US CHINA TRADE WAR — SECTION 301 NEGOTIATIONS, NOT JUST TRUMP, ASIA SOCIETY REPORT, HUAWEI INDICTMENTS, HONG KONG EXTRADITION, CHINA’S LONG TERM ECONOMIC PROBLEMS, GOVERNMENT SHUTDOWN, QUARTZ SURFACE PRODUCTS

TRADE IS A TWO-WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 20, 1986

US CHINA TRADE WAR UPDATE – FEBRUARY 21, 2019

Dear Friends,

At the outset of this newsletter, I want to address one complaint.  Some have criticized my blog for being too tough on China.  The objective of this blog post is not to be tough on China, but to describe the actual US China trade relations as it is.  Sounding happy about the US China trade relationship will not solve the problems between the US and China in the trade area.

In reality, the US and China are going through a very tough situation right now with 10 to 25% tariffs on $250 billion in imports from China. The trade problem has risen to a crisis situation.  President Xi in his recent letter to President Trump at the end of January emphasized the importance of this specific time in US China relations.  President Xi is correct.  This is a critical time for US China trade relations but as explained below, it is not just President Donald Trump.  Both the US and China need to settle this trade dispute.

More importantly, to illustrate the actual situation, I quote from actual government documents and news reports, which are attached to this blog. I want readers to understand the actual trade situation between the US and China not because I Bill Perry am describing it that way, but because the US government or credible news reports are describing the actual situation that way.

US China trade problems can only be solved if both the US and Chinese government understand the actual issues.  My job as a US lawyer is to predict the future and warn my clients and the readers of this blog post both in the United States and China about upcoming problems so the problems can be dealt with and hopefully settled.  Like a navigator on a boat my job is to spot the rocks and hazards before the boat hits an unexpected rock and sinks.

With regards to this specific blog post, I wanted to write it after the couple of rounds of talks in Washington DC to give my take on the situation.  From the White House Statement and even the Chinese statement from Xinhua, it is very clear that the key issues discussed in the trade talks are: Forced Technology Transfer, IP Theft and Enforcement of any trade agreement.  Trump and USTR Robert Lighthizer are not going to settle for an agreement with broad meaningless promises from the Chinese government, which are not kept.  The US wants tangible results and promises that can be enforced.

In the February 5th State of the Union speech, one of the few times President Trump received bipartisan applause from both the Republican and Democratic Congressmen and Senators was when he mentioned that he was negotiating a tough trade deal with China.

The most important point to understand is that US China Trade problem is not just Donald Trump.  As stated before, Trump may be the spark, but its China’s changing economic and political policies that are the gunpowder.  This is clearly illustrated by the recent Asia Society Task Force report “Course Correction: Toward An Effective and Sustainable China Policy” by very famous China hands and career diplomats that US China relationship has reached an inflexion/turning point and has to change.

As described more below, the Asia Society report is echoed by a report from John Garnaut of Australia, who says that President Xi Jinping and his clique have decided to move China back to the time of Mao and Stalin.

Another key point is the December 1st arrest of Huawei CEO, Ms. Meng Wanzhou, the daughter of the Huawei founder, in Vancouver, Canada based on an extradition warrant from the United States for bank fraud.  The key point is that the arrest of the Huawei CFO was not a topic of conversation during the first rounds of negotiations.  In the Fourth Round of negotiations in Beijing, the Chinese government suggested a separate round of negotiations solely on the Huawei issue but so far the US has not accepted the offer. I suspect that Trump will be reluctant to intervene.

The ZTE situation was very different from the current Huawei situation.  ZTE was still at the administrative level before the Commerce Department.  In contrast, criminal indictments have been issued in two different Federal Courts, one in Seattle with regards to the T-Mobile theft of intellectual property and the second indictment in the Eastern New York for bank fraud against Ms. Meng.

Criminal indictments against Huawei have raised these issues up to a much higher rule of law issue.  That makes it more difficult for President Trump to intervene.  As President, Trump controls the Executive Branch of the US Government, including the Commerce Department, but President Trump does not directly control the Courts, which is the Judicial Branch of the US Government.

One key point of the Huawei situation is the idea in China that they can apply the Chinese “way” to doing business internationally.  The numerous indictments against Chinese companies and the enforcement of extradition requests, not only in Canada, but also in Hong Kong, indicate that the Chinese way is not going to work internationally.  If Chinese executives can be arrested in Hong Kong, that clearly illustrates the real vulnerability of Chinese corporate officials, who do not follow international rules, especially if the Chinese company is a multinational, such as Huawei.

It is also very clear that China’s economy is still hurting.  Even if China is able to get a trade deal with US, that will not stop the dramatic economic fall in the Chinese economy.  The Chinese government has decided to attack private industry and return to Statism.  That policy is hurting China very badly.

Another issue complicating the negotiations is the recent Government shut down, which has caused the deadlines in all ongoing trade cases to be pushed up 40 days at Commerce and 35 days at the ITC.

My firm is also representing a number of US importers and fabricators in the Quartz Surface Products Antidumping and Countervailing Duty case.  As part of that effort, we are trying to persuade US fabricating companies and importers to fill out the questionnaires from the US International Trade Commission’s (“ITC”) so that their voices will be heard.  Have uploaded blank copies of those questionnaires to this blog below.

One big issue in the Quartz decision is the Commerce Department’s critical circumstances determination, which has caused Customs to reach back and try to get cash deposits of millions of dollars in imports prior to the Preliminary Determination.  Such a Customs action could well drive 100s if not 1,000s of US importers when the ITC in all probability will reach a negative critical circumstances determination as it does in close to 90% of the cases. This action raises the question whether the Antidumping and Countervailing Duty laws are truly just remedial statutes.

If anyone has any questions, please feel free to contact me.

Best regards,

Bill Perry

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CORE ISSUE OF THE 301 CASE AGAINST CHINA IS IP THEFT, FORCED TECHNOLOGY TRANSFER, AND ENFORCEMENT

The section 301 case started in the spring of 2018.  The core of the complaint is China’s aggressive campaign to steal intellectual property (“IP”)  from US and other foreign companies.  See attached Full Section 301 Report USTR FULL 301 REPORT CHINA TECHNOLOGY TRANSFER and Interim Report USTR FULLL 301 Report Update.  See more details below.

In the summer of 2018, the US first imposed 25% tariffs on $15 billion in imports from China.  China retaliated against US exports of agricultural and other products, including Soybeans

The US then in September imposed 25% tariffs on second $35 billion in imports from China in response to China retaliation.  China retaliated again.

US then imposed 10% tariffs on $200 billion in imports from China with a trigger of January 1, 2019 for tariffs to go to 25%.   See the Federal Register notices on my blog, www.uschinatradewar.com, for more details.

It should be noted that the tariffs on the first $50 billion in imports is to offset the harm caused to the United States and US companies because of the IP Theft and Forced Technology Transfer.  The tariffs on the $200 billion are in direct response to the Chinese government’s decision to retaliate against the US tariffs.

President Trump’s and USTR Lighthizer’s firm belief is that because of a US trade deficit and a Chinese trade surplus of $350 billion and total Chinese exports of $500 billion plus, the US could weather a trade war much better than China.

China’s response to the Section 301 case was “deny, deny, deny” and that the US was simply trying to contain China.  The Chinese Government’s decision to retaliate and refuse to deal with the US trade complaints led to the US escalation of the trade war to cover $250 billion in imports from China.

The full 301 report started and makes it clear that two key issues are IP Theft and Forced Technology transfer.  The attached 301 Federal Register notice starting the Section 301 case, FED REG PRESIDENTIAL DETERMINATION 301 CHINA, states:

First, the Chinese government reportedly uses a variety of tools, including opaque and discretionary administrative approval processes, joint venture requirements, foreign equity limitations, procurements, and other mechanisms to regulate or intervene in U.S. companies’ operations in China in order to require or pressure the transfer of technologies and intellectual property to Chinese companies. . . .

Fourth, the investigation will consider whether the Chinese government is conducting or supporting unauthorized intrusions into U.S. commercial computer networks or cyber- enabled theft of intellectual property, trade secrets, or confidential business information, and whether this conduct harms U.S. companies or provides competitive advantages to Chinese companies or commercial sectors.

Enforcement of any agreement with China is also a big issue. At the beginning of the Section 301 Report, USTR FULL 301 REPORT CHINA TECHNOLOGY TRANSFER, it lists ten IP Agreements the Chinese government signed with the United States from 2010 to 2016, which the Chinese government has ignored.  The last two agreement are the recent 2016 agreements between President Xi and President Obama to not require the transfer of technology as a precondition of doing business in China and to stop cyberhacking for commercial gain.  According to the USTR, the Chinese government ignored both Agreements.  See page 8 of the USTR 301 report.  All those agreements between the US and China were breached.

See statement by former USTR Charlene Barshefsky below that the Chinese government’s failure to follow the WTO agreements signed in the early 2,000s means that China should actual follow the Agreements or leave the WTO.  The Chinese government has run out of time.

SECTION 301 PROCEDURES

As to the procedures in the Section 301 case, please see my October 1, 2018 blog post for a detailed explanation of the 301 case, three outstanding lists and the issue of product exclusion requests.  The three lists of tariffs cover $250 billion in imports from China.

The deadlines to file an exclusion request for the first $50 billion have past.  Moreover, USTR Lighthizer has stated that there will no exclusion requests for the $200 billion until there is an outcome of the negotiations with the Chinese government.  If the negotiations go well, all or some of the 301 tariffs could be lifted so there will be no need for exclusion requests.  If the duties remain in place, then the USTR will have an exclusion process.

NEGOTIATIONS START AND THE FOURTH ROUND IS PRESENTLY ONGOING IN WASHINGTON DC

Because of the enormous pressure on the Chinese economy, as described more below, in November the Chinese government pushed for a meeting between President Xi and President Trump.  On December 1st, at a meeting in Buenos Aries at G-20, President Xi made a long presentation leading President Trump and USTR Lighthizer to believe that a structural deal could be struck with China regarding IP theft and forced technology transfer.  That discussion resulted in the US postponing the increase in the 10% tariffs on $200 billion until March 1st.

See the attached United States Trade Representative notice setting a hard date of March 2nd for US China Trade Deal, MARCH 2 USTR NOTICE PUBLISHED.  If there is no deal by March 1st, the tariffs on $200 billion in imports automatically could go from 10% to 25%.

But there are conflicting views as to whether the follow up negotiations in four rounds, first with Deputy USTR Jeffry Gerrish in Beijing and then in Washington DC with USTR Lighthizer, followed by additional negotiations in Beijing and the fourth round now in Washington DC indicated a Chinese government’s willingness to actually deal with IP Theft and Forced Technology Transfer issues and make any “structural” agreement truly enforceable.

A real question is what is meant by the word “structural”?  Again, the core issues in the Section 301 deal are IP Theft, Forced Technology Transfer and cyber hacking.  If the US and Chinese governments consider IP Theft and Forced Technology Transfer to be “structural’ issues, it appears that there is no deal yet in these areas.

There are reports in the Press that trying to persuade the Chinese government to compromise on the structural issues has been like “pulling teeth”.  But if the Chinese government were not willing to compromise on IP Theft and Forced Technology Transfer, in all probability the negotiations would have already ended.

On January 31, 2019, however, after the second round of negotiations in Washington DC, The White House issued the attached statement, WHITE HOUSE STATEMENT, as follows:

“The talks covered a wide range of issues, including: (1) the ways in which United States companies are pressured to transfer technology to Chinese companies; (2) the need for stronger protection and enforcement of intellectual property rights in China; (3) the numerous tariff and non-tariff barriers faced by United States companies in China; (4) the harm resulting from China’s cyber-theft of United States commercial property; (5) how market-distorting forces, including subsidies and state-owned enterprises, can lead to excess capacity; (6) the need to remove market barriers and tariffs that limit United States sales of manufactured goods, services, and agriculture to China; and (7) the role of currencies in the United States–China trading relationship. The two sides also discussed the need to reduce the enormous and growing trade deficit that the United States has with China. The purchase of United States products by China from our farmers, ranchers, manufacturers, and businesses is a critical part of the negotiations.

The two sides showed a helpful willingness to engage on all major issues, and the negotiating sessions featured productive and technical discussions on how to resolve our differences. The United States is particularly focused on reaching meaningful commitments on structural issues and deficit reduction. Both parties have agreed that any resolution will be fully enforceable.”

This White House Statement indicates that the structural issues of IP Theft, Forced Technology Transfer and enforcement were indeed the subject of the first two negotiation rounds.

At the same time in late January, the Chinese Government’s mouthpiece, Xinhua, stated in the attached article, XINHUA STATEMENT TRADE TALKS, as follows regarding the Washington DC negotiations:

“Liu, also a member of the Political Bureau of the Communist Party of China Central Committee and chief of the Chinese side of the China-U.S. comprehensive economic dialogue, led the Chinese delegation for the two-day trade talks that concluded on Thursday in Washington.

Liu delivered a message from Chinese President Xi Jinping to Trump, in which Xi pointed out that China-U.S. relations are at a critical stage.

Xi said when he and Trump met in Argentina last December, the two heads of state agreed to jointly advance the China-U.S. relationship featuring coordination, cooperation and stability.

“According to the consensus we have reached, economic teams from both sides have since conducted intensive negotiations and achieved positive progress,” said Xi. . . .

On the China-U.S. trade talks, the Chinese vice premier said that teams from both sides have spared no time in implementing the important consensus between the two heads of state.

He noted that during the latest round of talks, the two sides held candid, specific and constructive discussions about issues of common concern, which included trade balance, technology transfer, protection of intellectual property rights and a two-way enforcement mechanism, as well as other issues of concern to the Chinese side.”

Note that the Chinese side has acknowledged the importance of the IP theft, Forced Technology Transfer and enforcement issues.  Note also that at the meeting in the Second Round between Trump and Liu He at the White House at the end of January, USTR Lighthizer stated that the name of the game is “enforcement, enforcement, enforcement”, which would counter the original Chinese Government strategy of “deny, deny, deny”.

After the third round of negotiations in Beijing, there were newspaper accounts that it was like “pulling teeth” to get the Chinese government to give in on structural issues, including Forced Technology Transfer.  But there was also an agreement that any deal would come forth in a Memorandum of Understanding and that there would be a framework agreement between China and the US.  The big stumbling block seems to be Forced Technology Transfer.

Most experts, including Senator Rob Portman, expect there to be an interim agreement of Understanding by March 1st, which would allow Trump to state that the duties at least will not be raised to 25% as a more comprehensive agreement is further negotiated.

Trump has stated several times that the March 1st deadline could slide depending upon the negotiations and that a face to face, Trump/Xi meeting could happen soon.  In talking to many trade experts, the universal belief is that the US government will punt.  Have a short Memorandum of Understanding as the negotiations continue.

Some Chinese and other commentators believe that Trump will back down in the Xi and Trump meeting.  I do not think so.  Trump cannot back down on the IP issues, which are the core of the 301 case.

OTHER COUNTRIES AGREE WITH TRUMP ON US CHINA TRADE DISPUTE

Although the Chinese government and observers may think that the trade war is only coming from Trump and the United States, many other countries have jumped on US band wagon with regards to IP Theft and Forced Technology Transfer by China.  The countries include EC, Canada, Australia, Japan, South Korea and many other countries, because China has stolen their IP too.

Through its Made in China Program the Chinese government has focused on acquiring foreign technology/intellectual property by any means necessary from many different countries, not just the United States.

.        The technology for high speed trains was stolen from Germany and Japan.

.        Semiconductor technology was stolen from Australia and the US.

In fact, the systematic attacks on their IP have caused many companies to look at moving production out of China to other countries.

As described below, there have been aggressive attacks on US and foreign intellectual property by such companies as Huawei, which has bonus programs for employees to encourage theft of IP

In the United States, these aggressive attacks on IP have led to a new China initiative at the Justice Department and criminal prosecutions of Chinese companies and Chinese nationals for the theft of intellectual property.  These Justice Department criminal cases have led to the extradition of various Chinese nationals to face prison time in the United States.

Some commentators have suggested that the US dropped the ball by not going the WTO Route.  The USTR issued the attached report in February 2019, USTR REPORT WTO CHINA, stating, in effect, that using the WTO to deal with China has not worked.

Moreover, there were never multilateral negotiations with China, i.e. China at a one table with a number of different countries.  In fact, we are seeing a similar process to the WTO Agreement with China, which started first with the bilateral negotiations and the US China WTO Agreement.  That US WTO Agreement was followed up with agreements between China and many other countries.  In other words, any US China 301 Agreement will probably be a blueprint for future bilateral negotiations and result in similar bilateral agreements negotiated between China and other countries to stop international IP theft and forced technology transfer.

BEING TOUGH ON CHINA IS A BIPARTISAN REPUBLICAN DEMOCRAT ISSUE

Contrary to many commentators in China and elsewhere, the tough position against China in these trade negotiations is not just President Donald Trump.  The Chinese government should not expect a change in the tough US position on China trade policy if there is a change in US government. US China Trade Policy is not just a Republican issue.  It is bipartisan issue.  Traditionally, the Democratic party is much more protectionist than the Republican party, because the Democratic party is supported by the labor unions.

In the 2019 State of Union, President Trump spoke of a need for a strong US trade response against China and a strong structural trade agreement with China because of decades of IP theft.  This point provoked a bipartisan standing ovation from Republicans and Democrats.  Democrats hate Trump, but they agree completely on a tough response to China.  See the following video of the State of the Union at https://www.youtube.com/watch?v=OSy9NcPRSGs.

Cyber hacking is another example where the Chinese government made an agreement with the United States and President Obama and then proceeded to ignore it, break the agreement and continue aggressive cyber hacking to steal US IP.  In fact, many trade experts believe that the Chinese government believed that President Obama could be played.

Based on quotes from numerous sources, the Chinese government has succeeded in uniting both ends of the political spectrum, Democrats and Republicans, against China.  This trade situation is not going to change any time soon no matter what party is in power.

THE ASIA SOCIETY REPORT ON CHINA SUPPORTS THE BIPARTISAN TOUGH US TRADE POLICY AGAINST CHINA

Many Chinese and US commentators may believe that the trade fight with China is just Trump.  That simply is not true.

In February 2019, the Asia Society published the attached report entitled “Course Correction: Toward An Effective and Sustainable China Policy”, ASIA SOCIETY REPORT COURSE CORRECTION. The authors of the report are some of the most famous “China” hands in the United States, including Orville Schell, who has written dozens of books on China, former USTR Charlene Barshefsky, who negotiated the US China WTO Agreement, and Winston Lord, the Ambassador to China under Ronald Reagan and later the Assistant Secretary of State for East Asia under President Bill Clinton.  These are “old friends” of China.

Many of the members of the Task Force writing the Report speak fluent Chinese and have held very high positions in the US government dealing with China in Democratic and Republican Administrations.  These experts believe that the United States and China are at a true “inflexion”/turning point.  When “old China friends” are stating that the Chinese government needs to beware, it should be careful of the situation.

The report is very, very tough against China stating in part:

“The United States and China are on a collision course. The foundations of goodwill that took decades to build are rapidly breaking down. Many American opinion makers are starting to see China as a rising power seeking to unfairly undercut America’s economic prosperity, threaten its security, and challenge its values, while their Chinese counterparts are starting to see the United States as a declining power seeking to prolong its dominance by unfairly containing China’s rise. Beijing’s recent policies under Xi Jinping’s leadership are primarily driving this negative dynamic, so the Trump administration is right to counter those Chinese actions that defy norms  of fair economic competition, abrogate international law, and violate fundamental principles of reciprocity. The Trump administration is justified in pushing back harder against China’s actions, but pushback alone isn’t a strategy. It must be accompanied by the articulation of specific goals and how they can be achieved. . . .

