Try this for a new way to hammer the already troubled American housing market: Raise the price of a key housing input — nails.

On Jan. 23, the U.S. Commerce Department published a notice announcing its intention to slap tariffs ranging from 20% to 118% on “unfairly” low-priced Chinese nails, while charging a duty of 4% on nails from Dubai. The tariffs are aimed at helping five struggling U.S. manufacturers who filed a dumping suit claiming they’re hurt by imports of below-cost nails worth about $564 million last year.

Since 2004, imports from China and Dubai have shot up to more than 60% of the U.S. nail market from 33%, explains Paul Rosenthal, the Washington lawyer for the petitioners. Prices have fallen and U.S. production has declined. Mr. Rosenthal’s largest nail client, Mid Continent Nail Corp., of Poplar Bluff, Missouri, has shut down operations in Virginia and Texas.

But whether that is a result of “unfair” trade or just normal, market-driven competition is another question entirely. To prove dumping, you first need to know a country’s true cost of production. But since China is officially considered a nonmarket economy, the U.S. Commerce Department assumes all prices there are distorted. So Washington bureaucrats turned to India, of all places, as a proxy for the “real” costs facing Chinese nail manufacturers.

To calculate Chinese nail producers’ costs of labor in 2006-2007, Commerce officials consulted the International Labor Organization’s yearbook of labor statistics — for 2002. The bureaucrats acknowledged that the old yearbook “does not separate the labor rates into different skill levels or types of labor.” To get around that difficulty, Commerce “applied the same wage rate to all skill levels and types of labor” attributed to Chinese nail manufacturers.

To estimate factory overhead, selling prices, expenses and profits in China, the feds consulted last year’s annual report of a leading Indian hardware manufacturer, Lakshmi Precision Screws. Another problem surfaced: Lakshmi doesn’t make nails. But the Indian company does produce screws, nuts and bolts, using a manufacturing process that seemed to be, well, Chinese-like, the officials figured. In Washington, such data are considered close enough for government work. And it didn’t hurt that using these particular data sets just happened to justify hitting Chinese nails with higher tariffs, a politically desirable outcome.

The next step in evaluating an antidumping suit is for the U.S. International Trade Commission to gauge the damage to U.S. manufacturers. But with the exception of the five launching this suit, the U.S. nail industry is pretty healthy — average profit margins are north of 13%. So to make the case that the domestic industry has been hurt, U.S. trade officials decided that the most profitable and largest American nail manufacturer, Illinois Tool Works (ITW), should be excluded from the American industry.

ITW is a sophisticated global manufacturer of thousands of industrial products used in more than 50 countries, and produces nails both domestically and in China. Because ITW’s profits are associated with its ability to produce nails in China as well as in the U.S., both Commerce and the ITC decided that ITW isn’t American enough to represent the domestic industry, and excluded it from its calculations of possible damages due to “dumping.” Uncle Sam is basically punishing ITW for its ability to profit from global supply chains. Never mind that ITW is employing 1,000 Americans in its Paslode division, which makes a range of construction materials — including nails manufactured in its Texas, Tennessee, Kentucky and Arkansas plants.

Which arguably makes it at least as American, if not more so, than some of the “U.S.” nail manufacturers joining the suit. Consider one signatory, Gerdau Ameristeel, which is headquartered in Toronto and is a subsidiary of the Brazilian steel giant, Gerdau S.A. Another “domestic” petitioner, Davis Wire Corp., is based in California but is a unit 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. Davis Wire also imports Canadian wire rod, from which it makes American nails.

The antidumping investigations also give scant attention to other parties who might benefit from the trade flows in question. In a filing with the Commerce Department and in testimony to the ITC, ITW argued that it is an important part of the American industry. Maersk Sealand, the shipping company that employs 4,700 Americans and whose ships carry the nails to the U.S. from Dubai, didn’t even enter an appearance; such companies rarely do since it’s always proven to be a waste of their time in the past. Congress has written the law to give Commerce officials the discretion to ignore the interests of such downstream consuming industries. And the interests of American consumers who stand to pay higher prices for nails in retail outlets like Home Depot are also not a factor.

