US-China Trade War -- Sorghum
US-China Trade War. Sorghum is the latest move.

For the first time in over a decade, the United States Commerce Department late last year self-initiated an antidumping and countervailing duty case. This case was against aluminum sheet imports from China.  Almost all other antidumping and countervailing duty cases are initiated by domestic producers filing a petition asking the U.S. government to investigate whether the subject imports are dumped or subsidized, and injure the domestic industry. It was highly unusual for DOC to self-initiate AD/CVD cases and act as both prosecutor and judge in these cases.

On February 4, 2018, China’s Ministry of Commerce (“MOFCOM”) self-initiated its own antidumping and countervailing duty case against the United States for imports of US sorghum grain. Total China imports of US Sorghum Grain in 2016 were 5,869,000 tons worth more than $1.26 billion USD. China is a significant export market for U.S. sorghum, accounting for about 70 percent of total US sorghum exports in 2016. Sorghum is used primarily as a livestock feed, but can also is used to make alcoholic beverages like Chinese Mao-tai and other baijiu. This self-initiated action by MOFCOM is widely viewed as China’s counter to U.S. trade actions over the past year.

China’s case involves dumping claims and it also targets large US agricultural subsidies for sorghum grain, such as the following United States agricultural assistance programs: Crop Insurance; Price Loss Protections; Agricultural Risk Protections; Marketing Loans; Export Credit Guarantees; Market Access Programs and Foreign Market Development Partner Program.

The following North American sorghum/ grain exporters may be targets of this MOFCOM Action:

  • Agniel Commodities, LLC
  • Attebury Grain, LLC=
  • Big River Resources
  • Bluegrass Farms of Ohio, Inc.
  • Bunge North America, Inc.
  • Cardinal Ethanol, LLC,
  • Cargill, Inc.
  • Consolidated Grain and Barge Co.
  • DeLong Company  Inc.
  • Enerfo USA, Inc.
  • Fornazor International Inc.
  • Freepoint Commodities LLC
  • Gavilon, Illinois Corn Processing, LLC
  • International Feed
  • Louis Dreyfus Commodities
  • Marquis Grain Inc.,
  • Mirasco Inc.,
  • Pacific Ethanol, Inc.,
  • Perdue AgriBusiness, LLC,
  • The Scoular Company,
  • Southwest Iowa Renewable Energy, LLC,
  • Tharaldson Ethanol Plant I, LLC,
  • United Wisconsin Grain Producers
  • Zeeland Farm Services.

This case is important because it signals a possible escalation of the on-going trade war with China. In January 2017 China issued AD duties of 42.2 to 53.7% and CVD duties of 11.2 to 12% on another U.S. grain product used primarily for livestock feed, dried distiller’s grains with solubles (DDGS). Some of the companies who exported DDGS to China may also export sorghum to China.

At a minimum, it shows that what goes around can come around and that China has no intention of remaining idle in the face of US trade actions. If the US is going to self-initiate antidumping and countervailing duty cases against China, China is going to self-initiate antidumping and countervailing duty cases against the US. This sorghum grain trade case indicates there is a price to pay for US tariffs and trade actions. Most of the companies listed above are based in or have very close connections to America’s heartland and that is surely no coincidence; China is aiming this sorghum grain case right at President Trump’s constituency—the agriculture and rural states.

Both the Wall Street Journal and Investors Business Daily have in numerous editorials warned the Trump Administration that the economic issue that could stop the rise in the US economy is a trade war. Trump and the Republicans have tied their political star to the rising US economy. But if President Trump levies more tariffs against Chinese imports, expect the Chinese government to retaliate and aim its trade guns at products and constituencies that will hurt President Trump and the Republicans the most—agriculture.

In the meantime, any company involved in providing sorghum grain to China should be looking to retain counsel experienced with both China and with international trade.

Things are starting to get serious.

 

 

China trade duties“Logic clearly dictates that the needs of the many outweigh the needs of the few.”  Spock, from the Wrath of Khan.

In most trade cases, a few domestic producers (or even one) ask the U.S. government to protect them by imposing extra duties or other trade barriers on imports. Usually, larger numbers of U.S. importers, downstream manufacturers or consumers wind up bearing these costs to protect the domestic producers, even though these costs are often arbitrary, excessive and unfair.

The U.S. International Trade Commission (ITC) just wrapped up its part in the latest trade case against imported solar cells and modules. Solar products from China were already hit with antidumping and countervailing (AD/CVD) duties in 2011 and 2014. This was not enough for the two largest remaining U.S. solar producers, Suniva, Inc. and SolarWorld Americas, Inc., who now have asked for a safeguard investigation to determine whether extra tariffs, quotas, and/or floor prices should be imposed on all imported solar cells and modules from any country. Opposing Suniva and SolarWorld is the rest of the $29 billion U.S. solar industry, mainly the U.S. solar energy developers, downstream U.S. solar panel installers and U.S. manufacturers of solar components, such as racking systems and inverters. On the one hand, Suniva and SolarWorld are hoping the safeguard relief measures will save hundreds of workers at their facilities. On the other hand, opponents argue these remedial measures would threaten many thousands of workers at other U.S. companies that have benefitted from the solar energy boom.

Though Suniva blames import competition for its bankrupt condition and its need for this safeguard action, the reality is that Suniva filed this case because it got whacked by the second solar trade case filed by SolarWorld. Previously, Suniva’s business model relied on producing solar cells in the United States that it then shipped to China where they were assembled into solar panels that were shipped back to Suniva’s U.S. customers.

The second solar trade case brought by SolarWorld in 2014, however, targeted any Chinese solar panels, regardless of where the solar cells were made. SolarWorld had complained that the first solar case in 2011 had an enormous loophole because it covered only Chinese solar panels made with Chinese solar cells. After that first case, Chinese module makers quickly switched to use cells from third-countries, mainly Taiwan, which caused SolarWorld to file its second case. Suniva in the second case claimed that any Chinese modules that used its American solar cells should be exempt from AD/CVD duties just because they were American, but the Department of Commerce (DOC) disagreed. The second round of solar duties disrupted Suniva’s supply chain and made using its Chinese module assemblers cost prohibitive. Suniva thus decided its last hope was to file a safeguard action that would artificially create a level playing field whereby all imported solar panels would be subject to the same high duties, quotas or floor prices.

