all conditions that, Chinese authorities fear, could ignite something beyond control. And control is important in a country whose history in the absence of central control has been tragic.

The situation in China is inherently unstable because of the unyielding need to keep the economy expanding, employment and the middle class growing. World circumstances do not help. China has suppressed speech and responded forcefully to protests, but has delivered economically. Now, Chinese authorities must deliver economically lest more attention be drawn to the limitations on speech and the prevalence of protest. More individual freedoms surely will come with more prosperity and more international travel and global exposure, but authorities reasonably worry that they cannot maintain the breakneck speed that has produced the greatest improvement in living standards for the greatest number of people in the shortest period of time in the history of the world.

The Fragile China Doll

China has become a power in the world economy. It wants to be recognized for its economic importance, but forgiven as a new and developing country. It wants a place at every table, but not necessarily the burdens of responsibility that others at the table think it should share. It wants to project accomplishment and confidence (the Beijing Olympic ceremonies and the Shanghai Expo being the most outward indications), but it wants to be relieved of pressure. It is, domestically and internationally, layers of paradox.

China dolls are to be admired but not much handled, appreciated but not loved because they are too fragile to hold. Some Chinese authorities seem to perceive China now as a China doll, admirable but fragile, durable only as long as it is not handled. China dolls, however, are finished products, and China is a power in the making with a long way to being admired on a shelf. It will remain fragile, but must be ready for rough handling ahead.
 

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The World Trade Organization’s Appellate Body issued a report on March 11, 2011 in which the People’s Republic of China broke a skein of legal losses by recovering some of the ground taken by a WTO panel last autumn. The Chinese Government loudly celebrated a major victory, while U.S. Trade Representative Ron Kirk denounced a “clear case of overreaching” in a “deeply troubling” decision of the Appellate Body.

Were one to listen to the rhetoric of the two governments too closely, one might perceive the WTO proceedings as more of a political than legal affair. The Chinese did not win that much, and the United States did not lose that much. There had to have been powerful political motivations for the over-wrought pronouncements of the two sides.

China elected to consolidate complaints regarding the final Department of Commerce (“Commerce”) determinations in four different antidumping/countervailing duty investigations – hence, eight investigations into four different products – into one WTO complaint. It did not appeal any of the determinations to the U.S. Court of International Trade (“CIT”), and did not challenge any of the four final determinations of the U.S. International Trade Commission in any forum. Hence, what could have been twelve WTO cases and a like number of CIT cases came down to one WTO case.

Double Counting

China complained of many things in the WTO case, but here, too, there was selectivity. The only objection raised regarding the four antidumping final determinations was that Commerce was double-counting remedies, applying duties twice on the same cost or expense. Allegedly subsidized electricity, for example, was countervailed, but also compared to an external surrogate value as an inflated cost in the dumping case and assigned part of the antidumping margin. Meanwhile, China challenged virtually all of the subsidy findings.

The CIT already had ruled that Commerce could not investigate simultaneously for the same merchandise, over the same time period, both antidumping and subsidy allegations, because applying a non-market economy methodology in the antidumping investigation yields a double remedy. Commerce had concluded, in 2007, that it could investigate subsidy allegations in a non-market economy, notwithstanding the definition of subsidies as government financial contributions that are market-distorting.

The CIT did not deny Commerce its desire to conduct subsidy investigations of non-market economies. Instead, it ruled that Commerce would have to figure out how to avoid double-counting when conducting antidumping and countervailing duty investigations simultaneously.

The CIT decision, in the OTR case (GPX Intern. Tire Corp. v. United States, No. 08-00285, 715 F.Supp.2d 1337 (Ct. Int’l Trade 2010)), is on appeal before the Court of Appeals for the Federal Circuit (“CAFC”). The Appellate Body decision ought to strengthen China’s hand in that appeal, albeit that the Chinese Government is not a party. U.S. courts have never treated WTO decisions as dispositive, nor even necessarily persuasive, but a NAFTA panel did apply the Charming Betsy doctrine to require Commerce to interpret U.S. law compatibly with international obligations whenever possible.  The CIT here has said subsidy investigations of non-market economies are permissible, but not in conjunction with dumping investigations. The CAFC, were it to uphold the CIT, would rule consistently with the international obligation articulated in the Appellate Body report. There is no U.S. court ruling putting U.S. law at variance with the international obligation.

This Chinese victory, then, already had been won. The CAFC could have, and still could, overturn the CIT. The CAFC could do so without reference to the Charming Betsy doctrine and applicable precedent unless the doctrine were invoked and well-argued by counsel for the Chinese party. Even then, the CAFC ruling, not the Appellate Body report, will determine U.S. law on this question.
Chinese authorities often still insist that the United States cannot investigate subsidies allegations while denying China market economy status. That issue, however, is not in play in the Appellate Body report. Nor would its resolution solve China’s problem with respect to Commerce’s methodology.

Extending a cramped WTO Appellate Body report interpreting Article 14(d) of the Subsidies and Countervailing Measures Agreement in Canada’s complaint against the United States over the use of cross-border benchmarks for analyzing softwood lumber prices, Commerce has treated China in countervailing duty cases the way it attempted to treat Canada. Inasmuch as Canada could not be accused of being a non-market economy, Commerce there established that the methodology of using prices from outside a country in a subsidies case is not exclusive to non-market economies. China did not seem to argue at the WTO any defect in Commerce’s interpretation of the Appellate Body’s softwood lumber report. By accepting the interpretation, it sealed its own fate.

The recognition now of China as a market economy would change very little, if anything, for China in countervailing duty cases. Applying the reasoning applied to Canada, Commerce would continue to select price benchmarks from outside China, thereby utilizing the same methodology it uses now. Indeed, China’s pleading for market economy recognition could lead to Commerce’s solution to the puzzle it was presented by the CIT: as with any other market economy, Commerce could bring dumping and subsidies cases simultaneously against a China recognized as a market economy, and nonetheless could use a countervailing duty methodology founded on the same principles as the NME dumping methodology.

For these reasons – that the CIT already had delivered this victory; that recognition as a market economy could solve Commerce’s problem more than China’s – both China and the United States have exaggerated the significance of the Appellate Body report. There may be powerful political reasons on both sides for the exaggeration, not to be found in a reasoned interpretation of the law.

The Other Chinese Victory

The other Chinese victory accorded by the Appellate Body on March 11 is little more revolutionary than the decision on double-counting, but it may have a greater impact. Commerce has been treating automatically all Chinese state-owned enterprises (“SOE”) as “public bodies,” controlled and directed by the government. This operating assumption enabled Commerce to treat the provision of inputs in the manufacturing process from SOEs as financial contributions because they automatically came from the government. Then Commerce only had to show that the price of the input, when compared to a price from outside China, was less in order to measure the size of the subsidy.

Notwithstanding the automatic treatment of SOEs as public bodies, Commerce already was completing the analysis as to whether SOEs provided inputs at prices that would make them countervailable. The Appellate Body decision will require a more complete analysis every time. Instead of assuming government control, such that the SOE is acting as a public body, Commerce will have to develop evidence that the provision of the input is not a purely economic or commercial act.

The Uruguay Round Agreements recognized that state-owned enterprises could be commercial and had to be treated without assumptions about state direction or control. Commerce’s automatic judgment was at variance with this recognition; the Appellate Body corrected Commerce by requiring it to respect the proposition that state-owned enterprises are legitimate entities in the world trading system. Were it otherwise, the United States would have a very difficult time dealing with General Motors and Chrysler, among other examples. Consequently, the Appellate Body did not take a position that could be considered very remarkable.

The United States pretends that other countries have SOEs, but that all enterprises in the United States are private. As long as that fiction is maintained, the United States will continue to treat SOEs as different and as state-controlled, whether to greater or lesser degrees. Beyond trade, the Appellate Body report theoretically could have additional impact were the definition of the SOE as a non-public body to evolve and become more accepted in the United States, but the Appellate Body report, as a legal matter, pertains only to trade, and only to subsidies disputes, nothing more.

The Losses

China lost everything else. All bank loans from state-owned banks automatically are suspect and subject to comparison for loan terms with banks outside China. There was no effective challenge to the U.S. use of out-of-country benchmarks because China’s complaint was focused on the principle rather than the particulars. The principle of comparing land values to property outside China was endorsed by the panel and left untouched by the Appellate Body; the absurdity of comparing rural Shandong Province to urban Bangkok was permitted without comment. Every other Commerce judgment about subsidies was upheld.

Because none of these issues has been adjudicated in U.S. courts, they all remain subject to challenge. The WTO did not specifically adjudicate them. However, Commerce will continue its practice with respect to all of them, and over the next cases will establish administrative practice difficult for China, as a result of neglect, to overcome.

Winning And Losing Less Than Imagined

The WTO’s decisions have only prospective effect. In addition, the United States treats every defeat as sui generis, applicable to the immediate case and no others. The United States likely will ignore the decision on double remedies, preferring the decision of the Court of Appeals. It may ignore the decision on SOEs except for the administrative reviews in the four cases brought through the WTO appeals process. It likely will promise implementation, take the maximum “reasonable period of time” possible, fail to implement to China’s satisfaction, and oblige China to request a Section 21.5 compliance panel. Consequently, it could take China years to achieve compliance from the Appellate Body decision, and then may enjoy a very limited victory. All the while, the United States Congress will decry the Appellate Body and seek to build pressure against adverse decisions like a bench coach harassing basketball referees. It was not inappropriate, as seen from Congress, that the Appellate Body Report came with March Madness.

Such a limited outcome will be the product of Chinese decisions to rely on the WTO instead of U.S. courts; to consolidate cases instead of appealing them separately; of exaggerating publicly its victory so as to arouse public (and consequently political) resistance in the United States. It will also be the product of the WTO’s institutional weakness, limited to prospective and indirect enforcement, and then only with the cooperation of the parties.

It will be important for both parties to reduce popular expectations and to manage disappointments. Otherwise, in their competition to celebrate the virtues of the WTO, they will undermine the very institution upon which both, for political if not legal and economic reasons, have decided to rely.
 

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The U.S. Department of Commerce ("Commerce") reported to the U.S. Congress in November 2010 on the Relative Advantages and Disadvantages of Retrospective and Prospective Antidumping and Countervailing Duty Collection Systems. Commerce made no recommendations. It also is unlikely that Congress would have the appetite anytime soon to consider the wholesale revisions to U.S. trade laws that changing to a prospective duty assessment system would entail. Nevertheless, there are several noteworthy items in the report.

All other countries, unlike the United States, rely on prospective systems in their trade laws, as does the WTO. These systems require changes going forward, following an investigation and findings, but do not reach back for penalties. Congress instructed Commerce to address how prospective systems compare to the U.S. retrospective system on the following criteria:
(1) Remedying injurious dumped or subsidized imports;
(2) Minimizing uncollected duties;
(3) Reducing incentives to evade antidumping (“AD”) and countervailing duties (“CVD”);
(4) Targeting high risk importers;
(5) Considering the impact of retrospective rate increases on importers and their employees; and
(6) Minimizing administrative burdens.
Commerce received comments from 40 interested parties, including comments that the editors of this blog submitted on April 20, 2010. Those commentators represented a wide range of industries, petitioning U.S. producers, foreign producers, importers and customers. The U.S. Department of the Treasury and the U.S. Department of Homeland Security ("DHS"), which enforces AD and CVD orders at the ports, previously submitted comments for a study by the Government Accountability Office. Commerce summarizes some of those earlier agency comments in its report.

Commerce noted that the United States is the only country that uses a retrospective system for collecting AD and CVD duties. Advocates of keeping the retrospective system, mostly U.S. petitioners, emphasized the greater accuracy of the system because duties are assessed based on the amount of dumping or subsidization found for the actual imports in question. Commerce acknowledged that advocates of prospective systems argued that such claims of superior accuracy are not achieved consistently in practice because Commerce in recent years has not reviewed more than a couple of companies in administrative reviews, even when many companies requested reviews. Commerce has said it lacks the resources to review all the companies making requests. Commerce also noted the arguments of some commentators that retrospective duties are not very good at remedying the actual injury caused by dumping or subsidies because the duty rates cannot be known when importers and customers are making their pricing and purchasing decisions.

It appears from Commerce's Report that DHS would prefer a switch to a prospective system. Commerce quoted DHS as saying that "its preferred option would be 'for Congress to fundamentally alter the United States system by eliminating its retrospective component and make it prospective. This approach would …. [a]lleviate the collection issue faced by DHS due to substantial rate increases since the amount of duties assessed at entry would be the final amount owed.' "

Advocates of prospective systems emphasized that the retrospective system is bad for business, particularly small business, because it deprives companies of critical information on the full costs of their products before they have to make pricing decisions. Commerce responded to this criticism by pointing out that, because of due process rights in U.S. law, a prospective duty assessment system would not eliminate this uncertainty: the parties to AD and CVD proceedings have a due process right to appeal administrative determinations of Commerce and the United States International Trade Commission to the United States Court of International Trade and eventually to the United States Court of Appeals for the Federal Circuit. The courts routinely enjoin liquidation of the customs entries for the duration of these proceedings. The final duty rates, which could go up as well as down as a result of court decisions, can take years to be known.

Commerce, thus, is correct in questioning the advantage of a prospective system, in light of U.S. legal rights, to achieve accuracy and predictability. The United States is famously a litigious society; trade cases often take many years to work their way through the Court of International Trade, through possible remands by the court back to the agencies (Commerce or the International Trade Commission), and possible further judicial review by the Court of Appeals for the Federal Circuit (with possible remands to the Court of International Trade).

Any party appealing an agency decision would want the court to enjoin the final assessment of antidumping or countervailing duties pending the appeal’s outcome. Otherwise, much of the economic benefit, should the party succeed in the appeal, would be lost. Because of separation of powers and due process requirements of the U.S. Constitution, Congress would not be able to strip the courts of the power to issue such injunctions through a change from a retrospective to a prospective system of duty assessment. Therefore, even were Congress to legislate such a change, the U.S. system would retain retrospective aspects. Under a prospective system, duties could be assessed and collected at the time of importation, but for any case on appeal -- for those companies whose shipments are the subject of the appeal, and with respect only to the issues under appeal -- the final duty owed would not be known until the court process would reach final decisions.

A prospective system may still be better. In many cases, the potential effect of a judicial reversal of Commerce’s determination can be quantified at the time of the appeal. Companies would be able to account for the risk of judicial reversal when making purchasing and pricing decisions. For example, if the only issue on appeal for a particular respondent were whether to allow a particular adjustment in the dumping calculation, the effect on the margin of allowing or disallowing that adjustment could be calculated at the time when the appeal would first be taken; importers could price their products accordingly. By contrast, under the current U.S. system, at the time of importation, when importers make their pricing decisions, most of the data necessary for a dumping calculation are unknown because Commerce has not yet performed any calculations, verification has not yet occurred, and a myriad of other variables remains undetermined. Thus, even for cases subject to judicial appeal, a prospective system provides more certainty than the current U.S. retrospective system.

