December 16, 2005

Approximately 3,800 accredited journalists covered the World Trade Organization's December ministerial meetings in Hong Kong, churning out plenty of reports about the impasses that have been dogging the WTO's ongoing Doha Round of trade-liberalizing negotiations. But there were almost no reports about one issue that is so sensitive -- especially in Washington, D.C. -- that steps were taken at the WTO's highest levels to keep it out of sight during the Hong Kong meeting: reforms of the WTO's antidumping code.

The draft negotiating text that Director-General Pascal Lamy circulated to frame the Hong Kong agenda identifies no specific reforms of antidumping laws. Such laws seek to protect domestic manufacturers from low-cost foreign manufacturers "dumping" cheap goods in their markets. The WTO negotiators know better than to wave a red flag at the increasingly protectionist U.S. Congress over this issue. Congress would erupt in righteous anger at the slightest hint that the ongoing negotiations might, in fact, force the U.S. to practice what it preaches on free trade.

The American antidumping bureaucracy regularly accuses its trading partners -- especially China -- of being "unfair" by exporting their products at prices below "fair" costs of production. In fact, this accusatory, abusive practice has become the norm at the U.S. Department of Commerce. But the suggestion that Congress should want to do something to clean up the U.S. antidumping bureaucracy, rather than defend ad hoc protectionism to the bitter end, is naive.

While the subject receives minimal press attention and was not a noted item on the Hong Kong agenda, antidumping is nevertheless a covered subject in the Doha Round, and skirmishes over possible antidumping reforms preceded the ministerial conference in Hong Kong. Recently, some adroit political maneuvering in the U.S. Senate-led by Iowa Republican Sen. Chuck Grassley, who chairs the powerful Finance Committee -- scuttled an antidumping proposal that would surely have gutted the Doha process.

Why do America's trading partners consider the U.S. antidumping regime so scandalous? The real-world cases that follow should help to explain.

There is a story behind the new bed of Oriental design that my wife and I have just bought from the U.S. national retailer Crate & Barrel. Our bed was made in Guangzhou and was designed in California by a brilliant Chinese-born American entrepreneur named Maria Yee, who lives in the San Francisco Bay area. Ms. Yee, an American entrepreneurial success story, was born in Guangzhou as a teenager. During the Cultural Revolution in the mid-1960s she was picked up by the Red Guards and forced to work in a rock quarry while her parents were imprisoned. Ms. Yee made it to Hong Kong and freedom in 1981, and launched Maria Yee Inc. seven years later.

Enter John D. Bassett III, the president and CEO of the Vaughan-Bassett Furniture Company and the chairman of the steering committee of the American Manufacturers Committee for Legal Trade. Mr. Bassett and other domestic furniture makers, whose operations are mainly centered in southern Virginia and the Carolinas, don't like it when retailers like Crate & Barrel buy beds designed and manufactured by Maria Yee. China has been "dumping" beds upon unwitting U.S. consumers at below their "fair" costs of productions, Bassett testified before the U.S. International Trade Commission a year ago. The U.S. furniture coalition successfully got tariffs of 198% placed on Ms. Yee's beds -- including the one I bought.

Ms. Yee was sitting in the ITC's hearing room when Mr. Bassett protested that U.S. furniture makers had been bleeding jobs due to competition from China. "Our declining condition is due to one reason and one reason only. Dumped imports from China have surged into the United States at lower and lower prices," the Vaughn-Bassett executive declared.

After an investigation, the U.S. Commerce Department branded Ms. Yee an "unfair" foreign trader, and has taxed her beds to the maximum. But what kind of investigation did they conduct? Nobody at Commerce ever examined the books of Maria Yee Inc. Ms. Yee and her husband practically begged them to do so, but the bureaucrats said they did not have the time or resources to check everyone. Seven other Chinese furniture manufacturers were selected. All were found to have been "dumping," but at least escaped with lesser punitive tariffs averaging 8%. Maria Yee Inc., which was never properly investigated, was found guilty and assigned a "country-wide" antidumping margin.

The Yees tried to explain to Commerce officials that their manufacturing operation in southern China is wholly owned by their Hong Kong affiliate, operates fully in accordance with market forces -- and is in the business of turning profits, not selling their beds at nearly 200% below the cost to have made them. They got nowhere. Maria Yee, an American success story, has been labeled by her own adopted government as a businesswoman who engages in "unfair" trading practices. "This has been very painful for us," Peter Yee says. He adds that these days, Maria Yee Inc. is still selling furniture to customers like Crate & Barrel -- only not very many beds.