The problem is how high do those trade barriers have to be for Suniva and SolarWorld to have any chance of surviving?

In this ITC safeguard investigation, Suniva and SolarWorld originally asked for extra tariffs to be imposed for four years, starting at 40 cents per watt on imported solar cells and a minimum price floor of 78 cents per watt for solar modules, as well as proposed import quotas to limit the total amount of imported cells (0.22 gigawatts) and modules (5.7 gigawatts). Solar industry analysts feared these measures would at least double the current cost of solar products, slash solar demand by two-thirds, and undermine billions of dollars of pending solar investment projects.

The ITC just released three different remedy packages that recommend far less than what Suniva and SolarWorld requested. The highest of the Commission proposals calls for extra tariffs of 30 to 35 percent on solar modules and cells that would then decrease certain percentage points each year for four years. Given the current forecasts that imported panels would cost around 32 cents per watt, analysts expect the highest Commission proposed remedies would add only an extra cost of 10 to 14 cents per watt.

Suniva and SolarWorld have expressed disappointment with the ITC recommendations and they have asked President Trump to impose stronger measures they claim are necessary to save the domestic U.S. solar manufacturing industry from extinction.

Unlike the more common AD/CVD cases in which the ITC and the DOC decide on whether to impose extra duties, in these rarely used safeguard investigations, the President has the ultimate authority to decide what, if any, remedial measures should be imposed. President Trump will have until January 12, 2018, to decide what remedial measures will be imposed that may affect $8.3 billion of imported solar cells and panels. He can follow any of the Commission’s recommendations or come up with his own remedial measures.

There have been few U.S. safeguard actions (and none since 2001). One reason why safeguard actions fell out of favor was because domestic industries found them less effective than the more commonly used AD/CVD actions. Because safeguard actions permit trade restrictions to be imposed on fairly traded imports, U.S. law specifically limits safeguard measures to a shorter period (usually four years or less) and to a maximum tariff rate of not more than 50% above existing rates.

Most importantly, the safeguard statute gives the President discretion to weigh the costs and benefits of imposing remedial measures. From 1975 to 2001, U.S. Presidents have declined to implement any trade restrictions in slightly more than half of the cases (19 of 40) in which they could have. In those cases where the President did impose trade barriers, they were usually much lighter than what the petitioning domestic industry sought. Past Presidents chose to impose no or much lighter safeguard remedies because they acknowledged the potentially harmful impact the proposed tariffs or quotas might have on downstream users and consumers, as well as the risk of other countries retaliating by imposing their own safeguard measures against U.S. exports to those countries.

But since President Trump has vowed to take strong action against imports, this solar safeguard action (along with another safeguard action on washing machines) is being watched closely as a test of whether President Trump’s actions will match his tough campaign rhetoric. If President Trump imposes remedial measures tougher than what the Commission recommends, we could see a flood of other safeguard petitions from other U.S. industries seeking a quick direct route to import relief from a sympathetic President.

In 2015-16, solar energy-related companies employed 374,000 people in the U.S., which is more than the combined number of workers in the coal, oil, and gas industries. Technological advances and competition have pushed solar installation costs down more the 60 percent since 2011 and solar electricity has in some places become cost competitive with electricity sourced from oil, coal, and gas. If President Trump imposes excessive safeguard remedies he could wipe out all progress solar energy has made in the United States. For the U.S. solar industry to live long and prosper President Trump will need to balance the needs of the many and not just consider the needs of the few.

Here is hoping the President makes a logical choice because a lot is going to be riding on it.

antidumping duties against ChinaEarlier this month I wrote about it was not clear whether the U.S. antidumping order on garlic from China helped domestic garlic producers. One of the unusual consequences of this garlic antidumping order was that the California garlic producers had worked out an arrangement that allowed Chinese garlic to be imported from one “fair” supplier (Harmoni), while blocking the vast majority of all other Chinese garlic sourced from “unfair” suppliers.

The latest Department of Commerce (DOC) annual administrative review threatened to destroy that cozy arrangement between the California garlic growers and Harmoni because a couple of New Mexico garlic growers had filed a request seeking DOC review of Harmoni. The DOC had accepted the New Mexico growers’ review request and had initiated a review of Harmoni. Harmoni did not respond to the DOC’s questionnaires, so DOC issued a preliminary determination finding Harmoni would be subject to a 376% dumping rate. But the DOC was still considering arguments that the New Mexico garlic grower’s review request for Harmoni was invalid and should not have been accepted by DOC in the first place.

Last week, the DOC issued its final determination for this garlic review, and concluded that the review request filed by the New Mexico garlic growers was not legitimate and therefore its review for Harmoni and its 375% dumping rate would be rescinded. As a result, Harmoni is able to maintain its zero dumping rate and continue supplying California garlic growers with Chinese garlic.

The DOC rejected the New Mexico garlic growers’ review request because new information submitted after the preliminary determination called into question the credibility of their assertion that they were actually domestic garlic producers. For example, contrary to specific statements made on behalf of the New Mexico garlic growers, the DOC pointed to the record information showing Chinese garlic growers were in fact extensively involved in planning the New Mexico growers’ review request and had both directly and indirectly compensated the New Mexico growers and the U.S. attorney for participating in this review. One of the two New Mexico garlic growers dropped his support for the Harmoni review request and then submitted a bombshell statement admitting that his small garlic farm in New Mexico did not really compete with Chinese garlic. “Our stated moral high ground – ‘leveling the playing field,’ etc., etc. – inevitably came with a ‘wink, wink’ whenever we talked about it.” DOC concluded that “material misrepresentations” by the New Mexico garlic growers had tainted all their statements and information submitted by them and so it could not rely on any of the garlic production information demonstrating the New Mexico garlic growers were in fact domestic producers.