Although a switch to a prospective system would not be the panacea that some proponents claim it would be, it would represent an improvement over the uniquely cumbersome U.S. system of retrospective duty assessment for the following reasons:
• Defenders of the status quo claim superiority for the retrospective system because, they say, duty rates are based on a comparison of actual import prices to normal values or subsidies calculated for a contemporaneous period. However, because the prospective system allows the importer to account fully for the antidumping or countervailing duties when making pricing decisions (i.e., where the imports compete with the domestic product), a prospective system may, in fact, do a better job of remedying the injurious effect of dumping or subsidization.
• Prospective systems are better at collecting duties because they collect upon importation. Injured parties do not have to wait through years of administrative and legal reviews and proceedings before unfair competition can be offset.
• Prospective systems are more likely to reduce incentives and opportunities for the evasion of duties because they are clearer in their expectations: normal values or fixed duty rates advise importers in advance of the prices they should apply to goods, information known to authorities with certainty at the time of importation.
• The retrospective system has no reliable way to "target high-risk importers," as it is focused on the prices of goods after they are imported. The prospective system, focused on the price of the goods when they arrive at port, makes the relative "risk" of the importer less relevant.
• The American retrospective system, by creating much more uncertainty in the marketplace, creates competitive advantages for U.S. petitioners (through the advantages of market disruption occasioned by the very filing of trade remedy petitions), but the costs and consequences are visited upon importers, their employees, downstream businesses and their employees, and ultimately U.S. consumers, an inherently unfair distribution of the burdens arising from unfair trade.
• The retrospective system is by far more administratively cumbersome and expensive than the prospective system adopted by every other country and reflected in the principles governing the remedy system of the WTO.
The United States has maintained an expensive and inefficient system unlike any other
country's. The case for the status quo, the Commerce report shows, is weak and biased in favor of petitioners, against importers, consumers, and rational markets. The systematic analysis of retrospective and prospective duty assessment systems that Congress has invited has been overdue. This report, unfortunately, is not likely to lead to warranted change.

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General Motors And Subsidies

Just one year after investing $51 billion and acquiring a majority (61 percent) stake in General Motors, the Obama Administration, through the company’s Securities and Exchange Commission (“SEC”) filing on August 18, announced plans to begin selling the government’s stock and return the company to private control and ownership. The announcement was a cause for celebration on many fronts: the investment appears to have paid off, saving the company and its workers from bankruptcy and unemployment; returning capital to the American taxpayer ($6.7 billion having already been repaid); avoiding the multiplying effects of a failed corporation with thousands of suppliers themselves employing tens of thousands of workers all over the United States.

Some of the celebration was muted. There were doubts whether the stock sale would recoup all of the taxpayers’ money. The sale of shares will be gradual and the government will continue as a major (but not majority) shareholder. There remained no guarantees that General Motors would ever fully recover from its near-death experience. New General Motors leadership, although coming from the top ranks of major companies (the new CFO was CFO at Microsoft, for example), has no automotive experience.

The most serious concerns are that General Motors’ future depends, above all, on sales in China and Brazil, while its principal innovation, the all-electric Chevrolet Volt, is due to be introduced at a high price and with boundless uncertainty this year. The SEC filing acknowledges that the Volt depends on a battery technology “that has not yet proven to be commercially viable.”

Both the celebration and the concerns resonate with the trade law. They also present new political and diplomatic challenges for the Obama Administration. U.S. trade law and policy, dating back to the 1988 Omnibus Trade and Competitiveness Act, treat government equity infusions into private enterprises as subsidies.

In the highly publicized infusions of capital into General Motors, the United States was rescuing a company that the United States said would have gone bankrupt. The free market premises of the trade law dictate that a company that would go bankrupt without government help produces nothing but subsidized products thereafter. The subsidies could be extinguished only through market transactions eliminating all of the government equity, and even then an argument remains that no new merchandise would have been produced but for the government intervention. For the last year, GM has been unmistakably a state-owned enterprise, and the American interpretation of the WTO’s Subsidies and Countervailing Measures Agreement may permanently handicap GM’s international sales.

An American State-Owned Enterprise In China

The challenge for GM is acute in China, which has become GM’s leading market and the focus of its projected growth. The Obama Administration on August 26 proposed fourteen regulatory changes in the Department of Commerce’s Import Administration, including seven aimed directly at non-market economies and one that would make the products of state-owned enterprises almost automatically subject to allegations of unfair subsidies. Most of China’s automotive production is state-owned, and GM’s largest effort in China is in a joint venture with a state-owned enterprise. GM has been for the last year, unmistakably, a state-owned enterprise itself.

Were China and the United States developing and producing automobiles and parts only for their own markets, they might each choose to ignore the implications of state ownership and equity infusions. They might be subject to WTO complaints from the private makers of cars in other countries trying to compete in China and the United States because, as third country competitors, they would be disadvantaged, but such complaints are rare and difficult. China and the United States, however, are not circumscribing their own ambitions. Both are trying to claim green high ground, developing automobiles and components that will be more environmentally friendly. They are competing with one another to this end, but also cooperating. Both, separately and together, want to market their products around the world. The rest of the world could reasonably treat these products as unfairly subsidized.

The thirteen-year-old joint venture between GM and state-owned S.A.I.C. Motor Corp. of China (the former Shanghai Automotive Industry Corp.) is planning to develop small, fuel-efficient automobile engines and advanced transmissions. The joint venture for engines and transmissions, part of GM’s strategic plan to become greener, is aimed expressly at the Chinese market, but the joint venture is also planning to manufacture small cars together in India, and to market the engines and transmissions around the world.

Using Green To Buy Green

However worthy the green cause may be, and however dependent its success may be on government help, the products of the GM-SAIC joint venture are subsidized and probably in violation of WTO agreements. Nor is the problem limited to engines and transmissions, or even whole cars. On September 12, U.S. Energy Secretary Steven Chu traveled to Livonia, Michigan to tout the success of government financial support for A123 Systems, a manufacturer of lithium ion batteries destined for electric cars. At least $550 million of the government’s $789 billion stimulus program has gone to plants making such batteries, the leading edge of $2.4 billion committed to electric car development. The CEO of the company in Livonia volunteered, “This money was instrumental in the decision to put manufacturing in North America. We think that without this, it’s very unlikely that plants of this size and nature would have been happening in the U.S.” He might just as well have hung a sign around his neck with an arrow to the plant reading, “This way to our subsidized products.”

China committed in 2010 to a program of “indigenous innovation” that features attracting new technologies from other countries. It welcomes the innovations from GM in its joint venture, but also wants to convert American ingenuity into Chinese ownership. GM, now selling subsidized vehicles vulnerable to WTO challenge, may have no choice but to transfer technology to China in order to remain prosperous in the Chinese market.

China’s fourth largest automobile manufacturer began as a producer of batteries. BYD believes that its battery-driven electric vehicles will claim first place in the world market because of its leadership in developing batteries. BYD is not likely to welcome the Chevrolet Volt, GM’s highly subsidized battery-driven car, nor GM-SAIC products incorporating American batteries, into the Chinese market. Yet, BYD may be a beneficiary of the joint China-U.S. program for the development of electric cars, launched during President Obama’s visit to Beijing in November 2009. That program began with more than $150 million from the two governments.

Solving The Subsidies Problem

We warned in December 2008 that massive U.S. government bailouts of banks beginning in September 2008 demanded a change in thinking about countervailable subsidies.  Practically every major American bank had been deemed uncreditworthy and was lending money borrowed from or granted by the federal government. All such loans arguably were subsidies countervailable on goods an American producer borrowing from those banks might sell abroad.

The bailout of the U.S. automobile industry was an even more direct subsidy, financial contributions committed to the very survival of companies. And in looking forward, subsidies were targeted as much as possible on green technologies, on innovation, on reducing carbon footprints. There was no bigger target, because of the environmental damage it does, the jobs it provides, and the financial difficulty it was in, than the automobile industry. And within the automobile industry there was nothing more promising than electric cars.

When Premier Hu and President Obama met in September 2009 in Beijing, one of their few achievements was to create a joint foundation, jointly funded, for the development and promotion of electric vehicles.  Since that time, however, there is no indication that either country has put up its share of the money, or agreed on where the foundation should be located, exactly what it should do, and who should lead it. Like the temporarily calming effect of another cooperative agreement between China and the U.S., the electric car agreement may have muted the Chinese subsidies investigation into U.S. cars, but appears a year later to have done nothing to advance the agreement’s public and official objectives.

Contradictions now litter the trade battlefield, particularly over subsidies and green technologies. While the Obama Administration applauds achievements through subsidies to the automobile and battery industries, especially celebrating the implications for the development of green technologies in Michigan, House Ways and Means Committee Chair Sander Levin (D-Mich) is pressuring the Administration to launch a WTO case, upon a petition from the United Steelworkers, alleging Chinese subsidies to green technologies.

Japan seems to have beaten Levin, indirectly, to the punch. In mid-September, Japan challenged the Province of Ontario’s Green Energy Act at the WTO, alleging unfair subsidies for the development of solar and wind power. It is a direct challenge to national policies favoring local companies in their quest for a reduction in greenhouse gas emissions, what the Steelworkers are asking the United States to challenge in China, and what China could surely then challenge in the United States, particularly in the cash infusions in Levin’s own Michigan.

China and the United States might want to reach an accommodation, a mutual recognition of subsidies for automobiles, especially electric cars and their components, but also for other green technologies. Without such accommodation, GM faces a potential threat of effective banishment from the Chinese market, and potential loss of its joint venture once its technology has been transferred. Accommodation on the trade law, however, requires political and strategic accommodations, which may not be forthcoming.

China denies any correlation between state ownership and subsidies, and the United States insists that the temporary infusion of equity, whether into banks or GM, was a limited, temporary market transaction in which corporate management remained private. Both China and the United States insist that their automobile manufacturers operate independent of state direction, on market principles. An accommodation accounting for WTO rules would require each to admit that state ownership and equity infusion probably have violated the SCM. Otherwise, no accommodation would be necessary. Neither is likely to contemplate such an admission, however, and so both must continue to live under threats, the United States menacing state-owned Chinese enterprises and Chinese policies and practices enhancing exports, the Chinese launching investigations into U.S. subsidies while advancing an industrial policy of “indigenous innovation” promoting joint ventures as long as they deliver to China new advantages in technological change.

Either cooperation to reduce greenhouse emissions, or Japan’s initiative against Canada, will define the future. Either state intervention will be condoned in a financial crisis, or will be punished under world trade rules. There is an urgent need to address these questions before, one by one, technological innovations and world trade initiatives are derailed by the very international trade agreements intended to encourage both.
 

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Editor's Note:  Amelia Lo, the author of this article, is a Chinese law student in Hong Kong who was a foreign intern at Baker & Hostetler LLP during the summer, 2010.

According to United States Senator Charles Schumer (D-NY), a strident critic of China’s currency policy, “[the] most important issue in the Chinese-American relationship is currency.”  Schumer and other American critics often have used the term “currency manipulation”, fraught with negative connotation, when referring to China’s currency policy.  To appreciate the perspectives of two distinct sides in this debate, it is probably better to find more neutral language.  Governments may control the value of their currency, whether through the money supply (the actions of the American Federal Reserve Bank) or by floating on world currency markets.  Consequently, reference to “currency control” instead of “currency manipulation” might facilitate a dialogue that, to date, has been confrontational and full of accusations.

An Overview
China pegs its currency to the U.S. dollar at about 6.827.  In May, 2010, the trade deficit between China and the US was “the largest imbalance with any country”.  In June, the US trade deficit had reached nearly $50 billion, the largest figure in two years.

During 2010, there have been a number of bilateral meetings between Premier Hu of China and President Obama of the United States.  On June 19th, China’s central bank announced that it would reform “the formation mechanism of the Yuan exchange rate to improve its flexibility”.  The United States interpreted this announcement as an important Chinese concession, and looked forward to a significant and rapid adjustment in the exchange rate between the yuan (or “renminbi”or “RMB”) and the dollar.  There may have been exaggerated expectations of instant and significant market changes following China’s announcement, but only two small adjustments have occurred since June 19 and it may be too early to evaluate China’s new exchange rate policy.

The U.S. Point Of View
There seems to be an American consensus that China is manipulating the exchange rate of its currency, preventing it from floating free on world markets, to gain a trade advantage for an export-led economy.  The mainstream American media project this view, consistent with frequent expressions of American politicians, that China is manipulating its currency by maintaining a very low value for the yuan in trading with the dollar and other currencies.  Some, like Rep. Sander M. Levin (D-Mich.), even blame the unemployment problem in the U.S, perhaps the leading issue in the midterm elections, on China’s currency policy.

Although President Obama and Treasury Secretary Timothy F. Geithner have urged China “to allow the yuan to float higher,” they have been sensitive to potential Chinese reaction and value the U.S.-China relationship enough to avoid directly naming China as a currency manipulator in their annually mandated report to Congress.  They postponed delivery of the report until China had indicated some movement on the currency, enabling them to soften the criticism they otherwise were encountering.  They welcomed China’s June 19 announcement, but were concerned about how China’s promise to make its currency more flexible would affect U.S. China trade in practice. On 16 September, 2010, Secretary Geithner promised Congress that they, with other countries, will put pressure on China for “trade and currency reforms” in the next G20 summit in November in Seoul.

Although they have proposed different solutions to combat alleged currency manipulation, some more drastic than others, at least 130 US senators and representatives, Democrats and Republicans alike, disagree with China’s currency policy. Senator Charles E. Grassley (R-Iowa), the ranking member of the Senate Finance Committee, urged the Administration to name China as a currency manipulator.  Going a step further, Congressman Levin (D-Mich.), Chairman of the House Ways and Means Committee, urged the Administration to monitor closely China’s progress and take appropriate action by filing a complaint against China at the WTO alleging violation of Article XV of the General Agreement on Tariffs and Trade.

While Levin and Grassley, key Democratic and Republican members in Congress, agree that the Administration should do more to influence China to take more significant steps to appreciate its currency, Senator Schumer and Reps. Tim Ryan (D-Ohio) and Tim Murphy (R-Pa.) have sponsored bills in the Senate and the House, such as the Currency Exchange Rate Oversight Reform Act 2010, intended to force the U.S. Commerce Department to obtain a trade remedy against China if its currency is undervalued.

Some American manufacturers argue that the Chinese yuan “is undervalued by as much as 40 percent” and that the undervaluation acts as an unfair subsidy to Chinese goods.  Scott Paul, the executive director of the Alliance for American Manufacturing, has called on Congress to pass “strong legislation to penalize China’s currency manipulation”, believing that such congressional action would decrease the U.S. trade deficit.  Another lobbying group, the Committee to Support U.S. Trade Laws, along with some 47 manufacturing groups and unions that make up the “Fair Currency Coalition”, support Senator Schumer’s legislative efforts to pass “an effective, WTO-consistent trade remedy without further delay.”