Not only do protectionist stalwarts want to ignore evidence that U.S. consumers and some — many, even — U.S. companies benefit from trade. They want to ignore evidence that protectionism doesn’t even work to “protect” those companies that seek it. Senators Max Baucus (D., Montana) and Orrin Hatch (R., Utah) are pushing legislation that would forbid U.S. trade officials from considering whether antidumping tariffs would mainly shift production from one foreign location to another.

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Congress, Commerce and the petitioning nail manufacturers should know better. The nail manufacturers, especially, should own up to this game, not least because they’ve been on the losing side of U.S. protectionism themselves with tariffs on wire rod, the stuff of which nails are made.

Six years ago, Mid Continent was outraged when U.S. antidumping 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 that had caused shortages. The wire-rod tariffs contributed to today’s “problem” in the nail industry, incidentally: In 2005, ITW shifted some nail production to China largely because of the tariffs.

If that earlier experience teaches anything, it’s that even if a few hundred American jobs in the five U.S. nail companies that filed the antidumping petition are saved in the short term, it won’t last. More jobs will end up being created in China and other Asian countries like Indonesia, Malaysia and Vietnam, which are poised to pick up any business that China may lose.

The problem isn’t with the domestic nail petitioners, who are only seeking to use available legal tools to give themselves a leg up against their competitors. And whatever blame the Bush administration shares for playing along must be shared with George W. Bush’s predecessors from Ronald Reagan to Bill Clinton, each of whom did much the same. To hit the political nail on its real head, look to Capitol Hill, where lawmakers of both parties don’t see anything wrong with the U.S. trade laws.

Meanwhile, the tariffs drive one more nail into the coffin of America’s credibility on the international economic stage, and just as the crunch time is looming for the World Trade Organization’s Doha Round of global trade negotiations. That’s ultimately bad not just for nail consumers, but for everyone else, too.

Old-style textile protectionism suddenly has a new look. With the European Commission’s announcement last week of a new “licensing” scheme for Chinese clothing exports, Brussels has woven a new knot into free trade, and consumers will bear the cost. Even worse, the European Union bureaucrats are only echoing what Washington has already pioneered; namely, innocuous-looking substitutes for classic trade quotas. And none of it will likely ease the burden on uncompetitive Western rag-makers in the long run.

At first blush, it all sounds reasonable. The European Commission’s new scheme, announced last Thursday, aims to slow down imports of big-ticket Chinese clothing exports like trousers, blouses and bras to give European companies a chance to upgrade their production systems and price competitiveness. The so-called “double checking” system will require European businesses to apply for import licenses issued by the EU’s 27 member countries. Beijing will also require Chinese exporters to get licenses.

The program will increase costs for the chosen European importers, who have to pay the EU’s 27 member countries for the licenses. It also puts enormous power in the hands of unelected EU bureaucrats, who can choose who gets a license and who doesn’t. The idea is to help uncompetitive garment makers from France and Italy to the Mediterranean rim, while penalizing major European garment manufacturers who source globally.

“This is clearly an administration burden, but business can live with it,” notes Emma Ormond, an international trade consultant with PricewaterhouseCoopers in London. The alternative, Ms. Ormond observes, was a continuation of the EU’s remaining clothing quotas on China that are scheduled to expire at the end of this year — which EU Trade Commissioner Peter Mandelson refused to extend. That’s good, but ultimately a small comfort, given that Mr. Mandelson didn’t have the political capital to block the licensing scheme, which is a quota in another form.

None of this matters much for Chinese exporters, who can easily shift lower-end production to places like Bangladesh that are not subject to trade restraints. At the same time, the Chinese have incentives to restrict their own exports and focus on higher-end products. The resulting higher prices might not be good for European consumers, but that’s not China’s problem. Nor does the prospect that consumers will pay more for their T-shirts bother the Brussels-based European Apparel and Textile Organization (Euratex), which represents textile and apparel concerns in southern Europe. Euratex is happy to have the protection — for now, at least.

