The Scope Of The Challenge
China’s Ministry of Commerce (“MOFCOM”) initiated officially on November 6, 2009 antidumping and countervailing duty investigations into saloon and cross-country cars imported from the United States and manufactured by General Motors, Chrysler, and Ford Motor companies. Although the scope of the products at issue is described (chassis, engine, etc.) and defined according to tariff codes, the real scope of the petitions has little to do with saloon and cross-country (or sport utility) vehicles. The petitions upon which the investigations have been initiated may be the single most important documents in China-U.S. trade relations since the Chinese Protocol of Accession to the WTO. They are about competing models of economic and industrial development, and constitute a complaint against the American strategy for overcoming the financial crisis that dates from at least 2008. According to the Chinese petition, the United States, and the United States alone, caused the crisis. The Chinese contend that China is ascendant while the United States is declining, a statement as much of Chinese historical perspective as of legal rights and wrongs.
The selection of the Big Three American manufacturers, the timing, and the contents of the petitions, suggest that China, on the eve of President Obama’s first visit there, is going far beyond a trade remedy action concerning automobiles. Automobiles, however, may have been chosen as the target of the sweeping indictment, both because of vulnerability in the economic crisis, and because of their symbolism as the icon of American industrial dominance in the twentieth century. China is calling into question the American economic development model and the entire premise of American trade actions against China, advancing an argument that the U.S. automobile industry is failing and exposing the depth and breadth of American economic support for an exporting industry. Were the petitions to succeed, they would likely be the first of many against other U.S. exports to China.
The Chinese petitions challenge American definitions of market and non-market economies, and turn against the United States the subsidy policies and practices the United States has been applying to China. The Chinese petitions question the legitimacy of much of American trade policy toward China, while exposing great American vulnerability to trade remedy actions against American exports.
The petitions reach beyond trade policy. They question the U.S. Government’s energy and climate change policies by challenging government support for research and development into more energy efficient and less-polluting vehicles. As President Obama has placed research and development at the heart of the American economic recovery (and identified it with American global leadership), so China is now contending that state support for research and development is, according to Chinese law, the WTO, and implicitly American practice, a collection of countervailable subsidies.
There are many ironies in the Chinese decision to initiate a countervailing duty investigation based on the automobile petition, but perhaps the greatest is in the agreement reached a few days after initiation by Presidents Obama and Hu Jintao, in mid-November. They announced a cooperative effort specifically for the development of electric vehicles, and both committed significant R&D funds. Yet, China began investigating, ten days before President Obama’s visit, whether American subsidies for the development of electric vehicles violate WTO obligations. The Chinese petition contends that an American competitor, Tesla, in the nascent electric vehicle market, has been receiving funds (the petition alleges at least $465 million) from the federal government under several programs. The petition also identifies electric vehicle development funds to the Big Three, alleging $5.9 billion to Ford alone.
The excuse for the allegations against electric vehicles is the fungibility of money, which is an argument that has been used in the past by the U.S. Commerce Department that says any funds given to a company, for whatever purpose, may contribute to production and export of subject merchandise by relieving other sources of funds. There is no excuse offered, however, for the discussion of Tesla, which is not one of the Big Three, not a manufacturer of subject merchandise, and therefore not a respondent. Nor is there an explicit acknowledgement that electric cars are a different product not subject to the petition.
Warned But Oblivious
In December 2008, we warned the Office of the United States Trade Representative (“USTR”) of a potential Chinese action such as this one. USTR, under the Bush Administration, had solicited comments on how the United States should treat alleged Chinese subsidies. We advised that, since September 15, 2008, it was no longer possible to continue business as usual. The United States, in response to the global financial crisis, was subsidizing banks and encouraging loans to uncreditworthy companies at below market rates. Banks were becoming state-owned, even if temporarily, in all but name. The United States was also acquiring significant equity positions in the automobile industry through massive cash infusions.
Even were the petitions to be taken entirely at face value – that they were prepared by a private industry association and reviewed by MOFCOM for a subsequent government decision whether to initiate investigations in response to a private request – MOFCOM’s notices of initiation imply acceptance of the petitions as to the credibility of most of the allegations. The petitions, therefore, are plausibly statements of MOFCOM’s views on a variety of subjects critical to U.S.-China relations.
The petitions appear to have been used as an opportunity for China to offer a comparative history of economic development, of industry in general and the automobile industry, the American icon, in particular. This Chinese version argues that the American automobile industry had every possible advantage in global markets over the last century, that China’s industry has been developing quickly, first with foreign help but more recently of its own accord, and that the United States’ efforts to save its automobile industry cannot come at the expense of China.