So in the end, the California garlic growers got the DOC decision they wanted, which was to keep Harmoni out of the DOC review process. This allows Harmoni, to continue reaping the benefits from being the only remaining Chinese garlic company with a zero dumping rate. This also allows the California garlic growers to remain protected by incredibly high dumping rates that block most “unfair” Chinese garlic from sold in the United States, while still giving them direct access to cheaper Chinese garlic from the sole “fair” Chinese garlic supplier — Harmoni. In the end though, U.S. consumers bear the cost of protecting the handful of California fresh garlic producers still surviving.

I’m sure there will be other attempts to break down the antidumping barriers that block most Chinese garlic from the U.S. market and keep U.S. garlic prices the highest in the world. Perhaps garlic growers in Minnesota or some other state will file another review request targeting Harmoni.

Someone should.

China trade casesPresident Trump’s promises of tougher enforcement of U.S. trade laws has triggered the filing of an unprecedented wave of new antidumping (AD) and countervailing duty (CVD) petitions in the past few months. The U.S. already has many 397 AD and CVD orders in place, going back as far as 1977.  These orders cover 157 different products imported from 43 different countries. Most of these AD/CVD orders (by far) are on Chinese products, ranging from aluminum extrusions to xanthan gum. But just how effective are these AD/CVD orders? To what extent do these AD/CVD orders help certain domestic United States industries, but also harm other domestic industries? What kind of unintended consequences result from these cases?

To answer these questions, I look at one of the older AD orders: fresh garlic from China, which has been subject to AD duties since 1994. One reason why this order has lasted so long is because the domestic U.S. garlic industry has been able to show it would be vulnerable to material injury if the AD order on Chinese garlic were revoked. Gilroy, California may call itself the “Garlic Capital of the World,” but it is China that produces around  75 percent of the world’s garlic. China produces approximately 20 million tons of garlic a year as compared to the United States, produces around 175,000 tons. This disproportionality has allowed U.S. garlic producers to successfully claim they would be obliterated by a flood of cheap Chinese garlic were the AD order ever to be removed.

The vast majority of U.S. fresh garlic is grown in central California, but growing garlic there is getting tougher because of a tightening supply of land, labor, and water there. California garlic acreage planted is down significantly from 2000, and recent US garlic crops have been affected by white rot, a soil disease. Harvesting and packaging fresh garlic requires manual labor which has been hard to find, and likely will get even harder under Trump’s anti-immigration policies. California garlic growers face fewer available workers and increasing labor costs, as fewer people want to work on farms.  And as strip malls and suburbs creep towards farmland, property values are rising, making it even harder to find affordable housing for farmworkers. Garlic has also suffered from drought conditions in Central California for five years running and competition for scarce water resources has jacked up water costs for garlic growers.

The U.S. consumes about 260,000 tons of fresh garlic annually. After taking out the U.S. garlic used to make dehydrated garlic or as seed bulbs for the next garlic crop, U.S. garlic producers can now satisfy only about 30-40% of U.S. annual demand for fresh garlic. So, some imports are needed in the US market. Can AD/CVD laws effectively screen out unfairly traded garlic, while allowing in only the fairly traded garlic to fill the demand gap?

In the first few years after the AD order, Chinese garlic imports were completely shut out and U.S. garlic prices initially stabilized and then steadily increased. But by the mid 2000s, the US market price for garlic had risen so high that Chinese garlic could show they were selling at non-dumped prices even after absorbing initial AD duty deposits at 376%.

Between 2002 and 2007, the Department of Commerce (DOC) calculated zero or very low dumping margins for about a dozen Chinese garlic exporters. Not surprisingly, the volume of Chinese garlic imports into the United States increased, hitting about 72,000 tons in 2007. Since 2008, however, no Chinese garlic exporters have gotten any low AD margins calculated by DOC. More importantly, DOC has steadily knocked out Chinese companies that previously had low dumping margins, either by calculating higher updated margins in these later reviews or by applying the PRC-wide rate of 376% (or $4.71 /kg) because the responses from the Chinese garlic companies were deemed inadequate.

Out of all those Chinese companies that previously received a zero or very low AD margin, only one company, Zhengzhou Harmoni Spice (and their US affiliate, Harmoni International Spice), has been able to maintain an exemption from AD duties. This is because Harmoni worked out a deal with the California garlic growers (Petitioners) whereby Harmoni agreed to supply Chinese garlic to the Petitioners in exchange for the Petitioners agreeing not to request the DOC conduct another administrative review for Harmoni, which could result in Harmoni losing its zero dumping margin.  Some disapprove of such arrangements as an inappropriate gaming of the system that allows the domestic industry to manipulate the trade laws to its own benefit. But others view these as reasonable settlements that allow both sides to benefit in some way from the DOC not conducting a review.

In this garlic case, Harmoni clearly benefits as the sole Chinese garlic exporter with full access to the US market because it does not have to pay any extra AD duty costs or deal with burdensome DOC reviews. Petitioners also benefit by getting access to lower cost Chinese garlic they can use to supplement their own production and improve their overall profitability. Petitioners saw Harmoni as a “good” Chinese garlic exporter who would act responsibly in the market and not drive garlic market prices down, unlike all the other “bad” Chinese garlic exporters. Since 2004, Petitioners thus have not included Harmoni in their annual review requests that usually target all the other Chinese garlic exporters. Under US trade laws, DOC annual review requests can be filed by domestic producers, US importers for their own Chinese suppliers, and Chinese suppliers only for themselves; Chinese suppliers cannot request reviews for other Chinese suppliers.

The AD duties imposed on garilc increase costs that ultimately are borne by the consumer. But when fresh garlic costs are such a tiny part of your fettuccine alfredo, consumers are willing to absorb or are blissfully ignorant of those extra AD duties that inflate the price of garlic and the garlic wars are mostly being fought outside the public eye.

