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

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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.
 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Why China?

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

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

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

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

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

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

China’s Internet Great Wall

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

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

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

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

What’s Next?

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

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

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

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

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A year ago, American sentiment toward China, at least as expressed by many Members of Congress, was decidedly negative. Pending legislation included denunciations of China’s subsidization of exports and currency manipulation. Some Members of Congress wanted to restrict all Chinese imports. The slow American economic recovery was blamed to a significant degree on China.

Now, with Americans more focused on domestic economic woes than on any other single concern, complaints about China have receded. Illegal immigrants in the United States seem more of a target than anyone outside the country, even though there is no evidence at all that they have contributed to unemployment or economic stagnation. Historically, Americans tend to blame foreigners for economic hardship and there is a spike in trade remedy actions against foreign products. Not this time. Neither China nor anyone else but Americans themselves (and perhaps the aliens within), especially congressional leaders, seem to be blamed.

Still, China remains an available target, or at least a convenient means for collateral attacks on other trade priorities. The Obama Administration recognizes three pending trade agreements, with Korea, Colombia, and Panama, as potential stimuli for an expansion of exports that would create jobs. After three years renegotiating them to satisfy moderate Democrats as well as trade unions, the Administration declared them ready for congressional passage many months ago. Republicans, claiming to be champions of free trade, zealously advocated for their immediate passage until the Administration was satisfied with them. Then, Republicans launched a political campaign to deny workers displaced by trade agreements the Trade Adjustment Assistance (“TAA”) that for many years had enjoyed bipartisan support because the Administration linked TAA to passage of the trade deals.

The Administration may have pacified Democrats with the renegotiations and persuaded them that the trade agreements would bolster the economy, but not enough to prevent the insinuation of China as a barrier to final congressional approval. House of Representatives Minority Leader Nancy Pelosi (D-Calif.) has demanded a House vote on a bill retaliating against alleged Chinese currency manipulation as a pre-condition for voting on the trade deals. Her gambit, moreover, seems to have some companion support on the other side of Capitol Hill, where a small group of Senators plans to introduce a similar bill to retaliate against alleged Chinese currency manipulation. No such bill currently is pending, and none was passed in the last year, but Senator Jay Rockefeller (D-W. Va.) is proposing one, focused as much on a complaint about the WTO’s Appellate Body as on China.

With a crowded legislative agenda, bills on Chinese currency not yet fully conceptualized are not likely ever to become law. The very threat of them, however, could impede other international trade. The attempted linkage to the trade agreements with Korea, Colombia, and Panama is typical of congressional legislative tactics, but also a desperate sabotage of the Administration by its own political party.

The Administration wants and needs the trade deals. Republicans have wanted these trade deals, but have not wanted President Obama to enjoy the satisfaction and potential electoral help from passing them. The President could not pass them relying on his own party. At the moment when he seemed to have struck an agreement with Republicans to pass both TAA and the three free trade agreements, some Democrats seem to be seeking ways to stop him. Their general weapon of choice appears to be China, which Obama has not wanted to antagonize, and more specifically the currency, which his economists generally have advised not to pursue more than diplomacy has been pursuing already.

China, then, is no longer the principal target in bills about currency manipulation. In the Senate, the more fundamental complaint is about the WTO, and in the House the intended target is trade liberalization. In neither case is China likely to be used effectively, but it surely must be to China’s dismay that it is being used in these debates at all.

Other pending legislation regarding China arises more in the context of national security or simple nationalism: a resolution that would ban Chinese manufacture of parts for the President’s helicopter fleet; a ban on technology transfer from NASA. There is more than one “sense of” resolution, which has no legal consequence. Meanwhile, the Administration is promising China more from its export control reform than it can or will deliver, but at least it is actively gesturing in a desired direction.

Unlike a year ago, the legislative spotlight illuminating grievances over the economy and trade is not on China. Indeed, what some call the “Manchurian Candidate” for President, former Ambassador to China Jon Huntsman, has suggested that the United States must look to itself before looking to China for explanations of economic difficulties. The current focus should not be misinterpreted: the bills about China are not about China.

There are many reasons why. The most important is domestic. The summer spectacle of eighty-seven congressional freshmen holding the country’s debt ceiling hostage concentrated minds at home. Imminent possible failure of European banks, and of whole countries, has shifted focus from east to west. Renewed Wall Street bonuses and continuing home foreclosures are reminders of domestic greed, not foreign malevolence. The national conversation is not about China.

There is also a powerful explanation in the deliberate foreign policy toward China of the Obama Administration. Much has been done to routinize U.S.-China diplomacy and reduce earlier tensions. Even as there have been few concrete accomplishments, there have been many calming meetings. The Strategic and Economic Dialogue convened successfully. A summit of Presidents in Washington in January helped Obama recover from his doubtful Asian outing last November, and squads of potential Chinese investors have been visiting the United States, nurturing hope that some of the massive foreign reserves accumulated by China may yet find their way back to the United States. Better in the form of investments than loans or purchased bonds. China, at least rhetorically, has recognized that it cannot continue to attract foreign investment without making some foreign investments of its own.

