Considering the troubled state of U.S. housing markets, why would the federal government try to drive up the price of any essential component of every American home? Like nails. There is nothing fancy about Certain Steel Nails from China and the United Arab Emirates, an anti-dumping case that is as common as they come. Yet, looking into just this one case is important, as it illustrates how one of the most important, if perhaps the least understood, tools of U.S. trade policy work — or don’t work — at ground level.

Dozens upon dozens of imported products that are in everyone’s daily lives — popular seafood delicacies like shrimp and salmon, chemicals and fibers that go into everything from toothpaste and clothes to fertilizers; garlic, honey, mushrooms, apple-juice concentrate, tomatoes, pencils, notebooks, computers, bicycles, beds, plastic grocery bags at the checkout counter, gift boxes and wrapping paper, garbage cans and sewer pipes, the rebar foundations and steel beams that are part of every skyscraper in America, home appliances including refrigerators and televisions, automobiles and everything else that has some steel in it, and even the softwood lumber that goes into every home — are, or have been in the recent past, subject to special taxes upon entry at U.S. ports. The duties are slapped on when the federal government determines that the foreign wares have been offered to American consumers at “dumped” prices that are “unfairly” low. On Capitol Hill, the two emotionally charged pejoratives — “dumped” and “unfair” — are the beginning and end of the political debate. Many lawmakers, from West Virginia’s liberal Democratic Sen. Jay Rockefeller to Utah conservative Republican Sen. Orrin Hatch, routinely condemn “illegal dumping.” And in the White House, President George W. Bush regularly tells audiences that he is for “free trade,” as long as it “is fair.” Bush’s predecessors from Bill Clinton to Ronald Reagan all said the same. The bipartisan common denominator is that the politicians all know that they can get away with saying such things without fear of being challenged.

Not that most residents of Capitol Hill really understand the details; most don’t pretend to — and find it politically convenient not to ask questions that might question their own rhetoric. Apart from the handful of bureaucrats in Washington, D.C. who administer the trade laws, and also the members of the international trade bar who litigate the cases, few people really understand how the anti-dumping laws actually work, and whether, as advertised, they save American jobs from competition that is really unfair. The exception would include mainstream economists in virtually every university in the country who regard the basic theory that drives the anti-dumping laws with disdain. But not many academics follow the details of how dumping cases play out. No major American newspaper has an investigative reporter — not a single one — assigned to dig into the arcane world of anti-dumping. The wire services report the headlines, but rarely the full context. So it’s no wonder that very few Americans know very much about these laws that are embedded in their lives.

When Americans who live outside the Washington beltway hear politicians rail against “illegal dumping,” they would have no way of knowing that there is no such thing. Nor would the average American know that the anti-dumping tariffs tend to cost more American jobs that are intended to be protected. So this article about Nails is for them, the folks who are getting hammered all the time by the anti-dumping laws and don’t even know it.

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The U.S. Commerce Department announced its intention last month to slap tariffs on nails imported from China ranging from a stiff 20 percent to an outright prohibitive 118 percent. Nails shipped from Dubai in the UAE got off a bit easier, being taxed upon entry in American ports like Los Angeles and New Orleans at 4 percent.

The headline on the department’s Jan. 16 press release appealed to Americans’ innate sense of justice: “Commerce Finds Unfair Dumping of Certain Steel Nails from China.” The unfairly dumped nails had been sold to American consumers at prices that were “less than fair value,” the release explained. “Price discrimination hurts American manufacturers,” explained David Spooner, the assistant commerce secretary who is charged with ferreting out “unfair” foreign trade schemes. Sounds plausible — but a simple three-paragraph economics lesson shows why the press release is misleading. person.