However, the cozy arrangement between Harmoni and Petitioners is now at risk of falling apart, depending on DOC’s upcoming final decision in the latest garlic administrative review. The other Chinese garlic companies, unhappy at being excluded from Harmoni’s arrangement with Petitioners, found a couple of New Mexico garlic growers to serve as “domestic producers” who last year filed requests that DOC conduct a review of Harmoni. Petitioners and Harmoni immediately pointed out that these New Mexico garlic farmers did not have standing to file the review request because they were not really domestic producers like the large scale commercial garlic farms run by Petitioners that account for about 80% of US garlic production. DOC disagreed and has accepted the New Mexico growers’ review requests and initiated a review for Harmoni. In December 2009, DOC issued a preliminary determination noting that Harmoni had not responded to the Department’s questionnaires and would receive the PRC-wide rate.

Harmoni and Petitioners, however, are still arguing that the review for Harmoni should still be terminated because the review request filed by the New Mexico growers was fraudulent and cannot be a valid basis for a DOC review. DOC has received numerous filings with sordid details of how the Chinese garlic growers and their US attorney planned to use the New Mexico growers just to undermine Harmoni’s arrangement with Petitioners. Late in this review proceeding, one of the two New Mexico garlic growers withdrew his support of the original Harmoni review request once it realized it was just being used as a pawn by the Chinese garlic growers. Harmoni has also filed a federal racketeering action that is still pending against the Chinese garlic companies and their US attorney for conspiring to defraud the U.S. government by filing false documents with DOC.

We will soon find out in DOC’s upcoming final determination for this garlic review whether DOC will accept or reject the New Mexico garlic grower’s review request and thus whether Harmoni’s arrangement with Petitioners will collapse or continue. But the fact that DOC has even preliminarily accepted this New Mexico review request highlights how DOC’s administration of the AD/CVD laws is so unpredictable that even the domestic industry cannot count on how these cases will turn out. DOC’s acceptance of the New Mexico garlic growers’ review request for Harmoni is particularly surprising because the Trump administration has been so unabashedly protectionist and DOC claims to administer the AD/CVD laws to protect the domestic industry from unfair trade.

The AD duties on Chinese garlic thus far have significantly restricted Chinese garlic in the U.S. market. In part because of the high AD duties, US garlic prices are among the highest in the world. Petitioners have been able to find a “fair” Chinese garlic company to help supply them with lower cost Chinese garlic, while still blocking all other “unfair” Chinese garlic companies. And yet, this arrangement that has benefited the domestic industry may come undone if DOC continues to accept the Chinese/New Mexico review request of Harmoni. Given the difficulties unrelated to Chinese garlic (rising land, labor, and water costs), the last thing the “real” US garlic producers need is an unfavorable decision from DOC that will shut down Petitioners’ access to “fair” Chinese garlic and open the door to “unfair” Chinese garlic returning to the U.S. market. DOC’s handling of this garlic review request issue demonstrates the US AD/CVD laws are blunt tools that are inconsistently applied by DOC and often result in unexpected and unintended consequences that do not help the domestic industry.

US-China Trade WarThe Trump administration just launched two investigations to see if steel and aluminum imports threaten to impair the national security of the United States. Because these investigations were self-initiated by the Trump administration, many believe it pre-ordained that some type of import restrictions will be imposed. But here are a few reasons why imports should not be restricted, from China or from anywhere else.

Past Section 232 determinations indicate steel/ aluminum imports are not a “national security” threat. Only 26 investigations have ever been conducted under Section 232 of the Trade Expansion Act of 1962. Prior Section 232 investigations defined “national security” as covering not only a military or national defense component, but also the general security and welfare of certain industries “critical to the minimum operations of the economy and government.” Most (19 out of 26) resulted in either a finding of no national security threat or no action taken in any way. Only crude oil from Libya and Iran were found to be a national security threat that warranted some type of import restrictions.

The most recent Section 232 investigation concluded in October 2001 and it was also on steel. Even taking into consideration the national security requirements of the post 9/11 campaign against terrorism, the Department of Commerce (DOC) found that imported steel did not threaten to impair U.S. national security. In that report, the DOC found that the entire US military’s steel requirements was less than one percent of the domestic steel industry’s production capacity. DOC concluded (1) that the U.S. was not dependent on imported steel, and (2) that steel imports did not threaten the ability of domestic producers to satisfy any US national security requirements for steel.

Current steel and aluminum data are similar to those considered in the 2001 steel national security investigation. Only 30% of imported steel and aluminum was used in domestic consumption in 2016, showing a lack of dependence on steel and aluminum imports. Even if current US military requirements for steel have doubled from 2001 requirements, this would still be less than one percent of the 88 million tons of steel produced in the United States in 2016. The objective data shows steel and aluminum imports do not pose a threat to national security interests. National security should not be used as a pretense for protectionism.

Import restrictions would harm downstream US manufacturers. Additional tariffs, quotas, or other import restrictions may temporarily create a pocket of artificially higher U.S. market prices for steel and aluminum, particularly when compared to the lower prices in the much larger global market. This may provide a short-term benefit to US steel and aluminum producers who would have substantially less competition after import restrictions are imposed. But downstream US manufacturers who use steel and aluminum to produce cars, air conditioners, washing machines, airplanes, and a host of other industrial and consumer goods will either bear any increased costs and disrupted supply chains, or pass those increased costs down to the ultimate buyer/consumer in the form of higher prices. For every one US manufacturing job saved at a US Steel or Alcoa, sixteen US manufacturing jobs at a Ford, Carrier, Whirlpool, or Boeing, will be put at risk, because their foreign competitors would gain a cost advantage over them because of the import restrictions driving up the U.S. steel and aluminum prices they need to make their cars, air conditioners, washing machines or airplanes. The Trump administration specifically noted that shipbuilding, aircraft and vehicles may also become subject to a national security investigation. But any import restrictions imposed to protect the steel industry would adversely affect these other critical industries that may have to deal with higher steel and aluminum costs. The collateral damage caused by any Section 232 measures could be significant.

