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

Coauthored by Elliot J. Feldman and John J. Burke

The last of the quotas on textile and clothing imported into the United States from the developing world expired at the end of 2008 with the end of the quotas authorized by China’s Protocol of Accession to the WTO. Notwithstanding the end of the quotas, trade in textiles and clothing remains distorted by a web of bilateral agreements that give preferential access to the U.S. market on a quasi colonial basis. Dr. Elliot J. Feldman discussed these issues in a speech he gave on November 3, 2009 to a meeting of the Private Sector Consulting Committee of the International Textiles And Clothing Bureau entitled Rags To Riches To Rags? Textile Trade Policy In The United States After The Quotas.

Dr. Feldman noted in a speech (Part I & Part II) given on September 20, 2008 to the Chinese National Textile Association, Shandong Province Textile Industry Association and the Zaozhuang City Government, that U.S. textile companies would face substantial obstacles in filing trade remedy actions against textiles imports. Whether for the reasons he offered then, or for reasons related to the global recession, no trade remedy actions have been filed to date against textile or apparel imports into the United States. It is prudent to remain vigilant. Cases may still come. If they do, however, they are likely to be narrow and targeted.

Our prediction that significant trade remedy disputes over clothing and textiles are not likely with the United States is based on the organization and structure of American government as much as it is on the nature of the merchandise. The United States federal government has three branches, reasonably balanced and offsetting one another. The power to negotiate trade agreements rests with the President, but only Congress can pass the necessary legislation to implement them. Each house of Congress is divided into many committees.

Two committees, one in each house, control international trade, the Finance Committee in the Senate, and the Ways & Means Committee in the House of Representatives. These committees are also the tax writing committees. For various reasons, the Congressmen and Senators most interested in tax-writing tend to come from rural states with small populations. U.S. textile and apparel manufacturing tends to be concentrated in the more populous states, such as California, New York, New Jersey, Georgia and North Carolina. Hence, in the current Congress, at least, textile and apparel interests are not well-positioned to influence laws and policy with respect to international trade.

Notwithstanding over 30 years of quotas, the U.S. apparel industries declined drastically as production was shifted to lower cost countries, such as China, and countries that benefited from special trade preference agreements with the United States. These industries have declined to the point where, except for certain niche products, it would be hard to find a U.S. industry left with the standing to file a trade remedy case against apparel imports. The U.S. textile industry would like to restrict imports of apparel from countries such as China and Vietnam, because those imports compete with apparel made with U.S. textiles in countries that have entered into preferential trade agreements with the United States. However, the textile industry does not have standing to file trade remedy cases against apparel imports.

The U.S. textile industry would like to restrict imports from countries such as China because Chinese imports interfere with a quasi colonial strategy they have worked out with U.S. apparel companies. The strategy is simple. The capital intensive textile producers sell their products into regions subject to special agreements, originating with the Caribbean Basin Trade Partnership Act, the Caribbean Basin Economic Recovery Act, the Andean Trade Preference Act, and the African Growth and Opportunity Act. The countries subject to the agreements receive textiles and raw materials from the United States duty-free and return them in the form of finished goods to the United States, which imports them duty-free provided they contain raw materials from the United States. The United States thus effectively incorporates cheap labor offshore, preserving the capital intensive industry. The WTO waived on all of these agreements, permitting the discriminatory preferences regarding American content, in May 2009.

The looming question is whether China can penetrate with textiles the markets the United States has insulated through the duty-free provisions for apparel made from U.S. fabric and yarn. So far, however, China has not shown much interest in this direction, content to intensify capital investment at home while also relying at home on the labor intensive process of making finished products. Because the U.S. arrangements are based on regional trade agreements recognized by the WTO, there are limits on what other competing countries can do. They can seek their own bilateral agreements with the United States, of course, asking for the same terms as applied to the NAFTA, CAFTA, and Andean countries. They might focus on reconsideration of these privileged relationships by targeting tariff reductions in the Doha Round, but the Round already is paralyzed by agricultural issues. Expiration of the Multifiber Arrangement meant the end of quotas, but it has turned out not to mean global free trade.
 