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Rather than being a sign of “unfair” trade, “price discrimination” is simply the routine, sensible business practice of offering products at different prices in different competitive domestic markets: higher here, lower there, depending upon market conditions. Such cost-cutting, even ruthless cut-throat competition, is praised by mainstream economists as being a sign of healthy market competition. Nobody sees anything wrong when General Motors offers Chevrolets to consumers in, say, rural Mississippi or Alabama, at lower prices than in California’s Marin County or Manhattan. Indeed, GM is perfectly free to compete with rivals like Ford and Chrysler by selling Chevys at a loss, say at the end of model years, or to keep production lines running, to cite two of the most frequent rationales. Likewise, U.S. steel mills in Pennsylvania are free to sell their hot-rolled and cold-rolled products in western states like Oregon at lower prices than back East. Unless the cost-cutting is predatory in the anti-trust sense of trying to achieve monopoly-pricing power by ruining competitors — which would be nearly impossible to do, given the many vigorous competitors in the automobile and steel industries — consumers and the U.S. economy only benefit from the lower prices and bargains associated with price discrimination. When consumers are enticed to buy “loss leaders” in their supermarkets, that’s praiseworthy price discrimination.

But if GM would make a car in Mexico or Canada — or Korea, since GM owns Daewoo — and ship it to the U.S. across the international borders, asking a lower price than in the so-called “home” market, the price discrimination becomes “international price discrimination.” Politicians call international price discrimination “dumping,” and tax it by applying anti-dumping duties. Despite the rhetoric on Capitol Hill about “illegal dumping,” there is nothing unfair or illegal about either domestic or international price discrimination, especially considering the realities of modern global supply chains.

The rules of the World Trade Organization permit international price discrimination — and they also permit domestic authorities to tax it. The reason why this is permitted has very little to do with either mainstream economics or “fairness.” Rather, the WTO’s anti-dumping code has a political rationale as a sort-of safety valve for uncompetitive domestic industries — think steel in the U.S., leather in Europe, chemicals in India — that scream to politicians about the miseries of competing with foreigners. In the western United States, for example, steel producers would love to tax those Pennsylvania steelmakers for “dumping” product in their markets, but they can’t, as domestic price discrimination is considered healthy and cannot be taxed. But when that steel comes from, say, Canada instead of Pennsylvania, the otherwise economically beneficial international price discrimination becomes “dumping” that is subject to duties.. The ongoing case involving nails from China and Dubai reveals how the political rhetoric that supports dealing with “unfair” foreign trade is really a smoke-and-mirrors game.

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The smoke first shows up in the heart of the argument brought by Paul Rosenthal, the Washington lawyer who represents five small domestic nail producers that have brought the anti-dumping case. “Imports from China and the UAE have flooded the U.S. market during the past three years, taking significant market share from the domestic producers,” Mr. Rosenthal has argued in testimony before U.S. trade officials. The lawyer has cited the numbers: since 2004, imports from China and Dubai have shot up from 33 percent of the U.S. nail market to more than 60 percent; prices have fallen and U.S. production has declined. Indeed, Mr. Rosenthal’s largest nail client, Mid Continent Nail Corp., of Poplar Bluff, Mo., has shut down operations in Virginia and Texas.

To the domestic petitioners, the numbers are the result of their being forced to compete with “unfair” foreign competitors. But the details of the Nails litigation suggest otherwise.

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The first doubts would be associated with the fact that the U.S. nail industry has been enjoying 13-plus percent profits in recent years. How can a domestic industry that is that profitable demonstrate that it has been injured by the foreign competition? Enter the part of the story about how U.S. laws themselves are “unfair,” because they are rigged to punish foreigners — and please domestic constituencies — in the name of “fairness.”

To make the case that the domestic nail industry has been hurt by foreign competition, the U.S. International Trade Commission decided that the most profitable and largest American nail manufacturer, Illinois Tool Works, should be excluded from the American industry. ITW is a sophisticated global manufacturer of thousands of industrial products that are used in some 800 businesses in more than 50 countries, and produces nails both domestically and in China through its Paslode division.