But happy for how long? The most recent available data shows that China — despite quota restrictions that will end in December — sold Europeans more than $28 billion worth of clothing and fabric in just the first nine months of last year, and remains the EU’s top supplier. When Brussels slapped tighter quotas on China to rein in surges of popular clothing lines — including undies — in the famous 2005 “bra war,” the Chinese more than made up their losses by exporting nearly 30% more brassieres to the Americans. When Europe curtailed Chinese imports of cotton bed linen in 2005, Egypt and Bangladesh found lucrative sales opportunities.

Had the EU only observed the results of U.S. protectionism against Vietnam, perhaps its textile gurus would’ve thought twice about “monitoring” cheap Asian exports. On Jan. 11 this year, U.S. Commerce Secretary Carlos Gutierrez announced that the U.S. would start “monitoring” Vietnamese-made clothing exports. In time, Commerce could build a database for stiff antidumping tariffs, should import “surges” occur and “hurt” U.S. producers. Mr. Gutierrez, a former CEO of Kellogg Co., presumably knew enough about global supply chains to understand that the monitoring would cause turmoil, as importers would have to adjust their business plans to the possibility of subsequent high duties.

But as in Brussels, politics trumped economics. The monitoring program was a favor to Republican senators Elizabeth Dole of North Carolina and Lindsey Graham of South Carolina. The lawmakers demanded the import restraints in return for releasing holds on legislation aimed at clearing the path for Vietnam’s accession to the World Trade Organization. The president of the National Council of Textile Organizations, Cass Johnson, was happy to take the credit. Meanwhile, major American importers, manufacturers and retailers — household names like Levi Strauss & Co., Liz Claiborne and J.C. Penney — cried foul.

As well they should have. The globally sourced manufacturers had to scramble to rejig their sourcing lines. There’s uncertainty, too, about what will happen when the monitoring program expires in January 2009. The move also enraged the Vietnamese, who saw their U.S. exports for the targeted clothing lines decline sharply this year. U.S. cotton sweater imports from Vietnam are down 11%, various wool sweaters by 23-90%, and wool trousers, 95%. Meanwhile, Vietnam’s exports to Europe have risen sharply, benefiting European consumers, who can now buy cheaper duds.

Amid all this turmoil, the more enlightened parts of the American and European apparel industries are busy making money by embracing globalization, not shunning it. New York-based entrepreneur Wilbur Ross, for instance, bought out the bankrupt Burlington Industries, long a stalwart of the domestic textile lobby, formed the aptly named International Textile Group, and set up operations in China and Vietnam — and preserved U.S. jobs in the process.

Even some key members of the U.S. textile lobby who have pressed for restraints on Asian trade have also — without much fanfare, to be sure — been trying to adjust to global market realities. Unifi, Inc., a textile maker based in Greensboro, North Carolina, has announced a joint venture with a Chinese partner in Jiangsu province. And Glen Raven, Inc., another North Carolina fabric maker, proudly announced last month that it had built a new, 190,000 square-foot facility near Shanghai that will serve as the headquarters for Glen Raven Asia.

Europeans are also catching on. In the run-up to last week’s monitoring deal, Mr. Mandelson flew to Italy and urged manufacturers there “don’t be frightened” of competing with Asian suppliers. He has reason to think Europeans can compete: The venerable Ballantyne Cashmere, founded in Scotland in 1921, proudly points to its Scottish workers who make upscale sweaters from imported cashmere from China. “The world of Ballantyne,” the company proclaims on its Web site, “is now international.”

The textile lobbyists have had a long run. Protectionism has been woven into the American fabric since 1789, when the first Congress erected high tariffs to protect the domestic cotton crowd. In France in the 1600s, traffickers in imported calicoes risked public hanging, or a turn on the wheel. In more recent decades, the Europeans and Americans inflicted quota restrictions that limited economic growth in more than 40 mostly poor countries, while hitting consumers hard.