How do you distinguish “good” imports from “harmful” imports? Canada is by far the largest source of steel and aluminum imports.  A good number of Canadian producers are affiliates of US steel and aluminum producers. Chinese steel imports ranked 11th out of all 2016 imports and represented less than one percent of U.S. domestic production. The U.S. actually exported more aluminum to China (730,355 tons) than it imported (518,773 tons) in 2016. In the current 232 investigations, the USW has already asked that Canada be excluded from any import restrictions.  “China’s the problem, not Canada or other countries which are following the rules,” said USW President Leo W. Gerard. Presumably Canadian imports are usually considered among the “good” imports. But given the recent trade flare ups with Canada involving softwood lumber, dairy, renegotiating NAFTA, and border adjustment taxes (BAT), it is no longer a given that the Trump administration will give any preferential treatment to Canada.

Import restrictions would not address the real problem of Chinese overcapacity. Any threatened import restrictions would do nothing to reduce the China’s excessive steel and aluminum production capacity. Many of Chinese steel and aluminum mills are inefficient, debt-laden “zombie” state-owned mills that need to be permanently shut down. If China doesn’t cut its production capacity and instead keeps churning out steel and aluminum and selling onto the global market, China’s surplus production will continue driving global prices down. No matter how high the United States tries to build a tariff wall, these U.S. import restrictions will do nothing to address the key cause of global price declines for steel and aluminum.

Import restrictions may trigger retaliation. Section 232 import restrictions have been referred to as the trade “nuclear option“because it is so hard to argue against measures allegedly used to protect a country’s national security interests. If the U.S. invokes “national security” to protect its steel and aluminum industries, other countries will likely claim similar national security interests to protect their own allegedly critical industries from imports. For example, China could claim its soybean industry needs protection from imported soybeans that come primarily from the United States.

Despite the harsh campaign rhetoric during the Trump presidential campaign, Trump as President touted the recently announced “early harvest” deal with China as “gigantic” and “Herculean” and as a reset of US-China trade relations. Though the Section 232 national security investigation would appear to be the perfect forum for Trump to single out Chinese steel and aluminum producers for indiscriminate production expansion, it is now unclear whether Trump will do so lest he jeopardize the budding relationship he has developed with President Xi Jinping. If Trump does go after Chinese steel and aluminum imports based on national security grounds, it seems certain China will retaliate and find some U.S. industry to target with its own counter-actions.

If these Section 232 investigations result in import restrictions on all steel and aluminum imports, or even just on Chinese imports, there is a very real possibility the following lose-lose scenario will ensue:

  • steel/ aluminum prices increase, but not enough for the U.S. steel/aluminum industries to improve enough to recover or add any new jobs;
  • downstream industries that use steel and aluminum get hammered by increased steel and aluminum prices and lose sales to cheaper foreign imports from companies that still have access on the global market to lower priced steel or aluminum;
  • key foreign allies get harmed by restrictions on all US imports;
  • China and other countries impose their own national security import restrictions in retaliation against the United States.

I would much prefer the DOC and President Trump come to recognize this is a weak national security case. Labelling steel or aluminum imports as a national security threat is neither necessary nor supportable by the facts. President Trump could take more moderate actions that may be enough to claim political victory while avoiding retaliation from global trading partners.

international Trade lawyersEmboldened by President Trump’s promise of tougher enforcement of U.S. trade laws, a fresh wave of new antidumping and countervailing duty (AD/CVD) petitions were filed in March by domestic U.S. industries seeking relief from imports. The petitions cover five products (silicon metal,  aluminum foil, biodiesel fuel, wire rod, and carton closing staples) from all over the world from Argentina and Australia, to the UAE and UK. And of course, China. These petitions will trigger 25 separate AD/CVD investigations at the Department of Commerce.

However, one of President Trump’s first executive orders was to freeze hiring of any new or replacement federal government employees.  If this hiring freeze continues, the Department of Commerce (DOC) may not have enough manpower to administer all these new AD/CVD cases. The DOC already has about the same number of on-going investigations that must be completed, along with an even bigger number of administrative reviews of all the existing AD/CVD orders that are still in effect. For each case, a DOC case analyst and attorney must draft and issue multiple rounds of questionnaires, review the responses and comments submitted, analyze all the issues raised, calculate AD/CVD margins, and draft decision memoranda.  All these necessary tasks require a certain minimum amount of time to be completed. Without reinforcements, the expanding new case load threatens to stretch the DOC trade remedy team well past a reasonable or manageable work load.

Nine U.S. Senators have already asked President Trump to lift the hiring freeze for trade enforcement personnel at a variety of agencies such as DOC, Customs and Border Protection, USTR, and Department of Justice. They specifically noted that these agencies have been tasked with more extensive trade enforcement responsibilities, but the hiring freeze would have the effect of reducing the resources available for such enforcement.

Since the hiring freeze does not apply to military personnel or those deemed essential to security, maybe President Trump will find trade enforcement is essential to national security or carve out some other exception to allow new hires for the DOC and other trade related agencies.  But if the DOC cannot hire enough personnel to administer cases properly, then perhaps it will develop leaner and meaner ways to handle these new AD/CVD cases. That is the fear of the international trade lawyers at my law firm and elsewhere, and it should be the fear of any company, Chinese or otherwise, that finds itself caught in the crosshairs of an AD/CVD petition.

For example, DOC may now try to decide more cases based on applying total adverse facts available (AFA), after finding the respondent exporter or producer to be non-cooperative because their questionnaire responses are deemed untimely or inadequate. Making this sort of finding will allow the DOC to avoid crunching all the submitted sales and cost data to get AD/CVD margins that often are not that high (particularly for non-Chinese market economy cases). This will give the DOC the highest AD/CVD margins possible with the least amount of work if the exporter/ producer gives up or is given a death blow.

Even if a respondent survives the questionnaire process and avoids a total AFA determination, the DOC now can generate higher AD/CVD margins by applying a new trade law provision which allows it to find a “particular market situation” justifying an upward margin calculation adjustment. This is what Peter Navarro, head of the newly formed National Trade Counsel, recently urged Secretary of Commerce Wilbur Ross to do in an on-going administrative review of Korean OCTG oil drilling pipe. In that case, Navarro and the domestic pipe producers wanted the DOC to make a “particular market situation” finding the Korean pipe producers benefited from subsidies embedded in their purchases of Chinese steel. Navarro relied on a “logical” presumption that the Chinese steel subsidies of 60% found in a prior unrelated case would be passed through to benefit the Korean pipe producers to generate a margin of at least 36%. Navarro’s back of the napkin calculation lacked even a napkin to support the calculation. Respondents in that case complained that Navarro’s email was an unprecedented intervention and an overt suggestion that DOC calculate a politically acceptable but factually unsupportable AD/CVD margin.