ITW’s profits are associated with its abilities to harness global supply chains by producing in locations where that makes business sense, which one would think the U.S. government would consider a good thing. But rather than praise the Illinois-based multinational for its business acumen and ability to compete, Uncle Sam has sought to punish ITW for its abilities to compete globally. Excluding profitable ITC from the domestic industry because it also operates in China, allows the remaining small, struggling domestic nail producers to show that they are being hurt by overseas competitors. In the eyes of the U.S. government, the five remaining petitioners — about 50 percent of the domestic industry — are the only true representatives of American business. But it turns out that there is a bit of smoke-and-mirrors to this part of the story, also.

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Consider the remaining petitioners who are considered legitimate American nail producers. Such American companies like Gerdau Ameristeel, which is headquartered in Toronto and is a subsidiary of the Brazilian steel giant, Gerdau S.A. Brazil’s Gerdau parent corporation must find it convenient to use the American anti-dumping laws to allow its U.S. subsidiary to try to hit competition from China to protect its U.S. base. Gerdau’s participation in the nails litigation is by no means unique, as increasingly, U.S. subsidiaries of foreign corporations seek to use the U.S. anti-dumping laws to keep rivals out of American markets.

Arcelor-Mittal USA, for instance, is the subsidiary of the world’s largest steel company run by Lakshmi Mittal, a native of India who lives in London. Mr. Mittal’s American subsidiary supports U.S. anti-dumping tariffs on places like China, where it doesn’t make steel. But Mittal USA does not support duties on steel from countries where Arcelor-Mittal does make steel, like Kazakhstan, Romania, and South Africa.

Another good example of the ironies associated with foreign businesses using the American anti-dumping laws to promote sanctuary markets for themselves in the U.S. is a leading Canadian seafood producer, Cooke Aquaculture. Cooke owns two salmon farming concerns in Maine, Atlantic Salmon and Heritage Salmon. Atlantic and Heritage have successfully pressed for U.S. anti-dumping tariffs on salmon from Norway. Atlantic and Heritage have also persuaded U.S. trade officials to apply so-called countervailing duties to tax Norwegian salmon additionally, on grounds that the Scandinavian salmon that it receives government subsidies – even though, back in Canada, parent Cooke Aquaculture rakes in millions of dollars from the Canadian government to expand its processing facilities.

Another domestic petitioner in Nails, Davis Wire Corp., is based in California and presumably makes some nails along with its many wire and fencing products (even though Davis Wire’s website does not mention nails). Davis Wire is a part of the Heico Wire Group, which also includes a Canadian nail manufacturer named Sivaco — which exports nails to the U.S. from Ontario and Quebec. Is it convenient for the Heico Wire Group to seek tariffs on nails from China and Dubai, so it can continue to supply the U.S. market from Canada? U.S. officials don’t ask such questions.

Davis Wire also imports Canadian wire rod, from which it makes American nails. And the largest petitioning nail producer, Mid Continent Nail Corp., also makes nails in the U.S. from wire rod that it imports. Now we get to the really rusty economics that drive the Nails litigation.

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Six years ago, Mid Continent was outraged when U.S. anti-dumping tariffs were imposed to raise the prices of wire rod imported from eight countries, including Canada, Mexico, and Indonesia. The prospect of more expensive wire rod came on the heels of previous U.S. quota restrictions during the Clinton administration that had caused shortages. “How can I run a business when I can’t predict when I’m going to receive the raw materials I need to manufacture my product?” asked David Libla, Mid Continent’s president, in a press release on Sept. 24, 2002. Now, Mr. Libla’s customers in the home-construction industry who need to buy nails are having to ask the same question. At least, it is understandable why Mr. Libla has an incentive to pick up any available legal tool to pass his economic miseries downstream — as those miseries were in part created by the U.S. government in the wire-rod litigation.

As it turns out, Mid Continent wasn’t the only American company to complain about the harmful impact associated with anti-dumping tariffs on wire rod. Those wire-rod tariffs pushed Illinois Tool to shift some of its nail production to China in 2005. “One of the main drivers” behind that move “was the wire rod costs in the United States, testified ITW Paslode executive Guenther Kram in the current nails proceeding. “We believe that import duties would hurt overall U.S. production” of nails, Mr. Kram added.