The Report goes on to criticize the Trump policy of using tariffs to get China’s attention, but then says:

As the Trump administration stands up to China, it must also clearly express a willingness to pursue negotiated solutions by spelling out specific steps that could restore equity and stability to the relationship. Otherwise, the United States risks an irreparable, and possibly avoidable, rupture in this crucially important bilateral relationship. To avoid such a breakdown, the United States and China should seek negotiated solutions to priority issues whenever possible and erect prudent guardrails—including the appointment of specially designated officials—to keep the relationship from running further off the tracks. An adversarial United States-China relationship is in no one’s interest. More responsible statecraft is required both to protect American interests and to increase the chances of avoiding that no-win outcome.

At the same time, China’s increasingly unfair business practices have generated growing international criticism, especially from the very businesspeople who have traditionally been most enthusiastic in their support   of engagement with China. One of their most serious concerns is the way Beijing has ramped up its massive state drive to dominate the technologies of the future, both at home and abroad. This has included not just legitimate forms of Chinese innovation and investment, but also the acquisition of foreign technology through illegitimate means such as cyber theft, intellectual property violation, and forced technology transfer. As market reforms stalled or were reversed and the Chinese state’s role in the economy has grown, it has become increasingly clear that China is no longer converging with global norms of fair market competition but is in fact steadily diverging from them.

Xi Jinping’s revival of personalistic autocratic rule, including the scrapping of presidential term limits and his refusal to adhere to precedent for the peaceful turnover of political power for top leadership positions, makes China a less predictable and trustworthy partner and accentuates the political and values system gap that makes finding common ground more difficult. The Chinese Communist Party has tightened its control over information and society. It enforces ideological orthodoxy, demands political loyalty, and screens out foreign ideas, particularly in education and the media. Moreover, by arresting rights lawyers, incarcerating and indoctrinating Muslim minorities in the Xinjiang region, and repressing independent Christian congregations throughout the country, the regime has attracted increased international opprobrium as a human rights violator and set itself more explicitly in opposition to liberal values. . . .

This new dynamic that emanates from Beijing has precipitated a deep questioning—even among those of us who have spent our professional careers seeking productive and stable U.S.-China ties—about the long-term prospects of the bilateral relationship. We view this current period as unprecedented in the past forty years of U.S.-China relations. In the past, good sense usually prevailed and American and Chinese policymakers and scholars always managed to overcome severe bilateral strains triggered by specific incidents. We saw such a recovery even after the 1989 Tiananmen Square crackdown, as well as after the 1995-96 Taiwan Strait crisis, the 1999 accidental bombing of the Chinese embassy in Belgrade, and the 2001 collision between a U.S. surveillance plane and a Chinese fighter jet. By contrast, the current downturn in relations is deeper and more systemic in scope. What is more, it is occurring at a time when the U.S. and China’s economic and military capabilities have become more evenly matched, making the dangers of overt conflict far greater. . . .

Unfortunately, by the midpoint of the Trump administration’s first term, the negative trends in Chinese behavior that were highlighted in our earlier report have only grown more pronounced and worrisome. If the three most harmful trends identified below are now to be effectively addressed, a more robust and proactive U.S. policy toward China is required.

(1)           China’s pursuit of a mercantilist high-tech import-substitution industrial policy

 The Chinese state ramped up its clearly scripted and lavishly funded strategy to dominate the technologies of the future, not just through its own innovation but also by acquiring foreign technology by inappropriate means. This is not a standard industrial policy in which the government merely enables or channels spontaneous market activity. Instead, the policy aims to help Chinese firms control targeted sectors of technology markets both at home and abroad, dominate a wide range of cutting-edge industries deemed “strategic,” and put systemic limits on the operation of foreign competitors in its own domestic markets. As a result of this strategy, many foreign firms are pressured to transfer technology in order to conduct business in China, while others become victims of cyber theft by Chinese state actors. Despite decades of reform, discriminatory treatment of foreign firms is still deeply embedded in the Chinese system of bureaucratic protectionism.

As a result of intensified state control, the Chinese economy is diverging from global market norms. While rhetorically China’s leaders espouse an open global economic order, domestically the party-state is now dominating the economy more than it has at any time since the Mao era. Market reforms and the opening of the country to imports and inbound investment have stalled. At the same time, China’s government funds outbound investments by private as well as state firms to bring home technology and know-how in areas like robotics, chip fabrication, artificial intelligence, aerospace, ocean engineering, advanced railway equipment, new energy vehicles, power equipment, agricultural machinery, new materials, and biomedicine and medical devices. The goals of China’s industrial policy as expressed in the government’s major plans, such as “Made in China 2025” and “Civil-Military Integration,” are not just to help China achieve high-tech import substitution and dominate global markets in tech sectors, but also to enhance the country’s military power.

Beijing’s approach is forcing the United States and other advanced industrial countries to reassess their open and market-based commercial relationships with China in order to discipline mercantilist and zero-sum Chinese practices, preserve their own economic competitiveness, and protect their defense industrial bases. . . .

3.     China’s hardening authoritarianism

Under Xi Jinping’s leadership, China has been reversing what had been a slow and sometimes halting process of social and political liberalization by turning back toward more authoritarian forms of political control. For three decades after Mao Zedong’s death in 1976, China’s party-state gradually lessened its ideological controls on social and economic life. This progress created domestic support in both countries for U.S.-China cooperation. By making a U-turn back to personalistic dictatorship, Leninist party rule, and enforced ideological conformity, Xi has created new obstacles to engagement with the United States and other liberal democracies around the world, while also erecting barriers to Chinese interactions with foreign civil society institutions such as universities, think tanks, and non-governmental organizations (NGOs). . . .

More specifically, with regards to trade, as former USTR Charlene Barshefsky states in the following presentations on the Report, if China will not follow the WTO Trade rules, it should leave the WTO.  See https://asiasociety.org/video/chinas-decisive-turn-toward-statism and https://www.youtube.com/watch?v=uT01OGl7uG0.

HUAWEI IN A WORLD OF HURT FACING TWO MAJOR CRIMINAL INDICTMENTS IN TWO FEDERAL COURTS, WHICH COULD GROW TO THREE

As stated above, Huawei was not the topic of the January negotiations in Washington DC.  In the most recent negotiations in Beijing, the Chinese government proposed a separate negotiations track on Huawei, but to date the US government has not accepted

In fact, on January 28, 2019, the day before the negotiations began in Washington DC, the Justice Department issued two attached indictments against Huawei.  The first attached bank fraud indictment, ACTUAL HUAWEI IRAN INDICTMENT, was filed in the Federal District Court in the Eastern District of New York and is entitled United States of America Vs Huawei Technologies Co., Ltd., Huawei Device USA, Skycom Tech Co., Ltd., Wanzhou Meng, also known as Cathy Meng and Sabrina Meng and a number of unknown defendants.

The indictment was filed in the Federal District Court in the Eastern District of New York and provides detailed allegations against Huawei, Huawei USA,  Meng Wanzhou, the Huawei CFO and daughter of the owner, and several unnamed co-defendants alleging evasion of Iran sanctions, bank fraud, and  obstruction of justice.

One commentator in Hong Kong stated in an article, that ultimately this first indictment means that Huawei will pay a fine.  No, that is not the point.  Ms. Meng faces years in prison—real jail time.

The second attached indictment, DOJ TRADE SECRETS INDICTMENT HUAWEI, against Huawei took place here in Seattle when Huawei stole key robot technology from T-Mobile.  One of the most important parts of the T-Mobile indictment, which will have a direct impact on the US China 301 negotiations, is that Huawei has in place a bonus program to reward employees who steal foreign intellectual property.

The indictment states:

  1. On July 10, 2013, at the same time that HUAWEI CHINA and HUAWEI USA were falsely claiming that the conduct of A.X. and F.W. was “isolated,” constituted a “moment of indiscretion,” and was contrary to Huawei’ s corporate polices, HUAWEI CHINA launched a formal policy instituting a bonus program to reward employees who stole confidential information from competitors. Under the policy, HUAWEI CHINA established a formal schedule for rewarding employees for stealing information from competitors based upon the confidential value of the information obtained. Employees were directed to post confidential information obtained from other companies on an internal Huawei website, or, in the case of especially sensitive information, to send an encrypted email to a special email mailbox. A “competition management group” was tasked with reviewing the submissions and awarding monthly bonuses to the employees who provided the most valuable stolen information. Biannual awards also were made available to the top three regions that provided the most valuable information. The policy emphasized that no employees would be punished for taking actions in accordance with the policy.
  2. The launch of this HUAWEI CHINA bonus program policy created a problem for HUAWEI USA because it was in the midst of trying to convince T-Mobile that the conduct in the laboratory was the product of rogue employees who acted on their own and contrary to Huawei’s policies. As a result, on July 12, 2013, the HUAWEI USA Executive Director of Human Resources sent an email to all HUAWEI USA employees addressing the bonus program. The email described the bonus program as: “[I]ndicat[ing] that you are being encouraged and could possibly earn a monetary award for collecting confidential information regarding our competitors and sending it back to [HUAWEI CHINA].” The email went on to say: “[H]ere in the U.S.A. we do not condone nor engage in such activities and such a behavior is expressly prohibited by [HUAWEI USA’s] company policies.” The email did not state that the bonus program had been suspended by HUAWEI CHINA. Rather, the email emphasized that “in some foreign countries and regions such a directive and award program may be normal and within the usual course of business in that region.”

The indictments against Huawei are extremely serious, and I would be very surprised if Trump would agree to introduce Huawei into the trade negotiations.

Ms. Meng finds herself—immersed in a criminal action exposing her to 30 years in prison for bank fraud.  Although Ms. Meng received bail and is staying at her Vancouver house, she is due back in Canadian Court in February.  And there is probably a good chance that Ms. Meng will be extradited to the United States, where she will face even tougher problems.

There is also a potential third indictment against Huawei for theft of a US intellectual property for diamond glass used for mobile screens.  Huawei apparently stole the technology, and now the FBI is investigating the situation.  See attached article from Bloomberg entitled “Huawei Sting Offers Rare Glimpse of the U.S. Targeting a Chinese Giant”, HUAWEI GOES AFTER MORE TECHNOLOGY

THE PROBLEM WITH THE CHINESE WAY AND EXTRADITION REQUESTS ARE ENFORCEABLE IN HONG KONG

As stated in the past blog post, the Chinese government’s decision not to have any agreement with the United States or other countries with regards to the enforcement of judgments or extradition warrants also gives Chinese individuals a false sense of security.  Many Chinese individuals feel they are immune to laws in other countries and can break them with impunity and they can apply the “Chinese way” of playing games in international and commercial transactions in many countries.

Chinese companies, however, are now international operations.  As soon as the Chinese individual takes a step out of China, however, he or she can be arrested.  You can run, but eventually you cannot hide from US and other foreign extradition warrants and judgments.

The attached January 14th article in the South China Morning Post entitled “A Chinese math prodigy turned hedge fund coder and the stolen strategies that cost him his freedom”, ARREST CHINESE NATIONAL IN HONG KONG, described a Chinese graduate from Hubei , who stole” intellectual property from a UK company.  The article described the situation where a Chinese national in Hong Kong had fled the United Kingdom (“UK”) after stealing intellectual property from a UK company.  The Chinese individual was arrested in Hong Kong on a UK extradition warrant.  If a Chinese national can be arrested in Hong Kong on an extradition warrant from the UK, can US criminal extradition warrants be enforced in Hong Kong?

LONG TERM PROBLEMS AND IMPACT ON CHINESE ECONOMY

On January 31, 2019, during the US China negotiations, Premier Liu delivered a letter from Chinese President Xi Jinping to President Trump, in which Xi pointed out that China-U.S. relations are at a critical stage.  This is absolutely true.  This is a crucial point in history not only for relations between the US and the rest of the Western/Democratic countries but for China itself because it is facing a steep economic decline. 

As a result of the US Trade War and more importantly the Chinese government’s decision to strongly favor state run companies and aggressively attack the Chinese private industry, there is a real decline in the Chinese economy.  Major Chinese economists in and out of China are predicting a potential recession in China in the next year.

See below statements from Nicholas Lardy and Professor Xiang Songzuo. If the subsequent statement by John Garnaut’s on Xi’s ideology being similar to Stalin is correct, however, these changing economic and political policies will not end any time soon.

There has been enormous changes in the political and economic thinking in China in the last two to three years.  The first historical political and economic change in China began with the end of the Cultural Revolution, the Death of Mao Tse Tung and the rise of Deng Xiaoping.  Deng Xiaoping believed in term limits, decentralization of economic power and the move to a market economy.  This was a major change in the economic and political philosophy in China.

One of Deng’s most famous says is it does not matter whether the cat is black or white so long as it catches mice.  As indicated below, however, that is not the philosophy of President Xi Jinping.

The perception of the United States and many countries was that China was moving to a more open Democratic society with a strong market economy and that reform would press forward.  This transition would take substantial time, but China was moving in the right direction.

With the decision of Xi Jinping to become leader for life in China, like Mao Tse Tung, however, the situation in China has changed dramatically and the perception of China by the United States and many other countries has changed.

Recently, within the last two years, the Chinese government has started an attack on private industry in China.  State-owned companies can get loans and many advantages and have become more powerful in China.  In bad economic times, such as the present, private companies cannot get the loans to stay alive.

Meanwhile, the Chinese government has cracked down on private industry making it more difficult to operate in China in the form of substantial regulatory and tax pressure on private industry.  Private companies face very high taxes, which on entrepreneurs are as high as 60%.

The real threat to President Xi’s economic decision, however, is that 80% of employment in China is in the private industry, which has been the engine of most of the change.

Chinese experts in and out of China have warned the Chinese government that the Chinese economy is in a very perilous situation.  See statements of Nicholas Lardy and Professor Xiong in Beijing below.

The three pillars that have held the Chinese economy up in the past are gone—exports (China the factory of the World), infrastructure and real estate spending (debt is enormous).

The only one left is increased consumption by Chinese consumers.  But that is not appearing.  Too many average Chinese are feeling future bad economic times.  In bad economic times, the average Chinese does not spend.  He or she saves.

NICHOLAS LARDY — US EXPERT ON THE CHINESE ECONOMY

In January 2019, Nicholas Lardy, a US expert, who has been studying the Chinese economy for decades, through the Paulson Institute, published a new book entitled “The State Strikes Back The End of Economic Reform in China”.  Some of the important quotes from that book are as follows:

“Since 2012, however, this picture of private, market-driven growth has given way to a resurgence of the role of the state in resource allocation and a shrinking role for the market and private firms. Increasingly ambitious state industrial policies carried out by bureaucrats and party officials have been directing investment decisions, most notably in the program proclaimed by President Xi Jinping known as “Made in China 2025.”  . . .

“This book mobilizes a wealth of data to evaluate this resurgence in the role of the state, applying an analysis of China’s medium-term growth potential and the implications of this growth for the global economy. Its core conclusion is that absent significant further economic reform returning China to a path of allowing market forces to allocate resources, China’s growth is likely to slow, casting a shadow over its future prospects. Of major importance for the rest of the world newly dependent on China’s economic ups and downs, the goal of reducing financial risks, which have accumulated in the years since the global financial crisis”. . . .

The fundamental obstacle to implementing far-reaching economic reforms in China is the top leadership’s view that, while state-owned firms may be a drag on China’s economic growth, they are essential to maintaining the position and control of the Chinese Communist Party and achieving the party’s strategic objectives (Economy 2018, 15–16). These strategic objectives are outlined in the Made in China 2025 program and other industrial policies and include achieving domestic dominance and global leadership in a range of advanced technologies. Other strategic objectives are international, notably the Belt and Road Initiative, where state-owned construction companies such as the China State Construction Engineering Corporation Limited are major contractors for building roads, rail lines, power plants, ports, and other infrastructure in countries participating in the initiative.”

State Strikes Back at pp 46, 47, 49 and 507-508 (2019).

XIANG SONGZUO-CHINESE EXPERT ON THE CHINESE ECONOMY

As mentioned in a previous newsletter, on December 21, 2018 the Epoch Times in an article entitled “China May Be Experiencing Negative GDP Growth” reported on a December 2018 speech by Xiang Songzuo, Deputy Director and Senior Fellow of the Center for International Monetary Research at China’s Renmin University, who reportedly has stated that the Chinese stock market is looking like the US stock market in 1929 just before the Great Depression.  The article goes on to state:

Xiang challenged the figure given by the National Bureau of Statistics, which claims that China’s rate of GDP growth is at 6.5 percent. According to some researches, Xiang said, the real growth rate could be just 1.67 percent, while more dismal estimates say that China’s economy is actually shrinking.

In his speech, Xiang said that the Chinese regime leadership had made major miscalculations, especially in terms of the Chinese Communist Party’s (CCP) stance in the Sino-U.S. trade war. He criticized propaganda slogans aired by Party- controlled mass media, such as “The Americans are lifting rocks only to have them smash on their own feet,” “China’s victory is assured,” or “China will stand and fight” as being overly confident and ignorant of the real difficulty that the country faces.

Beyond the CCP’s stubborn attitude towards U.S. demands, a second cause for the recent downturn in the Chinese economy was the severe hit to private enterprises this year, Xiang said. Private investment and investments into private enterprises have slowed sharply, severely impacting confidence among entrepreneurs.

Various official statements implying the eventual elimination of private business and property have reduced private sector confidence. This includes the idea, put forward by some Party-backed scholars, that the market economy has already fulfilled its role and should retreat in favor of planned, worker-owned economics.

Xiang said: “This kind of high-profile study of Marx and high-profile study of the Communist Manifesto, what was that line in the Communist Manifesto? The elimination of private ownership—what kind of signal do you think this sends to entrepreneurs?” . . ..

Xiang said that a huge challenge for China is the Sino-U.S. trade war. He believes that it is no longer a trade war, but a serious conflict between the Chinese and American systems of values. The China-U.S. relationship is at a crossroads, he said, and so far there has been no solution found to resolve their differences. . . .

The core challenge facing private enterprises is not financing difficulty, though there are problems in this area, Xiang said. The fundamental problem is fear of unstable government policy.

“The leaders in the State Council said it clearly in the meeting of the Standing Committee: in China, the government is what can be least trusted. Therefore, in order to solve the debt problem, first, the debts that the government owes businesses need to be resolved, followed by the problem of state-owned enterprises owing private enterprises, and then that of large private enterprises owing smaller ones,” he said.

Mr. Xiang’s speech dovetails with what I have heard from friends who recently returned from China.  Their friends in China have told them that management in China companies has been telling its workers to be prepared to “chi ku” eat bitter, for the next ten years because of the poor economy and save their money.  Saving money in China does not result in increased consumption.

AUSTRALIAN EXPERT, JOHN GARNAUT, THE MAJOR PROBLEM IS THAT XI FOLLOWS STALIN AND MAO IDEOLOGY AND THAT WILL IMPACT THE LONG TERM RELATIONSHIP BETWEEN CHINA AND THE US AND OTHER WESTERN/DEMOCRATIC COUNTRIES FOR YEARS TO COME

On January 17th, Bill Bishop, a China expert in the US, under the brand Sinocism, released a long speech by John Garnaut, one of the top journalists covering China before joining the Australian Government.  The blog post, Engineers of the Soul: Ideology in Xi Jinping’s China is long.  But if the analysis is correct, it illustrates in detail why over many years so long as Xi and others like him with this ideology are in power, the US, Australia, EC and the Western and other Democratic countries will oppose China.  The article below is extensive, but it is very enlightening.  See the entire article by clicking on the link above.  This is the political reason for the Western/Democratic problems with China now:

“Regular Sinocism readers are no doubt familiar with John Garnaut, one of the top journalists covering China before he joined the Australian government, first as a speech writer for Prime Minister Malcolm Turnbull and then as a China policy advisor. John led the Australian government’s analysis of and response to PRC/CCP interference and influence efforts in the country, and his work has since had significant influence in other Western capitals.