U.S. AD/CVD cases have long had a reputation for being more objective and fact/data intensive than those conducted by most other countries. But if political pressure and personnel limitations push DOC to make more arbitrary AFA determinations or politically motivated findings of a “particular market situation” U.S. trade remedy cases will soon lose any advantage of perceived objectivity or credibility. The Department of Commerce already has significant discretion to weigh the record evidence and make judgment calls favoring the domestic industry. But at least those judgment calls have been based on an analysis of specific record evidence. The new “particular market situation” provision appears to give DOC even more discretion to make adjustments based only the thinnest of factual basis. This shift towards a more politically-driven AD/CVD process may result in the Department of Commerce issuing higher margins in the short term, but over the long term, the AD/CVD process risks losing significant credibility. Trade remedy cases, by definition, are intended to be remedial, not punitive. DOC’s AD/CVD process is supposed to determine the “fair” normal value for subject imports. If DOC’s definition of a “fair” export price is not factually or legally based, but is instead arbitrarily determined by politically influenced adjustments, an exporter or US importer has no way to determine whether or how their pricing should be adjusted in order to be deemed “fair” by DOC.

What this means in real life for Chinese companies sending products to the United States, and to those who import products made in China, is that they need to be even more careful not to run afoul of U.S. AD/CVD laws and pricing. And when tagged for any AD/CVD violation, it is more critical than ever that they respond quickly and with as many facts as they can muster, thus making it harder for the DOC to make quick and random and financially deadly decisions.

China US tradeChina’s President Xi Jinping is scheduled to meet with President Trump later this week at Mar-a-Lago and trade issues are expected to be at the top of their agenda. President Trump has already warned on Twitter that this meeting “with China will be a very difficult one in that we can no longer have massive trade deficits … and job losses.”

President Trump’s tweet shows how he views China primarily through a US-China trade imbalance lens, linked to American job losses. Trump’s trade worldview ignores the surpluses in trade in services and T-bills the US has with China. He also disregards jobs created by U.S. manufacturers that use inputs imported imported from China to produce higher value added products in the United States. See China. Friend Or Foe? Opportunity Or Challenge? Or, Why Can’t We All Just Get Along? President Trump also refuses to acknowledge (or recognize?) that the United States has lost more jobs to automation than to trade with China. Focusing too much on US-China bilateral trade deficits is an incomplete and misguided way of looking at a far more complex US-China trade relationship.

President Trump also seems to believe China will be willing to renegotiate terms with the US because it is so dependent on the US market. Though China does see the US as a very good and very important market for its goods, it is also true that China exports to all corners of the world and its home market consumer demand is also rapidly growing. China will not agree to massive trade concessions out of a desperate need for access to the US market.

President Xi also likely will be able to use this meeting to score points for his constituents back home. He will almost certainly demand that the U.S. treat China as a market economy, as promised fifteen years ago in the US-China WTO Accession agreement, even though he knows there is no way the U.S. will grant China market economy status under President Trump’s watch. China thus far has not overreacted to any of Trump’s blustery threats and has instead patiently waited to see what specific trade actions Trump orders. Until President Trump orders 45% tariffs on all Chinese imports or labels China a currency manipulator, President Xi will almost certainly continue taking what the international community will view as the high road and just keep firing off missives about how no one wins in a trade war. If though President Trump takes strong concrete actions against China at this week’s meeting, you can be certain China will quickly retaliate by taking its own trade action.

President Xi likely sees this meeting as an opportunity to elevate China’s standing as a more reasonable global market player than the United States and if President Trump continues to antagonize its global trading partners, China becomes a more attractive alternative trading partner. Loans from the China Development Bank and Export-Import Bank of China already have become the a very important source of foreign financing throughout Asia, Latin America and Africa. If Trump wants the U.S. to scale back from participating on the global stage, China is more than willing to step up and try to fill the void.

There will be plenty of posturing and both sides will get the sound bites they want to satisfy their core constituents at home, but it’s not clear what, if any, specific tangible takeaways either side will get from this meeting. Time will no doubt tell and we will be reporting back.

China lawyers
Trading Babe Ruth was a big mistake. So what?
Donald Trump is that fantasy sports team owner who vetoed every trade involving Team China or Team Mexico (except his own, of course).  But now he’s become the league commissioner and he’s promised to fix or renegotiate all of those “bad” trade deals. Yikes.

Donald Trump and Peter Navarro, head of the newly formed White House National Trade Council, are always bitterly complaining about the huge trade deficit the United States has with China and other “bad” countries. But trade deficits should not be equated with unfair trade or with the alleged utter destruction of American manufacturing. This is like complaining that a baseball trade was so bad it caused the team not to win the World Series for, say, 86 years. Or, complaining that your team is suffering from a seven-to-one player trade deficit even though your team gave up seven players who were either nobodies, soon to be has beens, or never will bes, and your team gained a perennial All-Star or future Hall-of Famer in return.

The U.S. trade deficit with China does not mean the United States is losing to unfair trade. Trade of goods is just one part of what drives our economy. Though the United States may run a deficit in the trade of goods (both overall and with China), we run a surplus in the trade of services.  Also, China and Japan each own more than $1 trillion in U.S. Treasury bills, bonds, and other securities. Moreover, foreign companies are “insourcing” and purchasing U.S. assets, such as buying U.S. companies or investing in building new factories, shopping malls, hotels, etc. Harping on the United States’ trade deficit while completely ignoring other economic factors in which the United States has a surplus is an incomplete and misguided way to evaluate how the U.S. economy is performing. Full disclosure: my firm and especially our international trade and our China lawyers have a lot of skin in this game as we generate millions of dollars a year in services directly related to US-China trade.

