The final part of “Nothing Unites The United States Congress Like China (And Not In A Good Way): Treating China Like Canada (Maybe Even Worse),” we present this week. It is called, “Lessons From Canada.” Part One, entitled “Rewriting Subsidies Law To Fit Chinese Facts,” was posted two weeks ago; Part Two, “The Broken Promise To China,” was posted last week.
China is not the first trade partner of the United States to experience losing by winning, going through the process by the rules only to have Congress change them. Perhaps there is something in the American culture that accepts Lucy enticing Charlie Brown and then snatching the football from him. We cautioned, in an article posted August 2, 2009, about “How The U.S. Treats Its Friends In Trade Disputes.” We did not elaborate there on changing the law, but Canada has experienced exactly what has now happened to China, and it has left a lasting impression on Canadians.
To overcome what it interpreted as an intractable bias against foreign countries and entities in U.S. courts, Canada successfully negotiated an alternative dispute resolution system for trade cases, Chapter 19 of the Canada-U.S. Free Trade Agreement, that became Chapter 19 of the North American Free Trade Agreement (“NAFTA”). Chapter 19 creates binational panels of trade experts from both Canada and the United States to replace the U.S. Court of International Trade for appeals of administrative determinations on countervailing duty and antidumping investigations at the Department of Commerce and the U.S. International Trade Commission. The binational panel decisions cannot be appealed except for limited “extraordinary challenges” brought by the governments for gross panelist misconduct or ultra vires panel actions that threaten the review process, so the panels replace the Court of Appeals for the Federal Circuit as well as the Court of International Trade.
Chapter 19 came into effect in 1989 and Canada won some of its first appeals to binational panels within the year. The United States promptly began to curtail the authority of Chapter 19 panel decisions. The Department of Commerce refused to recognize panel decisions from one administrative review to another, forcing Canadian entities to appeal every year determinations finding certain programs to be countervailable subsidies after binational panels had found, in the previous year, that they were not. This practice did not deviate radically from the Department of Commerce’s tendency to ignore CIT decisions as well, but Canada had thought that the Free Trade Agreement would mean greater comity.
Canada found the United States continuously ignoring binational panel decisions. When binational panels decided that the United States Customs Service had no legal authority to collect more than $1 billion in duty deposits, the United States refused to return the money to Canadians as the law seemed to require. The United States used the money as leverage to force Canada into a settlement of a case that Canada had won.
Most egregious, perhaps, and most consistent with China’s experience now, Congress used the occasion of implementing trade liberalization – the Uruguay Round Agreements Act of 1994 – to enhance protectionism, explicitly changing trade rules in the law to reverse adverse judicial decisions in the ongoing feud with Canada over softwood lumber. A section of the trade law, 19 U.S.C. § 1677(A)(5A)(D)(iii), was scripted by U.S. petitioners expressly to overcome decisions favoring Canada in trade remedy judicial appeals.
During the last war over softwood lumber, the United States forced Canada into extraordinary challenges under NAFTA and into U.S. courts to enforce NAFTA and WTO decisions. The United States turned its defeats at the WTO into opportunities to rehabilitate rejected agency determinations. Matters were prolonged for years while Customs collected deposits on duties that would never be owed. The United States accumulated $5.5 billion while bleeding out the cash flow of Canadian companies.
Canadians became completely discouraged. No matter how many times they won legal decisions, the United States kept collecting and holding onto their money. The dispute dragged on for five years. All the while, Canadians remembered well how the United States was willing and able to change the laws when Canadians had enjoyed legal victories, or to interpret laws in novel and doubtful ways.
Nor was the experience with the Uruguay Round implementation entirely new. The Department of Commerce, invoking Section 304 of the trade law, had imposed “interim measures” against Canadian softwood lumber in October 1991, collecting duty deposits, without a petition, self-initiation, nor a preliminary determination. It took two years for an international panel of the General Agreement on Tariffs and Trade (“GATT”) to find this action “inconsistent with Article 5:1 [of the GATT]. The United States then did nothing to comply with the GATT decision. This experience, too, Canadians remembered many years later.
Eventually, Canadians gave up, entering an agreement in which they handed over $1 billion to the United States, half of which was given to the U.S. industry that had lost the legal battles. It was not the first such cash payment to settle a trade dispute (Mexican cement companies paid $150 million), but it was the first not to result in free trade. The Canadians accepted managed trade at higher duty rates than prevailing at the time of the settlement when the legal process had promised free trade. The United States persuaded Canadians that, in the end, they could not win, no matter how much the law supported them. International rulings could not be enforced, and the domestic law could always be changed.
The United States deployed a powerful combination of actions against Canada, defying adverse legal decisions, collecting and withholding money illegally, changing the law. In the end, the United States got its way, not by celebrating the rule of law, but by bending the law to its will. Nothing impressed Canadians more negatively than completing a cycle of the judicial process only to have the law changed.
China Is Not Canada
In addition to the common lessons for China and Canada from different cases – that participation in the judicial process is no guarantee of a fair outcome – there are lessons, too, from the same cases. To pursue subsidies allegations against a non-market economy, the Department of Commerce adopted a methodology in parallel to its antidumping methodology for NMEs. Eschewing values in an economy with no market, the Department has looked to values in other countries. These surrogate values are meant to substitute for values in China that cannot be relied upon absent market forces.