The beginning of the end came in 1995, when the rag trade was finally brought into the trading rules administered by the WTO. Textile quotas were phased out for WTO members in 2005, leaving only special cases like China and Vietnam vulnerable to the current harassment, which is gradually winding down. The newfangled monitoring programs and licensing schemes are likely to face a similar fate. For those manufacturers and importers who still refuse to modernize, the day of economic reckoning is fast approaching.

CLARK FIELD, Philippines — The economic potential of the Philippines — and all the reasons it has yet to live up to that potential — come sharply into focus as soon as a visitor lands. Literally. With Manila’s current major international air terminal, some 50 miles to the city’s south, already too congested for serious expansion, the battle over the future of the Philippines’ next premier international air gateway has become a microcosm of all that the country could be, and all that’s holding it back.

Still widely known as “Clark Field,” the old name from its days as an American military airbase, the airport-in-waiting is now officially the Diosdado Macapagal International Airport, in honor of the former Philippine president and father of current President Gloria Macapagal Arroyo. And Ms. Arroyo has been playing the crucial, and often conflicted, role in determining the airport’s future.

Clark and its surrounding community in the province of Pampanga have never been rich. In its heyday during the Cold War, Clark Air Base bustled with energy as a major U.S. listening post and home of the 13th U.S. Air Force. But in June 1991, the U.S. Air Force, under fierce attack from nationalist forces in the Philippine Senate, finally flew out, leaving Clark covered in the volcanic ashes spewed out by nearby Mt. Pinatubo. Clark immediately fell upon hard times. Looters stripped the base clean, down to the toilet lids.

Things began to change in January 2006, when Ms. Arroyo — responding to complaints from the Pampanga business community that too many regulations from Manila were holding back Clark’s potential — signed an executive order unilaterally proclaiming open skies. The move unleashed the forces of economic liberalization at Clark by allowing foreign airlines to fly in hundreds of thousands of tourists from Korea, Singapore, Hong Kong, Macau, Malaysia and as far away as Dubai. It also opened the door to all the trade that could be conducted via the cargo holds of those planes. The formerly sleepy Clark, which processed fewer than 50,000 passengers three years ago, took off, bringing in nearly 500,000 last year. And prices are dropping. Singapore’s Tiger Airways has been offering flights from Macau to Clark for $9.99.

The benefits aren’t so much trickling into the local economy as pouring. More than 50,000 Filipinos now work here, some 10,000 more than were employed when the Americans ran the place. More jobs are coming as foreign companies find it easier and cheaper to move people and goods in and out.

Texas Instruments is putting in a billion-dollar semiconductor plant. The United Parcel Service has made Clark a regional hub. Yokohama Tire Philippines is making a $100 million expansion, and is exporting tires from Clark all around the world. Shoemart, the big Philippine retail giant, has moved in, as has Jollibee’s, the Philippine answer to McDonald’s (which also serves the nearby community). Other foreign and Philippine entrepreneurs are opening up more businesses to cater to the workers and tourists: hotels, restaurants and so on.

But the growth remains fragile, and will come to a halt if Ms. Arroyo’s government insists upon bringing Clark’s passenger traffic back to a trickle. Which, alarmingly, is just what the government has tried to do. In August 2006, just eight months after the initial liberalization, Ms. Arroyo bowed to pressures from domestic protectionist cronies — the most well-known of whom is billionaire Lucio Tan, the owner of Philippine Airlines — and issued a revised executive order aimed at slowing down the foreign airline traffic. While the numbers for arriving passengers were still up some 35% in the first quarter of this year, it is clear that Clark’s ambitions to become the Philippines’ premier gateway have been seriously threatened.

Citing “the continued uncertainty regarding the regulatory situation at Clark,” Tiger Airways announced on March 23 that it would be reducing its flight frequency from Singapore to Clark to nine weekly flights from 14. As Clark spokesman Arnel San Pedro told me, local business leaders are outraged that the national government would “refuse to prosper because of the subservience of some greedy people to the personal interests of ‘Manila’s Imperial Dragons.'”