John is now out of government and has allowed me to share with you a speech he gave at an internal Australian government seminar in August 2017. . . .

I knew John a little in Beijing and besides having tremendous respect for his work, and especially his access to Princelings at a level I am not sure any other foreign correspondent has ever had, I always found him to be a reasoned and thoughtful chronicler of the PRC.

Some now say he has become a China hawk, but I see it as more the evolution of a sophisticated China watcher who believes in seeking truth from facts, no matter how difficult it may be to accept the reality of the direction Xi and the CCP appear to be taking China. This is a trajectory I have found myself on, along with many of the most experienced foreign China watchers I know.

I wish I could say I find John’s arguments unconvincing, but in fact they only seem more accurate now, over a year after the 19th Party Congress, than they did when he gave this talk in 2017.

On to John’s thought-provoking talk:

Asian Strategic and Economic Seminar Series

Engineers of the Soul: what Australia needs to know about ideology in Xi Jinping’s China

As some of you know I’ve just spent the past eight months as a model public servant on my very best behavior: biding time, concealing opinions and strictly respecting the bureaucratic order.

Now I get to go unplugged.  . . .

But in the meantime I’m here as someone who was born into the economics tribe and has been forced to gradually concede ground to the security camp. This retreat has taken place over the course of a decade, one story at a time, as I’ve had to accept that economic openness does not inevitably lead to political openness. Not when you have a political regime that is both capable and committed to ensuring it doesn’t happen.

Politics isn’t everything but there’s no country on earth where it is more omnipresent, with the exception of North Korea. And there is no political system that is as tightly bound to ideology.

In the work I was doing upstairs in this building I went out of my way to remove ideology from my analysis of how China is impacting on Australia and our region. It was simply too alien and too difficult to digest. In order to make sense to time-poor leaders it was easier to “normalise” events, actions and concepts by framing them in more familiar terms.

This approach of “normalising” China also served to sidestep painful normative debates about what China is, where it is going and what it wants. It was a way of avoiding a food fight about who is pro-or-anti China. Taking the “Communist Party” out of “China” was a way of de-activating the autoimmune response that can otherwise kill productive conversation.

This pragmatism has worked pretty well. We’ve taken the China conversation to a new level of sophistication over the past year or so.

But by stripping out ideology we are giving up on building a framework which has explanatory and predictive value.

At some point, given the reach that China has into Australia, we will have to make a serious attempt to read the ideological road map that frames the language, perceptions and decisions of Chinese leaders. If we are ever going to map the Communist Party genome then we need to read the ideological DNA.

So today I’m stepping into the food fight.

I want to make these broad points about the historical foundations of CCP ideology, beyond the fact that it is important: 

  1. Communism did not enjoy an immaculate conception in China. Rather, it was grafted onto an existing ideological system – the classical Chinese dynastic system.
  2. China had an unusual veneration for the written wordand acceptance of its didactic value.
  3. Marxism-Leninism was interpreted to Mao and his fellow revolutionaries by a crucial intermediary: Joseph Stalin.
  4. Communism – as interpreted by Lenin, Stalin and Mao – is a total ideology. At the risk of being politically insensitive, it is totalitarian.
  5. Xi Jinpinghas reinvigorated ideology to an extent we have not seen since the Cultural Revolution.  . . .

 A Dynastic Cosmology

It was clear from my work as a journalist and writer in New China – to use the party speak – that the formal ideology of communism coexists with an unofficial ideology of old China. The Founding Fathers of the PRC came to power on a promise to repudiate and destroy everything about the dark imperial past, but they never really changed the mental wallpaper.  . . .

So this is my first observation about ideology – ideology in the broadest sense, as a coherent system of ideas and ideals: the founding families of the PRC are steeped in the Dynastic System.

Admittedly, communism and feudal imperialism are uneasy bedfellows. But they are not irreconcilable. The formula for dynastic communism was perfected by Chen Yun: their children had to inherit power not because of privilege but because they could be counted upon to be loyal to the revolutionary cause. Or, as he put it: “at least our children will not dig up our graves”.

Xi Jinping has exercised an unwritten aristocratic claim to power which derives from his father’s proximity to the founder of the Red Dynasty: Chairman Mao. He is the compromise representative of all the great founding families. This is the starting point for understanding the worldview of Xi Jinping and his Princeling cohort.

In the view of China’s princelings – or “Revolutionary Successors”, as they prefer to be known – China is still trapped in the cycle which had created and destroyed every dynasty that had gone before. In this tradition, when you lose political power you don’t just lost your job (while keeping your super) as you might in our rather gentrified arrangement. You lose your wealth, you lose your freedom, you probably lose your life and possibly your entire extended family. You are literally erased from history. Winners take all and losers lose everything.

With these stakes, the English idiom “life-and-death-struggle” is far too passive. In the Chinese formulation it is “You-Die, I-Live”. I must kill preemptively in order to live. Xi and his comrades in the red dynasty believe they will go the same way as the Manchus and the Mings the moment they forget.

China’s veneration of the written word

A second point, related to the first, is that China has an extraordinary veneration of the written word. Stories, histories and teachers have great moral authority.  . . . What is more certain is that China was particularly receptive to Soviet ideology because Chinese intellectuals found meaning in Russian literature and texts earlier and more readily than they did with other Western sources. “Russian literature was our guide (daoshi) and friend,” said Lu Xun.

In classical Chinese statecraft there are two tools for gaining and maintaining control over “the mountains and the rivers”: The first is wu (weapons, violence – 武) and the second is wen (language, culture – 文).

Chinese leaders have always believed that power derives from controlling both the physical battlefield and the cultural domain. You can’t sustain physical power without discursive power. Wu and wen go hand-in-hand.

The key to understanding the allure of the Soviet Commintern in Shanghai and Guangzhou in the 1920s is that their (admittedly brilliant) agents told a compelling story. They came with money, guns and organizational technology but their greatest selling point was a narrative which promised a linear escape from the dynastic cycle. . . .

Mao’s discursive advantage was Marxist-Leninist ideology. Language was not just a tool of moral judgment. It was an instrument for shaping acceptable behavior and a weapon for distinguishing enemies and friends. This is the subtext of Mao’s most famous poem, Snow. Communist ideology enabled him to “weaponise” culture in a way his imperial predecessors had never managed.

And it’s important to remember who was the leader of the Communist world during the entire quarter of a century in which Mao rose to absolute power.

The “Great Genius” Comrade Stalin. 

Mao knew Marxist Leninist dogma was absolutely crucial to his enterprise but he personally lacked the patience to wade through it. He found a shortcut to ideological proficiency with Joseph Stalin’s Short Course on the History of the Bolsheviks, published at the end of Stalin’s Great Terror, in 1938.  According to Li Rui, when interviewed by historian Li Huayu, Mao thought he’d found an “encyclopaedia of Marxism” and “acted as if he’d discovered a treasure”.

At the time of Stalin’s death, in March 1953, The Short Course on the History of the Bolsheviks had become the third-most printed book in human history. After Stalin’s death – when Stalin was eulogised as “the Great Genius” on the front page of the People’s Daily – the Chinese printers redoubled their efforts. It became the closest thing in China to a religious text.

The Short Course is hard reading but it offers us the same shortcut to understanding Communist ideology as it did for Mao.

Stalin’s problem was different to Lenin’s. Lenin had to win a revolution but Stalin had to sustain it. . . .

Stalin’s Short Course is a manual for perpetual struggle against a roll call of imagined dastardly enemies who are collaborating with imagined Western agents to restore bourgeois capitalism and liberalism. It is written as a chronicle of victories by Lenin and then Stalin’s “correct line” over an endless succession of ideological villains. It is perhaps instructive that many of the most “vile” internal enemies were said to have cloaked their subversive intentions in the guise of “reform”. . . .

The most original insight in Stalin’s Short Course on the History of the Bolsheviks is that the path to socialist utopia will always be obstructed by enemies who want to restore bourgeois capitalism from inside the party. These internal enemies grow more desperate and more dangerous as they grow increasingly imperilled – and as they collaborate with the spies and agents of Western liberalism.

The most important lines in the book:

  • “As the revolution deepens, class struggle intensifies.”
  • “The Party becomes strong by purging itself.”

You can imagine how this formulation was revelatory to a ruthless Chinese leader like Mao who had mastered the “You Die, I Live” world into which he had been born – a world in which you choose to either kill or be killed – and who was obsessed with how to prevent the decay which had destroyed every imperial dynasty before.

What Stalin offered Mao was not only a manual for purging his peers but also an explanation of why it was necessary. Purging his rivals was the only way a vanguard party could “purify” itself, remain true to its revolutionary nature and prevent a capitalist restoration.

Purging was the mechanism for the Chinese Communist Party to achieve ever greater “unity” with revolutionary “truth” as interpreted by Mao. It is the mechanism for preventing the process of corruption and putrefaction which inevitably sets in after the founding leaders of each dynasty leave the scene.

Crucially, Mao split with Khrushchev because Khrushchev split with Stalin and everything he stood for. The Sino-Soviet split was ideological – it was Mao’s claim to ideological leadership over the communist world. Marx, Lenin, Stalin, Mao. It was Mao’s claim to being Stalin’s true successor.

We hear a lot about how Xi and his peers blame Gorbachev for the collapse of the Soviet state but actually their grievances go much further back. They blame Khrushchev. They blame Khrushchev for breaking with Stalin. And they vow that they will never do to Mao what Khrushchev did to Stalin.

Now, sixty years on, we’re seeing Xi making his claim to be the true Revolutionary Successor of Mao.

Xi’s language of “party purity”; “criticism and self-criticism”; “the mass line”; his obsession with “unity”; his attacks on elements of “hostile Western liberalism”, “constitutionalism” and other variants of ideological “subversion” –  this is all Marxism-Leninism as interpreted by Stalin as interpreted by Mao.

This is the language that the Deep Red princelings spoke when they got together and occasionally when I interviewed them and crashed their gatherings in the lead up to the 18th Party Congress.

And this was how Xi spoke after the 18th Party Congress:

‘‘To dismiss the history of the Soviet Union and the Soviet Communist Party, to dismiss Lenin and Stalin, and to dismiss everything else is to engage in historic nihilism, and it confuses our thoughts and undermines the party’s organizations on all levels.’’

Today, the utopian destination has to be maintained, however absurd it seems, in order to justify the brutal means of getting there.  Xi has inserted a couple of interim goals – for those who lack revolutionary patience – but the underlying Marxist-Leninist-Stalinist-Maoist logic remains the same.

This is the logic of his ever-deepening purge of peers who keep getting in the way.

The purge of the princeling challenger Bo Xilai; the security chief Zhou Yongkang; the two vice chairs of the PLA Central Military Commission Xu Caihou and Guo Boxiong; the Youth League fixer Ling Jihua; the potential successor Sun Zhengcai just a fortnight ago.

None of this is personal. It’s dialectical. And inevitable.

It’s pushing and accelerating China’s journey along the inexorable corkscrew-shaped course of history.

“History needs to pushed along its dialectical course,” said Xi, in his speech to mark the party’s 95th birthday in 2015. “History always moves forward and it never waits for all those who hesitate.”

The same logic applies outside the party as within.

“The decadent culture of the capitalist class and feudalistic society must be opposed,” said the authoritative Guangming Daily, expanding on another of Xi’s speeches.

The essence of Maoism and Stalinism is perpetual struggle. This is the antidote to the calcification and putrefaction that has destroyed every previous dynasty, dictatorship and empire. This is why Xi and his Red Successor peers believe that Maoism and Stalinism is still highly relevant today. Not just relevant, but existential.

Xi has set in motion a purification project – a war against the forces of counter-revolution – that has no end point because the notional utopian destination of perfect communism will always be kicked a little further down the road.

There is no policy objective in the sense that a Wall Street banker or Canberran public servant might understand it – as a little more energy market efficiency here, or compression of the Gini coefficient there. Rather, this is how you restore dynastic vigour and vitality. Politics is the ends.

This is what Mao and Stalin understood better than any of their peers. This is what Xi Jinping’s Deep Red Restoration is all about. And why the process of extreme politics will not stop at the 19th Party Congress.

Which brings us to the title of this seminar.

Engineers of the human soul

At my first team bonding session in this building I asked who was the world leader who described artists and authors as “engineers of the human soul”.

Was this word image the creation of Stalin, Mao or someone else?

If you’re thinking Joseph Stalin, then you’re right:

“The production of souls is more important than the production of tanks…. And therefore I raise my glass to you, writers, the engineers of the human soul”.

To me this is one of the great totalitarian metaphors: a machine designed to forge complete unity between state, society and individual.

The totalitarian machine works to a predetermined path. It denies the existence of free will and rejects “abstract” values like “truth”, love and empathy. It repudiates God, submits to no law and seeks nothing less than to remold the human soul.

The quote is from Stalin’s famous speech at the home of the writer Maxim Gorky in preparation for the first Congress of the Union of Soviet Writers in October 1932. This marked the end of Stalin’s Great Famine and Cultural Revolution – the prototype for Mao’s Great Famine and Cultural Revolution – in the lead up to Stalin’s Great Terror.

For Stalin, Lenin and the proto-Leninists of 19th Century Russia, the value of literature and art was purely instrumental. There was no such thing as “art for art’s sake”. In their ideology, poetry has no intrinsic value beyond its purpose of indoctrinating the masses and advancing the cause of revolution.

Or, to use the engineering language of the original Man of Steel – Joseph Stalin – literature and art are nothing more nor less than cogs in the revolutionary machine.

But, if you think the answer is Chairman Mao, then you’re also right. Mao extended Stalin’s metaphor a decade later at his famous Yan’an Forum on Literature and Art delivered in two parts in October 1942, and published (in heavily doctored form) one year later:

“[Our purpose is] to ensure that literature and art fit well into the whole revolutionary machine as a component part, that they operate as powerful weapons for uniting and educating the people and for attacking and destroying the enemy, and that they help the people fight the enemy with one heart and one mind.”

This is when Mao made plain that there is no such thing as truth, love or artistic merit except in so far as these abstract concepts can be pressed into the practical service of politics.

Importantly, with contemporary significance, Mao’s talks on literature and art was his way of introducing the Yan’an Rectification Campaign – the first great systematic purge of the Chinese Communist Party. This was a project of orchestrated peer pressure and torture designed first to purge Mao’s peers and then to instil communist ideology deep within the minds of the hundreds of thousands of idealistic students and intellectuals who had flocked to Yan’an during the anti-Japanese war.

Importantly, the Communist Party never sought to “persuade” so much as “condition”. By creating a fully enclosed system, controlling all incentives and disincentives, and “breaking” individuals physically, socially and psychologically, they found they could condition the human mind in the same way that Pavlov had learned to condition dogs in a Moscow laboratory a few years earlier.

This is when Mao’s men first coined the term “brainwashing” – it’s a literal translation of the Maoist term xinao, literally “washing the brain”. Mao himself preferred Stalin’s metallurgical metaphor. He called it “tempering”:

“If you want to be one with the masses, you must make up your mind to undergo a long and even painful process of tempering.”

Mao’s Yan’an Talks on Literature and Art vanished and were then resurrected and republished everywhere at the onset of the Cultural Revolution – the most audacious and successful act of social engineering that the world has ever seen.

And, most relevant to all of us today, if you are thinking President Xi Jinping, then you’re also right.

President Xi, or Chairman Xi to use a more direct translation, was speaking at the Beijing Forum on Literature and Art, in October 2014. Xi’s Forum on Literature and Art was convened on the 72nd anniversary of the young Chairman Mao’s Yan’an Forum on Literature and Art.

Xi was arguing for a return to the Stalinist-Maoist principle that art and literature should only exist to serve politics. Not politics as we know it – the straightforward exercise of organisational and decision-making power – but the totalitarian project of creating unity of language, knowledge, thought and behaviour in pursuit of a utopian destination.

“Art and literature is the engineering that moulds the human soul; art and literary workers are the engineers of the human soul.”

Like Mao’s version, Xi’s art and literature forum speech was not published until one year later.

Like Mao’s speech, the published version made no acknowledgment that large chunks had been added, deleted and revised – to reflect the political imperatives of the times.

Like Stalin and Mao, Xi’s speech marked a Communist Party rectification campaign which included an all-out effort to elevate the respective leaders to cult status. Nothing in Communist Party choreography happens by accident.

It should be noted here that when Mao was rallying the country in 1942 he did so under the banner of ““patriotism” – because the idea of communism had absolutely no pulling power.

It’s no different today. Xi:

“Among the core values of socialism with Chinese characteristics, the deepest, most basic and most enduring is patriotism. Our modern art and literature needs to take patriotism as its muse, guiding the people to establish and adhere to correct views of history, the nation, the country and culture.”

And the old warnings against subversive western liberalism haven’t changed either.

For Lenin, Stalin, Mao and Xi, words are not vehicles of reason and persuasion. They are bullets. Words are weapons for defining, isolating and destroying opponents. And the task of destroying enemies can never end. (This deserves a stand alone discussion of United Front strategy – but I’ll leave this for another day).

For Xi, as with Stalin and Mao, there is no endpoint in the perpetual quest for unity and regime preservation.

Xi uses the same ideological template to describe the role of “media workers”. And school teachers. And university scholars. They are all engineers of ideological conformity and cogs in the revolutionary machine.

Among the many things that China’s modern leaders did – including overseeing the greatest burst of market liberalisation and poverty alleviation the world has ever seen – those who won the internal political battles have retained the totalitarian aspiration of engineering the human soul in order to lead them towards the ever-receding and ever-changing utopian destination.

This is not to say that China could not have turned out differently. Elite politics from Mao’s death to the Tiananmen massacres was a genuine contest of ideas.

But ideology won that contest.

Today the PRC is the only ruling communist party that has never split with Stalin, with the partial exception of North Korea. Stalin’s portrait stood alongside Marx, Engels and Lenin in Tiananmen Square – six metres tall – right up to the early 1980s, at which point the portraits were moved indoors.

For a long time we all took comfort in thinking that this ideological aspiration existed only on paper, an object of lip service, while China’s 1.4 billion citizens got on with the job of building families and communities and seeking knowledge and prosperity.

But it has been much more than lip service.  Since 1989 the party has been rebuilding itself around what the draft National Security Law calls “ideological security” including defending itself against “negative cultural infiltration”.

Propaganda and security – wen and wu, the book and the sword, the pen and the gun – are once again inseparable. Party leaders must “dare to show their swords’’ to ensure that “politicians run newspapers”, said Xi, at his first National Propaganda Work Conference, on August 9, 2013.

Xi has now pushed ideology to the forefront because it provides a framework for “purifying” and regaining control over the vanguard party and thereby the country.

In Xi’s view, shared by many in his Red Princeling cohort, the cost of straying too far from the Maoist and Stalinist path is dynastic decay and eventually collapse.

Everything Xi Jinping says as leader, and everything I can piece together from his background, tells me that he is deadly serious about this totalising project.

In retrospect we might have anticipated this from the Maoist and Stalinist references that Xi sprinkled through his opening remarks as president, in November 2012.