The caprice in selecting surrogate values is perhaps inescapable, but the Department of Commerce has been aggressive in abusing the virtually unlimited discretion it enjoys with a silent statute. The NME methodology for antidumping has statutory rules concerning the selection of surrogate values. Because no statute ever authorized countervailing duty investigations in NME countries, there are no rules. H.R. 4015’s pithy two pages introduce none.
In the countervailing duty investigation of Laminated Woven Sacks, the Department used land values in Bangkok as surrogates for rural Shandong Province. The Department did not even acknowledge in its final determination the testimony of a land use expert that such comparisons of land values across countries and between urban and rural areas are nonsensical.
The Department of Commerce justified its use of out-of-country benchmarks to evaluate subsidy allegations against products from China by citing its final determination in Softwood Lumber from Canada, the very trade dispute in which the United States kept changing the rules. There, the Department had reasoned that provincial government ownership of Canadian forests meant excessive government control of the market and prices, preventing the Department from measuring alleged subsidies. The Department therefore selected prices from the United States, “cross-border benchmarks,” effectively treating Canada as a non-market economy.
A Canada-U.S. Free Trade Agreement binational panel had struck down the cross-border benchmarks in a previous iteration of the dispute over softwood lumber, and a NAFTA panel, more than a decade later, rejected them again. The WTO Appellate Body ruled that out-of-country benchmarks might be justified in some cases, but not in this one. Claiming the WTO rejection of the cross-border benchmarks in this case to be an approval of cross-border benchmarks in principle, the Department of Commerce persisted in using them until Canada capitulated more generally for a settlement.
The Softwood Lumber final determination – repudiated by a binational panel and hardly endorsed by the WTO – has been the legal basis for the Department of Commerce’s methodology in applying surrogate values to China in the subsidies cases that the U.S. Congress has now blessed. The legislation never addressed this issue at all, and China has failed to challenge judicially this fundamental infirmity in the legal process. The Chinese countervailing duty cases are, therefore, the direct progeny of the U.S. treatment of Canada, its best friend and leading trade partner.
Although China is experiencing what Canada has experienced, China is not Canada. Four decades have passed since Canada underwent a drastic reappraisal of its relations with the United States and decided it had to diversify, only to conclude in a Royal Commission Report thirteen years later that Canada would always be dependent on the United States and needed to secure access to the American market. The free trade agreements were supposed to provide that security, but once binational panels began ruling in favor of Canada, the United States hastened to change, in fact and in legal interpretation, the terms to which it had agreed.
The United States has always taken Canada for granted. Canada has not always had to accept that relationship, but it has almost always elected to do so.
The United States cannot now, and never will be able, to take China for granted the way it does Canada. China will not bend so easily to the American will. During the last decade it has been chic in Canada to talk about a foreign policy that “punches above its weight,” highlighting the contradiction between Canada’s prosperity and international influence, on the one hand, and its very small population, on the other. China, by contrast, is thought not to punch its weight at all, still presenting itself partially as a developing country not ready for a full international role. Yet, the Chinese economy already surpasses Canada’s in size and is second only to Canada’s in two-way trade with the United States. Canada will never be a regional power in a region with the United States; China is already a regional power and is growing more powerful.
The United States cannot reasonably expect China to accept the kind of international trade treatment it has gotten Canada to accept. China will have no less a memory of what has happened, and may have no less bitterness that, having played by the rules and participated in the process, China had to face the United States simply changing the rules. But unlike Canada, China will not accept merely what the United States will permit it to have.
The Dangers Of What Has Been Done
Notwithstanding the celebration of bipartisanship and the suggestion of national unity against China in legislating H.R. 4015, the United States has embarked on a perilous course. Following the way it has treated Canada, the United States risks a trade war and endless antagonism with China. It risks, too, the whole international trading system now defined by the WTO, which the United States carefully has built over the last sixty-five years.
It is hazardous to exaggerate U.S. dependence on China as the leading creditor and emerging export market for the United States. China, on many dimensions including trade, is dependent on the United States. Nor should one romanticize the role China plays in the international marketplace. China’s economy is largely controlled from the center and the government does try to pick winners and losers. Notwithstanding protest and denial from China’s Minister of Commerce, there are instances when the appropriate question is not whether the state subsidizes, but whether those subsidies are actionable under U.S. and WTO laws and obligations.
The United States will remain for many years to come a greater power than China in virtually every respect. But unlike Canada, whose ambitions have been contained in a desire to be a faithful and trusted friend and ally, China’s ambitions are to be America’s equal. Probably nothing more; certainly nothing less.
China could interpret this most recent experience as a reason to give up on the rules, to bow out of the judicial processes. To a startling degree, that is what has happened with Canada.
China could devise ways to retaliate or, perhaps worse, imitate American conduct. China will not be inclined from the overheated rhetoric in the United States to conciliate, and it surely will not, like Canada, capitulate. The United States does not need a hostile or antagonistic China, and China will not benefit from a trade war with the United States. This latest episode, however, could be a turning point, as it was for Canadians who harbor an eternal resentment about the American willingness to change the rules when the United States does not like an outcome. Crowing about changing the rules after losing a legal proceeding is no way for the United States to avoid alienating the Chinese the way it has alienated many Canadians. To most Americans, it may not matter how Canadians feel. They still bend. But this time, with China, the United States is dealing with a much less forgiving and compliant friend.