Every serious academic study of the impact of U.S. anti-dumping actions — including those done by government bodies like the Federal Trade Commission, the Congressional Budget Office, and the U.S. International Trade Commission — has concluded that anti-dumping duties cost more American jobs than those that they protect. The evidence that the anti-dumping litigation associated with the wire-rod and nails cases has caused U.S. jobs to move offshore is just the most recent demonstration of the downside associated with the trade laws.

The nails from Dubai come to America on ships run by Maersk Sealand, which employs some 4,700 Americans. Illinois Tool’s Paslode division employs more than 1,000 Americans who make various nails and other construction materials in Texas, Tennessee, Kentucky and Arkansas. The interests of such Americans, plus the stevedores at ports of entry, truckers to deliver nails to retail outlets like Home Depot, the people who work and shop at such retail chains and in lumber yards, and contractors all across America who need nails to build homes are not considered by the U.S. officials who administer anti-dumping cases. The blame for this goes to Capitol Hill, where lawmakers have written the laws so that the interests of downstream industries and consumers are disregarded.

If that seems unfair, what about the charges that nail exporters from China and Dubai have been unfair in their pricing?

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In anti-dumping cases, the U.S. Commerce Department’s import administration determines whether “dumping” has been going on (the U.S. International Trade Commission, an independent federal agency, looks at whether the alleged “dumping” has caused injury to domestic petitioners).

One sign that the game is rigged in favor of domestic petitioners who bring the cases is that Commerce almost always finds “dumping.” This is particularly easy when it comes to China, which is considered a “non-market” communist economy where all prices are subject to government control — as if market pricing hadn’t replaced the era when the Chinese government really did control prices.

Essentially, the non-market methodology is a game of pretend economics. In Nails, Commerce picked India as a “surrogate” market economy that is comparable to China’s. The officials then crunched various numbers, pretending that the costs of producing nails in China are the same as in India.

To calculate the freight costs associated with getting nails from factories in China to seaports, the U.S. officials looked to statistics relating to freight and port costs in India (where where transportation and port costs are famously more expensive than those in China). And to figure what direct materials, energy and packing materials cost nail producers in China, “we used data from the Indian Import Statistics and other publicly available Indian sources,” Commerce officials acknowledged when announcing their findings.

“To value factory overhead, selling, general, and administrative expenses, and profit, we used the audited financial statements from Lakshmi Precision Screws’ 2006-2007 Annual Report,” the U.S. officials added. The problem was, India’s Lakshmi screw company doesn’t make nails. But since the Indian company makes nuts & bolts, and uses a manufacturing process that reminded them of how nails are made in China, the U.S. bureaucrats figured that those Indian nuts and bolts were the same as Chinese nails.

To see what the costs of labor in China were during the period of investigation, October 1, 2006 through March 31, 2007, Commerce dug out a yearbook of labor statistics from the International Labor Organization — for 2002. The officials acknowledged that the old yearbook “does not separate the labor rates into different skill levels or types of labor,” so we “applied the same wage rate to all skill levels and types of labor” for China. You can’t make this stuff up.

That is how the U.S. government concluded that some 70-plus nail manufacturers from China were selling their wares to Americans at prices that were “unfairly” low.

Dubai, at least, wasn’t hit with the non-market methodology. And with a tariff of only 4 percent, compared to tariffs on Chinese companies from 20 percent to 118 percent, the one company in Dubai that has been exporting nails to the U.S. got off easy. In fact, Dubai Wire now has an incentive to raise its prices vis a vis China, thanks to the U.S. government.