It was made clearer during Xi Jinping’s first Southern Tour as General Secretary, in December 2012, when he laid a wreath at Deng’s shrine in Shenzhen but inverted Deng’s message. He blamed the collapse of the Soviet Union on nobody being “man enough” to stand up to Gorbachev and this, in turn, was because party members had neglected ideology. This is when he gave his warning that we must not forget Mao, Lenin or Stalin.

In April 2013 the General Office of the Central Committee, run by Xi’s princeling right hand man, Li Zhanshu, sent this now infamous political instruction down to all high level party organisations.

This Document No. 9, “Communique on the Current State of the Ideological Sphere”, set “disseminating thought on the cultural front as the most important political task.” It required cadres to arouse “mass fervour” and wage “intense struggle” against the following “false trends”:

  1. Western constitutional democracy – “an attempt to undermine the current leadership”;
  2. Universal values of human rights – an attempt to weaken the theoretical foundations of party leadership.
  3. Civil Society – a “political tool” of the “Western anti-China forces” dismantle the ruling party’s social foundation.
  4. Neoliberalism – US-led efforts to “change China’s basic economic system”.
  5. The West’s idea of journalism – attacking the Marxist view of news, attempting to “gouge an opening through which to infiltrate our ideology”.
  6. Historical nihilism – trying to undermine party history, “denying the inevitability” of Chinese socialism.
  7. Questioning Reform and Opening – No more arguing about whether reform needs to go further.

There is no ambiguity in this document. The Western conspiracy to infiltrate, subvert and overthrow the People’s Party is not contingent on what any particular Western country thinks or does. It is an equation, a mathematical identity: the CCP exists and therefore it is under attack. No amount of accommodation and reassurance can ever be enough – it can only ever be a tactic, a ruse.

Without the conspiracy of Western liberalism the CCP loses its reason for existence. There would be no need to maintain a vanguard party. Mr Xi might as well let his party peacefully evolve.

We know this document is authentic because the Chinese journalist who publicised it on the internet, Gao Yu, was arrested and her child was threatened with unimaginable things. The threats to her son led her to make the first Cultural Revolution-style confession of the television era.

In November 2013 Xi appointed himself head of a new Central State Security Commission in part to counter “extremist forces and ideological challenges to culture posed by Western nations”.

Today, however, the Internet is the primary battle domain. It’s all about cyber sovereignty.

Conclusion

The key point about Communist Party ideology – the unbroken thread that runs from Lenin through Stalin, Mao and Xi – is that the party is and always has defined itself as being in perpetual struggle with the “hostile” forces of Western liberalism.

Xi is talking seriously and acting decisively to progress a project of total ideological control wherever it is possible for him to do so. His vision “requires all the Chinese people to be unified with a single will like a strong city wall”, as he told “the broad masses of youth” in his Labor Day speech of May 2015. They need to “temper their characters”, said Xi, using a metaphor favoured by both Stalin and Mao.

There is no ambiguity in Xi’s project. We see in everything he does and – even in a system designed to be opaque and deceptive – we can see it in his words.

Mr Xi did not invent this ideological project but he has hugely reinvigorated it. For the first time since Mao we have a leader who talks and acts like he really means it.

And he is pushing communist ideology at a time when the idea of “communism” is as unattractive as it has been at any time in the past 100 years. All that remains is an ideology of power, dressed up as patriotism, but that doesn’t mean it cannot work.

Already, Xi has shown that the subversive promise of the internet can be inverted. In the space of five years, with the assistance of Big Data science and Artificial Intelligence, he has been bending the Internet from an instrument of democratisation into a tool of omniscient control. The journey to Utopia is still in progress but first we must pass through a cyber-enabled dystopia in order to defeat the forces of counter-revolution.

The audacity of this project is breathtaking. And so too are the implications.

The challenge for us is that Xi’s project of total ideological control does not stop at China’s borders. It is packaged to travel with Chinese students, tourists, migrants and especially money.  It flows through the channels of the Chinese language internet, pushes into all the world’s major media and cultural spaces and generally keeps pace with and even anticipates China’s increasingly global interests.

In my opinion, if you’re in the business of intelligence, defense or international relations; or trade, economic policy or market regulation; or arts, higher education or preserving the integrity of our democratic system – in other words, just about any substantial policy question whatsoever – then you will need a working knowledge of Marxism-Leninism Mao Zedong Thought. And maybe, after the 19th Party Congress, you’ll need “Xi Jinping Thought” too.

END”

That is the real problem facing China.  Xi and the Chinese government have decided to give up economic reform and go back to the time of Mao and Statin.  This is real Communist ideology.

One may think that John Garnault is exaggerating.  It cannot be that bad.  But as noted above, with the Conference on Statism at the Asia Society, many Chinese experts, old friends of China including Orville Schell and Chrarlene Barshefsky, who was the USTR who negotiated the US China WTO agreement, believe that China has returned to Statism.  That is the same point of Nicholas Lardy above.

When I was in Beijing China in the mid-2,000s, I met many Chinese lawyers.  One lawyer told me in Beijing that there was a saying in China—Mao made China stand up, Deng made China rich and the hope is that the new leader will give China some form of Democracy.  That Chinese lawyer now lives two blocks away from me in Washington State.

Another Chinese lawyer in Beijing believed strongly in the mid-2,000s that China was on the right path to a new opening that might lead to a limited form of Democracy.  He now lives 30 minutes away from me.

Many Chinese have fled China because of the fear of what is going on in China now.

My hope and prayer is that I am wrong, but I do not think so.

GOVERNMENT SHUTDOWN

Because of a major disagreement between President Trump and Congress, a major part of the Government, including the Commerce Department and the US International Trade Commission (“ITC”), were shut down for over a month.  As a result, Commerce and the US International Trade Commission have extended all trade investigation deadlines by 35 to 40 days.

QUARTZ SURFACE PRODUCTS ANTIDUMPING AND COUNTERVAILING DUTY CASES—ITC QUESTIONNAIRES AND CRITICAL CIRCUMSTANCES TRAP

We are in the process of representing a substantial number of US importers and fabricators, US producers of downstream products, in the Quartz Surface Products from China Antidumping and Countervailing Duty case.  Quartz Surface Products are used to produce kitchen countertops, shower stalls and many other downstream products.

The Commerce Department recently issued a critical circumstances determination exposing thousands of importers to millions of dollars in liability and bankruptcy in a situation in which the US International Trade Commission (“ITC”) goes no critical circumstances in over 90% of the cases.

Cambria, the Petitioner in the case, has taken the position that it not only represents the producers of the slab, the raw material, but also all the producers of the downstream products, the fabricators.  We have learned that there are more than 4,000 fabricators of the downstream producers with 1000s of jobs at stake.  Cambria essentially argues that it is the sole representative of an industry with more than 4,000 companies.

Cambria’s objective in this case is very clear—drive up the prices of the raw material so as to drive out the fabricators, the downstream producers, all 4,000 of them.  We are working to include the fabricators in the domestic industry, but the fabricators have to be willing to answer the ITC questionnaires so as to have their voices heard.

The ITC questionnaires in the case are attached US producers–Quartz surface products (F) Foreign producers–Quartz surface products (F) US importers–Quartz surface products (F) US purchasers–Quartz surface products (F) Questionnaire Transmittal Letter QSP INITIAL ITC E-MAIL RETURN INSTRUCTIONS.

If anyone has any questions about the Section 301 case, the trade war with China, IP Protection, Huawei problem, the Quartz Surface Products case, antidumping or countervailing duty law, customs laws and any other trade or customs questions, please feel free to contact me.

Best regards,

Bill Perry

TRADE IS A TWO-WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 20, 1986

US CHINA TRADE WAR UPDATE – DECEMBER 21, 2018

Dear Friends,

Another difficult newsletter to write as every day there is more news.  Also trying to understand the current state of US China Trade Relations is like trying to tell the future by looking at tea leaves at the bottom of the cup.

At the Trump Xi Meeting on December 1st at the G-20 meeting in Argentina, there was a deal to delay the 301 tariffs for 90 days during which time negotiations would happen between the US and Chinese governments.  The Chinese government was to send a negotiating team to Washington DC on December 15th, but that did not happen.  The latest is that negotiations continue by phone and the Chinese negotiating team will come to Washington DC in January.

Meanwhile, the United States Trade Representative (“USTR”) has issued the attached new notice, MARCH 2 USTR NOTICE PUBLISHED, setting a hard date of March 2nd for US China Trade Deal.  If there is no deal by March 2nd, the tariffs on $200 billion in imports automatically go from 10% to 25%.  The USTR has also issued a new attached Section 301 update, USTR FULLL 301 Report Update.

The core of any US China deal will be provisions to prevent IP Theft, Forced Technology Transfer and cyber hacking for commercial gain.  So, what was a dim hope of a US China trade settlement at the G-20 has brightened the hope a little more, but there is still a very long way to go.

Making the situation more difficult was the December 1st arrest of Huawei CEO, Ms. Meng Wanzhou, the daughter of the founder, in Vancouver, Canada based on an extradition warrant from the United States for bank fraud.  Immediately many Chinese officials took this action as a personal attack on China by Canada and the United States.  Many Chinese commentators saw this action as an attempt by President Trump to increase pressure on China with regards to trade relations.

Readers of this newsletter, however, will remember the point last month that the Justice Department has raised US China trade relations to a new serious level by starting a new initiative to go after China officials, not only from a trade policy point of view, but also with criminal indictments and investigations for IP Theft and other issues.

On December 20th, the Justice Department further increased the pressure by bringing an indictment against two Chinese individuals for cyber hacking.  This is not politics.  This crisis has risen to criminal activity governed by the Rule of Law.

But apparently the Justice Department did pull its punches because it only went after the two individuals and not the corporate entities associated with the hacking.

That is just where Ms. Meng finds herself—immersed in a criminal action exposing her to 30 years in prison for bank fraud.  Although Ms. Meng received bail and is staying at her Vancouver house, she is due back in Canadian Court in February.  And there is probably a good chance that Ms. Meng will be extradited to the United States, where she will face even tougher problems.

The Canadian Trade Advisor has stated that this is a Rule of Law question, not China policy issue.

But the problems for Huawei have expanded exponentially.  As many international banks now refuse to do business with Huawei because the risks are too great.

But there are probably bigger issues behind the push by many countries to get Huawei out of their telecommunications networks.  On December 14th, it was reported that all five Western Intelligence Agencies have created a real campaign to kill Huawei’s activities in Western countries.

In addition, however, there has been an effort from the Chinese government to keep the Huawei problems separate from the trade negotiations.  The Chinese government has a real incentive to do this because its economy is facing very strong problems with the sharp decline in the Chinese stock market.  One Chinese economic expert is comparing the Chinese stock market to the 1929 stock market crash in the United States that led to the Great Depression.  That Chinese economist also believes that the Chinese economy is not expanding but contracting significantly because of the US China trade war and the Chinese government’s policy of killing the private industry.

My firm is also representing a number of US importers and fabricators, US producers of downstream products, in the Quartz Surface Products Antidumping and Countervailing Duty case.  As part of that effort, we are trying to persuade US fabricating companies and importers to fill out the questionnaires from the US International Trade Commission’s (“ITC”) so that their voices will be heard.  Those questionnaires are attached below.

If anyone has any questions, please feel free to contact me.

Best regards,

Bill Perry

G-20 DIM HOPE BECOMES BRIGHTER HOPE BUT??

The day before the US China meeting in Buenos Aires Argentina, USTR Lighthizer stated that there would probably be a deal.  And that is what happened.

Apparently at the start of the GP-20 meeting, President Xi made a 20-minute speech outlining the steps that the Chinese government was willing to take to end the trade war.

Although China agreed to immediately import US agricultural products, the key to the 301 case is IP Theft and Forced Technology Transfer.  The real issue is what is China prepared to do.

Meanwhile, the United States Trade Representative has issued the attached new notice, MARCH 2 USTR NOTICE PUBLISHED, setting a hard date of March 2nd for US China Trade Deal.  If there is no deal by March 1st, the tariffs on $200 billion in imports automatically go from 10% to 25%.

Apparently, the latest word is that the US and Chinese governments continue to negotiate by phone and the first real face to face meeting will be in January.  But that does not give much time to reach an agreement by March 1st.

Bill Bishop, a known China expert, in his Axios Sinocsim newsletter stated on December 14th:

“I’d already heard that the Chinese are planning to make big concessions, because they understand U.S. Trade Representative Robert Lighthizer won’t “accept warmed-over promises.”

  • And, now it appears this could be true, as indicated by the temporary cuts in tariffs on U.S. autos, mentioned in the intro above.
  • So as long as Trump keeps his resolve there may actually be a chance for some significant concessions on trade, moves that Chinese President Xi Jinping can spin domestically as not due to U.S. pressure but as part of the deepening of reform.”

On the other hand, my partner, who reads the Chinese Press in Chinese, commented on the December 13th speech by Xi Jinping on the anniversary of the market opening by Deng Xiaoping:

“I just read a seminar of a group of Chinese scholars reviewing the Xi Jinping speech. The take away:

1.) Reform is dead: permanently. Here, “reform” means move to an open, market economy with minimal involvement by the CCP and minimal involvement by SOEs. This kind of reform would mean the end of CCP control, and that prospect is dead, permanently.

  1. On the trade war, what the Chinese government hopes is: they will enter into some written agreement with Trump. But Trump will soon be swept away. As soon as that happens, the Chinese will tear up the agreement. This shows a mistaken understanding of the U.S. system: we don’t have one man/one party rule in the U.S. So the Chinese are viewing this from the standpoint of how their own system works. But it is interesting to see how this matter is analyzed in China.

Note this is what the Chinese scholars said. I agree, but this is coming from the Chinese side, not from me.”

Such a misreading of the US trade situation is extremely dangerous.  As mentioned in the last blog post, based on quotes from numerous sources, the Chinese government has succeeded in uniting both ends of the political spectrum, Democrats and Republicans, against China.  This trade situation is not going to change any time soon no matter what party is in power.

But other articles have stated that the US and Chinese governments continue to negotiate by phone and there will be face to face meetings in January.  On the other hand, the word is that the Chinese government will agree to make a number of trade concessions, but not agree to any “structural” changes.

The real question is what is meant by the word “structural”?  Again, the core issues in the Section 301 deal are IP Theft, Forced Technology Transfer and cyber hacking.  If the Chinese government’s intent is to make no enforceable concessions in these areas, these negotiations will fail.  That would be a major blow to China.

As indicated below, the indictment and US and Canadian actions against Huawei have made the negotiations more difficult.  But the Chinese government has attempted to keep the trade negotiations and Huawei situation separate, probably because of the big problems with the Chinese economy as explained below.

IP THEFT, FORCED TECHNOLOGY TRANSFER AND CYBER HACKING REMAIN THE CORE ISSUES OF THE 301 CASE

The core of the Section 301 case is intellectual property, rights which are Constitutionally protected rights.  Stealing intellectual property (“IP”) is piracy, pure and simple.

As the United States Trade Representative states on page 4 of its attached full 301 report, USTR FULL 301 REPORT CHINA TECHNOLOGY TRANSFER:

The Federal Register Notice described the focus of the investigation as follows:

First, the Chinese government reportedly uses a variety of tools, including opaque and discretionary administrative approval processes, joint venture requirements, foreign equity limitations, procurements, and other mechanisms to regulate or intervene in U.S. companies’ operations in China in order to require or pressure the transfer of technologies and intellectual property to Chinese companies.  Moreover, many U.S. companies report facing vague and unwritten rules, as well as local rules that diverge from national ones, which are applied in a selective and non-transparent manner by Chinese government officials to pressure technology transfer.

Second, the Chinese government’s acts, policies and practices reportedly deprive U.S. companies of the ability to set market-based terms in licensing and other technology- related negotiations with Chinese companies and undermine U.S. companies control over their technology in China. For example, the Regulations on Technology Import and Export Administration mandate particular terms for indemnities and ownership of technology improvements for imported technology, and other measures also impose non- market terms in licensing and technology contracts.

Third, the Chinese government reportedly directs and/or unfairly facilitates the systematic investment in, and/or acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and generate large-scale technology transfer in industries deemed important by Chinese government industrial plans.

Fourth, the investigation will consider whether the Chinese government is conducting or supporting unauthorized intrusions into U.S. commercial computer networks or cyber- enabled theft of intellectual property, trade secrets, or confidential business information, and whether this conduct harms U.S. companies or provides competitive advantages to Chinese companies or commercial sectors.

The Section 301 Report then goes on to list ten IP Agreements the Chinese government signed with the United States from 2010 to 2016, including the recent 2016 agreement between President Xi and President Obama to not require the transfer of technology as a precondition of doing business in China.  See page 8 of the USTR 301 report above.

On November 20, 2018, before the G-20 meeting, the USTR issued the attached an interim report in the Section 301 case, USTR FULLL 301 Report Update.  The Update states, in part:

“USTR has undertaken this update as part of its ongoing monitoring and enforcement effort. In preparing this update, USTR has relied upon publicly available material, and has consulted with other government agencies. As detailed in this update, China fundamentally has not altered its acts, policies, and practices related to technology transfer, intellectual property, and innovation, and indeed appears to have taken further unreasonable actions in recent months.

Section II describes how China continues its policy and practice of conducting and supporting cyber-enabled theft and intrusions into the commercial networks of U.S. companies and those of other countries, as well as other means by which China attempts illegally to obtain information. This conduct provides the Chinese government with unauthorized access to intellectual property, including trade secrets, or confidential business information, as well as technical data, negotiating positions, and sensitive and proprietary internal business communications.

Section III describes how, despite the relaxation of some foreign ownership restrictions and certain other incremental changes in 2018, the Chinese government has persisted in using foreign investment restrictions to require or pressure the transfer of technology from U.S. companies to Chinese entities. Numerous foreign companies and other trading partners share U.S. concerns regarding China’s technology transfer regime.

Section IV describes China’s discriminatory licensing restrictions and how the United States has requested consultations and is pursuing dispute settlement under the WTO in China Certain Measures Concerning the Protection of Intellectual Property Rights (WT/DS542). China continues to maintain these discriminatory licensing restrictions.

Section V describes how, despite an apparent aggregate decline in Chinese outbound investment in the United States in 2018, the Chinese government continues to direct and unfairly facilitate the systematic investment in, and acquisition of, U.S. companies and assets by Chinese entities, to obtain cutting-edge technologies and intellectual property and generate large-scale technology transfer in industries deemed important by state industrial plans. Chinese outbound investment is increasingly focused on venture capital (VC) investment in U.S. technology centers such as Silicon Valley, with Chinese VC investment reaching record levels in 2018.

SECTION 301 PROCEDURES

As to the procedures in the Section 301 case, please see my October 1, 2018 blog post for a detailed explanation of the 301 case, three outstanding lists and opportunity to request a product exclusion request.  The three lists of tariffs cover $250 billion in imports from China.

CANADA’S ARREST OF HUAWEI CEO MENG WANZHOU—YOU CAN RUN BUT NOT HIDE FROM US EXTRADITION WARRANTS

As stated above, making the US China trade negotiations more difficult was the December 1st arrest of Huawei CEO, Ms. Meng Wanzhou, the daughter of the founder, in Vancouver, Canada based on an extradition warrant from the United States for criminal offenses.

Although many Chinese officials took this action as a personal attack on China, when one digs down into the details, it becomes apparent that this action raises a major rule of law issue – bank fraud to get around Iran sanctions.

INTERNATIONAL EXTRADITION AND JUDGMENT AGREEMENTS ARE IMPORTANT

US judgments are not enforceable in China. Also, US extradition warrants are not enforceable in China.

