Trade Smoke and Mirrors

posted by
on April 3, 2007

In Washington, D.C., the most blatant protectionist mischief is routinely cloaked in high-minded rhetoric that sounds oh-so-reasonable — the better to conceal that the government favors some politically-connected domestic businesses at the expense of others. Consider the righteous March 30 announcement by U.S. Commerce Secretary Carlos Gutierrez that the Bush administration would now deploy another weapon in the U.S. trade-law arsenal to offset “unfair” Chinese government subsidies that distort trade and threaten American jobs.

It sounds great. But a closer look shows that Mr. Gutierrez is playing a familiar smoke-and-mirrors game, the object of which is to keep the underlying protectionist politics out of sight, along with the fact that Uncle Sam is picking losers as well as winners in the American marketplace.

Commerce has imposed high anti-dumping tariffs on allegedly below-cost Chinese exports for years. Now, for the first time the U.S. government also will impose so-called “countervailing duties,” which are tariffs that are aimed at countering Chinese government subsidies such as “tax breaks, debt forgiveness and low-cost loans,” as Mr. Gutierrez explained. His ongoing test case involves tariffs of up to 20% that Commerce is considering imposing upon “unfairly” subsidized imports of Chinese “coated free sheet paper.” The paper product is quite common, showing up in everything from glossy magazine covers to slick corporate sales brochures.

What reasonable person would oppose cracking down on any government’s subsidies that result in artificially low prices that distort trade? Not Mr. Gutierrez, who declared Friday that the new policy shows the Bush administration “is demonstrating its continued commitment to leveling the playing field for American manufacturers, workers and farmers.” Not the president of the National Association of Manufacturers, John Engler, who has lobbied hard for the policy shift, which he welcomed as “great news and an important step toward balanced trade with China.”

And certainly not Leo Gerard, the international president of the United Steelworkers of America. Mr. Gerard, who also represents American paper workers, is the man who has lobbied the hardest and the longest on behalf of the new U.S. policy. “Today’s decision to apply countervailing duties against Chinese products is long overdue, and it finally makes China subject to the same rules that all other major global traders are required to follow,” Mr. Gerard asserted on Friday.

The problem is, the realities of the new policy don’t match the rhetoric the three men are using. This isn’t Mr. Engler’s balanced trade, it’s managed trade. And while it is fine for the U.S. Commerce Secretary to rail against Chinese government-sponsored tax breaks, loans and such, what about the billions of subsidized tax breaks, soft loans, etc. that the U.S. steel lobby has been living on for decades? As for Mr. Gutierrez’s suggestion that American farmers suffer because of China’s subsidies on manufactured goods, one need only consider the billions upon billions of annual U.S. farm subsidies that flood global commodity markets with below-cost American foodstuffs, to the detriment of struggling farmers in every poor corner of the world. Most importantly, the new policy that Mr. Gerard touts doesn’t, in fact, apply the same rules to China as all other global traders must comply with.

Commerce insists on treating China as a “non-market” economy in anti-dumping cases. Because this methodology allows U.S. officials to assume that all pricing in China is government controlled, the bureaucrats already have vast discretion to apply high tariffs that penalize suspected subsidies. While the coated-paper subsidy case would hit China with tariffs in the 10%-20% range, Commerce is also considering tariffs of perhaps 100% in a parallel antidumping suit that targets the same glossy paper. In the international trade bar, it’s called double counting — taxing China as a non-market economy in antidumping cases while treating China as a market economy to calculate countervailing duties.

The real unfairness is in the non-market methodology itself, and how it allows U.S. officials to use obviously distorted numbers to come up with unreasonably high antidumping tariffs on Chinese exports. In this case, U.S. bureaucrats determine what China’s prices “should” be by consulting pricing and business data derived from surrogate “market economy” countries, quite often India. Last year, Commerce officials hit Chinese manufacturers of polyester staple fiber with antidumping tariffs as high as 109% — ignoring costs of production in China and using Indian government statistics instead.

Pretending that selected economic statistics from India reflect the true costs of producing anything in China is hardly a model of intellectual honesty. But the U.S. Congress has written the trade laws to allow such obvious economic distortions.

If officials in Washington were serious about attacking the fundamental issue of Chinese government subsidies, the better way to do that would be to challenge them in the World Trade Organization — where the rigors of international law would trump politics, not the other way around.

Meanwhile, the legality of Mr. Gutierrez’s new policy back home appears dubious. For more than two decades Commerce has insisted it didn’t have the legal authority to treat China one way in antidumping cases and another way in countervailing duty litigation. Now a bipartisan group of lawmakers who are tight with the domestic steel lobby — led by Sen. Carl Levin (D., Michigan), and Rep. Phil English, a Pennsylvania Republican and vice-chairman of the steel caucus — is pressing legislation to treat China as a non-market economy in antidumping cases and as a market economy (sort of) to calculate tariffs on subsidies. Even if this legal fix would correct the violation of U.S. law, Beijing could still challenge the double counting as a violation of America’s obligations as a member of the World Trade Organization to treat all trading partners fairly.

Whether the Chinese government pursues WTO litigation or not, the new Bush administration anti-subsidy shift would still be bad economic policy, driven by parochial politics. To see the impact of those politics up close, just consider Sen. Levin’s Michigan, the home of General Motors. On January 12, 2007, GM’s top economist, Mustafa Mohatarem, wrote a two-page letter to Commerce officials to protest that a shift of U.S. anti-subsidy policy on China would drive up the costs of production for the U.S. auto industry. Such a shift, Mr. Mohatarem wrote, could “distort trade flows and hurt the competitiveness of industries that consume foreign goods and materials.” Pointedly, he added that “the imposition of punitive duties on imports can lead to higher prices and reduced availability of critical parts and materials.”

It never was true, as Dwight Eisenhower’s defense secretary, “Engine Charlie” Wilson, famously asserted in 1953, that what is good for General Motors is always good for the country. But today, it is surely true that when the U.S. government deliberately moves to help domestic steel and paper producers, at the risk of driving up costs for companies like General Motors, for essentially political reasons, such managed trade is always a bad thing.