By GREG RUSHFORD
March 6, 2008

A three-judge World Trade Organization panel has ruled America's method for taxing shrimp imports out of line with the country's WTO obligations. What happens next will say a lot about the credibility of American leadership in promoting free trade.

The new WTO ruling is the latest twist in a politically charged case involving some $2 billion in annual shrimp exports to the U.S., counting not just India and Thailand -- the two countries pressing the current litigation -- but also China, Vietnam, Brazil and Ecuador. Three years ago, the U.S. Commerce Department slapped punitive duties ranging from 4% to 113% on shrimp from the six countries, alleging that they had been "dumping" their seafood delicacies in the U.S. at "unfairly" low prices.

That move was bad enough. But then U.S. Customs officials made matters worse by rolling out a novel accounting trick. Customs decided that shrimp imports from the six involved countries would be subject to a newfangled policy concoction called "continuous bonds."

In practice, that meant that an importer who planned to bring in, say, $100 million annually in shrimp subject to a 6% antidumping tariff would normally be required to post a $6 million cash deposit to cover the expected duties. On top of that, the importer would pay a $50,000 surety bond as "insurance" that payment can be made, in case import duties -- which can subsequently be raised or lowered by Commerce officials -- exceed the expected amount that year. Such bonds are backed by credit lines extended by the duty payer's banks.

But the new continuous-bond policy morphed the traditional $50,000 bonds into a bond equal to the expected-duty deposit over again -- meaning in the example above a bond of $6 million, in addition to the $6 million cash deposit importers already had to put up. While Customs was aiming at foreign exporters, the agency ended up squeezing the American importers who normally pay the duties.

For importers, the continuous bonds have been a continuous nightmare. They've been forced by lenders to scramble to obtain enormous annual credit lines, secured by putting up a portion of their businesses as collateral. Whether or not the importers end up having to borrow against their credit lines, the burdensome bonds constrain their ability to raise capital to re-invest in their businesses, as assets against which they could ordinarily borrow are already tied up. Predictably, some U.S. shrimp importers have been forced to exit the business, as their credit lines have been over-extended.

Customs officials justified the new policy -- which was announced without official prior notice in the Federal Register, and thus with no opportunity for affected importers to comment publicly -- as necessary to prevent possibly shady shrimp importers from failing to ante up duties when they are calculated at year's end. Such evasions had occurred in previous antidumping cases involving Vietnamese catfish and Chinese crawfish.

But when the National Fisheries Institute, whose members import some 80% of the seafood that Americans eat, challenged the Customs' paperwork burdens in the New York-based U.S. Court of International Trade, evidence of unsavory political calculations surfaced. Citing the agency's internal documents, U.S. Judge Timothy Stanceu found that Customs officials had been motivated "by domestic political pressures to take action directed against the shrimp importing industry." The bureaucrats had calculated that lawmakers from shrimp-producing states wielded more influence on important congressional committees than did representatives from shrimp-importing states. Despite that finding, the case is still wending its way through the federal courts.

Meanwhile, India and Thailand pursued their own claim against the U.S. at the WTO. Last Friday, they prevailed, when a three-judge dispute panel declared the continuous bonding policy inconsistent with America's obligations as a WTO member. The U.S. will likely appeal the finding.

Better, though, to comply with the decision by dropping the burdensome bond sham. When the U.S. prevails in WTO litigation, Uncle Sam expects the foreigners to comply forthwith. Now, Asians are asking that American officials do the same. Doing so would enhance America's credibility both in the WTO's dispute-resolution system and at the negotiating table for further trade liberalization, not to mention the benefits to America's own shrimp importers and consumers. Surely, U.S. trade policy has bigger shrimp to fry.