With regards to the Huawei situation, one Hong Kong commentator complained that the United States is not arresting Chinese criminals in the US.  But the reason that the US does not arrest Chinese criminals is that the Chinese government has determined that it does not want to have an international agreement with the United States to allow for mutual enforcement of judgments or mutual extradition warrants for criminals.

Many Chinese commentators may believe that the China does not have to follow the international agreements that it signed because it is a developing country and/or the agreements are unequal treaties.  Other countries, such as US, Canada, EU, Japan, Korea, and even Taiwan, however, take these international agreements very seriously and understand the importance of a country keeping its word in international negotiations.

These countries have mutual agreements with the United States to enforce judgments and extradite criminals.  This is called the Rule of Law.

The United States does intend to extradite Chinese individuals, who break US laws, to face judgment in US courts.  As Assistant Attorney General Brian A. Benczkowski of the Justice Department’s Criminal Division stated on November 1, 2018 with regard to extraditing Chinese individuals for stealing US Intellectual Property:

“The Criminal Division fully supports the Attorney General’s initiative to counter Chinese economic aggression.   Every day, the Chinese engage in efforts to steal American trade secrets and commit other illegal acts intended to enrich their economy at the expense of American businesses. . . .

We see it time and again: Chinese actors have stolen wind turbine technology in Wisconsin, agricultural research in Kansas, cancer drug research in Pennsylvania, and software source code in New York.

Wherever we see examples of this kind of criminal behavior, the Department will investigate it and prosecute it to the fullest extent possible. We also will continue to work hard to ensure that offenders face justice in U.S. courts.

Our Office of International Affairs is the focal point for all extraditions around the globe. In just the past few years, the Department has successfully extradited nine Chinese individuals, including two for theft of trade secrets. Long prison terms for these offenders help to create much-needed deterrence. . . .”

Emphasis added.

US JUDGMENTS NOT ENFORCEABLE IN CHINA GIVE CHINESE COMPANIES AND INDIVIDUALS A FALSE SENSE OF SECURITY

But the Chinese government’s decision not to have any agreement with the United States or other countries with regards to the enforcement of judgments or extradition warrants also gives Chinese individuals a false sense of security.

The US government cannot touch me because I am in China Ha Ha.  Chinese companies, however, are no longer small or even medium companies in the Chinese countryside.  Many Chinese companies, such as Huawei, are multinational companies and in Huawei’s case with operations in over one hundred countries.  As soon as the Chinese individual takes a step out of China, however, he or she can be arrested.  You can run, but eventually you cannot hide from US extradition warrants and judgments.

Ms. Meng Wanzhou knew she was under criminal indictment in the United States.  She probably had even seen the indictment.  Ms. Meng also has a husband and several houses in Vancouver, Canada.  One of her children is going to school in Boston, Massachusetts.  As soon as Ms. Meng decided to visit her family outside of China, she is a target.  She, therefore, should have taken the criminal indictments very seriously.

Apparently, Huawei has now hired two very large US law firms to defend itself and hopefully Ms. Meng in the US.  Ms. Meng needs a very good US criminal lawyer because in all probability Canada will extradite Ms. Meng to face criminal proceedings.

THE CHARGES AGAINST HUAWEI AND MS. MENG ARE SERIOUS –BANK FRAUD AND VIOLATIONS OF IRAN SANCTIONS

One key point to keep in mind is that like ZTE, Huawei uses US semiconductor chips and other high technology in its products.  Selling Huawei phones to Iran with American semiconductor chips in them is a violation of the US law regarding exports to Iran.

On December 9, 2018, the Wall Street Journal in an article entitled “Silicon Valley Helped Build Huawei Washington Could Dismantle It” stated that Silicon Valley giants, such as Intel, Broadcom and Qualcomm, are supplying $10 billion in high tech products, including semiconductor chips, every year.  As the article states:

“These interdependencies show how any U.S. actions against Huawei for alleged sanctions violations, which could go as far as a ban on it buying from American suppliers, could devastate Huawei’s operations, and curtail business for U.S. tech companies.”

Moreover, the key allegation against Ms. Meng is bank fraud.  As the Wall Street Journal explained on December 10th in an article entitled “Two British Banks Ensnared in Huawei Dispute”:

“To comply with banking and anti-money-laundering laws, banks must collect information from clients on their business and financial activities, and do additional due diligence and monitoring of high-risk clients. But in a twist to the usual narrative, the banks in this matter haven’t been accused of any wrongdoing and are instead portrayed as victims in court filings.

The court filings in Canada allege that at least three other global banks were misled by Huawei employees and representatives about the relationship between Huawei and Skycom.

One filing describes an August 2013 meeting and presentation by Ms. Meng to an executive at one bank—identified Friday as HSBC by Ms. Meng’s lawyer. Ms. Meng came to the meeting with an English interpreter and a PowerPoint presentation written in Chinese, and made a series of statements.

In an English translation delivered to the HSBC executive soon after, Ms. Meng stated in the presentation that Huawei complied with international sanctions laws and had sold shares it previously held in Skycom. The relationship was one of “normal business cooperation,” Ms. Meng stated, according to the filing.

Her lawyer said Friday the idea Ms. Meng engaged in fraud would be “hotly contested.”

As a fast-expanding telecom giant, Huawei’s access to global banks was paramount in helping it supply equipment across dozens of countries’ telecom networks. For the banks, the growing Chinese client produced a steady stream of fees. Dealogic data shows HSBC and Standard Chartered were two of Huawei’s biggest financing partners, with top roles on most of its $17 billion in loan and bond sales in the past decade. Citigroup Inc., Australia & New Zealand Banking Group Ltd., DBS Group Holdings Ltd. and Bank of China were among the other main arrangers.  . . .

Canadian prosecutors said the alleged conspiracy between Ms. Meng and other Huawei representatives to mislead banks was driven by the company’s need to move money out of sanctioned countries through the international banking system.

In the court filings, authorities alleged that the misrepresentations by Huawei to banks “violated their internal policies, potentially violated U.S. sanctions laws and exposed the banks to the risk of fines and forfeiture.” Banks carried out transactions for Huawei through New York and Europe, exposing them to “serious harm” and decisions made without knowing Huawei’s true risk, the filings said.”

As the Wall Street Journal explained on December 10 in an article entitled “Arrest of Huawei CEO Hinges on Offshore Puzzle”:

“Ms. Meng said she had served on the Skycom board to ensure it complied with trade rules, according to newly released defense filings that cite the 2013 PowerPoint presentation to HSBC Holdings Ltd.

Ms. Meng’s lawyer said Friday that she and Huawei severed ties to Skycom in 2009 and can’t be held responsible for its activities in the years that followed.

U.S. prosecutors say Skycom remained under Huawei’s control; between 2010 and 2014, they say, Skycom was used as a front for Huawei’s dealings with Iran in an arrangement that duped banks into approving millions of dollars in transactions that violated sanctions.

Canadian officials arrested Ms. Meng, the 46-year-old daughter of Huawei’s billionaire founder Ren Zhengfei, on Dec. 1 at the request of the U.S., which is seeking her extradition to face multiple criminal charges that each carry up to 30 years in prison, a move that has enraged the Chinese government.  . . .

The case could hinge on a large piece of the Skycom puzzle: Who ultimately controlled the company after 2009?

The answer is shrouded in mystery in part because of the opaque ownership of Skycom during the time Ms. Meng served on its board. A Wall Street Journal examination of Hong Kong corporate records found that Canicula Holdings Ltd., a company registered in the Indian Ocean island nation of Mauritius, bought Skycom from a Huawei subsidiary in November 2007.  Canicula retained ownership until Skycom was dissolved last year. . .

Skycom was registered in Hong Kong in 1998 by people whose names matched those of Huawei executives, according to corporate records. The Chinese city is one of the world’s easiest places to set up businesses, allowing companies to register with minimal documentation in as fast as a day and for as little as a few hundred U.S. dollars.

Unlike some corporate havens, Hong Kong records show directors and provide other basic information.

In the decade before Ms. Meng joined, Skycom had six directors. The names of five of them and another person identified as an early shareholder match the names of executives who worked at Huawei.

By the time Ms. Meng was named director in 2008, corporate filings show that the shares in Skycom owned by Hua Ying Management Co. Ltd., a wholly owned unit of a Huawei investment company, had been transferred to Canicula.

Ms. Meng’s lawyers said Skycom was sold in 2009, without specifying who bought it. U.S. authorities said in their indictment against Ms. Meng that Huawei continued to control Skycom after that year, and that Skycom employees were also Huawei staffers. Skycom workers used Huawei email addresses and badges, official Skycom documents bore the Huawei logo, and multiple Skycom bank accounts were controlled by Huawei employees, court documents say.

Employees in Iran used different sets of stationery stating “Huawei” or “Skycom” for different business purposes, according to court documents.

The Wall Street Journal reported in 2011 that an employee at an accounting firm listed in Skycom’s Hong Kong records said Huawei owned the company.

In court documents including an extradition request to Canada, U.S. prosecutors allege that multiple banks engaged in millions of dollars of transactions between 2010 and 2014 that they wouldn’t have otherwise been involved with as a result of Ms. Meng’s misrepresentations.”

But who brought Huawei to the attention of the US government—Hong Kong Shanghai Bank Corp.  As stated in the December 6. 2018 Dow Jones Newsletter:

“A federally appointed overseer at HSBC Holdings PLC flagged suspicious transactions in the accounts of Huawei Technologies Co. to prosecutors seeking the extradition of the Chinese company’s finance chief, people familiar with the matter said.

A monitor charged with evaluating HSBC’s anti-money-laundering and sanctions controls in recent years relayed information about the Huawei transactions to federal prosecutors in the Eastern District of New York, the people said . . .

The Journal reported in April that the Justice Department had launched a criminal probe into Huawei’s dealings in Iran, following administrative subpoenas on sanctions-related issues from both the Commerce Department and the Treasury Department’s Office of Foreign Assets Control.

HSBC in 2012 agreed to pay the U.S. $1.9 billion and enter into a five-year deferred- prosecution agreement over its failure to catch at least $881 million in drug- trafficking proceeds laundered through its U.S. bank and for concealing transactions with Iran, Libya and Sudan to evade U.S. sanctions. . . .”

Now the other shoe is dropping as the Wall Street Journal reported on December 20, 2018 in an article entitled “Some Global Banks Break Ties with Huawei”, these same foreign banks are now severing ties with Huawei because there is simply too much risk:

“Huawei Technologies Co., targeted as a national security threat by the U.S. and other governments, faces a new risk: reduced access to the global financial system.

Two banks that helped power the Chinese company’s rise as a global technology supplier, HSBC Holdings and Standard Chartered PLC, won’t provide it with any new banking services or funding after deciding that Huawei is too high risk, people familiar with those decisions said.

While HSBC made its decision last year, Standard Chartered moved more recently as concerns about Huawei escalated this year from a Justice Department investigation into whether the company violated U.S. sanctions on Iran, some of the people said. . . .

Huawei, active in about 170 countries, relies on international banks to manage cash, finance trade and fund its operations and investments. For more than a decade, HSBC, Standard Chartered, and Citigroup plugged Huawei into the global financial system as it entered new markets, providing it with everything from foreign currencies to bond funding from Western investors. Chinese banks finance Huawei in some markets but don’t have the reach to service it globally.

Standard Chartered recently decided it had to sever business with Huawei, people familiar with the matter said. Its relationship with the company dates back to the 2000s, and includes providing regional and global cash pools that free up excess cash in local Huawei units and let it pay suppliers in multiple currencies.

HSBC stopped working with Huawei last year, people familiar with the matter said, after the bank and a court-appointed monitor flagged suspicious transactions by the company to U.S. prosecutors in 2016. According to Canada court filings, HSBC was one of at least four global banks that Ms. Meng or other Huawei executives allegedly misled about Huawei’s ties to Skycom Tech, a Hong Kong company operating in Iran. The bank is still a mortgage lender on two homes Ms. Meng and her husband own in Vancouver, according to Canada property records. . . .

Other banks that have provided funding or services to Huawei, including JPMorgan Chase & Co., Australia & New Zealand Banking Group Ltd. and ING Group NV, declined to comment on whether they would enter into new business. An ANZ spokesman said it takes its due diligence responsibilities very seriously and has detailed policies and processes in place for use when engaging clients. A spokesman for ING, whose subsidiary Bank Mendes Gans runs a cash pool for Huawei in Europe, said the bank takes its sanctions policy extremely seriously and continually assesses clients for risks.”

Indictments are very serious legal problems that cannot simply be ignored because the individual thinks he or she is a high level Chinese official and that will protect him or her from arrest. High Level Chinese Government and Companies do not get a pass from US and other countries laws and regulations because they are from China.

On December 17, 2018, the Canadian Press in an article entitled “Freeland says corners could not be cut with U.S. arrest request of Huawei exec” stated:

“Cutting corners to avoid arresting a Chinese executive at the request of the Americans simply was not an option to keep Canada out of a difficult political situation, Foreign Affairs Minister Chrystia Freeland said Monday.

In an interview with The Canadian Press, Freeland said that type of tactic would erode Canada’s commitment to the rule of law at a time when it is under threat across the globe.

“I think people need to be very careful when they start to suggest that corners be cut when it comes to the rule of   law and when it comes to international treaty obligations,” said Freeland.

“That is one of the core foundations of everything that’s great about our country, one of the core foundations of our democracy,” she added.

“It’s not an accident that among our heroes are the RCMP.” . . . .

Freeland rejected that notion outright, saying it would undermine Canada’s credibility with other countries, including Canada’s “extradition partners.”

The Chinese government and state-run media have vilified the Canadian decision to arrest Meng, and ridiculed the rule-of-law argument. U.S. President Donald Trump also undermined Canada’s position when he mused in  an interview last week he might intervene in the Meng case if it would help him get a trade deal with China.

“You might call it a slippery slope approach; you could call it a salad bar approach,” Freeland said. “The rule of law is not about following the rule of law when it suits you.”

But there are probably bigger political issues when it comes to Huawei.  On December 14th, Bill Bishop, a China expert, reported in his Sinocism Axios newsletter that there is a real campaign to kill Huawei’s operations in many countries.  Mr. Bishop cited to a December 13th article from the Sydney Morning Herald in Australia, entitled “How the “Five Eyes’ cooked up the campaign to Kill Huawei” which states:

“In the months that followed that July 17 dinner, an unprecedented campaign has been waged by those present – Australia, the US, Canada, New Zealand and the UK – to block Chinese tech giant Huawei from supplying equipment for their next-generation wireless networks. . . .

Not all agreed to speak publicly about China when they returned home, but all were determined to act. And the Five Eyes network would include allies like Japan and Germany in the conversation.

This coming in from the cold was viewed as a countermeasure to China and its many proxies, who have long argued fears over its rising power and influence were a fiction, or worse still, signs of xenophobia.

Since that July meeting there has been a series of rare public speeches by intelligence chiefs and a coordinated effort on banning Huawei from 5G networks. It began with one of Malcolm Turnbull’s last acts as Prime Minister.

The Sunday before he was deposed Turnbull rang the US President Donald Trump to tell him of Australia’s decision to exclude Huawei and China’s second largest telecommunications equipment maker ZTE from the 5G rollout.

Australia’s statement on the rules it would apply to building next-generation wireless networks was released on August 23 and largely lost in the leadership maelstrom.

Huawei was not named but it ruled out equipment being supplied by “vendors who are likely to be subject to extra judicial directions from a foreign government”. . . .

Washington’s sharp focus on Beijing plays into Trump’s obsession with trade wars but it would be wrong to think it’s solely driven by the President. Over the past two years Republicans and Democrats in Congress and the Departments of Defense, State and the security agencies have come to the conclusion China is a strategic threat.

US prosecutors have filed charges against Chinese hackers and, in an audacious sting in April, American agents lured Chinese Ministry of State Security deputy director Yanjun Xu to Belgium, where he was arrested for orchestrating the theft of military secrets.

There is also speculation further indictments are imminent over a concerted Chinese hacking campaign known as “Operation Cloud Hopper”, which is believed to have penetrated networks across the globe, including Australia.

In addition the White House used its bi-annual report on China, last month to say Beijing had “fundamentally” failed to change its behavior around cyber espionage giving it unfair access to intellectual property, trade secrets, negotiating positions and the internal communications of business.

The report added weight to revelations in The Age and Sydney Morning Herald the same week that China had diverted internet traffic heading to Sydney and its peak security agency had overseen a surge in attacks on Australian companies.

This industrial scale cyber theft is just part of a form guide which convinced the Five Eyes intelligence chiefs that Beijing would not hesitate to recruit Huawei to its cause and the company would have no choice but to comply.

All the evidence before the spy bosses at the dinner in Canada pointed to a rising superpower mounting the most comprehensive campaign of espionage and foreign interference that any had witnessed.

The Party was aggressively exporting a worldview that was hostile to democracy and actively sought to undermine it.

A new Great Game was afoot and the West had been slow to act. But it is acting now.”

Although the press has been focused on China cyber hacking US and other Western targets, what goes around comes around.  The Chinese government and companies must expect many other countries, including the US, EC, Australia, Canada, Japan and other countries, to be cyber hacking China.  How did the US government get internal company documents of ZTE to go after it for sales to Iran of US technology?  What evidence does the United States and other countries have on Huawei?

In n October 19, 2915, blog post . I made this point citing testimony of James R. Clapper, Director of National Intelligence under President Obama.  More specifically, on September 29, 2015, in response to specific questions from Senator Manchin in the Senate Armed Services Committee, James R. Clapper, Director of National Intelligence, testified that China cyber- attacks to obtain information on weapon systems are not cyber- crime. It is cyber espionage, which the United States itself engages in. As Dr. Clapper stated both countries, including the United States, engage in cyber espionage and “we are pretty good at it.” Dr. Clapper went on to state that “people in glass houses” shouldn’t throw stones. See http://www.armed-services.senate.gov/hearings/15-09-29-united-states-cybersecurity- policy-and-threats at 1 hour 8 minutes to 10 minutes.

In response to a question from Senator Ayotte, Director Clapper also specifically admitted that the attack on OPM and theft of US government employee data is state espionage and not commercial activity, which the US also engages in. See above hearing at 1 hour 18 and 19 minutes.

But when the Chinese government cyber hacks US companies to obtain trade secrets and other intellectual property for commercial gain, that is another matter.  That is the core of the cyber hacking Agreement that President Xi and President Obama signed and the core of the Section 301 case.

But James Clapper’s testimony shows that when the Chinese government plays cyber hacking games, the US and many other governments will cyber hack China and its companies back and they are pretty good at it.  Huawei and ZTE are legitimate espionage targets because of their relationship to the Chinese military and their evasion of Iran Sanctions and US export control laws.

The US government, I am pretty sure, will cyber hack companies if it leads to a Justice Department indictment for criminal activity.  The US will not cyber hack to turn over commercial information to a US competitor, but they will cyber hack when it is in the interest of the US government to do so and that means criminal prosecution.  So, officials in those Chinese companies must take care.

And that brings us to the recent Justice Department indictments against Chinese individuals for cyber hacking for commercial gain.

MORE JUSTICE DEPARTMENT INDICTMENTS AGAINST CHINESE GOVERNMENT’S CYBERHACKING AND IP THEFT

In my last blog post, I stated that although the Chinese government denies, denies and insists that Chinese companies do not steal US IP and then brags about stealing IP, the Justice Department disagrees and has taken these issues to another level—criminal investigations resulting in prison time.  On November 1, 2018, Attorney General Jeff Sessions announced a new case and a new initiative to combat Chinese economic espionage for stealing IP on semiconductor technology from Micron.  The Justice Department statements related to those indictments are attached, JUSTICE DEPARTMENT ANNOUNCEMENT IP THEFT SESSIONS ANNOUNCEMENT NEW CHINA INITIATIVE IP THEFT ANOTHER JUSTICE DEP ANNOUNCE IP THEFT.  This China initiative began under the Obama Administration and has bipartisan support.