Looking at trade balances between countries as if they were a zero-sum game to be “won” or “lost” does not make sense because countries don’t actually engage in trade with each other on a national level. Only companies and individuals in each country trade with one another. A trade (for fantasy league baseball players or for real life goods) happens only if both sides believe they are exchanging comparable value with each other. China exports boatloads of goods to the United States because U.S. companies and individuals see those imports as the best value for their specific needs. A good chunk of the imports contributing to the U.S. trade deficit are used to manufacture higher value-added products in the United States. The U.S. imports crude oil for U.S. refineries to produce gasoline and other higher-value petroleum products. Boeing airplanes include all sorts of parts imported from around the world. If Party A and Party B each a consensus that a trade is mutually acceptable, and there is no sign of fraud or collusion, why should the President/League Commissioner intervene and try to fix those so-called “terrible” trade deals?

Even those trades perceived to have been lopsided or unfair does not mean that the losing team on the deal needs rescuing or that the deal should be voided or undone. Teams make stupid deals all the time.

Every team hopes to avoid making bad trades, just as reducing the U.S. trade deficit is not wholly a bad idea. But reducing trade deficits by itself will not restore America’s manufacturing jobs any more than avoiding bad trade deals by itself will get teams a championship ring. The effects of a huge trade deficit or a bad trade deal, either in the market place or on the playing field, tend to work themselves out over time because there are so many other factors that go into the country’s economic performance or team’s performance. A good President/League Commissioner would know better than to try to fix every “bad” trade deal or trade deficit he doesn’t like.

Editor’s Note:  If you talk with people who regularly do business with China, especially people with companies that do business in China, they will mostly tell you that what they/we need is not so much higher duties on imports, but more pressure exerted on China to level the playing field for foreign companies doing business in China.

International Trade LawThe U.S. International Trade Commission (ITC) yesterday determined by a 3-2 vote that the domestic U.S. tire industry was not injured or threatened with injury by imports of truck and bus tires from China. Although the U.S Department of Commerce last month in its concurrent investigations had determined that Chinese truck and bus tires were dumped and subsidized, the ITC’s negative determination means no more antidumping or countervailing duties (AD/CVD) will be collected on imported Chinese truck and bus tires.

The ITC’s negative determination is a good indication that for all the protectionist rhetoric and trade saber rattling from the Trump administration, the ITC is not just going to rubber stamp every case filed by a petitioning domestic industry. The ITC will still decide its AD/CVD cases based on the extensive amount of industry data collected from its investigations and will not rely just on the alternative facts offered by petitioners.

This tires case was weak from the outset. First, it was brought only by the United Steel Workers (which represents the workers at the big U.S. tire factories) and not by the tire companies themselves. Unlike virtually all other AD/CVD cases, the domestic producers in this case did not want to sign their name to the petition. Some have speculated that the Steel Workers filed this and other tire AD/CVD cases to obtain negotiating leverage to try to extract production and wage concessions from the U.S. tire industry management.

Although the U.S. market for truck and bus tires in 2015 was about $6 billion dollars, U.S. producers supplied only 60 percent of that demand. U.S. truck and bus tire producers already are operating at full capacity, so even with new U.S. tire factories opening, imports are still clearly needed to meet U.S. demand. China was the leading import source of truck and bus tires with about $1.2 billion imported in 2015.

All the U.S. produced tires were of premium brands, whereas most of the Chinese tires were sold under lesser known or private label brands. Because consumers generally associate producers’ brand names such as Goodyear or Bridgestone or Michelin with quality and performance, Chinese tires not surprisingly were priced lower when sold under a private label. This price difference associated with the different brands reflects the distinct market segments; the higher priced premium U.S. brands did not really compete with the no-name generics or private label Chinese tires. Moreover, though tire prices declined between 2013 to 2015, this was due primarily to declines in raw material costs, primarily natural rubber.  Prices of U.S. tires sold to OEM customers fell at the same rate as prices for U.S. aftermarket sales, even though very few Chinese tires were sold to OEM customers. Chinese tires thus cannot be blamed for the price declines that were occurring.

The domestic tire industry also was performing quite well and thus had a hard time demonstrating it had been injured. The domestic industry was healthy as production, capacity utilization, shipments were all higher in 2015 compared with 2013. Employment, wages and productivity indicators also showed improvement. The domestic producers had high and rising profits (operating income = 20.7%; net income = 18.3%), even though prices had fallen. So, even as Chinese imports were increasing, U.S. tire producers were thriving.

Despite all of these facts, this case could have resulted in an affirmative injury or threat of injury determination based on the increasing volumes of low-priced Chinese import tires that reducing the domestic producers’ market share. An argument can also be made that the significant volume of Chinese tires caused the domestic industry to lose revenue and be less profitable than it would have been without the Chinese imports.

In its preliminary investigation, the ITC made an affirmative determination by a 4-2 vote that the domestic industry was injured or threatened with injury, but two of the six Commissioners changed their positions in the final investigation. Vice Chairman David S. Johanson had found a threat of injury in the preliminary investigation, but switched to a negative injury/ threat determination in the final. Commissioner Dean A. Pinkert voted affirmative in the preliminary determination but then abstained and did not participate in the final investigation. If either of these two votes had stayed affirmative, a 3-3 tie vote would have resulted in AD/CVD duty orders being issued. Given the closeness of the vote, I expect the United Steel Workers will appeal the ITC’s negative determination to the U.S. Court of International Trade

Ultimately, this ITC negative determination was not only a huge victory for the Chinese tire industry and for U.S. importers of those tires, but also for anyone who wants U.S. trade cases to be determined on the facts and the law  and legal arguments presented and not just on a protectionist trade policy. The vast majority of petitions filed have resulted in AD/CVD orders being issued, and it likely will continue this way for the foreseeable future.  Given the current political climate, however, it’s nice to see a negative ITC determination just to be reassured that the ITC still recognizes its obligation under U.S. trade laws to conduct investigations fairly and that not all AD/CVD petitions are deserving of trade remedy relief.