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When China announced it was investigating U.S. chicken parts for dumping a few weeks ago, there were immediate suggestions of an incipient trade war, a Chinese “retaliation” over U.S. safeguards imposed on commercial tires, which we discussed in Trade War? , a recent article on this blog.  Yet, there have been disputes between China and the United States over chickens and chicken parts for several years. The United States has been blocking access to the U.S. market for Chinese chickens, and even before questioning trade in the other direction China has been challenging the U.S. actions.

Less than six months after China requested WTO consultations with the United States over measures that they claimed unfairly banned chicken imports from China, members of the U.S. Senate and House of Representatives reached agreement on legislation that eventually may reopen the door to Chinese chickens. On September 25, 2009, U.S. Secretary of Agriculture Tom Vilsack and U.S. Trade Representative Ron Kirk announced that members of the U.S. Senate and House of Representatives had reached an agreement on legislation that would provide the U.S. Department of Agriculture (USDA) funding for the year 2010 to implement rules allowing the import of poultry products from China. The announcement came two days after the WTO declared a panel had been formed to hear the case raised by China in April of this year that the United States’ restrictions on imports of Chinese poultry violated its obligations under the WTO. The public announcement from these Obama Administration officials suggests that the Administration had concerns about the legitimacy of the ban and finally succeeded in moving members of Congress from a protectionist position to a more pragmatic one on questions of the food safety of Chinese imports.

The history of the chicken trade dispute goes back to 2004, when China and the United States suspended trade in poultry amid concerns about the spread of avian bird flu. China claims that, at the Sino-US Joint Commission on Commerce and Trade in 2004, the two countries mutually agreed to lift the bans, but that the United States had failed to live up to that promise. Congresswoman Rosa DeLauro, a Democrat from Connecticut and the Chairwoman of the Agriculture Subcommittee of the House Appropriations Committee, has been an outspoken critic of safety standards for food imported from China, and was primarily responsible for legislation that effectively banned imports of Chinese poultry products. The legislation cut off funding for USDA to implement rules that would allow the importation of Chinese chicken parts consistent with U.S. food safety guidelines. Section 727 of the Omnibus Appropriations Act of 2009 (Public Law 111-8) unabashedly stated that, “None of the funds made available in this Act may be used to establish or implement a rule allowing poultry products to be imported into the United States from the People’s Republic of China.”

Congresswoman DeLauro’s version of the 2010 appropriations bill would have continued the ban on Chinese chicken, but the U.S. Senate version of the bill removed the ban subject to USDA’s adoption of safety inspection and approval procedures. The Senate version of the bill appears now to have prevailed in U.S. House and Senate negotiations, and soon may be approved by Congress.

Although the imbalance in the bilateral chicken trade is a dispute at least five years old, it received greater attention in 2009 as China requested WTO consultations with the United States on April 17, and then initiated an antidumping investigation and threatened to cut off U.S. chicken imports following President Obama’s decision in September to impose safeguard duties on Chinese tires. The U.S. Poultry and Egg Export Council has been lobbying Congress and the Obama Administration to keep the chicken trade open with China, at least for U.S. exports, especially as China is responsible for consuming 19% of U.S. chicken exports, and jumbo-sized chicken feet produced in the United States have been very popular in China and can be sold at much higher prices than in the United States.

Whether the Senate and House agreement on the 2010 appropriations bill ultimately will lead to USDA’s approval of Chinese chicken imports remains to be seen. The Obama Administration’s USDA will continue to face competing domestic pressures from Congresswoman DeLauro, food safety critics, and trade protectionists to require strict audits and on-site review of Chinese poultry processing facilities for compliance with U.S. food safety standards. But U.S. poultry exporters, as well as U.S. poultry producers looking to import from facilities located in China, will be pushing for free trade in chicken. The question is whether China’s WTO complaint can provide the additional impetus to ensure that USDA inspection procedures are conducted fairly, without the taint of protectionism, and will open the door for the import of safe and sanitary Chinese poultry products.