On December 20th, the Justice Department raised the issue even higher issuing an attached announcement, JUSTICE DEPARTMENT INDICTMENT AGAINST CYBER HACKINGw, of new indictments stating:

Two Chinese Hackers Associated With the Ministry of State Security Charged with Global Computer Intrusion Campaigns Targeting Intellectual Property and Confidential Business Information

Defendants Were Members of the APT 10 Hacking Group Who Acted in Association with the Tianjin State Security Bureau and Engaged in Global Computer Intrusions for More Than a Decade, Continuing into 2018 . . . .

The unsealing of an indictment charging Zhu Hua (朱华), aka Afwar, aka CVNX, aka Alayos, aka Godkiller; and Zhang Shilong ( 张 士 龙 ), aka Baobeilong, aka Zhang Jianguo, aka Atreexp, both nationals of the People’s Republic of China (China), with conspiracy to commit computer intrusions, conspiracy to commit wire fraud, and aggravated identity theft was announced today. . . .

Zhu and Zhang were members of a hacking group operating in China known within the cyber security community as Advanced Persistent Threat 10 (the APT10 Group).   The defendants worked for a company in China called Huaying Haitai Science and Technology Development Company (Huaying Haitai) and acted in association with the Chinese Ministry of State Security’s Tianjin State Security Bureau.

Through their involvement with the APT10 Group, from at least in or about 2006 up to and including in or about 2018, Zhu and Zhang conducted global campaigns of computer intrusions targeting, among other data, intellectual property and confidential business and technological information at managed service providers (MSPs), which are companies that remotely manage the information technology infrastructure of businesses and governments around the world, more than 45 technology companies in at least a dozen U.S. states, and U.S. government agencies. The APT10 Group targeted a diverse array of commercial activity, industries and technologies, including aviation, satellite and maritime technology, industrial factory automation, automotive supplies, laboratory instruments, banking and finance, telecommunications and consumer electronics, computer processor technology, information technology services, packaging, consulting, medical equipment, healthcare, biotechnology, pharmaceutical manufacturing, mining, and oil and gas exploration and production. Among other things, Zhu and Zhang registered IT infrastructure that the APT10 Group used for its intrusions and engaged in illegal hacking operations.

“The indictment alleges that the defendants were part of a group that hacked computers in at least a dozen countries and gave China’s intelligence service access to sensitive business information,” said Deputy Attorney General Rosenstein. “This is outright cheating and theft, and it gives China an unfair advantage at the expense of law-abiding businesses and countries that follow the international rules in return for the privilege of participating in the global economic system.”

“It is galling that American companies and government agencies spent years of research and countless dollars to develop their intellectual property, while the defendants simply stole it and got it for free” said U.S. Attorney Berman. “As a nation, we cannot, and will not, allow such brazen thievery to go unchecked.”

“Healthy competition is good for the global economy, but criminal conduct is not. This is conduct that hurts American businesses, American jobs, and American consumers,” said FBI Director Wray. “No country should be able to flout the rule of law – so we’re going to keep calling out this behavior for what it is: illegal, unethical, and unfair. It’s going to take all of us working together to protect our economic security and our way of life, because the American people deserve no less.”

“The theft of sensitive defense technology and cyber intrusions are major national security concerns and top investigative priorities for the DCIS,” said DCIS Director O’Reilly. “The indictments unsealed today are the direct result of a joint investigative effort between DCIS and its law enforcement partners to vigorously investigate individuals and groups who illegally access information technology systems of the U.S. Department of Defense and the Defense Industrial Base. DCIS remains vigilant in our efforts to safeguard   the integrity of the Department of Defense and its enterprise of information technology systems.”

According to the allegations in the Indictment unsealed today in Manhattan federal court . . . .

Over the course of the MSP Theft Campaign, Zhu, Zhang, and their co-conspirators in the APT10 Group successfully obtained unauthorized access to computers providing services to or belonging to victim companies located in at least 12 countries, including Brazil, Canada, Finland, France, Germany, India, Japan, Sweden, Switzerland, the United Arab Emirates, the United Kingdom, and the United States. The victim companies included at least the following: a global financial institution, three telecommunications and/or consumer electronics companies; three companies involved in commercial or industrial manufacturing; two consulting companies; a healthcare company; a biotechnology company; a mining company; an automotive supplier company; and a drilling company.

The Technology Theft Campaign

Over the course of the Technology Theft Campaign, which began in or about 2006, Zhu, Zhang, and their coconspirators in the APT10 Group successfully obtained unauthorized access to the computers of more than 45 technology companies and U.S. Government agencies based in at least 12 states, including Arizona, California, Connecticut, Florida, Maryland, New York, Ohio, Pennsylvania, Texas, Utah, Virginia and Wisconsin. The APT10 Group stole hundreds of gigabytes of sensitive data and information from the victims’ computer systems, including from at least the following victims: seven companies involved in aviation, space and/or satellite technology; three companies involved in communications technology; three companies involved in manufacturing advanced electronic systems and/or laboratory analytical instruments;   a company involved in maritime technology; a company involved in oil and gas drilling, production, and processing; and the NASA Goddard Space Center and Jet Propulsion Laboratory.   In addition to those   victims who had information stolen, Zhu, Zhang, and their co-conspirators successfully obtained   unauthorized access to computers belonging to more than 25 other technology-related companies involved   in, among other things, industrial factory automation, radar technology, oil exploration, information technology services, pharmaceutical manufacturing, and computer processor technology, as well as the U.S. Department of Energy’s Lawrence Berkeley National Laboratory.

Finally, the APT10 Group compromised more than 40 computers in order to steal sensitive data belonging to the Navy, including the names, Social Security numbers, dates of birth, salary information, personal phone numbers, and email addresses of more than 100,000 Navy personnel.

*              *              *

Zhu and Zhang are each charged with one count of conspiracy to commit computer intrusions, which carries a maximum sentence of five years in prison; one count of conspiracy to commit wire fraud, which carries a maximum sentence of 20 years in prison; and one count of aggravated identity theft, which carries a mandatory sentence of two years in prison. . . .

INTERNATIONAL COALITION TO ISOLATE CHINA ON IP THEFT, FORCE TECHNOLOGY TRANSFER AND CYBER HACKING

As stated in my last blog post, although many Chinese and US commentators believe that the only country pushing back on China in the IP area is the United States, that simply is incorrect.   Many other countries are jumping on the Trump band wagon when it comes to IP violations by the Chinese government.

In fact, these US China trade negotiations are simply a prelude to negotiations China will have with many other countries.  The early 2000 process of China joining the WTO started, not with “multilateral” negotiations of China with many countries.  Instead, first China negotiated a WTO Agreement with the United States and then other countries, including the EC, negotiated a WTO agreement based in large part on the Agreement China had negotiated with the United States.

One should expect to see the same process here.  First China negotiates these issues with the United States and then with many other countries.

As mentioned in the last newsletter, on IP, China will face a united front against IP Theft, Forced Technology Transfer and Cyber Hacking by the US, EC, Canada, Mexico, Japan and probably Korea against it.

CHINESE GOVERNMENT NEEDS A TRADE DEAL BECAUSE MANY PROBLEMS IN THE CHINESE ECONOMY

One reason that the Chinese government has not linked the Meng/Huawei problem with the US trade negotiations is that President Xi and the Chinese government need a deal.  The Chinese economy is hurting, and the situation has gotten much worse and faster than anyone in China predicted.

As my last blog post stated, the Chinese economy appears to be changing from a private economy with a smaller state-owned economy to an economy dominated by State-Owned companies.  The Chinese saying has changed from Guo Tui Min Jin to Guo Jin Min Tui.

Private entrepreneurs in China are reportedly facing taxes as high as 60%.  When the private entrepreneurs cannot pay their taxes, the Government simply buys the company out and takes over.  80% of Chinese employees, however, are employed by the private sector.

Recently, the Chinese government has stated that in 2019 it will cut taxes and pour more money into the system.  But the problem is that many in China do not believe the Chinese government.

On December 20, 2018, in an article entitled, China stock market meddling will be reduced after bad year, vows Beijing” the South China Morning Post stated:

“Financial Stability and Development Commission, part of the People’s Bank of China, says the heavy hand of intervention will be replaced by the light touch China pledges to attract more funds into stocks after the market reported one of the world’s worst performances in 2018

China’s heavy-handed intervention in stock trading will cease and investment funds will be encouraged to buy into its equity market, as Beijing hopes to boost a stock market that has been among the world’s worst performers this year.

The Financial Stability and Development Commission, part of the People’s Bank of China, announced on Thursday that the world’s second largest economy must fully implement “market principles” to “reduce administrative intervention in stock trading”.

The decision followed a meeting with the country’s financial regulators and major banks, brokerage houses and fund managers, chaired by deputy central bank governor Liu Guoqiang.

The conference agreed that China must follow “international practices” to cultivate “medium- and long-term investors” as well as allow various new asset managers access to the capital market.

It was not enough to boost market sentiment immediately, as the benchmark Shanghai Composite Stock Index closed on Thursday at a two-month low.

Beijing’s efforts to draw fresh funds into stocks may not work, due to weakening confidence in China’s economic growth outlook, according to Hao Hong, managing director and head of research at Bocom International in Hong Kong.

“Beijing has eased the intensity of its crackdown on shadow banking, and has pumped ample liquidity into the interbank market. But the money is just circulating between banks [and not reaching the real economy],” he said.

“There is no sign of an economic rebound in the near term.”. . .  .

China’s benchmark Shanghai stock index has so far lost 25 per cent in 2018. Compared to its peak in the summer of 2015, the index has lost more than 50 per cent, and China’s stock market capitalization has fallen below that of Japan’s.

In fact, the Chinese stock market has fallen like a rock and many average Chinese simply do not trust it anymore.

On December 21, 2018 the Epoch Times in an article entitled “ China May Be Experiencing Negative GDP Growth” reported on a December 16 speech by Xiang Songzuo, Deputy Director and Senior Fellow of the Center for International Monetary Research at China’s Renmin University, who reportedly has stated that the Chinese stock market is looking like the US stock market in 1929 just before the Great Depression:

Xiang challenged the figure given by the National Bureau of Statistics, which claims that China’s rate of GDP growth is at 6.5 percent. According to some researches, Xiang said, the real growth rate could be just 1.67 percent, while more dismal estimates say that China’s economy is actually shrinking.

In his speech, Xiang said that the Chinese regime leadership had made major miscalculations, especially in terms of the Chinese Communist Party’s (CCP) stance in the Sino-U.S. trade war. He criticized propaganda slogans aired by Party- controlled mass media, such as “The Americans are lifting rocks only to have them smash on their own feet,” “China’s victory is assured,” or “China will stand and fight” as being overly confident and ignorant of the real difficulty that the country faces.

Beyond the CCP’s stubborn attitude towards U.S. demands, a second cause for the recent downturn in the Chinese economy was the severe hit to private enterprises this year, Xiang said. Private investment and investments into private enterprises have slowed sharply, severely impacting confidence among entrepreneurs.

Various official statements implying the eventual elimination of private business and property have reduced private sector confidence. This includes the idea, put forward by some Party-backed scholars, that the market economy has already fulfilled its role and should retreat in favor of planned, worker-owned economics.

Xiang said: “This kind of high-profile study of Marx and high-profile study of the Communist Manifesto, what was that line in the Communist Manifesto? The elimination of private ownership—what kind of signal do you think this sends to entrepreneurs?”

Chinese law, social governance, and state institutions are rife with their own problems, he said. Xiang noted that even on the 40th anniversary of China’s “reform and opening up”—the term of the economic reforms started by former CCP leader Deng Xiaoping—current leader Xi Jinping still had to explicitly suggest greater protections for individual and corporate property.

Xiang said that a huge challenge for China is the Sino-U.S. trade war. He believes that it is no longer a trade war, but a serious conflict between the Chinese and American systems of values. The China-U.S. relationship is at a crossroads, he said, and so far there has been no solution found to resolve their differences.

In the short term, China faces drops in consumption across the board, from auto sales to real estate. Exports are also hard-hit due to the trade war and the gradual shift in the global supply chain.

Xiang criticized the Chinese regime’s reliance on increasing domestic consumption in order to keep the economy growing. Falling investment cannot be offset by consumption.

Throughout 40 years of market economic reforms, Xiang said, Chinese consumption patterns have demonstrated five phases. The first was to satisfy the demand for basic necessities like food and clothing; the second to satisfy demand for the “three new must-have items” (watches, bicycles, and radio sets); the third to supply non-essential consumer goods; the fourth to match demand for automobiles, and the fifth being real estate consumption.

However, each of these phases have all but come to an end. The Chinese authorities are hard-pressed to stabilize the exchange rate, foreign exchange reserves, and housing prices, Xiang said. Given these challenges, it will be even more difficult to stabilize investment, exports, the stock market, and employment rate.

Xiang said that in the first three quarters of 2018 before October, corporate bond defaults have exceeded 100 billion yuan ($14.51 billion). According to official data, the corporate defaults will exceed 12 billion yuan ($1.74 billion) this year, while a large number of enterprises have gone bankrupt.

Cao Dewang, a Chinese billionaire entrepreneur and the chairman of Fuyao, one of the largest glass manufacturers in the world, said that now a large number of enterprises have closed, as well as state-owned enterprises. Bohai Steel Group Company Limited, one of the world’s top 500 enterprises, went bankrupt. Its liability ratio reached 192 billion yuan ($27.86 billion).

Surging local Chinese government debt is another source of crisis. According to the National  Audit Office, local authorities owed 17.8 trillion yuan ($2.58 trillion), but He Keng, deputy director of the Financial and Economic Affairs Committee with China’s National People’s Congress, said that the real figure is 40 trillion yuan (about $5.8 trillion).

Xiang warned that China’s poorly performing stock market has come to resemble conditions during the Wall  Street Crash of 1929.

The devastating Wall Street stock market crash lasted for more than a decade, with most stocks falling 80 or 90 percent, Xiang said. The stocks of 83 firms fell by over 90 percent, 1,018 fell by over 80 percent, 2,125 by over 70 percent, and 3,150 by around 50 percent.

While unsound regulatory policy has exacerbated the problems, Xiang does not believe they are the underlying cause of the developing crash.

“Look at our profit structure,” he said. “Frankly speaking, China’s listed companies don’t really make money. Then who has taken the few profits made by China’s more than 3,000 listed companies? Two-thirds have been taken by the banking sector and real estate. The profits earned by 1,444 listed companies on the SME board and growth enterprise board are not even equal to one and half times the value of the Industrial and Commercial Bank of China. How can this kind of stock market become a bull market?”

Xiang made reference to a report comparing the profitability of Chinese and U.S. companies. American listed companies are in the billions, but among numerous Chinese tech and manufacturing companies, only one—Huawei—had profits in excess of $10 billion, but it was not a listed company.

The root problem concerning the Chinese economy, Xiang said, was that the majority of Chinese businesses rely on arbitrage, or taking advantage of price differences between markets, to make profits.

Official data claims that in the past ten years, IPOs (initial public offerings or stock market launches) have increased by more than 9 trillion yuan ($1.31 trillion), Xiang said. “Forty percent of it went to the stock market, speculation, and financial companies, but not investment into main businesses. Then can this be considered a good situation for listed businesses? Now you can say goodbye to the equity pledges, game over.”

“I’m acquainted with many bosses of listed companies. Frankly speaking, quite a few of them didn’t use their equity pledge funds to do real business, but just play at arbitrage,” he said. “They have many tricks: our listed companies buy financial management firms and housing. The government makes official announcements saying that our listed companies invested one to two trillion yuan in real estate. Basically China’s economy is all dealing with virtual money, and everything is overleveraged.”

“Starting in 2009, China embarked on a path of no return. The leverage ratio has soared sharply. Our current leverage ratio is three times that of the United States and twice that of Japan. The debt ratio of non-financial companies is the highest in the world, not to mention real estate,” he said.

As the economic downturn pressure is huge, the authorities have resorted to their old methods: loosening monetary policy, employing radical credit schemes, loosening fiscal policies, and using radical capital policies, said Xiang.

However, he thinks that the short-term adjustment of credit and currency cannot fundamentally solve the economic imbalances and gaps in development mentioned above.

“We are still trapped within the box of the old policy,” he said. “The key to whether transformation will be successful is the vitality of private enterprises—that is, whether policy can stimulate corporate innovation. We have been making a game of credit and monetary tools for so many years; isn’t this the reason we are saddled with so many troubles today? Speculation has driven housing prices so high.”

The core challenge facing private enterprises is not financing difficulty, though there are problems in this area, Xiang said. The fundamental problem is fear of unstable government policy.

“The leaders in the State Council said it clearly in the meeting of the Standing Committee: in China, the government is what can be least trusted. Therefore, in order to solve the debt problem, first, the debts that the government owes businesses need to be resolved, followed by the problem of state-owned enterprises owing private enterprises, and then that of large private enterprises owing smaller ones,” he said.”

Mr. Xiang’s speech dovetails what I have heard from friends who recently returned from China.  Their friends in China have told them that management in China companies has been telling its workers to be prepared to “chi ku” eat bitter, for the next ten years because of the poor economy and save their money.  Saving money in China does not result in increased consumption.

The problem with the Chinese government’s policy of stealing Intellectual Property is it sends a very clear message to Chinese entrepreneurs and its own inventors—your work, your inventions mean nothing because everything is owned by the State.  With Chinese scientists on average being paid $85,000 a year from the South China Morning Post and a campaign of belittling intellectual property, how can China grow and prosper?

That is the real problem facing China.  The Chinese government needs a trade deal before true disaster hits.

QUARTZ SURFACE PRODUCTS ANTIDUMPING AND COUNTERVAILING DUTY CASES—ITC QUESTIONNAIRES

We are in the process of representing a substantial number of US importers and fabricators, US producers of downstream products, in the Quartz Surface Products from China Antidumping and Countervailing Duty case.  Quartz Surface Products are used to produce kitchen countertops, shower stalls and many other downstream products.

The Commerce Department recently issued a critical circumstances determination exposing thousands of importers to millions of dollars in liability and bankruptcy in a situation in which the US International Trade Commission (“ITC”) goes no critical circumstances in over 90% of the cases.

Cambria, the Petitioner in the case, has taken the position that it not only represents the producers of the slab, the raw material, but also all the producers of the downstream products, the fabricators.  We have learned that there are more than 4,000 fabricators of the downstream producers with 1000s of jobs at stake.  Cambria essentially argues that it is the sole representative of an industry with more than 4,000 companies.

Cambria’s objective in this case is very clear—drive up the prices of the raw material so as to drive out the fabricators, the downstream producers, all 4,000 of them.  We are working to include the fabricators in the domestic industry, but the fabricators have to be willing to answer the ITC questionnaires so as to have their voices heard.

Attached are the ITC questionnaires in the case, Foreign producers–Quartz surface products (F) US importers–Quartz surface products (F) US producers–Quartz surface products (F) Questionnaire Transmittal Letter QSP US purchasers–Quartz surface products (F)to my blog, www.uschinatradewar.com.

If anyone would like help with these questionnaires, please feel free to contact me.