Despite the congressional pressures and pressure from American manufacturers, China is not without defenders in the United States.  The US-China Business Council and the U.S. Chamber of Commerce agree that the exchange rate is a serious problem, but both contend that legislation treating currency control as a subsidy subject to countervailing duties is not a good way to achieve the goal of rebalancing the yuan.  These associations think it wiser for the Administration to continue “its current approach of using multilateral and bilateral persuasion to achieve Chinese exchange rate reform” and to wait and observe the results.  The Commerce Department’s recent ruling in late August, 2010 that China’s yuan value cannot be “considered a direct subsidy to Chinese exporters” is a wise move as it avoided the direct confrontation of trade and currency issues.

China’s Point Of View
The Chinese Government strongly denies allegations of currency manipulation and rejects claims that the yuan is undervalued.  Premier Wen Jiaobao and the Chinese Foreign and Commerce Ministries are all of the view that China’s goal of a stable currency benefits the world at large, especially during the financial crisis.

Premier Wen maintains that China aims to continue to provide a stable currency and “steadily advance the reform of the formation mechanism of the RMB exchange rate under the principle of independent decision-making, controllability and gradual progress.”  Wen emphasizes that, while “some countries [are applying double standards when they demand the appreciation of the yuan] but at the same time [practice] trade protectionism against China,” China will continue in its goal to work towards trade balance, rather than surplus.

To illustrate the advantage of a stable yuan-dollar exchange, Wen refers to the popular view that “China’s efforts to maintain a stable yuan-dollar exchange rate [despite pressure to devalue] during the 1998 Asian financial crisis helped the world.”  China’s decision to keep its currency stable gave its currency credibility and ensured China’s financial stability after the crisis as “the nation [was able to] focus on improving productivity, quality and cutting costs.”

Foreign Ministry spokesman Qin Gang thinks that the U.S. politicizes the currency issue too much, and in a destructive and negative way.  He argues that, contrary to what U.S. congressmen may expect, “the appreciation of the yuan will neither root out the U.S. trade deficit to China nor solve the low U.S. savings rate or unemployment” problems.  Members of the Commerce Ministry, including Commerce Minister Chen Deming, Vice Commerce Minister Zhong Shan, and Commerce Ministry Spokesman Yao Jian, have reiterated consistently that the U.S. trade deficit will not be solved by a change in China’s currency policy.  Yao ascribes reasons other than the currency policy, such as globalization, for China’s trade surplus.

According to Zhong, the U.S. China trade deficit “is caused by the shift in international division of labor and of industries against the backdrop of globalization.” This theory, he says, was demonstrated in March, when China’s trade surplus briefly fell into a trade deficit under a basically stable exchange rate.  While Yi Gang, head of the State Administration of Foreign Exchange and Deputy Governor of the People’s Bank of China, contended that an official timetable for currency reform was not viable due to unbalanced development in China, he emphasized that China’s major goal in exchange rate reform is to make the yuan a “convertible currency”, one that can flow freely.

According to China’s Yuan Stress Test in March 2010, “half of China’s textile firms may [go] bankrupt if the value of the [Yuan] rises 5 percent against the U.S. dollar, given the industry’s thin profit margins.”  Such job losses could affect as many as 20 million civilians directly engaged in the textile industry, and another 140 million working in cotton farming.  Such indicators lead Chinese authorities to insist that the yuan’s convertibility is an internal affair, and that China will not sacrifice its domestic interests under foreign pressure.

Selected Points Of View Of Scholars
There is a variety of views on this subject: while some support China, many are those who strongly believe that the yuan is undervalued.

Supporters of China’s currency policy include Nobel Prize Laureate Robert A. Mundell, “father” of the Euro.  He remarked in June 2010 that he did not think that China should have a large appreciation in the current situation and that too much appreciation would hurt China’s economy. Another Nobel Laureate, Joseph Stiglitz, contends that the “US’s [act of forcing] China to revalue the RMB is a manifestation of protectionism” and that “the United States putting pressure on China for Yuan appreciation is [not a good idea as it risks] shaking up the foundation of world economic recovery.”

Economist Bai Chong-en of Tsinghua University in Beijing thinks that the yuan is not seriously undervalued.  He further contends that outside pressure on China to reform its exchange rate may do more harm than good in convincing China to allow its currency to appreciate, as “people don’t like to be forced to change things.”  Xia Bin, economist and counselor of the State Council, asserts that the US deficit is caused by the “defective economic structure” of the US but not China’s yuan value.  Huang Yiping, a professor at Peking University, who considers himself  “a strong advocate of greater exchange rate flexibility in China”,disapproves of Nobel Laureate Paul Krugman’s advice to the US government to blame, finger point and confront China for global problems and job losses.

There are strongly-held, contrary views from other leading economists.  Krugman, Fred Bergsten, Director of the Peterson Institute for International Economics, and Robert E. Scott , Senior Economist of the Economic Policy Institute, have repeatedly urged the U.S. government to adopt more aggressive policies such as ‘naming and shaming’ and retaliatory measures against China.  All three scholars blame China for US job losses, though the values they allege vary from about 1.5 million to 3 million. 

Krugman has accused China’s “undervalued” yuan of being a “significant drag on global economic recovery,” and has referred to China’s exchange rate policy as “most distortionary” and “[damaging]” and China’s manipulation to be “self-evident”.  To Krugman, and to Scott, the United States has the upper hand over Chinese exports and the U.S. government should not be afraid to force China into action on the currency.

Bergsten thinks the yuan is undervalued by between “[at least] 25 and 40 percent”.  He claims that China’s 2005 appreciation was not a real appreciation due to China’s increase in productivity. Although Bergsten acknowledges that macroeconomic forces contribute to China’s undervalued currency, he blames the Chinese government for manipulating its currency by “[buying] about $1 billion daily in the exchange markets to keep [its] currency from rising”, and claims these purchases to be the main cause of the exchange problem, in addition to a form of protectionism.

Would An Appreciation Of The Chinese Currency Actually Help The United States?
All things being equal, as economists like to say, an appreciation of the Chinese currency would make Chinese goods more expensive in the US and US goods cheaper in China.  Logically, an appreciation of the yuan therefore would decrease the US trade deficit with China, increase exports, and thus create jobs in the US.  China’s policy helps China in the long run.  But does it help China in the short run, as it may inhibit Chinese manufacturers’ desire to improve the quality of their products, such that they may have a quality advantage in addition to a cost advantage in the future?  Will other countries regard China as a market economy were it to adopt a fixed rather than floating rate?

Concluding Thoughts
The Peterson Institute for International Economics defines one of the criteria for “manipulation” to be “large intervention in one direction over a sustained period that frustrates balance of payments adjustments.”  If that definition were adopted generally, many countries in the world, including the U.S., could arguably fit the description of currency control or manipulation at first glance.  Liam Halligan, a UK-based economist and commentator, argues that “America’s long standing ‘weak dollar’ policy,” which “[allowed] its currency to depreciate in order to lower the value of its foreign debt,” “[amounted] to the biggest currency manipulation [and protectionism ] in human history.”

As Treasury Secretary Geithner wisely understands, the US cannot “force” China to revalue its currency in order “to create a level playing field for American exporters.”  Relentless pressure on China to revalue could harm the U.S. China relationship, which the Administration seems to value more than the narrower issue of currency exchange.  At the same time, the Chinese government should take into account the concerns of the US and conduct more dialogue with the US while it improves the flexibility of its currency.

According to Brookings Institution Senior Fellow Barry Bosworth, focusing exclusively on the exchange rate issue is “a mistake”.  The US government should focus on expanding US exports. Rather than blaming China for its economic problems, the US government should work within its own scope of influence, to formulate strategies that enhance the production capacity of manufacturers, to implement tax saving incentives to encourage employment and help small businesses.

We should not forget that US consumers have benefited from the diversity of low-cost Chinese imports.  If the US were to impose trade restrictions on China’s goods, US consumers would likely have fewer choices.

Time is required for an economy like China’s to transform from being export-oriented to market-based.  Both China and the U.S. are concerned about unemployment. On June 20th of this year, the Chinese government made a promise.  The U.S. should be patient and wait to see the results of China’s promise.  According to recent measurements, the value of the yuan “has risen about 1.5 percent, most of that over the course of [the week before the 15th of September]”, which is quite a promising figure.  Instead of striving for actions that involve blaming, shaming and retaliating, the U.S. government can initiate acts of cooperation, trust and tolerance such as by increasing dialogue at the top, the middle and grass root levels with China so that it can understand China’s plan and policy better, and allow China to understand American concerns.  By working together sincerely and communicating honestly and openly, the leaders of the two governments are likely to be able to reach a successful compromise and consensus on the currency issue.
 

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China’s goals of international recognition during the last decade, in addition to accession to the World Trade Organization (“WTO”), include most prominently acceptance by the United States as a market economy. There have been at least two motivations: to have its creation of a market, “with Chinese characteristics,” recognized and approved around the world; and to be liberated from the trade remedy methodology tailored specifically for non-market economies. The former is more psychic; the latter is pragmatic.

Non-Market Economy Status

World trade rules are built around principles of free trade. Free trade as an ideal type refers to unimpeded private market transactions where governments, monopolies, and state enterprises do not have enough influence to distort the conduct or outcomes of private enterprise competition. The free private enterprise system assumes, as did Adam Smith, that the selfish private acts of individuals and their organizations will yield, out of their competition and interaction, a greater public good. The market, not government, defines and produces the public good. It also assumes that governments and monopolies, when regulating or controlling private transactions, distort markets and thus are harmful to the public good.

The role of government in the ideal free private enterprise system is limited, mostly to regulating anticompetitive behavior and breaking up excessively large conglomerates and monopolies that prevent free competition. Of course, such limited government is a fiction. Governments have many roles in civil society, and all impact the economy.

All governments raise revenue through taxes. They make judgments about who most can afford to pay. Despite the periodic calls in the United States for a “flat tax” imposed on everyone equally, taxes everywhere are “progressive,” graduated according to the perceptions of what can be afforded and by whom, including business enterprises as well as individuals. Taxes on transactions – sales taxes or value added taxes – are also common. The form of taxation, the extent to which taxes are graduated, and the taxpayers (corporate or individual) all express public policies favoring some over others. A core public policy in the United States favors private home ownership, which has produced special tax provisions affecting everything from bank loans to construction materials. All such government interventions and taxes distort markets in one way or another. Yet, like death, taxes are inevitable and are the most obvious form of government intervention in markets.

Governments play additional roles. Every free market system assigns governments a role in forbidding the formation and operation of anticompetitive monopolies and trusts. Governments may regulate to protect the health, safety, and welfare of citizens. Such regulations typically raise costs of production for private enterprise, and impose certain manufacturing methods and ways of doing business. Hence, despite the ideal type, governments everywhere intervene in the free market.

Corporations rhetorically champion free enterprise, but in practice they seek competitive advantages that inevitably translate into limitations on competition. Governments regulate to limit or eliminate such corporate behavior. The nature of competition is to seek an advantage and a superiority over others. Such advantages are defined by reducing the competitive abilities and positions of others. Individuals and corporations idealize competition only to the extent that competition can improve their situations, which by definition requires the degrading of the competitive positions of others. Consequently, free private enterprise systems foster competitors whose objective is always to reduce competition. Governments overseeing such systems endeavor to maximize competition, while protecting against the release into the stream of commerce of products and practices inimical to the health and safety of individuals and society.
This ideal type of free enterprise system is the theoretical antithesis of a state-controlled or command economy. In the ideal type, government intervenes only as required, reluctantly, and while trying to guarantee free competition. In a command economy, government seeks to direct all economic activity, deciding what needs to be manufactured, to whom it should be distributed, and at what price. Government extracts rents from this production and, therefore, in control of the entire economy, can raise revenues anyway it likes. Markets function only to the extent that governments permit, in any particular sector, the interaction of willing buyers and willing sellers. Mostly, demand is regulated by supply, the latter controlled entirely by the government.

The United States, since the ascension to power of Mao Tse-Tung, has treated China, dominated by state-owned enterprises and with a tax system dictated by government (rather than negotiated among competing interests), as a non-market economy. However, China, since the “opening” of Deng Xiaoping, no longer regards itself as a non-market economy. Instead, China thinks of itself as a capitalist, market economy, albeit with “Chinese characteristics.”

There are many indicia supporting China’s self-image because substantial competition has grown up in China. Capitalist goods are everywhere and are sold competitively throughout the country. There are advertisements promoting different prices for the same or comparable goods. People decide what to buy, from food to cars, such that supply does not control demand, and the government does not control supplies. Labor has become mobile, with people moving from one part of the country to another, from one kind of job to another, from one corporate entity to another making or selling the same product. Prices vary with supply and demand, not dictated by government.

There are many indicia that China remains a command economy. The government owns and controls the supply and prices of natural resources and public utilities. The government controls banks and insurance, lends money through the banks according to government policy and rates, controls the currency and its value. The most important economic sectors, such as steel production, are dominated, when not exclusively captured, by state-owned enterprises. Through the control of money and loans and prices, the government dictates the supply and demand for the most important products and services.

The global economic meltdown with the fall of Lehman Brothers in September 2008 made the United States look more like China than the other way around. The U.S. government took effective control of major banks and insurance companies, bought out one of the leading economic sectors – automobile manufacturing – and shaped subsidy programs throughout the economy designed to assure the success or survival of enterprises chosen by the government. Yet, while insisting that it is the world’s leading capitalist economy, the United States denied China’s claim to be recognized as a market economy.
 

Symbolism Of Market Recognition

China, as a matter of national pride and self-respect, has resented the American insistence that massive American subsidies and market intervention preserved a capitalist, market, free enterprise system, while identical conduct in China guaranteed that China would be considered outside the mainstream, along with Cuba and Vietnam and North Korea, as a non-market economy. The more China has insisted that the United States should recognize it as a market economy, the more the United States has resisted. Excuses have become cumulative, most prominently in the American complaint over China’s refusal to float fully the value of its currency, notwithstanding that U.S. currency did not float freely until 1971, and the United States certainly was not considered a non-market economy before then.

Recognition as a market economy has come to mean, for China, fulfillment of a promise it perceives was made in 2001 when China acceded to the WTO. Even though the WTO agreement projected recognition as a market economy by 2016, and then only upon the satisfaction of various criteria, China’s Commerce Minister now insists that the United States agreed to recognize China’s market economy status by 2010 and offers a sense of betrayal that recognition has not happened.

The Practicalities Of Market Economy Status

In only one significant respect does recognition as a market economy matter: when complaints are brought that Chinese goods are dumped in the United States, the methodology for determining whether there is dumping, and if so, how much, is different for non-market economies. This distinct methodology gives the United States Department of Commerce more discretion and flexibility to find dumping, and to inflate the dumping “margin,” the measure of how much dumping and consequently how much duty will be owed for the merchandise to be imported into the United States.

Dumping is determined in one of two ways: either a good is sold abroad for a price lower than the price at home, or the costs to produce the good exceed the price at which the good is sold abroad. When Chinese goods are subjected to this second measurement, the cost of production, the non-market economy methodology becomes critical.