In November, while in Asia, Obama called for resumption of the Doha Round. His Administration now admits that this objective is not likely to be fulfilled. With its failure will be a failure to capitalize on the imagined global trading rewards that might have energized the world’s economy, and diminish even more the instruments thought to be available for economic recovery. In place of multilateralism, bilateralism is a modest but nonetheless significant alternative.

Successful partnership with China becomes more important with every multilateral setback. Diplomacy that routinizes the relationship, that removes it from a critical spotlight, inevitably makes the partnership more attractive to China. The trick, however, must be to avoid appearing weak, or desperate, to China. As much as the United States needs China, China needs the United States. As congressional complaint about China is not about China, friendship with China is not necessarily so much about China either. Both are about solving economic problems felt at home but driven by forces as foreign as domestic.

And so it is for China, too. China needs the United States as much for China as for the United States, for domestic as well as foreign purposes.

Changes in American politics about China from a year ago say more about the United States than about China or U.S.-China relations. It will be important for both countries to recognize and understand the impact of domestic politics on their relations, and on the needs they have for each other.

 

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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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Elliot J. Feldman was the keynote speaker opening an applied International Trade Workshop in Beijing on March 21, sponsored by the University of International Business and Economics of Beijing and the United Nations Conference on Trade and Development (“UNCTAD”). The conference, on “Non Tariff Measures and Chinese Foreign Trade,” comes at a time when there has been growing concern about global protectionism advanced by non-tariff measures, especially in China. UNCTAD is launching a major survey effort to identify non-tariff measures and to design strategies to deal with them.

Dr. Feldman was the only attorney invited to the workshop, the only speaker during the two-day conference from the private sector, and one of only two Americans. Others were university professors, international and Chinese civil servants, almost all economists specializing in trade and international development. The second American on the program was Michael Ferrantino, the Lead International Economist at the United States International Trade Commission.

Dr. Feldman emphasized how difficult it can be to identify non-tariff measures and to distinguish them from legitimate concerns about public health and safety. He shared experiences from his practice in which non tariff measures have played an important role in international trade disputes, applauded the project to create a taxonomy of non-tariff measures globally and to seek a strategy for minimizing them, and urged the workshop participants to promote an understanding of the underlying political and economic motivations for erecting such trade barriers so that compromises can be reached protecting public health and safety legitimately while minimizing impediments to international trade.

Please click here to read the text of Dr. Feldman's address.

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The Trade Situation: Pending Bilaterals

President Barack Obama told his Asian hosts in November that he would like to see the Doha Round of multilateral trade negotiations resume as soon as possible, an extension of the campaign initiated in his first State of the Union Address to double American exports over the next five years. After declaring the midterm elections a “shellacking” due to a slow economic recovery, the President converted his long-planned Asian trip into a quest for jobs that would depend upon market opening for American goods. He tied trade liberalization and trade agreements together with economic recovery by promising to conclude a bilateral Free Trade Agreement with Korea while reconstituting multilateral talks.

The American press blamed China and India for the collapse of the Doha Round eighteen months ago, and the apparent alliance between China and India in trade talks suggested a potentially significant development in world affairs. However, the Doha Round failure should have been ascribed as much to the United States and the European Union as to any of the developing countries. The Doha Round began as the “development round;” when developing countries bordering the Pacific Ocean found the deal on the table unacceptable, above all because of agricultural subsidies on both sides of the Atlantic, it was for the more developed countries to change and adjust, not to assign blame for a global disappointment.

The President enters trade terrain, with his call for resumption of the Doha Round, with little credibility. During his first two years in office, he never asked Congress for, and never seemed particularly interested in, trade negotiation authority. Without it, Presidents have minimal negotiating leverage with foreign governments because presidential signatures on agreements cannot be trusted. Congress retains, and typically delivers, the last word.

President Obama, not deliberately, has proved the point about trade negotiation authority, although by the end of 2010 his profile had improved as it had in almost every domain. He inherited three signed bilateral trade agreements; as he begins his third year in office, he has brought none of them before Congress. He seems to have persuaded Panama to revise its deal to satisfy congressional concerns, but has given no indication when he might present the deal for congressional approval. He left Korea without a revised agreement that he determined he had to have to satisfy Congress, souring the entire Asian expedition, although he seems to have solved these negotiating problems after his return. Nevertheless, the Korean deal must still go before Congress, which can still change it, and more than one prominent Democrat, such as Senator Sherrod Brown (D-Ohio), already has declared it unacceptable. The United Auto Workers have endorsed, but the AFL-CIO has denounced it. And even though some major American manufacturers, such as Caterpillar, have called the Colombian agreement the most important of all for them, there is no hint at all when it might be considered for approval.