If anyone has any questions about the Section 301 case, the trade war with China, IP Protection, Huawei problem, the Quartz Surface Products case, antidumping or countervailing duty law, customs laws and any other trade or customs questions, please feel free to contact me.

Best regards,

Bill Perry

https://uschinatradewar.com/6102-2/

US CHINA TRADE WAR –301 IP CASE NOT GOING AWAY, LONG COLD WINTER US CHINA TRADE RELATIONS, TRUMP XI MEETING DIM HOPE, JUSTICE DEPARTMENT CHINA IP INVESTIGATIONS, 301 PROCEDURES, NEW NAFTA

TRADE IS A TWO-WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 20, 1986

US CHINA TRADE WAR – NOVEMBER 19, 2018

Dear Friends,

This has been a difficult blog post to write because the US China Trade Relations are at a turning point.  Also every day there has been more news, most of it bad.

Although my hope is for a quick settlement, in all probability the US China trade relations are entering a long cold winter. The core of the Section 301 case is the IP Theft and Forced Technology transfers of US/foreign companies by Chinese entities under the direction of the Chinese government.  With no proposals/action plans from the US government and no real proposal from the China side until November 15th, which apparently was just a list of areas for possible negotiation, I do not see how this trade war ends soon.

Although there will be a Trump Xi meeting at the G-20 in Argentina on November 30 to December 1st, as of November 16th, there has been no real movement to a settlement.  Maybe an agenda can be created before the meeting, but usually those agendas are set up at lower level meetings and the issues are preliminarily negotiated before the meeting of the principles.  To date those real negotiations have not taken place.

Although there has been talks with the Treasury Secretary, Treasury will not make the decision in the Trade War embodied in the Section 301 case.  That decision will be made by the United States Trade Representative (“USTR”) Robert Lighthizer and Donald Trump.  To date, there have been no negotiations on the 301 case between China and USTR.

On October 29th, Bloomberg reported that sources in the White House indicated that the if there is no breakthrough at the Trump Xi meeting, President Trump will impose tariffs on the remaining $275 billion in imports from China, in effect, covering all imports from China, which in 2017 were close to $505 billion.

The US China Business Council and the American Chamber of Commerce in Beijing have both told the Chinese government to come up with an action plan to provide the US government to settle this dispute.  This action plan would specifically spell out the steps that the Chinese government is prepared to deal with the core of the Section 301 case  — intellectual property (“IP”) theft and forced technology transfer.  Although I hope that an agreement between the US and China is possible, as indicated below, my partner, Steve Dickinson, who represents many US companies in China, believes that the situation is not likely to change in the near future.

Making it more difficult, on November 13th Vice President Pence told the Washington Post:

In addition to trade, Pence said China must offer concessions on several issues, including but not limited to its rampant intellectual property theft, forced technology transfer, restricted access to Chinese markets, respect for international rules and norms, efforts to limit freedom of navigation in international waters and Chinese Communist Party interference in the politics of Western countries.

If Beijing doesn’t come up with significant and concrete concessions, the United States is prepared to escalate economic, diplomatic and political pressure on China, Pence said. He believes the U.S. economy is strong enough to weather such an escalation while the Chinese economy is less durable.

If the US demands that China, in effect, must concede on every issue and completely change its economy to settle the 301 case, which is not focused on the South China sea and other issues, China will stand up and refuse to back down.

On the other hand, if a proposal to settle IP Theft and Forced Technology Transfer, the core of the 301 case, can come from the Chinese side, there is a chance that the 301 case can be settled.

In addition, IP Theft has risen to another level with the Justice Department initiative below to criminalize the actions and threaten the Chinese companies and the individuals involved with criminal fines and prison time.

If there is no settlement of the IP issue, this trade war will go on and on.  My hope is that the Chinese government makes a pragmatic/practical decision to deal with the IP Theft and forced technology transfer issues and settles this 301 case before the damage becomes too great.

On November 4th, former Treasury Henry Paulson, a true friend of China, at an economic conference in Singapore at which Wang Qishan attended made clear his fear that the US and China are entering into a cold war and “that is why I now see the prospect of an Economic Iron Curtain—one that throws up new walls on each side and unmakes the global economy, as we have known it.”  That statement should make the Chinese government understand how serious this situation is.

Meanwhile, the Chinese government appears to be turning away from the private market and to more of a state-owned market causing many private Chinese companies to look at alternatives in third countries.

Because of this trade war, US importers, US and foreign companies with manufacturing operations in China and even Chinese private companies must make contingency plans to deal with this US China Trade War, which could block all Chinese exports from the US market.  My law firm has set up a new group of consultants in Vietnam, Thailand and Philippines to look for third country sources of supply.  Our lawyers have expertise in drafting contracts to help them import products from those countries and also to set up manufacturing operations in those countries. Products coming from countries, such as Thailand and Philippines, also get an advantage under the US General System of Preferences eliminating normal Customs duties on products, which can range from 4 to 6.5%. This gives those imported products from GSP countries a financial advantage over products from China and elsewhere.

This newsletter will describe the 301 and IP issues in detail.  At the end of the newsletter, the technical details of the Section 301 case will be set up with the three lists and the possibility of filing for a product exclusion request.

Finally, will make some brief comments on the new US Mexico Canada Trade Agreement.

If anyone has any questions, please feel free to contact me.

Best regards,

Bill Perry

THE US CHINA TRADE WAR IS NOT GOING AWAY SOON

To date the Chinese government appears to have dug in its heels, denied any IP theft or forced technology transfer and refused to provide any specific action plan to the US Government to deal with the IP issue.  The November 15th Chinese proposal apparently was just areas for possible future negotiation.

The attached full Section 301 report, USTR FULL 301 REPORT CHINA TECHNOLOGY TRANSFER, lists the IP Agreements between the US and China, which China has not followed through on.  The 301 report is based on studies done by the US China Business Council and the American Chamber of Commerce in China.

I have personally talked to US companies, who have had intensive pressure from Chinese companies to turn over IP.  That pressure from Chinese companies apparently is coming directly from the Chinese government.

Some of those US companies are leaving China.  In fact, because of the Trump tariffs and the IP problems, there are reports that 60% of US companies are planning to move all or some of their production out of China.  The Trump tariffs have been the spark, but the gunpowder is the Chinese government/companies’ aggressive attempts to take US companies’ intellectual property.

The Chinese government may believe that it can weather this trade storm and wait it out.  But my discussions with Chinese companies indicate that it is becoming a long, hard winter.  Despite the tariffs, the US stock market has hit record highs since the Trump election in 2016.  Unemployment is at record low levels.

In contrast, China has seen an enormous drop in the Shanghai stock exchange of 25%.  Although exports are up because the tariffs on the $200 billion are only 10%, many experts are expecting a sharp drop when the tariffs go up to 25% on January 1st.

The US may be hurt by a US China trade war, but all the economic indicators are that China will be devastated. See the November 1st article from the South China Morning Post about the dramatic slowing in the Chinese economy at https://www.scmp.com/news/article/2170966/chinese-manufacturing-activity-slows-more-expected-trade-war-intensifies.

The question for the Chinese government is does China want to be a friendly competitor or a strategic rival bent on becoming the hegemon, which will dominant all of Asia.  My hope is that China wants to join the international community as a friendly competitor.  If China wants to be a friendly competitor, it has to demonstrate a committed policy of rejecting IP theft and forced technology transfer.  Otherwise it will be regarded as an international outlaw and strategic rival, and the US and many countries in the World will push back, devastating the Chinese economy and setting back the Chinese economy by decades.

The question for the Trump Administration is do you want to settle the 301 case and deal with the IP issues or simply use the 301 case as an excuse to shut down all trade with China.

Chinese officials argue that they do not know what US government officials to negotiate with and what the core issues are in the Section 301 case.  The core issues are IP Theft and Forced Technology Transfer.  The US government officials to negotiate with are: President Donald Trump, USTR Robert Lighthizer and possibly President Trump’s son in law, Jared Kushner, who played a pivotal role in negotiating the US Mexico Canada Trade Agreement.  But USTR is the agency in charge of the negotiations and the entity the Chinese government has to negotiate with.  Negotiating with Treasury Secretary Mnuchin is not going to settle the 301 case because that case comes out of USTR.

Moreover, it is not just the US that China has to worry about on intellectual property.  Europe has already agreed to work with the US against China on IP theft and forced technology transfer.  Mexico and Canada will join the Coalition.  Japan will also join because it strongly believes that the Chinese government stole their intellectual property for the bullet train.  This is not a pretty situation for China.

THE IP CORE OF THE 301 CASE AND SIGNED CHINESE IP AGREEMENTS VIOLATED

The core of the Section 301 case is intellectual property, rights which are Constitutionally protected rights.  Stealing intellectual property (“IP”) is piracy, pure and simple.

As the United States Trade Representative states on page 4 of its attached full 301 report, USTR FULL 301 REPORT CHINA TECHNOLOGY TRANSFER:

The Federal Register Notice described the focus of the investigation as follows:

First, the Chinese government reportedly uses a variety of tools, including opaque and discretionary administrative approval processes, joint venture requirements, foreign equity limitations, procurements, and other mechanisms to regulate or intervene in U.S. companies operations in China in order to require or pressure the transfer of technologies and intellectual property to Chinese companies.  Moreover, many U.S. companies report facing vague and unwritten rules, as well as local rules that diverge from national ones, which are applied in a selective and non-transparent manner by Chinese government officials to pressure technology transfer.

Second, the Chinese government’s acts, policies and practices reportedly deprive U.S. companies of the ability to set market-based terms in licensing and other technology- related negotiations with Chinese companies and undermine U.S. companies control over their technology in China. For example, the Regulations on Technology Import and Export Administration mandate particular terms for indemnities and ownership of technology improvements for imported technology, and other measures also impose non- market terms in licensing and technology contracts.

Third, the Chinese government reportedly directs and/or unfairly facilitates the systematic investment in, and/or acquisition of, U.S. companies and assets by Chinese companies to obtain cutting-edge technologies and intellectual property and generate large-scale technology transfer in industries deemed important by Chinese government industrial plans.

Fourth, the investigation will consider whether the Chinese government is conducting or supporting unauthorized intrusions into U.S. commercial computer networks or cyber- enabled theft of intellectual property, trade secrets, or confidential business information, and whether this conduct harms U.S. companies or provides competitive advantages to Chinese companies or commercial sectors.

The Section 301 Report then goes on to list ten IP Agreements the Chinese government signed with the United States from 2010 to 2016, including the recent 2016 agreement between President Xi and President Obama to not require the transfer of technology as a precondition of doing business in China.  See page 8 of the USTR 301 report, which is attached above.

The international IP agreements China signed between 2010 to 2016 are NOT unequal treaties.  These are agreements that the Chinese government negotiated with the US and other foreign countries and then simply refused to follow through on.

See the article from the South China Morning Post on how China’s rampant intellectual property theft overlooked by the US sparked the trade war https://www.scmp.com/magazines/post-magazine/long-reads/article/2170132/how-chinas-rampant-intellectual-property-theft.

Moreover, the argument from some Chinese government officials and academics that China is a “developing” country and does not have to follow the international agreements that it signed is simply ridiculous.  China is now the second strongest economy in the World.

WHY IP PROTECTION SO IMPORTANT FROM THE US POINT OF VIEW

Many do not realize that IP rights, specifically copyrights and patents, are Constitutionally protected rights in the United States.  Article I Clause 8 of the US Constitution states:

“The Congress shall have power: “To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”

When I was in the Commerce Department in the mid 1980s during the Reagan Administration, Commerce Secretary Malcolm Baldrige believed that his job was to protect the crown jewels of American Manufacturing, the High-Tech industry.

In July 2018, USTR Lighthizer at the Senate Appropriations Committee responded to a question from Senator Schatz of Hawaii questioning the 301 case, by strongly stating the importance of protecting US intellectual property for future generations.  See https://www.appropriations.senate.gov/hearings/review-of-the-funding-priorities-for-the-office-of-the-us-trade-representative.

The United States views its high technology as the crown jewels, and crown jewels have to be protected. On June 15th, in the Section 301 case against China’s misappropriation to US intellectual property rights, through the United States Trade Representative (“USTR”), President Trump announced tariffs on $34 billion of Chinese imports.  The USTR announcement announcing the tariffs stated:

“We must take strong defensive actions to protect America’s leadership in technology and innovation against the unprecedented threat posed by China’s theft of our intellectual property, the forced transfer of American technology, and its cyber attacks on our computer networks,” said Ambassador Robert Lighthizer. “China’s government is aggressively working to undermine America’s high-tech industries and our economic leadership through unfair trade practices and industrial policies like ‘Made in China 2025.’ Technology and innovation are America’s greatest economic assets and President Trump rightfully recognizes that if we want our country to have a prosperous future, we must take a stand now to uphold fair trade and protect American competitiveness.”

DENY, DENY DENY—CHINESE GOVERNMENT RESPONSE

Recently, here in Seattle, the head of the San Francisco Chinese Consulate responded to the Section 301 case by simply denying all the allegations.  The Chinese government is not engaged in IP Theft and does not force companies to transfer their intellectual property when in China.

In an August 8, 2018 editorial, “China will not surrender to US threatening tactic”, the Chinese Daily, which is an arm of the Chinese government, stated:

But it created a new tactic of accelerating the trade war while advertising its willingness for talks. The mainstream opinion is that the US wants to use carrot-and- stick diplomacy to bully China into unilateral trade concessions, while some others hold that the hardliners in the White House overwhelm those calling for talks.

However, both groups share the same goal: to defeat China, no matter they prefer trade war or negotiation. But there is no way for them to be satisfied. . . .

But China will eventually defeat the trade blackmail of the US and it is impossible to force China into surrender to the US coercion. . . .

On October 16, 2018, in an editorial entitled “Commentary: Washington’s accusing China of “forced technology transfer” not grounded in facts” the China Daily stated:

BEIJING, Oct. 16 (Xinhua) — In its recent round of mud-slinging against China, the United States has once again resorted to such hackneyed charges as “forced technology transfer” and “intellectual property theft.”

Those allegations are detached from the facts, insulting to China’s technological achievements, and nothing but a pretext for the global hegemon to stymie the ascent of the world’s largest developing country.

China’s remarkable scientific and technological development allows no belittlement. It stems from the hard work of generation after generation of Chinese researchers, and benefits from international cooperation under the country’s long-standing opening-up policy. . . .

Meanwhile, as witnessed by the international community, China has made great strides in formulating and improving its laws and regulations on intellectual property rights (IPR) protection in recent years.

World Intellectual Property Organization Director General Francis Gurry said just two months ago that in the past 40 years, China has established a high-level IPR protection system that regards intellectual property as the driving force for innovation and economic development and treats Chinese and foreign companies equally.  Without any doubt, technology transfer abounds between Chinese and foreign entities, but that is rooted in the transferring parties’ pursuit of maximum profits.

As a matter of fact, U.S. companies have made huge gains in China over recent years from technology transfer and licensing. According to the U.S. Bureau of Economic Analysis, China paid 7.95 billion U.S. dollars in 2016 and 8.76 billion dollars in 2017 to the United States for the use of intellectual property.

Thus, such condemnation of normal commercial practices is a mockery of the spirit of contract. More ironically, one of Washington’s frequently used weapons to curb other countries’ development is to impose high-tech export bans.

Authoritative research reports have repeatedly suggested that should the United States relax its strict restrictions on high-tech exports to China, its trade deficits would decrease significantly. But Washington has continued to be obstinate.

As many have pointed out, the ongoing trade frictions between China and the United States betray Washington’s anxiety over China’s increasing scientific and technological strength.

That angst is self-inflicted. Beijing is committed to peaceful development and win-win cooperation. What’s more, if China and the United States, the top two economies and investors in scientific and technological research on the planet, can join forces, the whole world will benefit, including both countries.

Given that, it is high time that Washington abandon its zero-sum mentality and embark upon the path of win-win cooperation instead.

CHINA’S REASONS FOR NOT GIVING IN ON INTELLECTUAL PROPERTY

But we need to go deeper to understand China’s determination not to give in on the IP issues.  In past newsletters and this newsletter, I have advocated strongly that China needs to negotiate and deal with IP Theft and Forced Technology Transfer Issues.  I know for a fact that this happens in China.

Recently, I gave a speech in Houston, Texas about the Section 301 case.  At the end of the speech, an engineer from an oil refining company talked to me about the IP issue.  She has done projects all over the World.  The engineer told me that she has told her bosses that she refuses to do any more projects in China because of the constant aggressive attempts of the Chinese partners to steal the company’s IP.  Another senior manager at a major high tech company confirmed this point.

We know how the Chinese government helps Chinese companies get the IP.  IP for high technology cannot be sold to China by a service.  The policy of Chinese state-owned companies and Chinese banks, which are owned by the Government, is that the IP must be brought to China.  Then the US company cannot set up a wholly owned subsidiary in China to hold the IP.  No, the US company must have a joint venture, often with a direct Chinese competitor.  Once the Joint Venture is established, the Chinese company simply breaches the IP licensing agreements and takes the IP for the high technology.

Simply denying the IP problems will not solve the Section 301 case and make the tariffs go away.  But my partner, Steve Dickinson, who represents many US companies in China, has told me that the Chinese government cannot give in.  Steve speaks and reads Chinese fluently and follows the Chinese press closely:

“The trade and investment relationship between the U.S. and China is going through permanent change. The current round of tariffs is just the start. As the tariffs fail to bring a resolution, other restrictive measures will be implemented: prohibition on a) sale or license of technology to China, b) on Chinese purchase of U.S. technology companies, c) on education of Chinese students in U.S. schools, d) of hiring of Chinese nationals in U.S. business, and e) on cooperative research programs with Chinese scholars and researchers.

This is the “new normal” in China/U.S. business relations. U.S. companies that do business must adjust to this new normal as quickly as possible. Many companies are waiting to react because they believe that this conflict is just a temporary political problem that will soon blow over. This view is a mistake.

The tariff measures are the first step in a much more general conflict over the entire Chinese system. The U.S. objects to virtually every aspect of the current Chinese economic/trade/investment system. Rather than take on the entire Chinese system as a first step, the current tariff dispute with China has been narrowly defined.

The USTR 301 Report bases the tariffs on two concrete issues: forced technology transfer and IP theft. Rather than respond constructively on how these issues can be resolved, the Chinese government response has been to simply deny every claim in the 301 Report. In its White Paper in response to the 301 Report, the Chinese government flatly denied every claim in the report. On forced technology transfer: it does not happen. Companies that transfer their technology to China do it voluntarily based on their own business calculation. On IP theft: it does not happen and all the accusations of trade secret theft and cyber-hacking are simply lies.

This complete denial of every statement in the 301 Report has been consistently maintained by every layer of the Chinese government. There has been no movement at all. For example, in the forced transfer area, the Chinese government has refused to even consider opening the network, e-commerce and cloud computing markets in China to foreign based businesses. In the IP theft area, the Chinese government has refused to cooperate in investigation and extradition on the recent U.S. indictments in several high profile cases.

In the face of these consistent denials, there is no room now for the Chinese government to back down. There is a reason for this position. The forced transfer and IP “assimilation” regimes are at the core of the Chinese economic system. Any government leader who proposed to change those regimes in a serious and effective way would simply be removed from power. The current leaders of China understand this and that is why they cannot even suggest a compromise on this critical issues that go to the heart of the current Chinese system.