Non-market economy status presumes that, in the absence of markets, there are no market prices. It is then theoretically impossible to determine the cost of production because it is impossible to determine the costs of any of the inputs. There are no market wages; no market rents; no market utilities. Raw materials have no market prices, nor do any component parts.
When the inputs are imported from a market economy, dumping analysts use the price the Chinese manufacturer has paid for those inputs. But when the inputs are domestic products, analysts assume there is no market price for them. The analysts then seek and apply “surrogate” prices – prices of the same input in a “market” economy that, supposedly, is at a similar level of development as China. Surrogate values may come from many different countries, but American official analysts have favored (for China) India, Bangladesh, Indonesia, and occasionally other countries.

The selection of surrogate values is highly contentious and is decided, in the end, by U.S. government officials. They have decided that freight costs, for example, could not be used if derived from a Chinese-flag ship. They have chosen, instead, some of the highest shipping rates in the world.

Subsidies And Market Economy Status

Until November 2006, treatment of China as a non-market economy did have advantages for China. A “subsidy” in international trade is a financial contribution from a government that is market-distorting. Where there is no market, there is nothing to distort. Therefore, until November 2006, the United States had never brought a subsidies (countervailing duty) case against China. Subsidies could not be alleged; they had to be treated as costs of production susceptible to the application of surrogate values.

It was always thought that China could not and would not be exposed to countervailing duty allegations unless and until it might be recognized as a market economy. The Chinese Government, consequently, stayed out of trade remedy disputes, as dumping is the business of business, not government. Dumping is determined by prices, and companies, not governments, set prices. Moreover, it was exceedingly difficult to address some of the “inputs” this way for a cost-of-production analysis.

The 2006 mid-term elections delivered a significant Democratic majority pressuring the Administration to get tough on China, especially as to alleged subsidies. A petition alleging subsidies to coated free sheet paper was pending. The Department of Commerce, soon after the elections, decided to initiate a countervailing duty investigation, while refusing, still, to recognize China as a market economy.

China protested the apparent anomaly – a non-market economy subjected to a countervailing duty investigation – but to no avail. Various legal issues emerged and several are still the subject of WTO proceedings initiated by China. None has been resolved by the WTO, and meanwhile the United States has found subsidies and imposed countervailing duties in 12 cases already. All of these cases were accompanied by antidumping petitions, and a cumulation of dumping and subsidies duties have been imposed in 26 cases since 2007. Petitioners complaining about unfair competition from China now routinely file simultaneously antidumping and countervailing duty petitions.

Why Non-Market Economy Status No Longer Has Practical Meaning

The decision to investigate subsidy allegations and impose countervailing duties while still treating China as a non-market economy rendered the non-market economy status practically meaningless. It is not as if, were China tomorrow to be recognized as a market economy, anything of practical value would change.

The United States has been applying surrogate values for subsidy allegations against China throughout the economy. For the allegation that China was not charging enough money for the commercial use of land in rural Shandong Province, the Department of Commerce used land values from suburban Bangkok. The Commerce Department ignored entirely expert testimony that the use of such values was nonsensical from the perspective of economics and land use.  And Commerce treated any input supplied by a state-owned enterprise as a subsidy, the value of which was to be determined by selection of a surrogate value in a market economy. 

The rationale for the application of surrogate values is based on Certain Softwood Lumber from Canada.  Even though a WTO panel found the use of such values improper in the case of Canada and a NAFTA panel found it illegal, the Commerce Department dismissed the NAFTA panel as having no precedential authority and the WTO panel as ambiguous. Beginning with coated free sheet paper, the Commerce Department has cited its own administrative determination in the softwood lumber case as the basis for its treatment of China.

The Commerce Department argues that, even though Canada is indisputably a market economy, Canadian provincial governments own so much of the forests that any price for standing timber cannot be a market price. It did not matter that nearly twenty-five percent of the standing timber sold in Quebec is private, as is more than fifteen percent in Ontario. It did not matter that the pricing scheme for public forests in Quebec was based entirely on the prices in the private forest. The Commerce Department reasoned that the public sector was so large compared to the private sector that the private sector prices were driven by the public sector and therefore could not be used. It reasoned that the residual value methodology applied by Ontario, whereby the market price of manufactured lumber required certain pricing of the raw material, could not be used because most of the natural resource was in public hands. It did not matter that the NAFTA and WTO panels disagreed, as did a number of notable experts.

China, over the course of three years, has failed to successfully challenge any of the Commerce Department surrogate value applications in U.S. courts. [confirm] Consequently, the Commerce Department has been laying a foundation of subsidy findings as “administrative practice,” upon which it can rely for virtually anything that may arise in the Chinese economy. Bank loans, even from commercial banks, can be treated as non-market rates because of the alleged dominance of state-owned banks setting the market rates; prices for inputs from private companies can be set aside as long as there are state-owned enterprises in the same business. It will be very difficult for China to prove that the state is not dominant in one sector or another, and the burden of proof will fall on China.

The United States can recognize China as a market economy and continue to apply surrogate values and non-market economy methodologies in trade remedy disputes because China has focused on the issue of market economy status instead of on the methodology the United States developed in the softwood lumber dispute with Canada. The core issue remains not the nomenclature, but the predominance of state-owned enterprises.

The Strategic And Economic Dialogue

The Strategic and Economic Dialogue in Beijing in May 2010 seemed to produce only one Chinese headline: that the United States was going to recognize China as a market economy. The expectation was variously seen as fulfillment of a promise and as an essential American concession, a Chinese victory of sorts. The United States, as it happens, did not provide such recognition, only promising to continue a discussion about it. Consequently, the United States now knows it is holding something that China values highly, and yet is not worth very much, an enviable negotiating position. China, for its part, needs to recognize how little such recognition means, and move on to more meaningful discussions.
 

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Chief Judge Jane A. Restani of the United States Court of International Trade (“CIT”) on August 4, 2010 ordered the United States Department of Commerce (“DOC”) to forego the imposition of countervailing duties on pneumatic off-the-road tires from the People’s Republic of China. Her decision, in GPX International Tire Corporation v. United States, was based on her ruling that US law prohibited DOC from imposing duties higher than the amount needed to offset subsidies on imported products.

The problem for DOC, inherent in the case and as posed by Judge Restani, is that DOC uses surrogate values presumed to be unsubsidized, rather than a company’s actual production costs, to calculate Normal Values. DOC compares these Normal Values in its non-market economy antidumping methodology to the export price, a methodology that should, at least in theory, offset any subsidies on the production of the merchandise (because the comparison has been taken against unsubsidized inputs through surrogate values). If DOC were to impose countervailing duties to offset subsidies that benefit the production of the merchandise, then it would be offsetting the same subsidies twice.

Double counting of subsidies does not occur with DOC’s market economy dumping methodologies (19 C.F.R. §§ 351.405 & 351.406) because, in those cases, Normal Value is calculated based on actual prices in the foreign market and actual costs incurred in that market. Thus, if there were any subsidies imbedded in those prices or costs, they would not be offset by the antidumping methodology and would need to be addressed separately in a countervailing duty investigation.

Judge Restani’s August 4, 2010 decision followed an earlier decision in the GPX case where she sent the matter back to DOC to find a way to avoid the double counting problem. In the earlier case, Judge Restani found that, while DOC had discretion to impose countervailing duties on Chinese merchandise while still considering China to be a non-market economy (the central issue in dispute), DOC had to avoid double counting of subsidies when it applied the countervailing duty law and the antidumping non-market economy methodology to the same products at the same time.

DOC interpreted Judge Restani’s earlier decision as giving it three options: (a) not apply the countervailing duty law; (b) apply the market economy antidumping methodology in that case; or (c) lower the cash deposits imposed in the antidumping case by the amount of cash deposits imposed in the countervailing duty case. DOC decided to lower the antidumping deposits by the amount of the countervailing duty deposits. Judge Restani found that option contrary to US law because there is no provision in the antidumping statute to lower duties by the amount of countervailing duties and because that option is unreasonable as it requires the parties to go through the expense of countervailing duty proceedings that are essentially useless.

Judge Restani ordered DOC to forego imposing countervailing duties on off-the-road tires from China because DOC demonstrated in that case that it did not have the ability to determine the degree to which double counting was occurring in its non-market economy language and offset it directly within that methodology. Thus, the CIT has left open the option in future cases for DOC to try new methodologies to eliminate the double counting within the antidumping nonmarket economy methodology. DOC continues to have the option of imposing countervailing duties to products from China in cases without a companion antidumping case on the same products, or in cases in which it uses its discretion to recognize a market-oriented industry (“MOI”). In that latter instance, considering MOI status, it could continue its general policy of not recognizing China as a market economy while using a market economy methodology for a particular industry. DOC has never recognized an industry in China as “market-oriented,” but it does have the statutory authority to decide to apply market economy methodologies on a case-by-case basis.

DOC, or the petitioners in the GPX case, have the right to appeal Judge Restani’s decision to the Court of Appeals for the Federal Circuit (“CAFC”). Should they do so, that higher court could overturn Judge Restani’s decision, affirm it, or modify it. Were the CAFC to overturn the decision, DOC would be free to apply countervailing duties to the same products on which it used the non-market economy antidumping methodology. In deciding whether to appeal, however, DOC must consider the risk of appealing and losing. Right now Judge Restani’s decision is binding on DOC only in the GPX case: it does not set precedent that DOC would be forced to follow in all future cases. Were DOC to appeal and have the CAFC affirm Judge Restani’s decision, that affirmation would be binding precedent, prohibiting DOC from applying both the CVD law and the non-market economy methodology to the same merchandise.

Judge Restani’s decision was based solely upon US law. However, China has challenged at the World Trade Organization, on the same grounds of double-counting, the application to China of the countervailing duty law while DOC refuses to recognize China as a market economy. Judge Restani’s decision in GPX demonstrates the value, at least to the companies involved, of appealing to the US court, rather than relying solely on WTO challenges. As we noted in earlier articles on this blog (US Court Decision Ought to Change Chinese Thinking and WTO Challenges Not Always a Panacea for Respondents in Trade Litigation), the WTO process is designed to vindicate governmental interests, but does not often provide much comfort or relief for commercial interests. Appeals in the US courts, by contrast, are a right belonging to the companies themselves that have been hurt by the agency’s challenged actions and, when those companies win in U.S. courts,, the remedy can provide immediate retroactive relief.
 

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China Is A Target

China has been the primary target of anti-dumping measures around the world for a very long time. More than 30 countries have initiated roughly 600 antidumping cases against 4000 different types of Chinese products during the last two decades. The United States alone has conducted 122 investigations (excluding withdrawals and terminations), and imposed 101 orders against Chinese goods. Approximately 30 percent of all WTO-member anti-dumping investigations have been directed against China.

The Chinese Government and Chinese companies have not consistently cooperated with U.S. authorities or participated fully in investigations. History shows, however, that cooperation and participation matter and that results enabling Chinese merchandise to remain competitive in the U.S. market are always possible.

It Is Possible To Win

For many Chinese companies, the United States is an indispensable market and their very existence depends on retaining access to it. Good legal defenses can be expensive, but not nearly as expensive as having to abandon the market, or sell at non-competitive prices. Failing to participate in antidumping or countervailing duty investigations under the assumption that winning is impossible, either because the American system must be rigged or competent counsel is not affordable, is particularly unfortunate because many companies that do participate fully and with competent counsel can, and often, do prevail.

Historically, Chinese companies have won few antidumping and countervailing duty cases, not because it was impossible to win, but because the Chinese companies were not familiar with the legal and operational procedures of the US antidumping and countervailing duty laws, have hired low cost counsel without the experience or resources to defend them effectively, and failed to cooperate fully with the United States Department of Commerce (“DOC”) or participate at the United States International Trade Commission (“ITC”). These reasons for failure are far more important than anything that might be supposed about the political environment or anti-Chinese prejudice in the United States.

Before petitions seeking investigations of Chinese steel products began being filed in 2007, the largest case against China (by volume of exports) was Bicycles from the People’s Republic of China. Hundreds of millions of dollars of exports and thousands of jobs across China, Hong Kong and Taiwan were at stake. Chinese exporters hired talented lawyers who led them through multiple submissions and verifications, in China, Hong Kong and Taiwan. Millions of dollars were spent in legal fees, but more than 100 million dollars of exports were threatened. Paying for competent counsel paid off. Of the nine exporters found dumping, the highest antidumping margin was only 13.67%. Several companies were not found to be dumping at all. The ITC, applying these margins in the analysis of whether a U.S. industry was materially injured or threatened with material injury by Chinese exports of bicycles to the U.S., found none, leading to dismissal of the case.

It Pays To Pay

Chinese respondents in Ball Bearings from the People’s Republic of China spent nearly a million dollars in legal fees, but the leading company, with a multi-million dollar investment in a state-of-the-art manufacturing facility outside Shanghai, received a zero margin and was free from duties. There is no guarantee, of course, that when a Chinese company spends more money on legal services it will necessarily get better results, but there are market reasons why some lawyers command higher rates than others: their time is in more demand, which means the market for services is recognizing their value. It may seem to a company an important savings to hire lawyers for $50,000 or even $100,000 less than lawyers from firms with greater reputations, but when a $100 million market is at stake, the savings on legal fees suddenly does not amount to that much and do not make sound commercial sense.

There are additional considerations. Chinese companies typically want fixed fees for legal services, no matter what may happen in a case. In some instances, petitioners may not want to spend very much themselves and therefore do not apply a great deal of legal pressure on respondents. However, when the opposite is true and petitioners press their case hard, there is much more legal work necessary on the defense. A budgeted commitment for a questionnaire response and perhaps one supplemental questionnaire could turn into multiple supplemental questionnaires. Legal briefing that might have appeared to be routine could require enhanced legal skills and knowledge of the law.

A company may be confident that its records are kept well, only to learn during an investigation that the company standards will not satisfy DOC. In these instances, counsel may require much more time and effort to prepare the company for the audit DOC officials will conduct (called “verification”), which will be a full inspection of the company’s books.

When the fee is fixed and additional legal services are required because of the circumstances of the case, one of three things can happen. The lawyers can do all that is required for the fixed fee and take a financial loss on the case. The company can agree that it will need to pay more for the additional services. Or, the lawyers, without saying much to the company about it, can simply do less, providing less than optimal services because they effectively are not being paid to do all that is required.

It may be unethical not to do all that is needed when payment may not be forthcoming, but in most instances that is what happens. Chinese companies insist upon the fixed fee and will not pay more; the lawyers cannot afford to do a great deal more. The lawyers then do the minimum necessary to get through the case, and the company suffers without ever being told that the lawyers are doing less than they should be doing.

For all these reasons (and there are many others), it pays to pay: participation and cooperation in the case is always better than refusing or limiting participation. Paying for the best available legal services is always better than trying to get through the case on the cheap, particularly when the cost is compared to what is at stake. It is always better to be flexible about fees because every possible contingency in the case cannot be anticipated in advance, and because there will always be unscrupulous lawyers (as there are unscrupulous businessmen) who will promise more than they can deliver, and will do as little as possible to earn their fees.