But even the economic logic of any anti-dumping tariff on Dubai Wire doesn’t make much sense, considering that the Dubai nail producer basically only sells its nails to one customer in the U.S. With only one sales market, how could any sort of price discrimination — where there would be different prices both a home market and an overseas market — be going on? But try telling that to U.S. officials, who know how to jigger numbers to find any foreigner guilty of being an “unfair trader.”

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How sympathetic are the US petitioners? Are they really able to compete in global markets? Or are they examples of classic protectionists who simply can’t keep up with world-class competitors, and want their government to try to prop them up by passing on the costs of their inefficiencies to downstream consumers?

Consider the convincing testimony before the International Trade Commission by angered American businessmen and women who need to buy imported nails, and who have had dealings with the U.S. nail industry.

Based in New York, Mona Zinman is the co-CEO of Prime Source Building Products, the nation’s largest nail distributor, with 34 distribution centers that sell over 1,000 types of nails in the U.S. Many of the nails her company needs aren’t available domestically, Zinman testified. She related that about five years ago one U.S. nail producer, Stanley Bostitch, had refused to keep supplying Prime Source with one of the lines it needed, Grip-Rite collated nails. “Overnight we lost $50 million a year in Bostich sales,” Ms. Zinman said. When Prime Source couldn’t find another American supplier for Grip-Rite, it looked overseas.

This is how Ms. Zinman explained the situation to the ITC: “In contrast to the U.S. industry, the Chinese were anxious to supply our needs. Sales of Grip-Rite collated nails have gone from almost zero a few years ago to in excess of $150 million today — all imports. This is the business the domestic USA mills turned away. There is no USA mill that can produce the range of collated nails that we import from China.”

Another witness, Gary Tabor, president and CEO of Building Material Distributors, said he found the Nails petition puzzling. BMD, headquartered in Sacramento, employs some 400 U.S. workers and has sales of more than $300 million annually.

Here’s how Mr. Tabor put it to the ITC officials: “However, it is strange for me to be sitting on the opposite side of the table from Davis Wire, one of the Petitioners, because we happen to be a large multi-million dollar customer of Davis. In fact, just recently I spent a week playing golf with their chief executives at their invitation. We have a solid and longstanding relationship with Davis Wire, to which we provide a variety of wire products…In fact, until this case was filed, we were unaware that they even produced nails. I’ve now learned that they produce only approximately 20 percent of the nail products BMD distributes, and that they could not realistically manufacture the quantities of products that we need from any one particular supplier.”

Mr. Tabor added that his company has two distribution centers within 50 miles of Davis Wire’s plant in Pueblo, Colorado: “Again, they’ve never once mentioned to us that they’re in the nail business.”

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Perhaps the most damning evidence against the anti-dumping laws is that they don’t even work for those who pursue the tariffs. In the short run, desperate domestic petitioners may enjoy obtaining their government’s help in driving up prices, while their competitors’ business plans are thrown into turmoil. This is what is happening in the U.S. nail industry today.

But in the longer run, those prices always seem to fall, as other sources of supply are established. These days, the tariffs on China and Dubai are diverting business to countries that are positioned to take up the slack: Taiwan, Korea, Malaysia, Russia, Bulgaria, Indonesia, Chile, Honduras, Mexico, Canada. One well-placed U.S. industry source relates that shipments of nails are being shipped in plain boxes from China to Korea, where they are being sent on to the U.S. with “Made in Korea” labels. Even in Dubai, while Dubai Wire has had to pay the expenses of litigation to get a 4 percent tariff, another nail competitor has sprung up that doesn’t have to worry about anti-dumping duties — and is eager to seize the competitive tariff advantage that the U.S. anti-dumping regime has offered. Meanwhile, sharp lawyers for Illinois Tool have already succeeded in persuading the Commerce Department to lower the anti-dumping tariff for ITW’s China operations from 20 percent to 4 percent — giving the U.S. multinational an edge over other Chinese nail producers who face higher duties, and another competitive incentive to keep shipping nails to the U.S. from China.

One way or another, legal or not, tariff barriers are always porous. And the jobs don’t come back to America.