Does China Have A Case At The WTO?
China has argued that the U.S. chicken ban is a quantitative restriction on trade in violation of Article XI:1 of the General Agreement on Tariffs and Trade (GATT 1994) and Article 4.2 of the WTO Agreement on Agriculture, and that the ban is not consistent with the Agreement on the Application of Sanitary and Phytosanitary Measures (“SPS Agreement”). Even though legitimate questions have been raised in the United States about the safety of Chinese food products generally, it would seem that China has a good case regarding chickens that the U.S. ban is not consistent with the WTO Agreements.

It is not clear that the ban would even qualify as an SPS measure that the United States might justify on the basis of concerns for protecting public health. As a WTO panel noted in paragraph 7.149 of European Communities – Measures Affecting the Approval and Marketing of Biotech Products, the purpose, form and nature of a law determines whether it qualifies as an SPS measure. That panel went on to note that the “nature” of an SPS measure is that it has “requirements and procedures, including, inter alia, end product criteria; processes and production methods; testing, inspection, certification and approval procedures… ." Section 727 of the Omnibus Appropriations Act of 2009 does not establish any requirements or testing procedures for determining whether Chinese poultry products meet public safety criteria. To the contrary, Section 727 denies funding for the USDA to adopt and implement any such requirements or procedures exclusively for poultry products from China (“None of the funds made available in this Act may be used to establish or implement a rule allowing poultry products to be imported in the United States from the People’s Republic of China.”).

Even were the ban considered an SPS measure, it would not likely satisfy the requirements of the SPS Agreement. Articles 5.1 through 5.4 of the SPS Agreement require that SPS measures be based on assessments of health risks, taking into account scientific evidence, the cost-effectiveness of alternative approaches to limiting risks, and the objective of minimizing negative trade effects. Article 2.1 requires that any SPS measure be “applied only to the extent necessary to protect human, animal or plant life or health” and that it be “based on scientific principles and is not maintained without sufficient scientific research ….” The very procedures that would allow for risk assessments, research, the gathering of evidence, and evaluation of competing effects have been blocked by legislation that precludes any financial support going to USDA to undertake such procedures.

USDA likely has known that the Chinese chicken ban is problematic with respect to the United States’ international obligations. A February 2006 fact sheet published by the Foreign Agriculture Service explains that the SPS Agreement was adopted during the Uruguay Round with the support of “[v]irtually all countries, including the United States” because countries previously had used vague and opaque SPS measures to disguise restrictions on trade. According to USDA, the SPS Agreement requires that measures “be based on science,” “be applied only to the extent necessary” to protect health, and “should not arbitrarily or unjustifiably discriminate between countries where identical or similar conditions prevail.” USDA, however, has had its hands tied thus far by the Chairwoman of the Agriculture Subcommittee of the House Appropriations Committee, who opposed earlier attempts by USDA to implement rules allowing the inspection and import of Chinese poultry products.

Were a WTO Panel to agree that Section 727 lacked the “nature” of an SPS measure, Section 727 would appear to be a quantitative restriction on trade in violation of GATT Article XI(1) and Article 4.2 of the Agriculture Agreement. Given the law’s unique and exclusive application to China, it would appear also to violate the principle of most-favored nation treatment, as China suggested in its request for consultations:

Moreover, by imposing these restrictions with respect to imports from China, but not similarly prohibiting the import from other Members of like products, China is concerned that the US fails to accord immediately and unconditionally to China an advantage, favour, privilege or immunity granted to other Members with respect to rules and formalities in connection with importation.
 

The United States certainly would have other trade disputes with China that would be more compelling and defensible at the WTO.

As pointed out previously on this blog, it is a significant undertaking to seek relief through WTO Dispute Settlement Proceedings. However, in this case there is no mechanism for China to challenge Section 727 in U.S. courts. A WTO challenge offers the best avenue for China to obtain meaningful relief. Here, simply filing the WTO challenge appears likely to have given the U.S. Government sufficient incentive to lift the chicken ban voluntarily.

