By GREG RUSHFORD
January 29, 2008

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.