US-China trade warPresident Trump has already acted on some of his trade-related campaign promises. One of his first official actions was to withdraw the United States from the Trans-Pacific Partnership (TPP). Trump also floated the idea of imposing a 20% tax on all imported Mexican goods to pay for the US-Mexico border wall, but he appears to have backed off that idea, at least somewhat. Below I discuss how the Trump Administrations early trade actions may benefit China the most, instead of benefitting America “first.” I also discuss how China is not standing idly by, but rather is positioning itself to defend or retaliate against U.S. trade actions that target China.

  • Trump’s TPP Withdrawal. In signing the executive order withdrawing the United States from the TPP, President Trump merely signed the death certificate for a trade deal that was practically comatose well before he took office. Trump described the TPP (along with basically every other trade agreement) as a “bad deal” that would result in a “death blow for American workers.”  Many commentators, however, have noted that China will be the biggest winner from Trump’s abandonment of the TPP.  The TPP aimed to reduce trade barriers and tariffs across 12 countries, but specifically and tellingly did not include China. The TPP was part of a strategic U.S. pivot towards Asia that attempted to strengthen American economic ties in the region to counter-balance China’s increasing power there. With the demise of the TPP,  other Asian countries such as Australia, South Korea, and the Philippines, likely will be pulled even tighter into China’s expanding economic sphere of influence in the region. China also has been handed an opportunity to fill the political leadership void in the region created by Trump’s withdrawal from TPP.  China now could take the place of the United States in the TPP, but appears more likely to push for completing of its own proposed Regional Comprehensive Economic Partnership (RCEP), which includes many of the same Asian countries that were part of TPP, but not the United States. If RCEP is successfully negotiated, U.S industries stand to lose significant market share throughout the Asian countries that will have preferential rates with its RCEP partners, but not the United States.
  • Trump Floats, Then Walks Back, A Proposed 20% Tax on Mexican Imports. The Twitterverse exploded with people angry that avocados and tequila could cost more because of Trump’s proposal to impose a 20% tax on all Mexican imports.  White House spokesperson Sean Spicer rushed to explain that the idea of the 20% tax was not really a policy proposal, but just one example of the options for how to pay for the U.S.-Mexico border wall. Trump’s having paused after proposing a 20% tax on imported Mexican goods got a bad reaction (“Guacapocalypse!!”) and that may bode well for China exports to the United States, at least temporarily. During the campaign, Trump had proposed a 45% tax on all Chinese imports. But if U.S. consumers hated the idea of a 20% tax on Mexican goods, it seems likely that a 45% tax on Chinese imports would trigger even greater outrage because of the broader spectrum of goods from China that would be affected. Instead of a straight tariff on imports, however, Trump may now try to impose a border adjustment tax (BAT) similar to what House Republicans have recently started pushing. But calling it a tariff or a more complicated BAT won’t change the bottom line, which is that either option would make imports more expensive and US consumers would bear the brunt of those increased costs.

China thus far has publicly taken the high road and stated no one wins  in a U.S.-China Trade war. However, China also has taken the following steps to better position itself to defend, or to more aggressively retaliate, against the United States if Trump insists on escalating the trade war.

  • China’s WTO Challenge v. U.S. Continuing NME Status for China – China insists that when it negotiated the terms that allowed China to accede to the WTO in 2001, the United States agreed to treat China as a non-market economy (“NME”) in antidumping cases, but only for another fifteen years, after which it would be treated like all other market economy countries. Unfortunately for China, the Chinese negotiators for the 2001 US-China WTO Accession agreement were primarily politicos, and not lawyers. Because this agreement was not drafted precisely as the Chinese intended, the United States has been able to parse the language to come up with a plausible legal argument that the U.S.-China WTO Accession did not call for an absolute hard deadline for terminating China’s NME status, but rather provided only a conditional promise to terminate China’s NME status. The revocation of China’s NME status is a high priority objective among China’s leadership and immediately after the December 11, 2016 fifteenth anniversary of China’s WTO accession, China filed a WTO challenge against the United States’ continued application of NME status in antidumping cases against China.
  • China’s Increasing Opposition to U.S. AD/CVD Proceedings – China’s complaint against the United States’ refusal to grant market economy status will take many years to work its way through the WTO dispute settlement process. In the meantime, China will not just wait to see if the WTO will rule in its favor. China just within the past month has become more outspoken against U.S. Department of Commerce (DOC) determinations in AD/CVD proceedings against China.  China’s Ministry of Commerce (MOFCOM) recently issued press releases objecting to specific methodologies used by DOC and ITC to obtain inflated AD/CVD rates in a wide variety of cases involving off-road tires, biaxial geogrids,  hardwood plywood and amorphous silica fabric, carbon and alloy steel, and ammonium sulfate.  Previously, MOFCOM typically would only monitor the outcomes of DOC and ITC cases without commenting on any specific issues arising from U.S. AD/CVD proceedings. This recent increased activity from MOFCOM objecting to very specific and often technical AD/CVD legal issues in US investigations signals a more aggressive policy stance by the Chinese government to support Chinese companies subject to US AD/CVD proceedings.
  • China’s AD/CVD Actions against U.S. Exports to China – Not only is China playing more aggressive defense in U.S. AD/CVD proceedings, China is also starting to take the offensive and initiate its own AD/CVD cases against certain U.S. exports to China. On January 12, 2017, MOFCOM announced the final results in the AD/CVD investigations against dried distiller grains (DDGs)  from the United States and issued AD and CVD margins of 42.2%-53.7% and 11.2-12.0% that were higher than expected. DDGs is an ethanol by-product used as animal feed, and in 2015 China imported 6.8 million tons of DDGS from the United States worth $2 billion and was the single largest export market for U.S. DDGs producers. MOFCOM’s DDGs determination indicates that China is looking to use its own AD/CVD actions not only to score political points, but also to have an economic impact. It is rumored China already has received an AD/CVD petition against soybeans from the United States and is just waiting for an appropriate time to officially initiate these investigations, probably in reaction to a U.S. action against China.