Loosely tied to the petitions’ comparative history of economic development is a contemporary conclusion. The petitions allege that “the U.S. subprime crisis escalated suddenly and ballooned into a global financial crisis.” (Elsewhere, the petition complains, “since the broke out [sic] of economic crisis aroused by the United States sub-loan crisis.”) This critical commentary, like the comparative economic history, is irrelevant to the subsidy and dumping allegations, but appears to be an unvarnished Chinese view of why the United States is today in China’s debt. It is a commentary that unashamedly connects economic and industrial policy to allegations of unfair trade, without hesitating to accuse the United States of pursuing a state-driven “industrial policy,” while implicitly denying its own.
Even the terms of reference equate American policy with Chinese language: the petitioners found President Obama referring to the automobile as a “pillar industry” of the American economy, a favorite Chinese term frequently noted by the U.S. Department of Commerce when, focusing on Chinese central planning, it assumes a link of plans to actions and accuses the state-driven Chinese economy of massive subsidies.
It is possible that neither President knew the details of the automobile petitions when they met shortly after investigations were initiated and they agreed to cooperate in the development of electric vehicles. There had been bilateral consultations as mandated by the WTO before initiation of a subsidies investigation, and the United States Trade Representative had summoned the Big Three manufacturers to a meeting, but the United States has not exported electric cars to China and the subject of the investigation is saloon cars and sport utility vehicles. There was no reason, therefore, for either President to think that R&D support for the development of electric vehicles was a primary focus of the countervailing duty petition.
The agreement Presidents Obama and Hu reached on this subject is strange in the circumstances. In light of the agreement, there is little logic in pursuing the allegations, but China may have its own reasons for both, nearly simultaneous, actions.
A Petition More And Less Than Meets The Eye
According to the countervailing duty petition, China is second only to the United States worldwide in the purchase of automobiles. In the narrower classes of saloon and cross-country vehicles, the petition claims China imported 33,732 such vehicles from the United States in 2007, and 43,240 in 2008. Chinese total imports of these vehicles, however, grew from 234,493 to 299,132 during the same period. Thus, the Big Three represent, in shipping from the United States, less than 15 percent of China’s imports of the subject merchandise, and less than half of one percent of China’s total consumption.
The petition does not link systematically any injury being caused by these shipments to current Chinese manufacture and sale of these specific categories of vehicles. To the contrary, the petition acknowledges that China’s own production and consumption grew during the period of investigation, even as overall imports grew as well. Nor are the subsidy allegations focused on the subject merchandise, but rather refer to the entire automobile industry, and especially initiatives regarding energy efficiency and green technologies that are unrelated to the subject merchandise. The petition challenges almost every aspect of the economic recovery package, with a particular objection to Buy American provisions. But it does not narrow the subsidies analysis to the scope of the petition, complaining more generally about the automobile industry. In repeated recitations of the legal “specificity” standard, it treats automobiles as a specific industry, not the types of cars about which the petition complains.
The petition details two arguments for upstream subsidy investigations, although it does not expressly call for any, and Chinese regulations may not articulate how one might be done. After all, upstream subsidy investigations in the United States have been rare, with the Commerce Department loathe to do them. In a notable exception to practice, the Commerce Department undertook an upstream subsidy analysis in Hardwood Laminated Trailer Flooring from Canada and in February 1997 found no subsidy. There, the allegation was about Canadian stumpage, possibly the most controversial subsidies issue between Canada and the United States in the last twenty-five years. Here, the allegations focus on steel and on components for electric vehicles. Steel is perhaps the most contentious trade issue between China and the United States and likely will be the subject of more petitions in 2009 and early 2010. In both principal instances – stumpage with Canada, steel with China — an important motivation for the petition might have been to get at the upstream product. The attack on electric car inputs may reflect the U.S. objections in several subsidies cases brought against China regarding inputs from state-owned enterprises. The United States, however, has not deployed any upstream analyses.
It seems the petition, then, is not so seriously about saloon cars and SUVs. It may be more about preemptive strikes (electric vehicles; R&D) and retaliation on thorny disputes (steel). The petitions seem to contend that there is no material difference between the economic actions of governments in China and the United States, between market and non-market economies.