The Bigger Picture In Trade Remedy Disputes

Many Chinese businessmen and government officials, in our experience, seem to believe that the antidumping and countervailing duty investigations initiated by the United States (and Europe) are part of a larger, undeclared China-US (or China-West) trade war, and that the U.S. Government is behind the scenes controlling the outcome of the cases to the detriment of Chinese companies. There are undoubted protectionist biases in the trade laws that the U.S. government is required to respect, but trade remedy investigations and reviews are more conflicts between companies in different countries competing for the same market share than they are contests between nations. Americans are not unaware that, should they play unfair at home, their own exports may face unfair practices in China and elsewhere, which is why they subscribe to the WTO and a common rule worldwide.

There is little or no benefit for a company to conjure world trade as a conspiracy, and there is ample contrary evidence that respect for laws and institutions can pay off. Chinese companies would benefit more by participating and cooperating fully, fighting as hard as possible according to the legal rules, hiring competent American counsel and participating fully in all phases of the DOC and ITC investigations, instead of blaming or speculating on political motivations behind poor results.

Summary: Improving The Chinese Prospects Of Winning

How can Chinese companies win antidumping and countervailing duty cases? They first need to hire competent U.S. lawyers with experience and proven track records. The homework necessary to choose counsel is not simple, but again not impossible. They cannot listen to lawyers touting their own credentials without proof. They need to ask questions. Their focus, however, should be on the quality of the lawyers and their services, their reputation and their experience. It should not be only on price. Until recently, many trade remedy petitions were brought against merchandise from other countries. Respondents in other countries have never depended so much on the price of legal services the way Chinese companies have done, and there is a contrast in results that suggests powerfully that it pays to pay.
Second, Chinese companies need to commit to cooperation with the investigating agencies and participation in every phase of the investigations. They need to commit resources and devote themselves to fighting hard to win. They need to consider the potential expense of defending their interests in the U.S. market against the potential value of losing access to the market. They need to think in the medium and long term, for once shut out of the market by an adverse outcome, it could take five years or more (the period awaiting a sunset review of an antidumping or countervailing duty order) to get back in. And they must know that, when their market access is challenged in the U.S., a challenge in Europe likely will follow, and vice versa. The global market means global challenges, and a problem in one place inevitably becomes, sooner or later, a problem in another.

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Editor's Note: Baker & Hostetler LLP recently submitted the following comments in response to the Department of Commerce’s request for comments on Retrospective Versus Prospective Antidumping and Countervailing Duty Systems.  中文请点击这里

Introduction: The American Way Compared To The Method Used By Almost Everyone Else            

        Remedies for disputes heard by panels of the World Trade Organization are prospective.' There are no penalties for past misdeeds. Procedural delay is rewarded. A country is not expected to change its ways before the absolute completion of proceedings and definitive adverse decisions. While it continues conduct ultimately found inconsistent with its international obligations, a country faces no penalty. Only when the decision requires change and a country refuses is the country subject to penalty, and then only indirectly.

        Article 9 of the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (the "Antidumping Agreement") provides for the imposition and collection of anti-dumping duties, and authorizes either prospective or retrospective assessment of duties. The prospective system governs international trade remedy systems in almost every country. It also governs the conduct of original antidumping and countervailing duty investigations in the United States. Except for the very limited exception of critical circumstances, which is almost never used, a company will not be liable for antidumping or countervailing duties on imports before there is at least a preliminary determination of dumping or countervailable subsidies. The United States may be unique in its application of a retrospective review system governing the assessment of duties after an order is imposed, and is certainly the only major WTO member that uses a retrospective system.

        The Request for Comment asks for a comparison of prospective and retrospective systems with respect to six criteria. The first criterion refers to "remedying injurious dumping or subsidized exports to the United States." This language carries at least two assumptions, that the result of an investigation will be to find dumping or subsidization, and that the dumping or subsidization will be found to be injurious. The language, thus, fails to recognize a key problem with the American system: the mere filing of a petition disrupts trade because it distorts markets.

          Exporters to the United States, as a matter of prudence and precaution, invariably raise prices when an investigation is initiated. Importers and downstream customers start scrambling for alternative suppliers because of uncertainty about how imports from the country subject to the petition may be treated later on. Consequently, petitioners in the American system are rewarded for the filing of a petition, no matter whether the petition is frivolous or bound, ultimately, to fail. The main cause of that problem is the very low standard in the United States for accepting petitions, but retrospective duty assessment exacerbates the problem because importers know that, were an order to be imposed, their liability would be unlimited and would not be determined until well after the subject merchandise had been imported.

        Where dumping or subsidization and injury are found, remedies are important. A system that imposes an implicit remedy where there may be no need, however, that imposes an in terrorem effect on trading partners, is defective, and may explain why other countries have thought better of this system. The United States ought to be asking itself, when comparing prospective and retrospective systems, why almost everyone else does things differently.

         The American retrospective system begins collecting bonds for prospective duties as soon as there is a preliminary determination estimating antidumping or countervailing duty margins. The negative effects of this initial bonding period are muted because the bonding rate acts as a cap on the duties that can be collected for imports entering between the Commerce Department's preliminary determination and the International Trade Commission's final determination. The actual duties assessed can go down for imports entering during this period, but they cannot go up.

        The bonding cap is lifted and replaced by a cash deposit requirement when the antidumping or countervailing duty order goes into effect. Thereafter, the actual duties assessed can be increased or decreased drastically, based on the results of administrative reviews that may not be completed until more than two years after the affected merchandise was imported. Should the results of those administrative reviews be appealed, the actual determination of duties owed could be delayed many years further.

         Importers, who are held accountable for the duties, operate in an environment of substantial uncertainty for many years because of this system of assessment. It is impossible to know in advance of the Commerce Department's analysis what a final antidumping or countervailing duty tariff rate may be because there are so many variables that can affect the calculations, including methodological changes the Commerce Department may introduce between reviews, following importation. So, too, the U.S. Treasury cannot know how much money it will actually collect in duties during this extended period.

        The prospective system in most other countries removes most of the uncertainty characteristic of a retrospective system. As in the United States, the investigation in a prospective system produces duty rates, updated regularly through administrative reviews.  However, reviews do not change rates retrospectively. The duties collected are the duties owed, without the possibilities of increased duties or money returned according to the results of an administrative review. The rates set in the investigation apply to all imports going forward until the first review; the rates set in administrative reviews also apply going forward only.

        Not every prospective system is the same, but the principles are consistent and have similar market effects. In Canada, for example, the original investigation determines "normal values," which are minimum acceptable prices. As long as goods are imported above those prices, no duties are collected. Goods imported below normal values, however, are taxed the difference in price. The system is designed not for the purpose of revenue collection, but for the purpose of fair trade: the normal values define prices above which goods are not determined to be dumped or subsidized, leaving no reason to be collecting duties on them. The purpose of the law is to assure fair competition for domestic products, not to disrupt the market or create uncertainty for importers.

         The European Union also has adopted a prospective system. EU officials establish the normal value for a product in an investigation and then compare the normal value to the export price. The percentage difference between these two is fixed as the duty rate, which applies to all future imports of the product unless superseded on a prospective basis in a subsequent review.

        Most systems are neither purely prospective or retrospective. In the United States, for example, parties must request administrative reviews. When none is requested, the previously found duty rates continue to apply between administrative review periods, and the cash deposit rate from the investigation becomes the duty rate when no first administrative review is conducted.' A European Union importer may be able to recover previously collected duties, provided he can prove that dumping or subsidization has ended or that goods are being imported at rates below those that had applied when the goods had been imported.

Relative Merits Of Prospective And Retrospective Systems

        The American retrospective system is more accurate in assessing duties than the prospective system used in the European Union because it is based on the actual prices of imported sales compared to domestic prices (or contemporaneous costs) of like products sold at or near the same time. The American system is not necessarily more accurate, however, than the prospective normal value system used in Canada and several other countries. Although the Canadian system uses normal values calculated during a prior period, both systems use current import data. Because the Canadian prospective normal value system performs the necessary calculations at the time of importation, the risk of inaccuracy caused by lost data is reduced. Moreover, collection of total, accurate duties in a retrospective system requires assessment against importers well after the goods have been imported. It is not unusual for importers to be out of business by the time the final rates are supposed to be collected, leaving only deposits in the Treasury.

        Early estimated rates usually are much higher than rates to be finally assessed. These estimated rates distort the market, often dramatically, but when an importer can survive the initial impact, he can also recover monies paid that exceeded what ultimately was due.

         The American system is administratively very expensive because customs entries must be kept open, sometimes for years (subject to legal appeals and challenge), before final duties can be assessed. In the interval, the possibility of actual collection diminishes, while importers do not know whether they will be getting money back, or will owe more.

        In the prospective system where normal values are fixed in advance, importers can know what their prices have to be to avoid duties. In other prospective systems where duty rates, rather than normal values, are fixed in advance, importers can know what prices they need to charge their customers in order to recover the costs of the duties and still make a profit. There is more certainty and stability in the market than in a retrospective system. Duties are collected at the time of importation. Consequently, there is much more certainty that they, in fact, will be collected, and as the amount to be collected is known at the time of importation, the administrative system is much less cumbersome and expensive.

The Goals Of The Comparison

        Congress asked the Department of Commerce to compare prospective and retrospective antidumping and countervailing duty systems according to six goals. The current American retrospective system appears superior to a European style prospective system, but not a Canadian style prospective system, with respect to the first goal. All types of prospective systems appear preferable for the remaining five.

• The retrospective system may appear in theory to be superior for remedying injurious exports to the United States because it calculates duty rates based on a comparison of the actual import prices to normal values or subsidies calculated for a contemporaneous period. However, because the prospective system allows the importer to account fully for the antidumping or countervailing duties in its own pricing decisions (i.e., where the imports compete with the domestic product), it is arguable whether, even under this criterion, a retrospective system is superior.
• Prospective systems are better at collecting duties because they collect upon importation and do not have to wait through administrative and legal reviews and proceedings that can take years.
• Prospective systems are more likely to reduce incentives and opportunities for the evasion of duties because they are clearer in their expectations: normal values or fixed duty rates advise importers in advance of the prices they should apply to goods, information known to authorities with certainty at the time of importation.
• The retrospective system has no reliable way to "target high-risk importers," as it is focused on the prices of goods after they are imported. The prospective system, focused on the price of the goods when they arrive at port, makes the relative "risk" of the importer less relevant.
• The American retrospective system, by creating much more uncertainty in the marketplace, creates competitive advantages for U.S. petitioners (through the advantages of market disruption), but the costs and consequences are visited upon importers, their employees, downstream businesses and their employees, and ultimately U.S. consumers.
• The retrospective system is by far more administratively cumbersome and expensive than the prospective system adopted by almost every other country and reflected in the principles governing the remedy system of the WTO.

         The United States has maintained an expensive and inefficient system unlike any other country's. The systematic analysis Congress has invited has been overdue, and ought to lead to change.
 

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Note: Dr. Elliot Feldman on April 15, 2010 presented the following speech at AmCham-China’s Conference of the Asia-Pacific Council of American Chambers of Commerce (APCAC).

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Difficulties with China are now on Page One of The New York Times and The Washington Post almost every day. There is consensus in Washington that relations between China and the United States will get worse before they get better. There are many issues, most related only marginally, if at all, to trade. As examples, there is frustration in Washington that China does not share a western view of the nuclear threat from Iran, nor the urgency of the nuclear threat from North Korea. There is disappointment and chagrin over Copenhagen, and obvious disagreement over Taiwan and over the Dalai Lama. These issues are mostly strategic, sometimes cultural. Cooperation on them would go a long way toward calming concerns in other areas. There is no sign, however, of mutual understanding.

There are many additional issues dividing China and the United States that are economic. The most obvious is that China, as of January, held $2.4 trillion in foreign exchange reserves, of which nearly $900 billion was in U.S. Treasury bonds and securities. The reserves had grown $453 billion in 2009, and economists predict similar growth again in 2010.

No less important to the United States and other countries is the valuation of the RMB. After the end of the dollar peg in July 2005, the RMB appreciated over 20 percent against the dollar. With the global economic crisis, however, China froze the RMB and let its value relative to other world currencies drift down with the dollar. Premier Wen Jiabao dashed American hopes last month that China would permit some adjustment any time soon.

Within the U.S. administration it is said that the word “currency” is not to be spoken, but the characterization of the associated issues as “mercantilism” seems more than tolerated. Meetings between Chinese and American leadership since September 15, 2008 frequently have invoked references to “rebalancing,” the idea that Americans should save more, Chinese should spend more, and Chinese exports to the United States should decline as they find a market at home among consuming Chinese. Such rebalancing, endorsed publicly by both countries, is difficult, however, when an undervalued RMB persistently makes Chinese goods comparatively inexpensive abroad and foreign goods expensive in China.

Both countries, and as important, the governments of both countries, are preoccupied with job creation. Weaker currencies tend to keep jobs at home. Chinese intransigence about currency valuation raises doubts among Americans, however, about the sincerity of Chinese pledges to rebalance. Those doubts are shared, perhaps even more acutely, in Europe. In a form of diplomatic jiu-jitsu, Premier Wen has called the U.S. demand for currency adjustment “a type of trade protectionism,” and Commerce Minister Chen Deming has escalated the rhetoric, threatening that American action on currency would precipitate a trade war that, he insisted ominously, the United States would lose.

Many in Congress, and some in the Administration, want to make currency valuation a trade issue, which perhaps Premier Wen already has done for them by calling it one, confirmed by Minister Chen. Countervailing duty petitions now routinely allege currency valuation as an illegal subsidy (three times in 2009 alone), and many in Congress, and in the business community, want the Treasury Department to label China a currency manipulator. The U.S. Department of Commerce, however, consistently refuses to investigate the allegation, concluding each time that the elements of an export subsidy have not been pleaded sufficiently, particularly as to the subsidy law’s specificity test: the laws and regulations pertaining to valuation of the RMB, Commerce has concluded, are not specific to any industry or group of industries in China, nor is the valuation conditioned on exports.

This legal conclusion has enabled both the Bush and Obama Administrations to avoid a major confrontation with China over the RMB in trade remedy cases, while both Administrations have refused, at least so far, to acquiesce to congressional pressure. The aggressive language adopted by Premier Wen and Minister Chen on this subject, however, could change the dynamic and make it much more difficult for President Obama to hold the line. The postponement of a Treasury Department determination, an apparent trade-off for President Hu’s visit to Washington this week, may only preserve a U.S. card that could be played, in any event, only once.

While China’s exports benefit from an undervalued RMB, China insists that it is contributing to global economic and financial stability, and points to its faster recovery from global recession. China’s friends remind critics of the role of a stable Chinese currency more than a decade ago in halting an Asian financial meltdown. China is not without defenses for its conduct over currency valuation.