The WTO challenge to the chicken ban has moved the internal U.S. discussion of the issue from one of purely domestic politics controlled by a powerful subcommittee within the U.S. House of Representatives, to one of respect for international obligations in which the President’s Cabinet-level policymakers—the Secretary of Agriculture and the U.S. Trade Representative -- are involved actively. The President’s pragmatism suggests that he chooses his international trade battles carefully. While the President will want to be resolute on certain trade issues with China, the Chinese chicken ban seems transparently inconsistent with the United States’ WTO obligations and public safety concerns can be addressed through USDA’s implementation of prudent, non-discriminatory inspection procedures. WTO attention to the Chinese chicken ban, coupled with support from U.S. industry groups with aligned interests, should provide the Obama Administration and the Congress with the incentive they need to ensure that the U.S. Senate and House agreement to remove the ban from the 2010 appropriations bill is implemented in the final draft that reaches the President’s desk for signature.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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When companies see their access to the U.S. market threatened by actions of U.S. Government agencies in trade cases, whether antidumping, countervailing duty, or safeguards, often they want to ask their government to challenge those actions at the World Trade Organization (“WTO”). Many governments, too, think they should take their grievances over U.S. policies to the WTO rather than challenge U.S. government actions in U.S. courts. However, companies, and governments, should first consider whether the likely benefits to them outweigh the potential costs.

The WTO dispute resolution process is designed to vindicate the rights of sovereign governments, not necessarily those of the private parties to trade disputes. Only governments may appear, and even a victory may not bring meaningful relief to the government or to the affected private parties. Also, the WTO process could put at risk meaningful relief that the private companies might be able to obtain on their own in U.S. courts.

The WTO process lacks a remand mechanism. Thus, should the WTO Appellate Body determine that a dispute resolution panel made a mistake, it could not send the issue back to the panel to correct the mistake. In many cases, this lack of remand authority means that an Appellate Body reversal, even on relatively minor grounds, terminates the proceedings without any resolution.

Without a remand capability, the Appellate Body cannot gather additional information when it has determined that panels below did not gather enough. The Appellate Body is not empowered to go beyond the record. So, the Appellate Body has to conclude that the record is inadequate, whereupon it may decline to rule, either on the whole case, or on some, often important, parts of it.

Even when the WTO finds that the U.S. actions were contrary to WTO obligations, this vindication may be of little practical benefit for a complaining government or an affected company. The WTO retaliation scheme often involves retaliation in other industry sectors, but unless the pain of the retaliation is enough to cause the United States to comply, it typically does not benefit the industry sector that is the focus of the dispute. The government authorized to exact compensation through retaliation must navigate domestic politics to pick industries for retaliation, and often finds it impossible not to incur the wrath of one industry or another. After all, antidumping and countervailing duty cases erupt because one country believes another is shipping too much of a product at an unfair or subsidized price. It would be unusual for the second country to be shipping similar quantities of the same merchandise in the other direction. Retaliation – restricting imports – is never likely to be on the same merchandise. Therefore, the government may be vindicated, and almost inevitably at a political price, and the company frequently gets no relief at all.

Another factor that companies, especially, should consider is whether a WTO challenge could put at risk more meaningful relief that the company might obtain through appeal of the agency actions in U.S. courts. Just as there is a possibility that victory before the WTO could improve the chances of victory before a U.S. court, there is risk that a loss before the WTO could undermine the company’s U.S. court appeal. This risk is acute in antidumping cases because WTO panelists are almost always former government dumping officials: their training and experience is in imposing duties on goods being imported into their countries. They are not very sympathetic with exporting companies, nor as comfortable with interpreting the law from an exporter’s perspective. Also, less obvious, but nonetheless real, is the risk that a victory at the WTO might be used by the United States to trump a victory in U.S. court.

This latter risk arose in the Softwood Lumber case where Canada and the Canadian lumber industry pursued a strategy of challenging an affirmative U.S. International Trade Commission (“ITC”) threat of injury determination under both U.S. law and the WTO. Canada won on both fronts. However, the U.S. Government claimed that the new ITC determination made to “comply” with the WTO ruling allowed the United States to keep its antidumping and countervailing duty orders in place even in the face of an order requiring the ITC to make a negative determination as a matter of U.S. domestic law. The U.S. Court of International Trade (“CIT”) eventually struck down that claim in Tembec, Inc. v. United States, USCIT Slip Op. 06-152 (Oct. 13, 2006). However, by the time the court’s decision became final, the United States had collected billions more in estimated antidumping and countervailing duties and Canada had acquiesced in a settlement that deprived the court decision of precedential effect.