When the U.S. furniture makers testified that Chinese beds were very attractive to American buyers, they certainly knew what they were talking about. Well-known American firms like Vaughn-Bassett, Lexington Home Brands and Drexel-Heritage import considerable amounts of furniture from China. No U.S. furniture firm has ever complained that what it sources from China is "dumped" at an unfairly low price. At a Nov. 21, 2003 hearing held by the U.S. International Trade Commission, one of the U.S. petitioners candidly explained what was going on.

Steve Kincaid, the president of Kincaid Furniture and a major buyer of Chinese furniture, explained that if his company didn't buy from China, his retail customers like Marriott Hotels "will do so directly." Mr. Kincaid complained that it was unfair for retailers to buy from China, instead of from companies like his: "The Chinese factories are bypassing us and going straight to our long-time customers." Companies like Vaughn-Bassett and Kincaid Furniture have gotten the federal government to defend their own freedom to buy from China, and to make it more difficult for their retail customers to do the same thing.

Whenever a domestic industry files an antidumping case, the Commerce Department employs a standard methodology that almost always finds that dumping has occurred. The deck is particularly stacked against China.

To understand how the game is played, consider the otherwise innocuous tissue paper that wraps presents in gift boxes. The tissue paper is now subject to antidumping tariffs of 112%. Importers of tissue paper from China were found "guilty" without a shred of reliable evidence.

Because the Commerce Department has branded China a "nonmarket economy," antidumping officials are free to select "surrogate" free-market countries -- India, usually -- and base their estimate of production costs in China off of production costs in these surrogate countries. The comparison is obviously artificial, but that is how Congress has written the antidumping laws.

To calculate the costs of electricity for Chinese tissue paper manufacturers, Commerce bureaucrats consulted the Key World Energy Statistics 2003 -- looking for India, not China. To calculate the costs of steam in China, Commerce used the same number it had calculated in an antidumping case against Chinese hot-rolled steel. To determine the costs of scrap in the Chinese tissue paper industry, Commerce checked the Indian Import Statistics for "waste and scrap of paper or paperboard."

If these methods do not seem shoddy and unfair enough, consider dyes and ink, two of the most important costs in producing tissue paper. To estimate the costs of dyes for Chinese tissue paper makers everywhere in China, Commerce checked data from the Indian Chemical Weekly for prices in just one Indian city, Mumbai. The available public record suggests that the average prices of dye in India ranged between $5 and $6. But Commerce took the highest price for Indian dye, which was $14, pretending that Chinese tissue paper companies always paid that much. "The Department used the highest available dye value from the ICW [Indian Chemical Weekly] price quotes to value all dyes," one Commerce internal memo admits without a trace of embarrassment.

It was even worse for ink, where average Indian prices hovered between $2 and $4. Commerce came up with $20 as the "fair" value for the ink that Chinese tissue paper producers used. By pretending that the Chinese paid $14 for dyes instead of $5 or $6, and $20 for ink that Indians usually paid $2 to $4 for, the U.S. officials were able to inflate China's "dumping" margins to 112%, a patently absurd number.

When the U.S. government cooks the books to help domestic petitioners thwart foreign competitors, other legitimate business interests also suffer. In the bedroom-furniture case, antidumping authorities didn't consider that Chinese manufacturers import American oak, cherry, walnut, maple and other U.S.-grown hardwoods to make those beds. Virginia and other southern states actively pursue such export opportunities.

In the tissue paper case, the Commerce officials tried to help seven family-owned U.S. tissue paper makers which are mostly based in New England and employing fewer than 500 workers. These petitioners' interests were put ahead of giant tissue paper users like American Greetings Corp, which is headquartered in Cleveland and generates some $2 billion in annual sales. The U.S.-based multinational buys some tissue paper from the U.S. antidumping petitioners, but it also imports from China.

Moreover, executives at the giant Minneapolis-based Target Corp., which employs thousands of Americans, have said flatly that the domestic petitioners can't supply Target's needs.

In my years of covering antidumping cases, nobody in the Commerce Department (or the White House under the past three presidents) has ever shown much interest in reforming America's antidumping bureaucracy. Nor has anyone on Capitol Hill, where testifying U.S. trade officials are never asked about dumping and oversight is nonexistent. But occasionally, federal judges will document abuses in particularly egregious cases. In June 2002, for instance, U.S. Judge Richard Eaton of the New York-based U.S. Court of International Trade penned a 35-page decision that documents the twisted economic logic that Commerce officials used to punish the Chinese apple-juice-concentrate industry.

Employing its usual nonmarket-based methodology, Commerce picked a company from India named Himachal Pradesh Horticultural Produce Marketing & Processing Corp. as a free-market surrogate for Chinese apple-juice producers. But Judge Eaton found that HPMC was not a free-market operation at all, but a "government-controlled company" that subsidizes Indian apple growers by artificially raising prices. By comparing HPMC's above-market floor price paid to Indian apple growers to lower real-world prices in the U.S. market, Commerce inflated the antidumping margin, accusing the Chinese of selling Americans apple-juice concentrate at an average of 51% below its "fair" cost of production.