In view of the non-trade issues – and the internet dispute over Google is many things, including strategy, technology, human rights, but also trade -- it is arguable whether “pure” trade disputes between China and the United States, trade remedy actions regarding allegations of dumping, subsidies, safeguards, patent and trademark infringements, are all that important. The value of Chinese goods exported to the United States peaked in 2008; less than 2 percent of the value of those goods were subjected in 2009 – the year when U.S. manufacturers were most severely impacted by world trade conditions -- to trade remedy investigations. The official U.S. trade line, in every Administration, reflects such data and has had the following elements:

• The Administration is following the laws as set out by Congress, nothing more;
• There is considerable friction in every significant trade relationship;
• Such friction is normal and indicative of a healthy relationship;
• Trade disputes represent a tiny fraction of overall trade and should be considered nothing more than irritants.

Unfortunately, U.S. trading partners rarely see the disputes this way. While successive Administrations try to minimize them, another branch of the U.S. government, Congress, takes them very seriously and promotes them. Congress, and American trading partners, see trade disputes as economically, politically, even diplomatically important, while Presidents try to ignore them. President Bush, it is said, was amazed at how distressed Canadians were over the treatment of Canada’s softwood lumber exports to the United States. Yet, the trade represented between $7 and $10 billion annually, and there were many U.S. Senators signing letters, testifying at International Trade Commission hearings, and lobbying the Office of the United States Trade Representative and the Department of Commerce. Frequent representations were made by the Canadian Ambassador. For years, no Canadian prime minister failed to raise the issue with the president whenever they met. It probably should have occurred to the president that, since it was apparently important to everyone else, it just might be important.

There is a similar imbalance in trade disputes with China, and to date a similar presidential inclination to minimize them. Although I believe President Obama did what he had to do politically and legally with respect to commercial tires from China in September 2009, and that he acted with as much diplomatic sensitivity as possible within the requirements of the law, I also believe that he underestimated the Chinese reaction just as President Bush misunderstood how the U.S. treatment of softwood lumber was poisoning relations with Canada. The U.S. Department of Commerce, which answers to the President, is, and always has been, systematically deaf to complaints from foreign governments, invoking the mantra that the disputes are minor, normal, even healthy. The apparatus of the Department, meanwhile, and the biases of the laws, are organized and designed to protect the interests of U.S. industry against foreign competition. China, like Japan and Canada before, do not see trade disputes the way Presidents and the Commerce Department see them, and for China, as occasionally for other countries, there are additional, non-economic issues of national pride. Canadians, for example, were furious at the transparent American disrespect for the rule of law in the lumber litigation.

The United States tends to underestimate the Chinese Government’s sensitivity to domestic interests. The Western press has been translating this sensitivity into “hubris” or “triumphalism,” even simple “arrogance,” but whatever it might be called, Chinese concerns for domestic interests reflect a sense of national pride.

The Western press also underestimates internal Chinese debate. The voices of a harder line are heard, notwithstanding the many moderate and engaged voices among elites. Unfortunately, the same is true as to what the Chinese hear from the United States.

Most important to China has been the refusal of the United States to treat China as a market economy. Legally and financially, non-recognition enhances the ability of U.S. industry to succeed in antidumping complaints. Politically and psychologically, however, the issue is far more important. The Communist Party believes it is governing a capitalist state that, economically, should be treated like every other capitalist state. The indicia of a market economy, governed by supply and demand, contracting labor, and competition, are everywhere in China. It is decidedly not a command economy like the Soviet Union.

The United States sees something else. It sees national planning, central control, and a restricted currency. It sees dominant government banks and state-owned enterprises.

When China as a government appears in trade remedy disputes, for example, its counsel sometimes represent the principal Chinese enterprises as well as the Chinese government. This inherent conflict of interest raises doubt about the independence from the government of these enterprises. The counsel for no other foreign governments appear in U.S. proceedings simultaneously representing supposedly private enterprises. It is widely presumed that the Chinese enterprises engage the government’s counsel at the government’s direction. China and the United States are, thus, looking past each other as to China’s very identity.

In November 2006, right after congressional elections produced a Democratic majority, the Bush Administration, while refusing to recognize China as a market economy, nevertheless accepted a petition to investigate Chinese government programs alleged to confer countervailable subsidies on goods exported from China to the United States. A countervailable subsidy, until that time, had been treated in U.S. law as a market-distorting government subsidy. Inasmuch as the United States denied that China had a market, government support would have nothing to distort. The United States Department of Commerce, however, cheered on by Congress and supported by the rest of the Administration, was not deflected by this apparent anomaly. The Chinese Government would now have to answer questions sent to it by the United States Department of Commerce, and would have to receive Commerce Department auditors who would inspect government books and test the veracity of government answers, all the while being treated as a non-market economy.

This recipe for confrontation did not produce a satisfying meal for anyone. Chinese officials were insulted and often adjusted doubtfully to the diplomatic cooperation the new investigations required. U.S. Embassy personnel in Beijing and officials from Washington were not unwilling to make their dissatisfaction with China known. Moreover, U.S. officials began to accuse Chinese officials, in print, that they had not been entirely truthful or accurate in responding to American inquiries. In one published preliminary determination, the Department of Commerce alleged that, “the GOC has withheld the information requested by the Department,” and “the GOC has failed to act to the best of its ability.” The Department declared, “the GOC’s claims of non-use are incorrect as a matter of fact,” and “the GOC’s statements . . . are unreliable and are contradicted by other facts on the record.” I am not aware of comments of this type printed in the Federal Register about other governments.

The multiplying investigations have not enhanced relationships, regardless whether the cases have involved much money or little, or whether the products in dispute have been significant or trivial. The process, and the underlying premises, which the United States insisted was business as usual, have been damaging. In the slow economic recovery we all anticipate in the United States, there will be more cases, more misunderstanding, and more difficulty.

China’s worldwide exports increased from 1999 to 2008 from $195 billion to $1.4 trillion. One of the great surprises accompanying this growth is how few trade complaints, compared to the scale of the growth, that it produced. There were 21 antidumping cases brought against China worldwide in 1999 (often against the same product but in several countries). While China’s exports multiplied seven-fold, in 2008 only 52 new cases were brought against Chinese products (again, often involving the same product but in several different countries). The United States, between July 1, 2007 and June 30, 2008, became China’s leading export destination and China’s leading trade antagonist, with 18 initiated cases. During the previous decade, however, India initiated 120 antidumping cases against Chinese products while becoming China’s leading trade partner in goods; the United States, by contrast, initiated 87, barely more than the European Community, which initiated 84.

Although these numbers for formal disputes are surprisingly small under the circumstances (for the volume and variety of trade), there are at least a couple of notable trends. One is that the number of cases initiated against Chinese products has increased every year except in 2007, albeit in small increments. Another is that more cases are brought against Chinese products around the world than against the products of any other country, by far. Against no other country is so much suspicion expressed about business dealings, honest reporting, and sincere cooperation in the interests of free trade. Since accession to the WTO, China has begun to test trade remedies itself. It initiated 14 antidumping cases against the products of other countries in 2001, more than doubled that number, to 30, in 2002, and through 2008 had initiated 151 antidumping investigations against foreign products. The United States was one of its first targets (along with Japan), and is now its leading target.

When negotiating accession to the WTO, China sought concessions because of its self-characterization as a developing country, a forgiving explanation for a transition from a government-controlled economy. China graduated very quickly from this self-definition, although it still invokes it frequently. It has now initiated three different subsidies investigations, all into products from the United States. In the case against automobiles, initiated on the eve of President Obama’s visit to China last November, the application for duties endorsed by China’s Ministry of Commerce proclaimed a declining United States unfairly trading with an ascendant China. It claimed technical superiority in a pillar industry, what it called the key industry of America’s industrial revolution.

This development, I submit, is of dramatic implication and potential consequence. The United States, since 2006, routinely entertains petitions against China complaining of subsidies due to state-owned banks and state enterprises. China has responded with a complaint about the U.S. bailout of the Big 3 automobile manufacturers and the infusion of capital into U.S. banks. China alleges non-market loan guarantees and special loans to the U.S. steel industry. More jiu-jitsu: China is accusing the United States of government involvement in the economy in programs nearly identical to U.S. allegations against China, and China has begun bringing cases against the United States at the WTO, a forum in which the United States usually wins the cases it initiates, but usually loses the ones brought against it.

The United States is an historic sore loser at the WTO, in one celebrated instance taking more than five years to comply with an adverse decision. China, by contrast, promptly capitulated when the United States brought its first two complaints against it, by requesting consultations, at the WTO; now, the world will watch how the United States responds as China brings more complaints against the United States. To date, China has made a doubtful strategic choice, to appeal its trade disagreements exclusively to the WTO, never seeking recourse in U.S. courts. Between the pattern of American non-compliance at the WTO, for which there are few punitive mechanisms available and all remedies are prospective, and the decision to permit adverse administrative precedents to accumulate without legal challenge, Chinese frustration with the United States as a trading partner is likely to grow, even as the partners can hardly escape one another.

China, it seems, is responding to the United States by acting like the United States. Whatever the poetic justice, this course is perilous. China, unlike the United States, is still dominated by state-owned enterprises, does provide central direction to important segments of its economy, and is still learning how to conduct business in trade remedy disputes.

At a more policy-based level, the United States appears, at the behest of Asian countries, to be in hot pursuit of the Trans-Pacific Partnership, which looks and feels like an economic reincarnation of George Kennan’s cold war approach to the Soviet Union. China, so far, apparently has said nothing, and there is more than enough skepticism, in the United States and abroad, about the trajectory of the TPP despite American enthusiasm. China, nonetheless, cannot be pleased by an even implied encirclement, and an answer to the question of what the United States will gain from this initiative seems to be buried in unexamined assumptions.

These developments, taken together, are unnecessarily ominous. Asian countries are urging the United States to engage more in Asia because, they readily say, they are afraid of China. While China is flexing the muscles of a world power, it is still the fragile developing country it claimed to be only a few short years ago. Tensions in trade are symptomatic of other problems. They are also the essence, because trade and commerce constitute functional interaction more than anything outside armed combat. Trade disputes, it is true, are but a tiny fraction of trade, and there are fewer of them than might be justified given the clash of systems, defiance of rules on all sides, and fundamental underlying political needs, above all for jobs. But they resonate.

Governments in Beijing and in Washington both need to find more jobs for their populations. Both need to promote production and exports. The only possible compromises require consensus about what the rules should be and how they should be obeyed. Those compromises require trade policies.

Trade disputes shape trade policy. The pursuit of trade disputes is determined in U.S. law by the petitions of private enterprise that the Department of Commerce and the International Trade Commission can rarely avoid investigating. By contrast, Chinese law permits the Ministry of Commerce to keep the existence of petitions secret, and the initiation of investigations to be determined by the Ministry’s private assessment of the “public interest,” a provision that does not exist in U.S. law. Consequently, China can, and does, have a trade policy. The United States can have one only with difficulty, and at present has none. U.S. trade policy, such as it is, inherently is protectionist because it follows the protectionist inclinations of private enterprise in hard times. China’s trade policy, unfortunately, is equally or even more protectionist, and is unquestionably the product of government choice. Today, it is hard to tell the pot from the kettle because they are both black.

The United States needs a policy, and China needs a new one. Like almost every major international issue today, this one dividing the United States and China requires the two countries to work together from first principles. They need to examine together what defines and runs and regulates markets. They need to decide together how to keep markets open and free and how to assure fair treatment of foreign investments. That China is standing up to the United States at the WTO is good – it is about time someone besides the European Community and occasionally Japan or others did. It is also not so good if it means antagonism rather than accommodation.

The United States needs to understand that the lack of democracy in China does not mean government unconscious of its responsibility to its people; China needs to understand that central paralysis of American institutions does not necessarily mean American weakness. Both have to keep reminding themselves, lest every now and again they seem to forget, how much they need each other.

I want to conclude briefly with some practical suggestions about how the private sector might respond in these antagonistic times. There are things you can do to cushion the shocks and protect your interests without necessarily changing government policies. The operating assumptions here are that, on the one hand, there will be more trade disputes, and more orders imposing duties and restricting trade; and on the other hand, that business between the two countries will continue to grow.

Should you be a company exporting goods, you should be sure to monitor dumping and subsidy orders in every country where you are doing business, whether in-house or with outside counsel. Even the most sophisticated companies can run afoul of orders, facing penalties and customs duties, because they have not monitored thoroughly. Chinese companies that are exporting should examine carefully the loans they are taking from Chinese banks. They should consider whether they are receiving better-than-market terms, and whether they are exposed to allegations of benefitting from government subsidies. Exporters should learn everything they can about their foreign competition, especially regarding pricing and costs of production: careful pricing can minimize risks of dumping allegations. Such study could also lead to the acquisition of foreign companies. Ownership can reduce dramatically exposure to trade remedy actions. Exporters should cultivate relations with importers, for it is important to have allies in countries where you are doing business. And Chinese companies should make sure they are perceived as private and independent of government.

There are many practical things American companies doing business in China can do to help themselves. They can enlist in trade associations that lobby the U.S. government, beyond the U.S. Chamber of Commerce. They can participate in, or seek to create, boards or commissions to advise the government. Like Chinese companies, American companies now should be wary of better-than-market bank loans or subsidies, especially in agriculture and steel, and like Chinese companies cultivating relations with importers in the United States, American companies should cultivate relations with importers in China.

The corporate world does not control its own destiny, but it need not be tossed without recourse in a turbulent sea. Every company, and every industry, can make things better for itself and, by so doing, contribute to an overall improvement in a bilateral relationship that sorely needs improvement.
 

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        Washington, D.C., partner Elliot Feldman, leader of Baker Hostetler's international trade practice and an author of the firm's China-U.S. Trade Law blog, authored a column, "China and the US Must Stop Throwing Stones," which was published in the "Opinion" section of the March 30, 2010, edition of the The Financial Times （中文全文请点击这里）.

        According to Feldman, "One of the most troubling features of the growing tension between China and the US is that both countries legitimately have a lot to complain about. It is commonly understood that China and the US have divergent interests. Less understood is that, in the bilateral economic and trade relationship, they usually are complaining about the same things. Both are trying to protect jobs and now seem engaged in a zero-sum game that no one can win. When China and the US criticise each other, each side must realise they are launching their complaints from inside glass houses without regard for their own structural vulnerabilities."

      Feldman continues: "Both China and the US believe the other is attempting to interfere in a free market economy and engage in protectionist practices to the detriment of the other. The US sees too much state direction in the Chinese economy and continues to designate China as a non-market economy, leaving China feeling stigmatised and at an unfair disadvantage in international trade."

        Feldman's article goes on to provide insight into the countries' opposing viewpoints and some of the events/actions which have led to the current situation. He concludes: "China and the US should acknowledge the reciprocal nature and legitimacy of each other's complaints and seek mutual solutions–or such complaints will compound and multiply, and the two countries will grow further apart and more antagonistic. If Beijing and Washington cannot agree to stop throwing stones from inside their glass houses, the great risk to the world is that they will board them up."