The President obviously did not think he could count on a Democratic Congress to pass these trade deals, and while Republicans tout free trade, they are not likely to deliver the Democratic President any immediate trade victories. So, even as the Panamanian and Korean deals may be ready, products of President Obama’s negotiations to satisfy essentially Democratic Party and constituent demands, they were not presented to the extraordinarily productive lame duck Democratic Congress, and could still be rejected in a more Republican session.

The Trade Situation: Doha And Agriculture

When the Doha Round talks fell apart in September 2009, American commentators blamed Asians, especially China and India, but the core dispute was over agricultural subsidies, especially American and European. Some trade analysts think the whole multilateral project is dead, or look to more modest enterprises such as the Trans-Pacific Partnership negotiations, but President Obama specifically said he wanted to reopen the Doha Round, and he may have a significant opportunity to do so, in major if not ironic part courtesy of the shellacking.

President Obama’s first budget, eight months after the collapse of the Doha Round under President Bush, featured an assault on agricultural subsidies. Agriculture Secretary Tom Vilsack emphasized that “direct [farm] payments were never intended to be around this long,” noting that their extension already had cost taxpayers $5.2 billion per year for twelve years. Writing in the Des Moines, Iowa Register, Vilsack assured that “cutting these subsidies does not leave these farmers without a safety net [b]ecause these cuts in farm subsidies do not affect access to other farm programs. . .” Budget Director Peter Orszag emphasized “reducing subsidies to large farmers” in order to save money. When asked how he would cut the growth in the federal deficit, House Financial Services Committee Chairman Barney Frank told the press, “The President proposed cutting back on agricultural subsidies,” but also complained, “some of the great budget hawks in both parties killed that right away.”

President Obama was on the side of China and India, seeking to cut agricultural subsidies. He couldn’t do it because the bipartisan budget hawks often came from rural states and would not give up their bounty. He could not resume the Doha talks, however, without doing something about agricultural subsidies.

The Tea Party To Obama’s Rescue

It is here that the Tea Party may be coming to his rescue. Tea Party members have said they have no more patience for Republicans than for Democrats who do not share their views. Although those views typically are more coincidental with the Republican Party, Tea Party members elected to Congress insist they are as ready to challenge Republicans as Democrats; in the primary elections they toppled several Republican Party incumbents and nominees.

The core of the Tea Party’s views is to cut big government, and to slash government give-aways, of which the biggest long-standing give-away of all is agricultural. Indeed, some in the Tea Party already have declared agricultural subsidies specifically as a target.

During the 2010 campaign, Kentucky and Tea Party Senate candidate Rand Paul told a Kentucky Farm Bureau audience that he wanted to repeal all agricultural subsidies that pay farmers not to farm. He said such a move would save $1 billion annually, and invoked agricultural subsidies specifically as targets to reduce the federal debt. Saying, “I don’t think federal subsidies of agriculture are a good idea,” Paul urged that farmers grow more, not less, and increase exports. He declared support for the trade agreements with South Korea, Panama, and Colombia because they would enable Kentucky farmers to export more food.

Many a Republican ox would be gored by renewal of the President’s assault on money for big farmers. While Paul was attacking agricultural subsidies, his future Kentucky seatmate and Senate Minority Leader Mitch McConnell (R-Ky) said, “I have voted for most of the farm bills, yeah, and I try to help Kentucky agriculture.” Thus, the President and the Tea Party, on this subject, are singing from the same hymnal, which most Republicans find off-key. Both the President and the Tea Party see an opportunity to save money by cutting farm subsidies, and while the Tea Party has said little about international trade, Paul’s statements demonstrate general support, if only to open foreign markets for American products, which is precisely President Obama’s interest. Tea Party adherents would have no objection to a growth in jobs, putting Americans to work, making goods foreigners would buy in more open markets. Those markets will open only with freer trade, and freer trade will be possible, at least through the Doha process, only with reduced American and European agricultural subsidies.

Of course, Europe has shared the American spotlight in spending public money on private farmers. Per capita, European largesse is notably greater than American. But Germany, Europe’s economic engine and principal financier of the Common Agricultural Policy, has long wanted to reduce such contributions. Now that the threatened defaults of Greece, Ireland, Portugal, and Spain all point to Germany to save the Euro Zone, the time for Germany to induce reductions in agricultural subsidies may well have arrived.

As the Doha talks imploded, it became apparent that Europeans would not cut back agricultural subsidies until the United States did. It also became apparent that Europeans could no longer afford them. The United States and Europe, consequently, needed a mutual reduction, and passage of the 2008 Farm Bill in the United States, confirmed by the summary rejection of the Obama budget in 2009, made that step impossible. Now, with non-partisan Tea Party sympathy for the President’s budget-cutting objective, the crucial step may be possible.

