WTO Rules on U.S. Trade Remedies Practice of ‘Double Counting'!

Last week’s ruling by the WTO Appellate Body on the U.S. trade remedies regime went mostly unnoticed, due to the dramatic developments in Japan and Libya.  However, its implications could be significant… thought not immediate.  The Appellate Body reversed a previous panel decision which allowed the U.S. government to apply higher tariffs to imports from China (a non-market-economy), for both dumping and subsidizing violations.  The decision is considered a major victory for China, and a serious blow to the U.S.’s efforts to curb imports from China.

In the past, the U.S. government applied ONLY anti-dumping duties to imports from non-market economies (like China).  This changed in 2007 when the U.S. government decided to start treating China as a market economy, without granting it a ‘non-market-economy’ status.  This brought the current WTO challenge by the Chinese government on four specific U.S. measures, which imposed duties on imports from China for both dumping and subsidizing (thus imposing “double” duties).

Two WTO Agreements address the imposition of anti-dumping and anti-subsidies duties, but each member state has to establish and administer its own ‘trade remedies’ regime, thus leading to definitional and interpretational problems.  The Appellate Body decision hinges on some very fine legal findings, which can be argued both ways, but one things is for sure: this decision makes it more difficult for market economies (like the U.S. and the EU) to confront the trade distorting practices of state capitalism (like China).

Now, it’s up to the U.S. government to implement the Appellate Body ruling, by stopping the current practice of applying both anti-dumping and countervailing measures to imports from non-market economies, like China.  If the U.S. government fails to do so, then the Chinese government can request compensation for failure to comply and bring retaliatory actions against U.S. exports to China.  It took the Dispute Settlement Body two years and six months to reach this point – and it could just as long to truly punish the U.S., if Washington decided to ‘stall.’

But why does all this matter?  Well, the Administration’s decision to impose both anti-dumping and countervailing measures against imports from China cooled down some of the protectionist rhetoric coming out of the U.S. Congress.  Democrats and Republicans in Congress have been looking for ways to ‘get tough on China’ and this regulatory treatment gave them some cover.

Although I doubt that the Obama Administration will do anything to comply with the Appellate Body, especially as we are approaching the 2012 election, this decision gives new impetus to the hardliners in Congress to demand further tough measures to curb what is perceived as China’s unfair trade practices… which means, amending the law to treat China’s undervalued currency as a subsidy and thus applying added duties on ALL imports from China!

Putting Things into Perspective – Some History If I May:

The whole purpose of the World Trade Organization is to eliminate barriers to trade and protectionist policies by its member states.  Since its early inception in the late 1940’s, the GATT (later to become the WTO) tried through a series of multilateral negotiations to bring down barriers to trade; first by eliminating quotas and other technical barriers to trade, and then by gradually reducing tariff rates.  For example, the average tariff rate in the U.S. is under 5%, while in China is over 10%… and China still maintains certain quotas, which are to be phases-out over time since China joined the WTO in 2001.

In exchange for reducing tariffs and barriers to trade, WTO members are granted three “trade remedies” through which they can block imports and protect domestic industries: anti-dumping duties (to protect domestic industries from foreign dumping), countervailing duties (to protect domestic industries from trade-harming foreign subsidies), and safeguard measures (to protect domestic industries from a surge of imported goods).

The first two measures (after a lengthy investigation that lasts over a year) increase the tariff rate on a subject product, by the weighted average degree of the violation; safeguards impose a quota (and/or a tariff) for a period of time needed for the domestic industry to adapt and prepare for foreign completion.  Therefore, these three measures allow for an exception to the basic principle of the WTO, which is to reduce trade barriers and protectionist measures.  Just to put things in perspective, for the U.S. (historically the most prolific user of ‘trade remedies’ and currently second only to India in number of measures in force) ‘trade remedies’ impact less than 4% of total imports by value!

Dumping, contrary to common perception, is not selling your goods in a foreign market below cost.  Dumping is selling in a foreign market below the price you charge domestically.  Determining dumping requires an extensive investigation on pricing components and accounting manipulations to derive to a ‘factory’ prices (before advertising, insurance, transportation, etc).  For imports from a market economy (like Japan), prices are taken at face value and calculating dumping is not that hard.  However, for imports from a non-market economy (like China), where the state controls the means of production and prices are fixed, administering authorities in the U.S. and the EU have to use surrogate values (in the case of China, its often India)… which inevitable lead to much-much higher dumping margins for non-market economy countries.  China has tried to get market economy status from both the U.S. and the EU, with no success so far, even though it will get it automatically at 2016 based on its accession provisions.

Subsidies are much easier to calculate and to impose duties on.  Any subsidy that is offered by a government and impacts exports, can be attributed as a tariff (on a weighted average percentage basis) by the importing government.  In the U.S. (and the EU) anti-subsidies duties (called countervailing measures) did not apply to non-market-economies, because presumably in a ‘communist planed economy’ all means of production are owned by the state, and any subsidies will not be targeted to specific industries or companies but will apply to all producers.  If that approach to subsidies sounds too ‘pre-soviet collapse’ it’s because that’s exactly what it was designed to exclude.  China, thought ‘communist,’ is not at all like planed economy Soviet Russia.

Safeguards are somewhat different in that they provide relief not because of unfair trade practice (dumping or subsidizing), but because of a surge in imports that a domestic industry/sector cannot compete with.  Also, safeguards can be in place in a couple of months, employ a combination of tariffs and quotas, and can only last up to 6 years.  Once a country uses a safeguard on a specific product for its maximum time (6 years) it cannot use this mechanism for this product in the future.  Anti-dumping and anti-subsidies measures, can be renewed every five years, and can stay in effect for decades.

The Bottom Line –

Trade remedies that protect for unfair (dumping and subsidies) or fair (surge) trade practices make up a very small percentage of the total trade of major trading countries like the U.S., the EU, and China.  Although the legal implications of the Appellate Body’s decision will have a significant impact on both the current administration of the system, and future Doha negotiations, the actual economic implications are not that great.

Trade remedies allow governments in developed economies the means through which to provide targeted-specific relief to struggling industries that are facing competition from developing nations.  The most recent Appellate Body decision makes it harder for the U.S. and the EU to alleviate the pains of globalization and the rapid rise of China.

This decision, thought it might be legally defensible and economically insignificant, will have long term political implication for the U.S.-China trade relations.