Were the United States to try again what the CIT struck down in Tembec, it surely would fail again. That conclusion, however, does not mean the United States might not try, and for the time being, with the Tembec decision having been denied precedential effect, the United States could again indulge in the principle that justice delayed is justice denied (i.e., the delay and continued collection of cash deposits would force a settlement unfavorable to the respondents).

There are cases that should be taken to the WTO, both by governments and by private companies. More often, however, challenges to market protectionism should be brought in U.S. courts. In some cases, such as the U.S. Commerce Department’s use of a technique known as “zeroing” to find dumping and to inflate antidumping margins, the WTO offers the best chance of obtaining relief. The law does not require choosing forums, but it is prudent to do so, and particularly wise to overcome the reflex suggesting that the WTO could be a panacea for unfair protectionism.

 

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The United Steelworkers, qualifying as an “entity” “representative of an industry” under Section 201 of the U.S. Trade Act of 1974, petitioned the Obama Administration in April 2009 to enact a temporary “safeguard” remedy to protect the manufacture and sale of low-grade commercial tires in the United States against a surge of imports from China. Petition Seeking Relief from Market Disruption Caused by Imports of Consumer Tires from China, Inv. No. TA-421-07, April 20, 2009.  Even though the union filed the petition without cooperation or support from any company manufacturing tires in the U.S., and safeguards exist primarily to protect productive industries, the Obama Administration is under exceptional political pressure to honor the union’s request. 

The special safeguard law for China, Section 421, expires in 2012 in accordance with China’s Protocol of Accession to the World Trade Organization.  Thereafter, China will be subject only to the same safeguard provisions as every other country. Until then, the Obama Administration will have to weigh its relations with China against domestic interests and priorities. All safeguards, uniquely among trade remedies, require presidential decisions.

The United States International Trade Commission (“ITC”) issued a report on June 18 finding “market disruption,” the statutory basis for recommending trade relief for a domestic industry under the special safeguard for China. The ITC recommended, on July 9, three years of very high but gradually reducing tariffs. Ten United States Senators then wrote President Obama endorsing the ITC recommendations.

Relying on the ITC record, a Trade Policy Staff Committee (“TPSC”) assembled for this case and comprised of the Departments of State, Commerce, Labor, and Treasury, chaired by the Office of the United States Trade Representative (“USTR”), must make its own recommendation to the President as to whether he should grant any relief to the industry and, were he to do so, how much and in what form. The final public hearing on the case, convened by the TPSC, was held in Washington, D.C. on August 7. All written submissions were due from all parties by August 11.

The statute provides expressly for settlement of disputes where market disruption has been found, but should China want to settle this dispute, it must do so by August 17. The TPSC is expected to make its recommendation to the President by September 2. In the absence of a settlement, the President must decide the question of remedy for the market disruption found by the ITC by September 17.

China’s strategy in this case has been to adopt a “Republican” political and policy position – that the market forces surrounding the choices of the companies to give up the manufacture of low-grade tires should govern, allowing thousands of jobs to move offshore to lower cost manufacturers. China’s opposition to safeguard remedies has been articulated as a preference for market forces over the employment of American workers, and for economic analysis that contradicts the ITC’s report. Advocates for the Chinese side have given the law little attention.

The Chinese strategy opposing the imposition of safeguard remedies neglects both the politics of the American two-party system, and the legal purpose of safeguard provisions. Its reliance on dueling economic analyses, instead of law and a keener appreciation of the political situation of the President, probably will mean that the special safeguard for China will be applied for the first time. China may have something still to say, however, about the severity of the application.

The President is not likely to provide the full measure of relief proposed by the ITC because he may not want to gamble on the predictions that the tariffs would be prohibitive and cause even more market disruption, but he may be inclined to provide more “relief” than China would find acceptable. The August 17 deadline is not absolute (the statutory language instructing that the Trade Representative “should seek to conclude such agreement before the expiration of the 60-days consultation period” would seem equivocal enough were China to express immediately a commitment to a politically sensitive settlement). The statute also permits later review, on the President’s initiative, for modification, reduction, or termination of imposed relief. Mutual sensitivity to the domestic political implications of this case in both China and the United States could lead to an amicable compromise, albeit probably somewhat unsatisfactory (as compromises and settlements are supposed to be) for everyone. 

