On September 29th, the day Congressional recess began before elections just ended, the Senate dropped plans to vote on imposing a 27.5% tariff on Chinese-made goods due to Beijing's currency management practices (policy if you insist). This action killed chance for passage of several related House bills. H.R. 1498 defined a depressed yuan value an illegal trade practice, H.R. 4217 would allow interested parties such as steel users a status as participants in trade cases and H.R. 5529 would further protect industry by changing methods by which anti-dumping tariffs are calculated. The first two have marginal merit, but I think H.R. 5529 should have died more publicly and that Phil English (R-PA) and only six co-sponsors should be ashamed of themselves for naming this abomination the Trade Law Reform Act. But analysis of these attempts provides important lessons for manufacturing industry leaders, especially learning that in only 50 of 435 Congressional districts nationwide are enough manufacturing businesses located to "get traction" with the national political system.
The context for these issues goes back to Big Steel and their 40-year effort to restrict steel imports with purchased political favors. Since the mid-1960s, the U.S. has endured losses (invisible to the public) of $90-$150 billion in subsidies to vertically integrated steel producers. This figure includes direct federal ($21.8 billion) and state/local ($1.4 billion) payments, $3.6 billion from Pension Benefit Guarantee Corporation bailouts, $2.1 billion in tax preferences, $10.4 billion via exemptions from environmental regulation, $4.6 billion "Buy American" bidding without competition purchases and $1.7 billion in federal loan guarantees, plus indirect subsidies derived from import laws regarding "voluntary restraint agreements" or "trigger price mechanisms."
But by the start of this new century, the driving force for modernization was the $3.9 billion in foreign capital invested in 21 firms at 69 facilities that now represents 42% of domestic shipments. This activity, plus the rise of mini-mills that are smaller, productive and efficient (and now provide half of domestic steel production), has changed the industry that is arguably as healthy as it has ever been. According to the Financial Times, the top three U.S. producers ship 70% of flat-rolled production versus only 25% in 2003, demonstrating greater control over output that can respond to demand. Therefore, U.S. markets have waned in interest to foreign suppliers (while about 40% of imports are made by Big Steel itself) and, concurrently, large, alternate markets (China and India) are growing rapidly.
Another indicator for this turnabout is that only two U.S. anti-dumping cases were initiated this year versus 12 in 2005 - down from 26 in 2004. The recent 11-year average is 33 cases annually, and this trend is mirrored globally. The U.S. decline is a reflection that our economy has grown steadily since 2001 and that the steel industry was a participant making it happen. Of 366 anti-dumping cases over the past 11 years, 208 (58%) were launched by or for the steel industry. Since 2003, however, only 10 of 77 cases (13%) covered steel products, and in five of the 10, the International Trade Commission found that domestic industry suffered no injury.
The intent of H.R. 5529 should be quashed permanently because it does great harm by changing methodologies by which dumping calculations are made to assure affirmative findings by a U.S. petitioner. This is a distortion of the dispute settlement process, and (as agreed by U.S. courts) is illegal under U.S. law, NAFTA panel reviews, and blatantly illegal due to U.S. agreement to obligations under World Trade Organization protocols. Provisions of the legislation diminish U.S. stature and defeat the American position of "doing the right thing" under anti-dumping agreements (ADA) within WTO.
Instead of such grossly erred and self-serving requests by a few industry people for protection, it is recommended that pursuit of counterfeiting issues is broader, more important and not subject to criticism for being narrow in perspective, self-serving and illegal. Instead of China currency manipulation as a U.S. industry card in this game and dropping the flawed approach to dishonest ADA procedures, why not pursue "the cost of counterfeiting" as a national matter? Counterfeiting costs U.S. business $200-$250 billion annually (including U.S. auto parts makers $9-$12 billion), causes the loss of 750,000 jobs and impacts 5%-7% of world trade. 70% of counterfeit products originate in China, and the U.S. had a $202 billion trade deficit with China last year.
Know where to attack. Narrow selfishness is not an acceptable attack mode.
FEDERAL TRIANGLE: Protectionism is Bad Policy
November 15, 2006