The petition is a first foray against multiple levels of American government (with four allegations concerning subsidies from the state of Michigan), perhaps a response to the now-frequent American complaints about Chinese regional and local government programs and planning. The petition, thus, is less than meets the eye: it is hard to take it too seriously as to the specific cars in question; and a great deal more than meets the eye: a resetting of the table for the treatment of the role of the state in the economy, for addressing American federalism, and in the future of energy efficiency and green technologies.
There are many possible problems arising from this investigation. The United States has never before defended itself in China. China has never before sent investigators to examine U.S. books. No U.S. state has ever before submitted to a Chinese investigation, or participated in one. Although this petition has precipitated China’s third countervailing duty investigation against the United States, none has yet reached a preliminary determination, none has yet involved a verification with Chinese officials inspecting U.S. government books, and none has involved a state government. The U.S. automobile industry has not been subject to dumping or subsidies allegations before. Conducting the investigation will be new for China; responding to it will be new for Americans. It will require a sorting out of American federalism, and a new diplomacy for China.
Some have said that the investigation is retaliation for the tire safeguard. In its timing, this view seems attractive, but too much about it makes the theory implausible. The petition covers too much ground and is too broad an assault on the U.S., its trade and economic policies, to have been mere retaliation for a safeguard contemplated in the Accession Protocols. The timing is more notable for President Obama’s first visit to China than for the safeguard. It sets an agenda: affirmatively, market economy recognition; negatively, warnings on steel and electric vehicles.
There have been no reports suggesting any U.S.-China dialogue about the petition during President Obama’s visit. The United States may have chosen deliberately to say nothing, or it may not have reached the President’s attention in the planning of the visit. China, however, may take American silence on the subject as a first round of acquiescence to the charges, and the charges, formally lodged in a trade action, are the most serious China has brought against the United States since, at least, China’s accession to the WTO.
Other countries likely will watch this investigation closely. On the last day of his Asian tour, President Obama received from President Lee Myung-Bak of South Korea agreement to reconsider the automobile dispute that is blocking finalization of a free trade agreement, but he did not receive agreement to reopen settled language in the pending treaty as sought by Congress. South Korea likely will be reinforced in its objections to the terms of the pending free trade agreement with the United States, as China intends to demonstrate massive subsidies to the U.S. automobile industry that ought to make South Korea reluctant to lower its barriers to U.S. cars.
Competing automobile industries, especially in Europe, which have been subsidized heavily during the financial crisis, may face future Chinese challenges. China may seek to clear its market, as implied in a petition that sees its industry ascendant.
China may have been anticipating American barriers to electric vehicles. The action brought, however, could now arguably make those barriers more likely. Tesla manufactures a luxury vehicle; China will seek to enter the U.S. with much more modest electric cars. Consequently, it may be difficult for Tesla, or any other U.S. manufacturer of electric vehicles, who may not yet have sold in the market when Chinese imports first arrive, to challenge Chinese electric cars. The Chinese petition, however, provides theories for challenging vehicles not yet in the market, including an attack on suppliers.
In Laminated Woven Sacks from China, the U.S. International Trade Commission found neither injury nor threat of injury to any American industry. Instead, it found that China’s industry was responsible for retarding the development of a U.S. industry. China did not contest this weakest of all possible injury allegations, enabling final affirmative determinations.
Chinese acquiescence could inspire a similar approach to electric vehicles. American petitioners might allege that Chinese imports are designed to kill off a nascent American industry. The petition could assure an American petition against Chinese electric cars that could complicate the efforts of both countries to develop new technologies for energy efficiency and environmental improvement. The petition is uncompromising and unforgiving as to American efforts to develop cleaner, more efficient automobiles.
The Chinese countervailing duty petition on automobiles could do more to change Chinese-U.S. trade relations than summits and presidential visits. Just as President Obama apparently did not pursue the frequent congressional complaint (and constant Bush Administration theme) regarding revaluation of Chinese currency, so China did not, apparently, assail publicly the United States as the source of the global financial crisis. Yet, President Obama was barely home before congressional committees called again for tough trade sanctions against China, including an attack on Chinese currency.
In a public document that forms the basis for a Chinese investigation of the United States, the current form of American capitalism is being put on trial. Consultations already have failed. No negotiations have followed. Unless national leaders contain the impulses of their respective Ministries (Departments) of Commerce, the trade war that the tires safeguard likely did not trigger may become inescapable. Each country will accuse the other of violating international trade rules in their respective pursuit of a cleaner and more energy efficient planet. Cooperation might threaten leadership. Without a swift settlement, China will be obliged to make its subsidies case, and the United States will not like it.