To continue reading the full article click here.
 

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The U.S. House of Representatives approved an amendment to the 2010 Energy and Water Appropriations bill, just before recessing for an August holiday, that would forbid the use of appropriated funds to “purchase passenger motor vehicles other than those manufactured by Ford, GM, or Chrysler.” The bill does not require that the vehicles be made in the United States, so cars manufactured by BMW, Honda, Toyota, Hyundai and others might be excluded from government fleets, but not necessarily a Chrysler made in Mexico or a Ford made in Germany. Congressmen may have been reasoning that cars made by companies effectively owned by the government should be given preference, but that thinking would have excluded Ford. Ford, then, would have been excluded because it was the only one of the “Big Three” American manufacturers that did not require a government bailout. It would have been politically impossible to exclude from government purchases the one traditional American manufacturer that has managed its own way through the economic crisis. The bill, otherwise, favors neither American workers nor vehicles made in the United States.

This amendment is unlikely to become law because the Obama Administration almost certainly will oppose it, as will Senators representing the thousands of U.S. workers who make Toyotas, Hondas, Hyundais, BMWs and the cars of other foreign-owned manufacturers in the United States.  Nevertheless, the amendment is a good indication of current protectionist sentiment in the U.S. Congress.  The Financial Times quoted Dr. Elliot J. Feldman last week condemning the Buy Ford, GM or Chrysler amendment.

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Senior U.S. officials revealed privately in the days prior to the first Strategic and Economic Dialogue (“S&ED”) of the Obama Administration, convening in Washington, D.C. on July 27, 2009, that they planned to ask China to subscribe to the Government Procurement Agreement (“GPA”) of the World Trade Organization (“WTO”). They assigned this quest, they said, a high priority, even as the subject seemed to escape public notice.

China did not begin discussing the GPA at the WTO until December 2007, even though upon its WTO accession in 2001 it was expected to negotiate GPA accession “as soon as possible.” China has sent out officials to study the terms under which other countries have signed the Agreement, and is working on a written proposal that would open its government procurement to foreign enterprises while protecting certain areas of economic activity.

China’s trade partners had attached no particular urgency to China’s GPA accession until the autumn of 2008, when China as well as more developed countries, led by the United States, began committing hundreds of billions of dollars to government expenditure for recovery from a global economic recession. It then became important for manufacturers to gain access to the planned expenditures of foreign governments, and the GPA appeared to be the key to access.
The United States would like its manufacturers to be able to participate in the Chinese Government’s expenditures for recovery and so wants China to sign the GPA. China, of course, would like the same for its manufacturers -- to have governments in the United States, Europe, and Japan buy Chinese goods with the funds the governments are spending for recovery. But signing the GPA is not so easy. The signatories have carved out many restrictive exceptions. China does not want to give away more than it gets. In every country, nationalist sentiment clamors for job creation at home, not for government expenditures to buy foreign goods and, hence, to create jobs abroad.

At the very moment, in February 2009, when the United States was asking the world to shun protectionism and recognize that free trade is a necessary element of global recovery, the United States Congress was inscribing in the American Recovery and Reinvestment Act of 2009 (“ARRA”) a requirement for governments of all levels to “Buy American” when spending $787 billion. The provisions were summarized upon notification to the WTO:

• Section 604 of the ARRA requires the Department of Homeland Security (DHS) to procure US-manufactured textile and apparel goods, subject to certain exceptions (including non availability, de minimis, purchases outside the United States, and small purchases). This provision becomes effective 180 days after the date of enactment of the ARRA, which was 17 February 2009. Section 604(k) requires DHS to apply the "buy American" provision in a manner consistent with US obligations under international agreements.
• Section 1605 requires that only US-produced iron, steel and manufactured goods be used in public buildings and public works funded by the ARRA, subject to certain exceptions (public interest, non-availability, or unreasonable cost). Section 1605(d) requires the "buy American" provision be applied in a manner consistent with US obligations under international agreements.