Ms. Arroyo’s reversal was especially galling because Mr. Tan — the archetypal “imperial dragon” — is such a terrible well from which to draw economic advice. He first got really rich in the 1970s, thanks to various tax breaks and favors bestowed by former Philippine strongman Ferdinand Marcos. Understandably, the Chinese-born tycoon takes a dim view of cuttthroat market-oriented competition from foreign-run budget airlines. His critics revile him as the personification of what’s wrong with the Philippine economy.

But Mr. Tan’s current ally in the presidential palace, Ms. Arroyo, is more forgiving. In 2002, the president honored him for his “lifetime” of achievements in “helping build the nation.” Numerous press reports from Manila have it that Mr. Tan has been among Ms. Arroyo’s most generous sources of campaign financing; presidential press secretary Ignacio Bunye declines comment.

Now Ms. Arroyo is being pressed by a deeply concerned Clark business community that believes that Mr. Tan’s influence upon the Arroyo administration is pulling the economic ladder out from under them. The airport’s energetic chief executive, Victor Jose Luciano, made an impassioned presentation last month to Ms. Arroyo and her cabinet urging the president to issue a third executive order undoing the damage she created with her second one back in August 2006.

Ms. Arroyo holds a doctorate in economics, so she presumably understands that her first instincts to open the Philippine skies were the right ones. Her method may be problematic, though. When she moved to slow down the Philippines’ open skies prospects last year, Ms. Arroyo’s public rationale was that instead of unilateral liberalization, the Philippines would negotiate with foreign governments for increased access to their airports in return. Indeed, the Arroyo administration has recently concluded negotiating a major expansion of passenger landings for flights between the Philippines and South Korea.

But behind the scenes, Mr. Tan seems to dominate the process. A leaked copy of the Aug. 9, 2007, minutes of the Philippine government’s official air negotiating panel shows that nine of the 23 members aren’t government officials, but work for Mr. Tan’s PAL and two other Tan-owned airline and cargo operations. Cebu Pacific, another domestic carrier that is following Mr. Tan’s anti-open skies lead, has another two seats.

Since in practice the Philippine airline negotiating body seeks unanimous consent to schedule negotiations with foreign airlines, Mr. Tan effectively has veto power — and last month’s minutes make clear that PAL sees “no immediate need” for urgency in scheduling many more air talks. Supporters of open skies report that the last air talks the Philippine government held with Macau were in 2001, that similar negotiations with Hong Kong last occurred in 1996, and in 1995 for Malaysia and Thailand.

From PAL’s perspective, why hurry? Philippine airline industry sources who ask not to be identified report that Mr. Tan’s airline has found a wonderful way to profit from current restrictions. When passenger quotas assigned by the Philippine authorities to, say, Macau, or Hong Kong, or Dubai, have been filled, the Philippine government has given expanded entitlements to fly more passengers to PAL, which turns around and “rents” those entitlements to foreign carriers. While the details of such deals remain confidential, credible industry insiders report that Dubai is paying PAL at least $1 million a year in passenger rents. Not that this money is “free,” of course: The foreign carriers pass the extra expense on to fliers — many of whom are hard-pressed Philippine overseas workers — in the form of pricier tickets. Mr. Tan, who declined persistent requests to be interviewed for this column, is turning a profit for PAL without flying his own airplanes.

The question now is whether Ms. Arroyo will be able to summon the political courage to stop him from doing it. She might reflect on some history. When the airport’s namesake, her father — an economic reformer — was elected in 1961, the Philippines boasted the second-largest economy in Asia, second only to Japan. When Ferdinand Marcos won election four years later, he went on to help enrich his cronies while crippling the economy with an array of protectionist schemes. With a stroke of her presidential pen, Ms. Arroyo could not only re-open Philippine skies to economic development, she could also prove that “Philippine prosperity” doesn’t have to be an oxymoron.
Mr. Rushford is editor of The Rushford Report, an online journal that follows the politics of international trade and diplomacy.