Trade Cases

Leibowitz: Trade Reform or More Trade Remedy Headaches?

Written by Lewis Leibowitz

Every so often there are ideas (but rarely new ones) to “reform” international trade laws. Mostly, the interests that have the ear of Congress (domestic producers of steel, for example, and organized labor) put forward their ideas. Less often, interests that employ more Americans in manufacturing put theirs forward. The two sides of the divide never seem to discuss what the proper goals of trade remedy law should be.

Last week, the two Ohio senators (Democrat Sherrod Brown and Republican Rob Portman) announced the introduction of a new trade remedy bill to further their goal—making it easier and cheaper for domestic petitioners to secure antidumping and countervailing duties that will keep out more imports. The senators’ press release of Friday, April 16, describes their principal proposals, but the text of the bill is not yet available.

The two senators from Ohio, as usual, do not pay much attention to the competitive effects of keeping steel imports down. They appear to believe that the more imports can be reduced, the better for the country. This new bill, entitled the “Eliminating Global Market Distortions to Protect American Jobs Act,” is aimed at imposing more duties and reducing imports more. Based on Friday’s press release, the bill deals with four major subjects:

1. Cracking down on “repeat offenders” in trade remedy law through a “successive investigation” procedure.

2. Addressing “cross-border subsidies.”

3. Changing cost calculations in antidumping cases to “prevent exporters in other countries” from distorting home market selling prices.

4. Reaffirming the recent Commerce Department practice of investigating “currency undervaluation.”

What problems are these provisions attempting to solve, and what unintended consequences await us if these changes are made?

First, a little background is in order. Antidumping law imposes extra tariffs on imports that are sold at lower prices and injure competing U.S. producers. The United States has an unusual system of “retrospective” collection of these duties (i.e., long after importation of the goods that are taxed). Fans of the retrospective system label traders and exporters as “trade cheats.” The senators’ press release repeats that charge, which is horribly misleading but is made so often that it has become part of trade remedy folklore. Huge antidumping margins are regularly published, but many people do not understand that these are not duties, but deposits of estimated duties. The high numbers discourage imports, which I suppose is their idea.

Second, the four proposals in the bill have been kicking around for quite a while—and there are problems with each of them. The trade remedy laws are famous (or infamous) for being complicated and expensive for companies to deal with successfully. Both sides complain about the complexity and the expense. At the end of the day, downstream industries pay the price for high duties, because U.S. importers pass the cost to their domestic customers. Generally speaking, the loss of jobs and economic activity exceeds the gain to petitioners—more jobs are lost “downstream” than are gained “upstream.”

Third, petitioners believe that if they can impose higher antidumping and countervailing duties, it’s better for them. This means that their customers will deal with domestic producers because they have to—but that is not necessarily true: steel users can move overseas, they can cease production and let imports of downstream products come in, or they can search for alternatives to the products they buy now, if available. But convincing domestic producers that they are making a mistake by raising their customers’ costs is nearly impossible in the short term, and politicians don’t like to think about the possibility that they are not helping very much.

With that as background, the specific proposals and their problems are, in summary, as follows:

1. “Repeat offenders”—The label is objectionable because companies found to be dumping (selling at less than “normal value”) have done nothing illegal or immoral. Dumping is not a violation of global trade rules and never has been. The proposal to treat “repeat offenders” more harshly would permit the Commerce Department to make imports subject to antidumping and countervailing duties more quickly than before. That would permit the U.S. to collect cash deposits of estimated antidumping or countervailing duties (cash deposits) earlier than now permitted and discourage imports while investigations are under way.

2. Cross-border subsidies—These are subsidies conferred by two or more countries that benefit export production from one of the countries—for example, a company in Country A makes semifinished steel and a company based in Country A opens a rolling mill in Country B. Both countries provide subsidies that benefit the rolling mill in Country B. The argument is that such subsidies can damage companies in a country that competes with these subsidies and allows the importing country’s government to impose countervailing duties on exports that receive subsidies from two or more countries. Of the four proposals, this one has the most logic. I would need to see the details, but there may be merit in this one.

3. Changes in cost calculations—Please be patient, this is complicated. In antidumping cases, the “normal value” is used to compare to export prices to determine if there is “dumping” (normal value – export price = margin of dumping). The usual calculation compares selling prices in the domestic market of the exporting country (say, Germany) compared to sales of a similar product to the United States. However, if a large number of “home market” sales are below the average total cost of production, alternative prices are used—third country markets or cost-based “constructed value.” While Commerce can find “particular market situations” that affect home market selling prices in certain cases, recently Commerce has used a similar analysis to determine whether the home market sales are below cost, potentially permitting dumping margins to increase. However, the Court of International Trade has rejected the use of “particular market situations” in determining whether sales below cost have occurred. It may be that the new bill seeks to overturn these court decisions. Stay tuned for further details.

4. “Undervalued currency”—Currency manipulation, a country keeping its exchange rate with the dollar artificially low, has stoked the fires of outrage for many years. Under accepted international trading rules, it is so difficult to assess the amount of currency manipulation that it can’t fairly be used. Commerce recently adopted new rules to permit evaluating the degree of currency manipulation in countervailing duty cases. In one case so far (Vietnamese tires), Commerce found currency manipulation and imposed countervailing duties on a preliminary basis. The final determination is due next month—it will be an early test for the Biden administration in currency issues. The Brown-Portman bill may propose new legislative language to encourage Commerce to continue to impose subsidies based on currency manipulation. Further details to come.

There is, of course, no guarantee that the bill will become law or emerge from the legislative process unchanged. If it passes in anything like its current form, it could put the United States on the wrong side of more global trade rules. In addition, it will make it more expensive for companies that need imports in the market to be globally competitive. Great care is needed to make sure that these changes don’t do more harm than good to U.S. manufacturing competitiveness.

The consideration of this legislation provides an opportunity for players in all aspects of international trade to debate whether these kinds of changes help or hurt the country and the industries in it. I look forward to that debate.

Lewis Leibowitz

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Lewis Leibowitz, SMU Contributor

Lewis Leibowitz

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