The full article, "China and the US Must Stop Throwing Stones," can be viewed on The Financial Times website (free registration required).

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One of the most troubling features of the growing tensions between China and the United States is that both countries legitimately have a lot to complain about, and typically they are the same things. Three issues are particularly conspicuous at present and at the core of difficulties in the trade relationship – the definitions and status of “market” and “non-market” economies; the role of governments as owners of strategic economic sectors and retaliation over grievances arising from that role; and cyberattacks. When China and the United States criticize each other, they often are launching their complaints from inside glass houses, fortifications especially vulnerable to retaliation.

Market Economies

Almost every member of the World Trade Organization, and even countries (such as Russia) that are not, for international trade purposes are considered “market economies.” The designation is important because the rules of fair trade are written to promote markets, rewarding market transactions and penalizing conduct judged to distort markets. The distinctions emerged at the dawn of the Cold War when the rules enabling private enterprise to compete with state-directed economies were written.

State economic interventions, according to world trade rules, distort markets. State-directed economies – “non-market economies” (“NMEs”) – are inherently distorting. World trade rules deal with them through exclusion, denying them entitlement to the benefits of favorable assumptions.

Although China agreed, when it acceded to membership in the WTO in 2001, that it was not yet accepted as a market economy, it did not expect such recognition to be far behind. Now, nearly a decade later, it seems nowhere in sight, and largely because of objections raised by the United States.

The United States sees too much state direction in the Chinese economy. National plans are reinforced by regional and local planning. State-owned enterprises are dominant, particularly in the most important sectors of steel and energy production. State-owned banks control most lending. Tax schemes systematically favor designated sectors. Utilities providing manufacturers with energy are state-owned. There is no private ownership of land. And today, most important of all, currency is tied to the dollar and does not trade freely in international markets.

China does not see its economy this way. State enterprises are enterprises whose profits go to all shareholders, who are the people of China and not small investing bands of capitalists. They are controlled by boards with mandates to operate competitive, profitable businesses. Banks, controlled by the state, protect the state’s interests, and thus avoid reckless and feckless lending that can jeopardize whole economies. Labor is mobile and subject to competition. Land tenures in Britain, and some other Commonwealth countries, are based on the theory that the Crown owns all of the land, but thriving markets in land tenures exist. No one claims that the Crown’s ownership of all of the land in these countries suggests they are not market economies. The dollar began to float freely and trade on international exchanges less than forty years ago, and no one suggests that prior to the collapse of Bretton Woods the United States was not a market economy. In China’s view, all the people of China are the shareholders of the economy at large, but no less capitalistic in their support of competition and free enterprise. Most observers of China today remark on the Chinese worship of money, no less than in traditional capitalist societies.

The American indictment of China as an NME is defended now from inside a glass house. After the fall of Lehman Brothers in September 2008, the federal government in the United States took large ownership positions in many key banks. The government took effective ownership of the automobile industry. The Congress of the United States endlessly writes tax laws to favor one industry or another, especially the larger ones dependent on exports. Property is private, but government institutions set the terms of ownership and all of the financing that makes ownership possible. And the government in the United States intervenes in the economy regularly to create and save jobs, regulating the labor market, encouraging companies to hire labor and discouraging dismissals.

Neither China nor the United States is an ideal market economy. The distinctions might not matter practically, representing different paths to the acquisition and distribution of the benefits of commerce, except that they do in the application of trade laws. China thinks itself stigmatized by its designation as an NME, and it is disadvantaged in international trade.

Until 2006 there was at least a trade-off. Trade law, as applied everywhere, recognized that state intervention in the economy could not be market-distorting if there were no market. Consequently, trade remedy actions based on subsidy allegations could not be initiated, both because there was no way to measure a subsidy in the absence of market prices, and because a subsidy by definition must distort a market and in an NME there is no market to distort.

In late 2006, the United States began to have things both ways. It said China was enough of a market economy to justify bringing subsidy cases against its exports, yet not enough to shed its designation as an NME.  Ever since, China has been manifestly subject to a deliberately unfair trade regime. Yet, when China takes exception, it does so from within its own glass house, and not only because of the conditions that shaped American views in the first place.

Even as China began in 2006 to defend its practices in the United States, its conduct tended to reinforce the indictment instead of refuting it. Instead of acknowledging that it had little control over regional and local governments, their “planning” or their commercial practices, the central government, citing to the Constitution of the People's Republic of China, asserted that all governments reported to it.  Instead of acknowledging difficulty in amassing information demanded by U.S. authorities in trade investigations, it tried to answer questions without verifiable information. Instead of leaving private enterprises in China to find counsel and defend their own interests, the government convened supposedly independent chambers of commerce and largely directed the management of China’s legal defenses. It relied principally on the advice of Chinese lawyers with very limited knowledge of U.S. law. All these actions tended to convince American investigators that China is state-run and not ready to be considered a market economy.

As a practical matter, this issue has lost most of its importance. U.S. authorities have developed methodologies that would reach the same conclusions about fair trade even were China now recognized as a market economy. But symbolically this issue remains critical.

China’s Retaliation: Mutual Accusations Of Subsidies

Exhausted, perhaps, by the apparent futility in its claim that it should be recognized as a market economy, China has adopted an alternative strategy, accusing the United States of similar market deficiencies. China now formally accuses American exports of being subsidized in an economic system marked by substantial state involvement.

China does not deny that the development of its automobile industry has been heavily subsidized. Instead, China argues that it has graduated from subsidization. This view, however, neglects the history of international trade disputes centered on the privatization of state enterprises that followed on the collapse of Communist regimes. The United States accused all such enterprises, especially in the steel industry, of continuing long-term benefits, arguing that privatization could not extinguish the value of subsidies unless the sale of the state enterprise took place at a full market price. The United States placed the burden of proof that no subsidies passed through from the state to the private enterprise on the foreign private enterprise, a burden virtually impossible to bear because of inadequate documentation.

China, perhaps preemptively, has accused the U.S. automobile industry of exporting subsidized vehicles to China. As we discussed on December 1, 2009 on this blog, the countervailing duty investigation launched in November 2009 arises from a petition that argues the American automobile industry is in historic decline and survives only due to massive government subsidization. The central problem of these accusations, however, is that they are hurled from a glass house. The United States will now almost certainly accuse China of subsidizing the automobiles China is gearing up to sell to the United States. Hence, while the industries in both countries are trying to develop fuel efficient automobiles that will eliminate carbon emissions, thereby serving mutual objectives related to saving the planet, trade laws in both countries already are impeding direct competition based on the quality of the product.

China’s action, contending that the United States does not produce automobiles through free market enterprise, is a transparent retaliation for the American insistence that China is a non-market economy. However, this action carries the disagreement forward into the terrain of the future, where China and the United States need most to cooperate.

Cyberattacks

The United States has complained for a long time that China has subjected American defense and security establishments to incessant and invasive cyberattacks. These complaints took on a new character and dimension when Google complained that a coordinated Chinese assault on Google customers included an invasion of the accounts of Chinese dissidents. Google, already criticized for accepting Chinese government censorship that affects the internet in no other country, found the latest attacks intolerable. Google threatened to leave China.

The Google-China confrontation led Secretary of State Hillary Clinton to deliver a major speech on “internet freedom” that called for international condemnation of China.  Jack Goldsmith, Harvard Law School professor and former senior Justice Department official in the Bush Administration, responded quickly in The Washington Post: “[T]he problem with Clinton’s call for accountability and norms on the global network,” Goldsmith wrote, “is the enormous array of cyberattacks originating from the United States. Until we acknowledge these attacks and signal how we might control them, we cannot make progress on preventing cyberattacks emanating from other countries.”

The cyberattacks from China are presumed to be state-directed because of the state control and censorship of the internet imposed on companies such as Google. Attacks from the United States are presumed, at least by Americans, to be the work of private individuals, free-lancers, the sort of people who fill e-mail boxes incessantly with spam. Goldsmith accepts this orthodoxy, noting that “Scores of individuals and groups in the United States design or employ computer payloads to attack government Web sites, computer systems and censoring tools in Iran and China. These efforts are often supported by U.S. foundations and universities, and by the federal government. Clinton boasted about this support seven paragraphs after complaining about cyberattacks.”

Boarding Up The Glass Houses

China surely knows at least as much about what is happening in its cyber sphere as Professor Goldsmith. The American complaint about Chinese interference with the internet appears well-founded, as is the American complaint about China’s control of its economy and China’s subsidization of industry. But each of these complaints is launched from a glass house. Until China and the United States acknowledge mutually the problem – that their legitimate reciprocal complaints need more solution than aggravation – such complaints will compound and multiply, and the two countries will grow further apart and more antagonistic. They must either appreciate the view that glass houses uniquely afford – a place from which one can see out very well, but others can also see in -- stop throwing things at each other from inside the glass houses, or board them up. The last choice, which may define the direction in which things are going, is probably the worst of all.

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The Scope Of The Challenge

China’s Ministry of Commerce (“MOFCOM”) initiated officially on November 6, 2009 antidumping and countervailing duty investigations into saloon and cross-country cars imported from the United States and manufactured by General Motors, Chrysler, and Ford Motor companies. Although the scope of the products at issue is described (chassis, engine, etc.) and defined according to tariff codes, the real scope of the petitions has little to do with saloon and cross-country (or sport utility) vehicles. The petitions upon which the investigations have been initiated may be the single most important documents in China-U.S. trade relations since the Chinese Protocol of Accession to the WTO. They are about competing models of economic and industrial development, and constitute a complaint against the American strategy for overcoming the financial crisis that dates from at least 2008. According to the Chinese petition, the United States, and the United States alone, caused the crisis. The Chinese contend that China is ascendant while the United States is declining, a statement as much of Chinese historical perspective as of legal rights and wrongs.

The selection of the Big Three American manufacturers, the timing, and the contents of the petitions, suggest that China, on the eve of President Obama’s first visit there, is going far beyond a trade remedy action concerning automobiles. Automobiles, however, may have been chosen as the target of the sweeping indictment, both because of vulnerability in the economic crisis, and because of their symbolism as the icon of American industrial dominance in the twentieth century. China is calling into question the American economic development model and the entire premise of American trade actions against China, advancing an argument that the U.S. automobile industry is failing and exposing the depth and breadth of American economic support for an exporting industry. Were the petitions to succeed, they would likely be the first of many against other U.S. exports to China.

The Chinese petitions challenge American definitions of market and non-market economies, and turn against the United States the subsidy policies and practices the United States has been applying to China. The Chinese petitions question the legitimacy of much of American trade policy toward China, while exposing great American vulnerability to trade remedy actions against American exports.

The petitions reach beyond trade policy. They question the U.S. Government’s energy and climate change policies by challenging government support for research and development into more energy efficient and less-polluting vehicles. As President Obama has placed research and development at the heart of the American economic recovery (and identified it with American global leadership), so China is now contending that state support for research and development is, according to Chinese law, the WTO, and implicitly American practice, a collection of countervailable subsidies.

There are many ironies in the Chinese decision to initiate a countervailing duty investigation based on the automobile petition, but perhaps the greatest is in the agreement reached a few days after initiation by Presidents Obama and Hu Jintao, in mid-November. They announced a cooperative effort specifically for the development of electric vehicles, and both committed significant R&D funds. Yet, China began investigating, ten days before President Obama’s visit, whether American subsidies for the development of electric vehicles violate WTO obligations. The Chinese petition contends that an American competitor, Tesla, in the nascent electric vehicle market, has been receiving funds (the petition alleges at least $465 million) from the federal government under several programs. The petition also identifies electric vehicle development funds to the Big Three, alleging $5.9 billion to Ford alone.

The excuse for the allegations against electric vehicles is the fungibility of money, which is an argument that has been used in the past by the U.S. Commerce Department that says any funds given to a company, for whatever purpose, may contribute to production and export of subject merchandise by relieving other sources of funds. There is no excuse offered, however, for the discussion of Tesla, which is not one of the Big Three, not a manufacturer of subject merchandise, and therefore not a respondent. Nor is there an explicit acknowledgement that electric cars are a different product not subject to the petition.

Warned But Oblivious

In December 2008, we warned the Office of the United States Trade Representative (“USTR”) of a potential Chinese action such as this one. USTR, under the Bush Administration, had solicited comments on how the United States should treat alleged Chinese subsidies. We advised that, since September 15, 2008, it was no longer possible to continue business as usual. The United States, in response to the global financial crisis, was subsidizing banks and encouraging loans to uncreditworthy companies at below market rates. Banks were becoming state-owned, even if temporarily, in all but name. The United States was also acquiring significant equity positions in the automobile industry through massive cash infusions.

Even were the petitions to be taken entirely at face value – that they were prepared by a private industry association and reviewed by MOFCOM for a subsequent government decision whether to initiate investigations in response to a private request – MOFCOM’s notices of initiation imply acceptance of the petitions as to the credibility of most of the allegations. The petitions, therefore, are plausibly statements of MOFCOM’s views on a variety of subjects critical to U.S.-China relations.

The petitions appear to have been used as an opportunity for China to offer a comparative history of economic development, of industry in general and the automobile industry, the American icon, in particular. This Chinese version argues that the American automobile industry had every possible advantage in global markets over the last century, that China’s industry has been developing quickly, first with foreign help but more recently of its own accord, and that the United States’ efforts to save its automobile industry cannot come at the expense of China.

Loosely tied to the petitions’ comparative history of economic development is a contemporary conclusion. The petitions allege that “the U.S. subprime crisis escalated suddenly and ballooned into a global financial crisis.” (Elsewhere, the petition complains, “since the broke out [sic] of economic crisis aroused by the United States sub-loan crisis.”) This critical commentary, like the comparative economic history, is irrelevant to the subsidy and dumping allegations, but appears to be an unvarnished Chinese view of why the United States is today in China’s debt. It is a commentary that unashamedly connects economic and industrial policy to allegations of unfair trade, without hesitating to accuse the United States of pursuing a state-driven “industrial policy,” while implicitly denying its own.

Even the terms of reference equate American policy with Chinese language: the petitioners found President Obama referring to the automobile as a “pillar industry” of the American economy, a favorite Chinese term frequently noted by the U.S. Department of Commerce when, focusing on Chinese central planning, it assumes a link of plans to actions and accuses the state-driven Chinese economy of massive subsidies.

It is possible that neither President knew the details of the automobile petitions when they met shortly after investigations were initiated and they agreed to cooperate in the development of electric vehicles. There had been bilateral consultations as mandated by the WTO before initiation of a subsidies investigation, and the United States Trade Representative had summoned the Big Three manufacturers to a meeting, but the United States has not exported electric cars to China and the subject of the investigation is saloon cars and sport utility vehicles. There was no reason, therefore, for either President to think that R&D support for the development of electric vehicles was a primary focus of the countervailing duty petition.

The agreement Presidents Obama and Hu reached on this subject is strange in the circumstances. In light of the agreement, there is little logic in pursuing the allegations, but China may have its own reasons for both, nearly simultaneous, actions.