Any executive worth his salt would want to know what sort of misconduct was been going on under his nose. But Commerce Secretary Carlos Gutierrez and his top press aide, Christine Gunderson, have refused to respond to repeated requests for comment. If the secretary were interested in turning over rocks in his department, he might also read a recent study published by the Cato Institute. Trade policy analyst Dan Ikenson writes that Commerce's import administration "routinely exploits gray areas in the law to favor the domestic interests that seek protection -- and according to the verdicts of U.S. courts, sometimes violates the law in the process."

Despite the U.S. Congress's protection of antidumping laws, the possibility of minor reforms at the margins in the WTO's Doha process is not yet entirely dead. The hint of future antidumping reforms is buried deep in Annex D of the revised draft ministerial negotiating text which the WTO's Mr. Lamy and Kenyan diplomat Amina Mohamed have circulated to negotiators from the WTO's 148 member countries.

In the most general terms imaginable, the annex refers to a "call on participants, in considering possible clarifications and improvements in the area of antidumping," to "take into account the need to avoid the unwarranted use of antidumping measures, while preserving the basic concepts, principles and effectiveness of the instrument and its objectives where such measures are warranted." The annex concludes with the hope that a "mandate" for antidumping reforms would be agreed upon "early enough to assure a timely outcome within the context of the 2006 end date for the Doha Development Agenda...."

The reforms to the antidumping code that will be eventually considered sometime in 2006 will be highly technical. The fights will be over the parameters that WTO member countries can use to calculate antidumping margins, or duties, that are designed to rein in sales across international borders that are below "fair" costs of production.

To be sure, the technicalities will be vigorously fought over by advocates for business interests that stand to win or lose millions of dollars, depending upon how antidumping margins are set. But nobody will be talking about reforming the heart of a protectionist system that has gotten out of control. While no country's antidumping regime is free of misconduct, America's abuses are the most widely resented because they are the most hypocritical. Antidumping advocates in Washington routinely speak of how these laws are needed to ensure the proverbial "level playing field," but everyone in the business knows the laws are administered to tilt that field to help domestic petitioning industries stick it to their foreign competitors.

In September 2005, Senator Bryon Dorgan, a North Dakota Democrat and champion of protectionism, offered an amendment that would have derailed the Doha negotiations. Mr. Dorgan's idea was to deny funding for U.S. trade officials "to negotiate or enter into a trade agreement that modifies or amends any law of the United States that provides safeguards from unfair foreign trade practices."

Mr. Dorgan defended his proposal on the Senate floor with an emotional blast that blamed cheap imports for America's economic ills. The senator not only attacked U.S. consumers in places like Los Angeles, he also singled out his own constituents in Fargo who buy imported goods. "They are like hogs in a corncrib; they can't get enough of this," Mr. Dorgan fumed.

Responding, Finance Committee Chairman Grassley, the plain-spoken Iowa Republican, made short shrift of his North Dakota colleague's mischief by pointing out that it would ruin the Doha negotiations. "It will happen that our trade partners will respond by demanding other items be taken off the table," Mr. Grassley explained. "In other words, once we go to the table in good faith to negotiate, and we start saying, 'This is not negotiable, that is not negotiable,' then you could understand that trading partners are all going to have their pet projects off the table."

Significantly, the Dorgan amendment was strongly opposed by the heavyweights in U.S. trade lobby circles, including the National Foreign Trade Council, the Emergency Committee for American Trade, the National Association of Manufacturers and the U.S. Chamber of Commerce. America's major exporters, and even some trade association members and farm groups that themselves use the antidumping laws, were making it clear that there are more important priorities in the Doha negotiations than defending the existing U.S. antidumping regime to the exclusion of all else.

The would-be killer amendment was defeated by a decisive 60-39 vote. Free trade advocates were naturally delighted. "That vote was a very strong statement of support for using the trade laws as a negotiating chip," observed David Phelps, the president of the American International Institute of Steel. "I'll take 60-39 anytime."

But will that negotiating chip turn out to have much real value? When they eventually negotiate, trade officials will not be talking about ways to prevent U.S. antidumping bureaucrats from finding American entrepreneurs like Maria Yee guilty of "dumping" without bothering to examine the real evidence. No matter what technical adjustments may be achieved as the Doha package moves closer to finalization, it appears that the abuses of due process that define America's antidumping regime will be with the international trading system for many years to come.

(c) 2005 Dow Jones & Company, Inc.

Mr. Rushford is editor and publisher of the Rushford Report, a Washington-based newsletter that specializes in the politics of international trade