The commitment to apply these restrictions “in a manner consistent with US obligations under international agreements” followed public pledges by the newly inaugurated lawyer-President “that we are going to abide by our World Trade Organization and NAFTA obligations just as we always have.” The President had come under fire from the Government of Canada, in particular, because of the ARRA provisions.

President Obama struggled to minimize the significance of the “Buy American” provisions by emphasizing that they would not alter the American commitment to respect all international obligations. He recognized the importance of not sending a signal of protectionism. He told a Canadian Broadcasting Corporation interviewer, “I think that if you look at history one of the most important things during a worldwide recession of the sort that we’re seeing now is that each country does not resort to ‘beggar they neighbor’ policies, protectionist policies, they can end up further contracting world trade.” Yet, he acknowledged, “a lot of governors and mayors are going to want to try to find U.S. equipment or services.”

Provincial premiers and mayors in Canada decided to copy the Buy American provisions, and the protectionist fever that began with the United States, at least symbolically, inevitably spread. The National Development and Reform Commission (“NDRC”) issued on May 27 in China Circular 1361, Opinions on the Implementation of Decisions on Expanding Domestic Demand and Promoting Economic Growth and Further Strengthening Supervision of Tendering and Bidding for Construction Projects. Were the title not to have said it all, a summary might read, “Buy China.” According to the Circular, “Government investment projects that are under government procurement should purchase domestic products, unless these domestic goods, construction engineering or services are not available in China or cannot be acquired on reasonable commercial terms. Projects requiring imported products will need prior approval from relevant government authorities.”

The United States is a signatory to the GPA. China is not. Consequently, Chinese enterprises have no rights of access to government procurement in the United States, nor have U.S companies rights to participate in government procurement in China. Were the congressional objective in the ARRA to keep out China, there was no legislative need for the provision. State and local governments, by international agreement, were free without the legislation to discriminate against Chinese goods. Both countries have included escape clauses -- the U.S. in its legislation and China in the non-binding NDRC Circular -- requiring goods to be available on “commercial terms” at home before prohibiting imports, but both are structured to spend their stimulus packages to create domestic, not foreign jobs.

The concept of free trade, which President Obama recognized, requires mutual access to government procurement. However, the United States, when it subscribed to the GPA in 1998, attached hundreds of exceptions, including especially total exceptions for thirteen state and local governments and qualified exceptions for most of the other thirty-seven. Exceptions for highway and mass transit funding apply to all fifty states and exceptions for procurement of construction grade steel cover most states. Most of the ARRA expenditures are slated for state and local governments, with an emphasis on infrastructure, so the commitment to abide by international obligations offsets almost not at all the Buy American provisions that are consistent with the restrictive U.S. implementation of the GPA.

Much of China’s recovery expenditures are anticipated to be provincial and local, the likely “relevant government authorities” in Circular 1361. China’s absence from the GPA means foreign enterprises have no rights to government procurement in China, but provincial and local governments could buy from them. Circular 1361 converts the absence of a right into an effective prohibition. China and the United States are closed to each other’s government procurement, with governments retaining considerable discretion to open up as needed.

The ARRA, and Circular 1361, are signals. The U.S. interest in pressing China to sign the GPA will not produce quick or meaningful results as long as the United States sends protectionist signals, and China likely will reveal a competing protectionism unless it believes there will be a reciprocal opening. Despite the U.S. pressure, the two countries only agreed, as to the GPA, to treat all goods manufactured domestically as domestic products, regardless whether there might be foreign ownership -- a reaffirmation of current law.  The United States must step beyond assurances about compliance with international obligations and provide examples of a free procurement market; China must make purchases from abroad to enhance domestic stimulus projects. Without such concrete steps, both countries will be sending protectionist signals, and the more they press each other in settings like the S&ED, the more they may harm the cause of free trade. 

Dr. Feldman was quoted recently in a Business Week report on the S&ED.  He also discussed the June 2008 Strategic Economic Dialogue meetings in an interview with CNBC.

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