It is not as if farm subsidies have not been cut before. There was a significant rollback in the 1996 Farm Bill under President Clinton, but subsidies were restored and expanded twice under President Bush, demonstrating that farm subsidies are more Republican than Democratic. Enhancement of Republican presence in the House of Representatives thus is not likely to help the Democratic President, but the themes of government give-aways, deficit reduction, and restoration of trade opportunities ought to be irresistible to many in both parties.

Were President Obama to align with the Tea Party over agricultural subsidies as a means to reduce the deficit, he might split Tea Party adherents from the Republican Party while embarrassing Republicans demanding cutbacks in federal expenditures. As in 1996, a Democratic President could restore sanity to the Farm Bill, and as in 1996, American cuts in agricultural subsidies would almost certainly lead to corresponding cuts in Europe. Were both the United States and Europe to make serious reductions in their agricultural programs – the United States to reduce the deficit, Germany to free up resources to rescue the Euro Zone -- the Indians and Chinese may find the hope and satisfaction they need. Doha then could be resurrected, and the Obama Administration could discover, courtesy of the Tea Party, that it can fashion a trade policy, one that could satisfy both China and India, after all.
 

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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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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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Whenever the United States complains about its trade imbalance with China, China responds that it would buy more goods and services from the United States were it not for U.S. export controls that either prevent or restrict those purchases.  Export controls serve important national security and foreign policy goals and the United States will not be eliminating them any time soon.  Nonetheless, there has been a general recognition among U.S. industry and government officials that the present controls are more restrictive and cumbersome than they need to be. 

There have been many attempts at export control reform in the recent past, but those initiatives usually died in inter-agency squabbles.  The Obama Administration is determined to change that pattern through strong support for the reform process from the very top.  President Obama, during his State of the Union address on January 27, linked export control reform to economic recovery, stating:

Third, we need to export more of our goods. Because the more products we make and sell to other countries, the more jobs we support right here in America. So tonight, we set a new goal: We will double our exports over the next five years, an increase that will support two million jobs in America. To help meet this goal, we're launching a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security.

Another change from prior attempts at export control reform is that, according to statements made by Pentagon Press Secretary Geoff Morrell at a January 27 Pentagon press conference, the leadership of the Defense Department now is committed to working with other agencies and Congress "to make meaningful and lasting changes to our export controls."  Mr. Morrell noted that Defense Secretary Gates "believes that [export control reform] is imperative to keep our nation competitive in this global economy."  He further noted in response to questions that:

[W]hat is required here is not, you know, tinkering around the edges of what is a rather cumbersome, antiquated, outdated, bureaucratic set of rules and regulations governing the export of technology.  [Defense Secretary Gates] believes you need to conduct a wholesale reform of export controls, really starting with a blank sheet of paper. And ...he fully supports and is willing to go to bat for [the initiative of the President].

John Boehner, the Republican party leader in the U.S. House of Representatives, stated in a news conference on January 28 that he believes there could be bipartisan support for legislation to overhaul the export controls.  With the Defense Department and both political parties supporting reform, the chance for meaningful reform of the U.S. export control system may be greater now than it has been in many years.

Chinese companies should not expect a drastic loosening of restrictions on exports to China right away.  As President Obama noted in his State of the Union address, any reform of export controls must be consistent with national security. While administrative agencies and members of Congress are in principle in favor of eliminating unnecessary restrictions on exports, they also are sensitive to concerns that loosening of export controls, particularly with respect to China, might undermine national security.  We expect export control reform to go forward, but only in areas where a consensus is reached that a loosening of controls would not undermine national security.

One of the areas where export control reform may most increase the ability of Chinese companies to buy products from the United States is the commodity jurisdiction process, which determines whether a product or technology should be controlled as a "defense article" by the State Department under the International Traffic in Arms Regulations ("ITAR") or by the Commerce Department under the Export Administration Regulations ("EAR").  This jurisdiction issue is critical to whether a product can be exported to China because Congress has banned all products controlled under the ITAR from being exported to China.  By contrast, products subject to control under the EAR generally can be exported to China, often without the need for an export license. 

The commodity jurisdiction process currently is extremely cumbersome, which means that military controls often remain on technologies that may have been developed originally for the military long after these items have become predominantly commercial.  Reform of the commodity jurisdiction process could mean much greater opportunities for Chinese companies to buy U.S. products.

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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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Below are charts which track developments in current cases. You can scroll down the page to browse all cases or click on a title to be taken to those particular cases.

Go to Adminstrative & Sunset Reviews 

Go to Active U.S. Investigations against Chinese Products

Go to WTO cases - China As Complainant

Go to WTO cases - China As Respondent

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