A Petition More And Less Than Meets The Eye

According to the countervailing duty petition, China is second only to the United States worldwide in the purchase of automobiles. In the narrower classes of saloon and cross-country vehicles, the petition claims China imported 33,732 such vehicles from the United States in 2007, and 43,240 in 2008. Chinese total imports of these vehicles, however, grew from 234,493 to 299,132 during the same period. Thus, the Big Three represent, in shipping from the United States, less than 15 percent of China’s imports of the subject merchandise, and less than half of one percent of China’s total consumption.

The petition does not link systematically any injury being caused by these shipments to current Chinese manufacture and sale of these specific categories of vehicles. To the contrary, the petition acknowledges that China’s own production and consumption grew during the period of investigation, even as overall imports grew as well. Nor are the subsidy allegations focused on the subject merchandise, but rather refer to the entire automobile industry, and especially initiatives regarding energy efficiency and green technologies that are unrelated to the subject merchandise. The petition challenges almost every aspect of the economic recovery package, with a particular objection to Buy American provisions. But it does not narrow the subsidies analysis to the scope of the petition, complaining more generally about the automobile industry. In repeated recitations of the legal “specificity” standard, it treats automobiles as a specific industry, not the types of cars about which the petition complains.

The petition details two arguments for upstream subsidy investigations, although it does not expressly call for any, and Chinese regulations may not articulate how one might be done. After all, upstream subsidy investigations in the United States have been rare, with the Commerce Department loathe to do them. In a notable exception to practice, the Commerce Department undertook an upstream subsidy analysis in Hardwood Laminated Trailer Flooring from Canada and in February 1997 found no subsidy. There, the allegation was about Canadian stumpage, possibly the most controversial subsidies issue between Canada and the United States in the last twenty-five years. Here, the allegations focus on steel and on components for electric vehicles. Steel is perhaps the most contentious trade issue between China and the United States and likely will be the subject of more petitions in 2009 and early 2010. In both principal instances – stumpage with Canada, steel with China -- an important motivation for the petition might have been to get at the upstream product. The attack on electric car inputs may reflect the U.S. objections in several subsidies cases brought against China regarding inputs from state-owned enterprises. The United States, however, has not deployed any upstream analyses.

It seems the petition, then, is not so seriously about saloon cars and SUVs. It may be more about preemptive strikes (electric vehicles; R&D) and retaliation on thorny disputes (steel). The petitions seem to contend that there is no material difference between the economic actions of governments in China and the United States, between market and non-market economies.

The petition is a first foray against multiple levels of American government (with four allegations concerning subsidies from the state of Michigan), perhaps a response to the now-frequent American complaints about Chinese regional and local government programs and planning. The petition, thus, is less than meets the eye: it is hard to take it too seriously as to the specific cars in question; and a great deal more than meets the eye: a resetting of the table for the treatment of the role of the state in the economy, for addressing American federalism, and in the future of energy efficiency and green technologies.

Possible Reverberations

There are many possible problems arising from this investigation. The United States has never before defended itself in China. China has never before sent investigators to examine U.S. books. No U.S. state has ever before submitted to a Chinese investigation, or participated in one. Although this petition has precipitated China’s third countervailing duty investigation against the United States, none has yet reached a preliminary determination, none has yet involved a verification with Chinese officials inspecting U.S. government books, and none has involved a state government. The U.S. automobile industry has not been subject to dumping or subsidies allegations before. Conducting the investigation will be new for China; responding to it will be new for Americans. It will require a sorting out of American federalism, and a new diplomacy for China.

Some have said that the investigation is retaliation for the tire safeguard. In its timing, this view seems attractive, but too much about it makes the theory implausible. The petition covers too much ground and is too broad an assault on the U.S., its trade and economic policies, to have been mere retaliation for a safeguard contemplated in the Accession Protocols. The timing is more notable for President Obama’s first visit to China than for the safeguard. It sets an agenda: affirmatively, market economy recognition; negatively, warnings on steel and electric vehicles.

There have been no reports suggesting any U.S.-China dialogue about the petition during President Obama’s visit. The United States may have chosen deliberately to say nothing, or it may not have reached the President’s attention in the planning of the visit. China, however, may take American silence on the subject as a first round of acquiescence to the charges, and the charges, formally lodged in a trade action, are the most serious China has brought against the United States since, at least, China’s accession to the WTO.

Other countries likely will watch this investigation closely. On the last day of his Asian tour, President Obama received from President Lee Myung-Bak of South Korea agreement to reconsider the automobile dispute that is blocking finalization of a free trade agreement, but he did not receive agreement to reopen settled language in the pending treaty as sought by Congress. South Korea likely will be reinforced in its objections to the terms of the pending free trade agreement with the United States, as China intends to demonstrate massive subsidies to the U.S. automobile industry that ought to make South Korea reluctant to lower its barriers to U.S. cars.

Competing automobile industries, especially in Europe, which have been subsidized heavily during the financial crisis, may face future Chinese challenges. China may seek to clear its market, as implied in a petition that sees its industry ascendant.

China may have been anticipating American barriers to electric vehicles. The action brought, however, could now arguably make those barriers more likely. Tesla manufactures a luxury vehicle; China will seek to enter the U.S. with much more modest electric cars. Consequently, it may be difficult for Tesla, or any other U.S. manufacturer of electric vehicles, who may not yet have sold in the market when Chinese imports first arrive, to challenge Chinese electric cars. The Chinese petition, however, provides theories for challenging vehicles not yet in the market, including an attack on suppliers.

In Laminated Woven Sacks from China, the U.S. International Trade Commission found neither injury nor threat of injury to any American industry. Instead, it found that China’s industry was responsible for retarding the development of a U.S. industry. China did not contest this weakest of all possible injury allegations, enabling final affirmative determinations.

Chinese acquiescence could inspire a similar approach to electric vehicles. American petitioners might allege that Chinese imports are designed to kill off a nascent American industry. The petition could assure an American petition against Chinese electric cars that could complicate the efforts of both countries to develop new technologies for energy efficiency and environmental improvement. The petition is uncompromising and unforgiving as to American efforts to develop cleaner, more efficient automobiles.

The Chinese countervailing duty petition on automobiles could do more to change Chinese-U.S. trade relations than summits and presidential visits. Just as President Obama apparently did not pursue the frequent congressional complaint (and constant Bush Administration theme) regarding revaluation of Chinese currency, so China did not, apparently, assail publicly the United States as the source of the global financial crisis. Yet, President Obama was barely home before congressional committees called again for tough trade sanctions against China, including an attack on Chinese currency.

In a public document that forms the basis for a Chinese investigation of the United States, the current form of American capitalism is being put on trial. Consultations already have failed. No negotiations have followed. Unless national leaders contain the impulses of their respective Ministries (Departments) of Commerce, the trade war that the tires safeguard likely did not trigger may become inescapable. Each country will accuse the other of violating international trade rules in their respective pursuit of a cleaner and more energy efficient planet. Cooperation might threaten leadership. Without a swift settlement, China will be obliged to make its subsidies case, and the United States will not like it.

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The Chinese Ministry of Commerce (“MOFCOM”) announced on November 6, 2009 that it had launched anti-dumping (“AD”) and countervailing (“CVD”) investigations against sedans and sport utility vehicles of cylinder capacity ≥ 2000cc originating from the United States. We are providing on this blog an English translation of the CVD notice. This announcement represents the third CVD investigation initiated against U.S. products in less than six months. So far, Chinese investigations have targeted CVD investigations only against products originating from the United States.

According to the November 6 notice, MOFCOM will investigate 24 alleged subsidy programs, all identified as being provided by the U.S. Government. However, four of those alleged programs are tax incentives and other assistance provided by the state of Michigan, which in the U.S. federal system is a distinct sovereign and not part of the U.S. Government. ( In China, all regional and local governments are subordinate to the central government. In the U.S., the states have distinct powers and are not subordinate.)

China adopted its regulations on CVD investigations in October 2001, and the Regulations Of The People’s Republic Of China On Countervailing Measures entered into force at the beginning of 2002. However, China did not initiate its first CVD investigation until June 1, 2009.

The vocal U.S. steel industry was the first target of Chinese countermeasures. The product under investigation was grain-oriented flat-rolled electrical steel, and an Ohio company – the AK Steel Corporation – and a Pennsylvania producer – the ATI Allegheny Ludlum Corporation – were singled out as respondents.

Soon after President Obama imposed additional tariffs on Chinese commercial, low-cost tires as a China-specific safeguard measure, MOFCOM issued a press release saying it would review AD and CVD petitions against U.S. poultry products and cars. Many observers rushed to label this announcement as “retaliation.” However, both products have been the subject of trade disputes between China and the United States for a long time. Our previous article “Trade War?” analyzed the safeguard action and recent trade disputes between the two sides, querying whether China was retaliating in the opening salvo of a trade war. The initiation of investigations into U.S. automobiles may require an adjustment in our analysis. We expect to post soon an analytical article on China’s investigations of alleged U.S. subsidy programs, particularly as they refer to U.S. automobiles.
 

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This article is co-authored by Elliot J. Feldman and John J. Burke.

 Until now, China has preferred the WTO to resolve trade disputes. Of a dozen countervailing duty cases brought against Chinese products, all but one (the coated free sheet paper case failed at the International Trade Commission) went adversely before U.S. agencies and the Government of China challenged none of these final agency determinations in U.S. courts. Instead, China consolidated four of them and complained at the WTO.

We have indicated before our doubts about the wisdom of this choice (see our blog article titled WTO Challenges: Not Always A Panacea For Respondents In Trade Litigation). Now, there is new evidence. In GPX International Tire Corporation v. United States, a case brought before the United States Court of International Trade (“CIT”) by private parties (not the Government of China), Chief Judge Jane Restani found an important flaw in the procedures of the United States Department of Commerce that could return substantial sums of money to importers of Chinese goods and alter the way trade remedy actions are brought and analyzed against China. Although this victory for Chinese interests is less than suggested by its advocates and some in the trade press, it is significant nonetheless and comes at an important time. The Chinese Government has achieved nothing comparable in its efforts at the WTO.

Judge Restani’s decision does not preclude the Department of Commerce from initiating countervailing duty investigations against China or any other non-market economy. In fact, its impact is more likely to be seen in the conduct of antidumping cases against China. Judge Restani held that, when Commerce chooses to apply the countervailing duty law to China with respect to the same products for which it also is calculating antidumping duties, using the non-market economy methodology, Commerce must alter its antidumping calculations to avoid counting the same subsidy twice. She noted that Commerce would have to accomplish this task within the confines of the non-market economy provisions of the antidumping law. She remanded to Commerce to find some way to resolve this problem.

The easiest way for Commerce to resolve the double counting problem, as strongly hinted by Judge Restani, would be to resume its old practice of more than twenty years of not applying the countervailing duty laws to non-market economies. She noted that the Court of Appeals for the Federal Circuit in the 1986 case, Georgetown Steel, held that Commerce was not required to apply the countervailing duty laws to non-market economies. Many legal commentators had interpreted the Georgetown Steel case as prohibiting the use of countervailing duty laws to non-market economies. Judge Restani acknowledged that interpretation, but held that Georgetown Steel was ambiguous and she herself found the statute ambiguous. Therefore, she deferred to Commerce’s interpretation as "not unreasonable."

Judge Restani implicitly urged Commerce to abandon its adventure in applying the countervailing duty law to non-market economies, but nonetheless gave Commerce the option of altering its antidumping methodologies to prevent double counting. Given all of the political capital the Commerce Department has now invested in applying the countervailing duty laws to China, we expect Commerce will work hard to find a way to resolve this issue through changes in its antidumping calculations, without returning to the conventional interpretation of Georgetown Steel.

Commerce could separate antidumping from countervailing duty cases. It could decline to initiate them together against the same product. The cost of filing may go up for petitioners, but they might be able to preserve the ability to claim both subsidies and dumping. They could, alternatively, not include alleged subsidies in the calculation of cost of production for dumping, and instead allege all subsidies together in the separate countervailing duty petition. There would be no double-counting, but alleged subsidies would not escape scrutiny.

Judge Restani does not exclude these possibilities. To the contrary, she expressly authorizes as “reasonable” petitions alleging subsidies in non-market economies. She denies overturning Georgetown Steel, but she certainly overturns the popular understanding of it for the last two decades.

Judge Restani also overturned Commerce’s automatic use of December 11, 2000, the date China joined the WTO, as the cut-off date for determining whether a subsidy could be calculated in China. Commerce had been countervailing alleged subsidies conferred after that date, but refusing to investigate any allegations of subsidies conferred before that date. Some of the Chinese companies argued that Commerce could not go back any earlier than the date in 1997 when it announced it would apply the CVD law to China. The U.S. producers argued that there should be no cut-off date. Judge Restani ruled that Commerce must decide how far back to go based on the facts of each subsidy allegation. The bottom line for the Chinese Government and Chinese companies is that they now have to be prepared to defend against subsidy allegations reaching back into the 1990s, a serious setback from core arguments advanced by some counsel for China in the CVD cases.

Judge Restani, Chief Judge of the CIT, has long been a rigorous, thoughtful judge willing to reject the arguments of the United States Government and prepared to interpret the law and international agreements as favoring free trade. However, the Court of Appeals for the Federal Circuit historically has not been unwilling to overturn her. Occasionally, when she thinks a legal issue especially important and perhaps difficult, she assembles a three-judge panel of the court to hear a case. Three-judge panels have not been overturned in the last twenty years. Consequently, this decision is vulnerable to appeal.

Despite the celebration of a Chinese victory, assuming an unsuccessful appeal, there may be many ways around the rejection of double-counting, leaving China with less of a legal victory than it seems now to think. Nonetheless, although China lost the key legal principle at issue in the case – whether subsidy actions can be brought against non-market economies – it won a point that should mean the return of monies to importers of record in the United States and should complicate life for petitioners who were making the simultaneous filing of antidumping and countervailing duty petitions routine. As narrow as that victory may be, it is substantially more than anything gained to date at the WTO, and more than anything likely to be possible at the WTO as to Chinese exposure to CVD petitions.  It ought  to convey several lessons one of which is that U.S. courts are not necessarily inhospitable to Chinese appeals.  Another ought  to be, like the Chinese proverb, that the road is long, and requires many steps.  This appeal should be the first, not the last, on a journey to justify the practices of the Chinese economy.
 

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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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The Commerce Department on August 12 postponed its preliminary determination in Prestressed Concrete Steel Wire Strand from the People’s Republic of China to October 24 claiming it needed more time due to the large number and complexity of the subsidy programs alleged in the case.  However, most of the allegations involve programs that Commerce has investigated recently in other cases.  A more likely explanation, therefore, is that the civil servants temporarily acting while political positions in the Commerce Department remain vacant want more time in hopes that more politial guidance wil be provided before critical policy decisions must be made.  A recent article in Inside U.S. Trade's World Trade Online took note of the large number of vacancies in the political positions in the Commerce Department.  We discussed how these vacancies are affecting trade policy in a recent posting on this blog.

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