So the only short term resolution of the trade war is for the U.S. trade team to capitulate. The U.S. has capitulated in the past. What reason is there to believe that the U.S. will not capitulate now? The reason the U.S. is not likely to capitulate is that U.S. businesses have waited now for 20 years to see real improvement in the Chinese system. The result has not been improvement. Over the past decade the situation has grown steadily worse. As a result, China has lost its former supporters in the U.S. business community. Since China has lost its main body of support in the U.S., there is no pressure on the U.S. trade team to back down. It is therefore unlikely that they will.

The situation is critical and U.S. businesses that operate in China must begin an analysis on how to deal with the trade situation and then make concrete plans to deal with the impact of the situation on their business operations. Many companies believe that they are faced with a black or white decision: either abandon China or pretend that nothing is happening. This approach is a mistake.

The response is far more complex. Some companies will continue to work with China based on the situation that has been in place for the past decade. For those companies, the major adjustment is that they can quit dreaming that anything will change. For other companies, developing supply relations outside of China will become critical. For other companies, China will no longer be attractive and a move will be required.

What is consistent is that every company that operates in China will be required to evaluate its operations in China under the new normal of current and increasing restrictive trade and investment measures. Some of the analysis that must be performed is:or companies that purchase products from China: how will current and future tariffs impact the business. For some of our clients, the tariffs are largely irrelevant. For others, the impact is severe.

When tariffs have an impact: what can be done? Is an exclusion from the tariffs possible? Will the Chinese factory agree to a price adjustment? Should sales be directed to countries outside the U.S. where tariffs are not imposed.

If the supply chain must be moved to another country, a careful analysis is required. Will you need to build a factory or can you purchase from an existing supplier or contract manufacturer? Is the infrastructure and legal system in the target country adequate for your needs? How long will it take to move and what will be the cost? In the end, after the analysis is complete, the result may be that a move from China is not cost effective.

China currently requires many technology companies to license their technology into China. For example, such licensing is required in the network, cloud, SaaS sector, e-commerce and fin-tech sectors. The Chinese government has made it clear that this policy will not change. Companies in this sector that have held off on China in the hopes of a change in policy must now make a decision: accept the licensing requirement or abandon China as a market.

Many U.S. companies engage in co-development of technology and products in China, working with many types of Chinese entities. Over the past 15 years, the Chinese court system has been receptive to protecting the contractual rights of foreign entities, provided that the contracts are properly drafted. Will this support continue? Or will U.S. companies need to look to different ways to protect their innovations that do not rely on the Chinese legal system?

For U.S. companies that want to sell or license technology to Chinese person, will new rules make that difficult or impossible? For U.S. companies that want to bring in Chinese investment, what will be the impact of restrictions that are currently being proposed. For U.S. companies that rely on hiring large numbers of Chinese professionals, what will be the restrictions. For U.S. education and research institutions that want to work with Chinese researchers, will that be possible? What about Chinese scholars who have become naturalized citizens of other countries: will they also be banned?

The questions above must be faced by every party from the U.S. that works with China in any way. The new normal with China is just that: China will not be permanently cut off from business relations with the U.S. But the nature of the relationship has changed. The situation is fluid and the final configuration of the U.S/China business relationship has not been settled. Businesses that wait until after a final resolution is reached will be left behind.

Now is the time to evaluate and take action.

As explained below, because of the great change in US China trade relations, we are working to help US companies, importers and even Chinese private companies set up operations in third countries, such as Vietnam, Thailand and Philippines.  We now have arrangements with consultants on the ground in these countries to help establish manufacturing operations or develop second sources of supply.On the legal side, we have substantial experience drafting foreign manufacturing agreements and supply agreements in these other countries to help companies wanting to move to a third country or source products from those countries.

See more information below.

To understand why we are so pessimistic of a short term settlement, on November 7th, the China Academy of Social Sciences, which is part of the Chinese government, posted an article on what they continue to pose as the ideal Chinese domestic innovation/assimilation of foreign IP project: the high speed rail/bullet train project: http://ex.cssn.cn/djch/djch_djchhg/zggdxlbdly_91788/The PRC high speed rail project was one of the most notorious examples of IP theft in the modern era. Chinese companies stole from 4 different companies breaching IP license agreements with the European and Japanese companies.  Not only did the Chinese companies break their agreements to purchase foreign technology, they are now attempting to sell their illegal clones right back into foreign markets in competition with the companies from whom they stole the technology.

When challenged by Hitachi and others, the Chinese companies responded:

1). The licenses were unfair, so breach was justified.

2). Foreign patents, other IP and formal license agreements are all just unfair means foreigners use to keep China down.

3). The foreign companies should be happy that China is making cheap imitations, since that expands the market for the high speed rail products.

Books have been written about this project in China, where the perpetrators of the theft are lauded as national heroes. They describe in detail exactly how the foreign companies were tricked into giving away their technology. No one hides what was done. Instead, the Chinese government brags about how smart the Chinese companies were compared to the fool foreign companies who thought that formal licenses, IP registration and the rule of law would protect them. In effect, the Chinese Academy of Social Sciences says what fools the foreign companies are.

Although the Chinese Academy of Social Sciences/the Chinese government may think that stealing foreign IP is the way to go, Japanese companies, such as Kawasaki Heavy, disagree.  In the April article entitled Did China Steal Japan’s High Speed Train, http://fortune.com/2013/04/15/did-china-steal-japans-high-speed-train/, Fortune states:

One China defender recently claimed his countryman’s “bandit innovators” could be good for the world. That was small consolation for the Japanese, who say that China pirated their world-famous bullet train technology.

“Don’t worry too much about Chinese companies imitating you, they are creating value for you down the road,” said Li Daokui, a leading Chinese economist at the Institute for New Economic Thinking’s conference. Such “bandit innovators,” he expanded, would eventually grow the market, leading to benefits for everybody.

Kawasaki Heavy Industries (KHI), maker of Japan’s legendary Shinkansen bullet trains, bitterly disagrees. After signing technology transfers with CSR Sifang, the builder of China’s impressive, new high-speed rail, KHI says it deeply regrets its now-dissolved partnership.

The key point is that the Chinese Academy of Social Sciences/the Chinese government posted its high-speed rail article on November 7th, right in the middle of the trade war and just prior to the Trump/Xi G-20 meeting.

It should be noted that the Chinese approach to IP is directly contrary to the Japanese approach to IP.  In the 1990s, Japanese companies were among the top 10 companies getting US patents with Hitachi getting more patents in some years than IBM.  The Japanese know how to develop IP right—invent and patent.

THE JUSTICE DEPARTMENT DISAGREES—CRIMINAL ECONOMIC ESPIONAGE CASES AGAINST CHINESE COMPANIES AND CHINESE INDIVIDUALS

Although the Chinese government denies, denies and insists that Chinese companies do not steal US IP and then brags about stealing IP, the Justice Department disagrees and has taken these issues to another level—criminal investigations resulting in prison time.  On November 1, 2018, Attorney General Jeff Sessions announced a new case and a new initiative to combat Chinese economic espionage.  In the attached statement, SESSIONS ANNOUNCEMENT NEW CHINA INITIATIVE IP THEFT, Attorney General Sessions stated:

But under President Donald Trump, the United States is standing up to the deliberate, systematic, and calculated threats posed, in particular, by the communist regime in China, which is notorious around the world for intellectual property theft.

Earlier this year, a report from U.S. Trade Representative Robert Lighthizer found that Chinese sponsorship of hacking into American businesses and commercial networks has been taking place for more than a decade and is a serious problem that burdens American commerce.

The problem has been growing rapidly, and along with China’s other unfair trade practices, it poses a real and illegal threat to our nation’s economic prosperity and competitiveness. . . .

From 2013 to 2016, the Department of Justice did not charge anyone with spying for China.

But since the beginning of 2017, we have charged three people with spying for China or attempting or conspiring to do so. And when it comes to trade secret theft, we are currently prosecuting five other cases where the theft or attempted theft was for the benefit of the Chinese government.

In 2015, China committed publicly that it would not target American companies for economic gain. Obviously, that commitment has not been kept.

Just ask GE Aviation, or Trimble, of Sunnyvale, California.

Today I am announcing another economic espionage case against Chinese interests. . . .

I am announcing that a grand jury in San Francisco has returned an indictment alleging economic espionage on the part of a Chinese state-owned, government owned, company, a Taiwan company, and three Taiwan individuals for an alleged scheme to steal trade secrets from Micron, an Idaho-based semi- conductor company.

Micron is worth an estimated $100 billion and controls about 20 to 25 percent of the dynamic random access memory industry—a technology not possessed by the Chinese until very recently.

One of the defendants served as president of a company acquired by Micron in 2013. He left the company   in 2015 and went to work for the Taiwan defendant company—from where he is alleged to have orchestrated the theft of trade secrets from Micron worth up to $8.75 billion.

The Taiwan defendant company then partnered with a Chinese state-owned company—so that ultimately China could steal this technology from the United States and then use it to compete against us in the market. This is a brazen scheme.

If convicted, the defendants face up to 15 years in prison and $5 million in fines. The companies could face forfeiture and fines worth more than $20 billion.

This week the Commerce Department added the Chinese company to the Entity List to prevent it from buying goods and services in the United States, to keep it from profiting from the technology it stole.

And today the Department of Justice is filing a civil action to seek an injunction that would prevent the Chinese and Taiwan companies from transferring the stolen technology, or exporting products based on it to the United States.

We are not just reacting to crimes—we are acting to block the defendants from doing any more harm to our U.S. based company, Micron. . . .

As the cases I’ve discussed have shown, Chinese economic espionage against the United States has been increasing—and it has been increasing rapidly.

We are here today to say: enough is enough. We’re not going to take it anymore.

It is unacceptable. It is time for China to join the community of lawful nations. International trade has been good for China, but the cheating must stop. And we must have more law enforcement cooperation; China cannot be a safe haven for criminals who run to China when they are in trouble, never to be extradited. . . .

I am announcing that I have ordered the creation of a China Initiative led by Assistant Attorney General John Demers, who heads our National Security Division . . . .

This Initiative will identify priority Chinese trade theft cases, ensure that we have enough resources dedicated to them, and make sure that we bring them to an appropriate conclusion quickly and effectively. . . .

This will help us meet the new and evolving threats to our economy. Today, we see Chinese espionage not just taking place against traditional targets like our defense and intelligence agencies, but against targets like research labs and universities, and we see Chinese propaganda disseminated on our campuses.

And so I have directed this initiative to focus on these problems as well and to recommend legislation to Congress if necessary.

China—like any advanced nation—must decide whether it wants to be a trusted partner on the world stage—or whether it wants to be known around the world as a dishonest regime running a corrupt economy founded on fraud, theft, and strong-arm tactics. Our wish is to have a trusted partner.

The President has made clear that this country remains open to friendship and productive relationships with China. Nothing is more important for the world. We want our relationships to improve, not get worse.

But these problems must be solved. These threats must be ended.

This Department of Justice—and the Trump administration—have already made our decision: we will not allow our sovereignty to be disrespected, our intellectual property to be stolen, or our people to be robbed of their hard-earned prosperity. We want fair trade and good relationships based on honest dealing.  We   will enforce our laws—and we will protect America’s national interests.

Emphasis added

For those Taiwan and Chinese individuals that believe that they cannot be touched by Justice Department warrants in the United States, another think coming.  As Assistant Attorney General Brian A. Benczkowski of the Criminal Division stated on November 1, 2018 in the attached statement, JUSTICE DEPARTMENT ANNOUNCEMENT IP THEFT:

The Criminal Division fully supports the Attorney General’s initiative to counter Chinese economic aggression.   Every day, the Chinese engage in efforts to steal American trade secrets and commit other illegal acts intended to enrich their economy at the expense of American businesses. . . .

We see it time and again: Chinese actors have stolen wind turbine technology in Wisconsin, agricultural research in Kansas, cancer drug research in Pennsylvania, and software source code in New York.

Wherever we see examples of this kind of criminal behavior, the Department will investigate it and prosecute it to the fullest extent possible. We also will continue to work hard to ensure that offenders face justice in U.S. courts.

Our Office of International Affairs is the focal point for all extraditions around the globe. In just the past few years, the Department has successfully extradited nine Chinese individuals, including two for theft of trade secrets. Long prison terms for these offenders help to create much-needed deterrence. . . .

Emphasis added.

Although Chinese individuals may not be touched in China, once they leave the country and go to Europe or any other country, Justice Department extradition warrants can easily take hold.  The individual may find himself arrested on entry to Europe or some other country based on a US extradition warrant.

Taiwan individuals are subject to Justice Department extradition warrants, as are Hong Kong individuals.  In an antitrust case for price fixing of LCDs against many Taiwan high tech companies, Taiwan extradited high ranking company officials to the United States to face prison time.  Two executives at AU Optronics were sentenced to three years in Federal Prison and served the time.

As Assistant Attorney General for National Security John C. Demers further stated on November 1, 2018 in the attached statement, ANOTHER JUSTICE DEP ANNOUNCE IP THEFT:

Just two days ago, in United States v. Zhang Zhang-Gui, et al., we charged ten defendants, including co- opted company insiders, working for or acting on behalf of the Jiangsu Ministry of State Security, also known as the “JSSD,” an arm of the Chinese intelligence services. According to the charging documents from the Southern District of California, the defendants conspired to hack U.S. and European defense and aerospace contractors in order to steal information to develop a Chinese version of a commercial airplane turbofan engine.

Just over three weeks ago, in the Southern District of Ohio, we obtained the extradition of a JSSD intelligence officer who was also alleged to have attempted to co-opt an employee of a defense contractor in order to steal trade secrets related to commercial airplane engines.

In September, in the Northern District of Illinois, we charged an individual here in the United States who acted as a source for a JSSD intelligence officer, helping him, among other things, to assess engineers and scientists for recruitment.

In August, in the Northern District of New York, we charged an individual with stealing turbine technology and sending it to China.

And so it goes.

Taken together, these cases, and many others like them, paint a grim picture of a country bent on stealing its way up the ladder of economic development—and doing so at American expense. This behavior is illegal. It’s wrong. It’s a threat to our national security. And it must stop. . . .

On November 16, 2018, the LA Times, a well-known Democratic newspaper, in an article entitled” China has taken the gloves off in its theft of U.S. Technology secrets”¸ http://www.latimes.com/politics/la-na-pol-china-economic-espionage-20181116-story.html, stated:

“They want technology by hook or by crook. They want it now. The spy game has always been a gentleman’s game, but China has taken the gloves off,” said John Bennett, the special agent in charge of the FBI’s San Francisco office, which battles economic spies targeting Silicon Valley.

“They don’t care if they get caught or if people go to jail. As long as it justifies their ends, they are not going to stop.” . . .

Alperovitch and U.S. officials also have noticed a shift in who is behind the attacks. China’s military is no longer directing the bulk of the hacks. It appears China’s chief civilian intelligence agency, the Ministry of State Security, has taken the lead instead.

The trend is troubling because the spy service employs more sophisticated and seasoned hackers than the military . . . .

“The problem here is the scale and scope of the threat,” said John Demers, the Justice Department’s assistant attorney general for national security. ”It is both impressive and frightening. The Chinese are methodical, persistent and well- resourced. It’s a concerted effort to steal and gather the know-how to produce . . . .”

MIDTERM ELECTIONS WILL NOT SAVE CHINA—IP THEFT AND FORCED TECHNOLOGY TRANSFER HAVE UNITED THE REPUBLICANS AND THE DEMOCRATS IN WASHINGTON DC

The Chinese government may think that the Democratic Victory in the House of Representatives in the Midterm Elections will save China.  But as these newsletters have been saying for years, the only one more tough on China than Donald Trump and the Republicans is the Democrats.

The new Speaker of the House is Nancy Pelosi.  Many Chinese may not remember that Nancy Pelosi demonstrated in Tiananmen Square against the Chinese government in 1991.  See https://www.chicagotribune.com/news/ct-xpm-1991-09-06-9103070091-story.html.  Nancy Pelosi is no real friend of China.

On November 17, 2018, Nicholas Kristof, a New York Times Columnist and no friend of Donald Trump, in an article entitled “The Dangerous Naïveté of Trump and X” stated:

“Trump is right (I can’t believe I just wrote those three words!) that China has not played fair. The best response would have been to work with allies to pressure China simultaneously from all sides; instead, Trump antagonized allies so that we are fighting this battle alone.

Why have I and so many others soured on China?

This is larger than Trump and Xi. China’s admission to the World Trade Organization in 2001 was meant to integrate the country into the global trading system as an increasingly responsible world power. But after moving mostly in the right direction under Deng Xiaoping and Jiang Zemin, China stalled under Hu Jintao and has moved backward under Xi.

China has stolen technology and intellectual property even as it has become more aggressive militarily in the South China Sea and curbed freedom at home. Xi offends global values by detaining more than one million Muslims in the Xinjiang region, arresting lawyers and Christians, and steadily squeezing out space for free thought. I used to report from China each year but now find the limits on a journalist visa so onerous that it’s not worthwhile. And I’m supposed to be the lao pengyou, or old friend, of China.”

On November 8, 2018, the Wall Street Journal reported on a November 7th speech in Singapore in an article by Greg Ip entitled “Henry Paulson Delivers a Sobering Message” that:

“Few people have championed U.S. engagement with China as forcefully or successfully as Henry Paulson, first at Goldman Sachs Group Inc ., later as Treasury Secretary, and now as elder statesman.

So when Mr . Paulson concludes engagement is failing and an “economic Iron Curtain” may soon descend between the two, it’s a sobering statement of the perilous state of relations between the two economic superpowers.

In a speech delivered Wednesday in Singapore, Mr. Paulson warns China its behavior has alienated American friends and unified the American public against it. He is less critical of the U.S. but nonetheless believes it has unrealistic expectations of China and of its own allies. If neither changes course, the result will be “a long winter in U.S.-China relations” and “systemic risk of monumental proportions.” . . .”

In 2006 Paulson became the Treasury Secretary for George W. Bush, where he pushed a US China initiative, the “strategic economic dialogue” because he believed that the US China economic relationship is the most important economic relationship in the World. He then founded the Paulson Institute to smooth bilateral relations with China.

In the attached speech, PAULSON SPEECH, at the November 7th Economic Forum in Singapore at which Wang Qishan and other high level Chinese officials attended, Paulson stated:

Today, this region must look warily at the prospect that what, until now, has been a healthy strategic competition will tip into a full-blown cold war. . . . .

Taken together, these and other drivers, such as China’s cyber practices and island building in the South China Sea, have fueled a new consensus in Washington that China is not just a strategic competitor but very possibly our major long-term adversary.

America’s longstanding “engagement” policy is now widely viewed as being of little use for its own sake. . . .

Unless these broader and deeper issues are addressed, we are in for a long winter in US-China relations.

Let’s just take the economics.

The United States played the decisive role in facilitating China’s entry into the World Trade Organization. Yet 17 years after China entered the WTO, China still has not opened its economy to foreign competition in so many areas. . . .

But it also helps explain why so many influential voices now argue for a “decoupling” of the two economies, especially with respect to technology- related trade and investment that will disrupt supply chains.

These arguments will not go away anytime soon.

They will drive a variety of new approaches from this administration and its successors.

Both Democrats and Republicans are saying so.

And this negative view of China unites politicians from both left and right who agree on nothing else. . . .

In large part because China has been slow to open its economy since it joined the WTO, the American business community has turned from advocate to skeptic and even opponent of past US policies toward China. American business doesn’t want a tariff war but it does want a more aggressive approach from our government.

How can it be that those who know China best, work there, do business there, make money there, and have advocated for productive relations in the past, are among those now arguing for more confrontation?

The answer lies in the story of stalled competition policy, and the slow pace of opening, over nearly two decades. . . .

It is not just that foreign technologies are being transferred and digested.

It is that they are being reworked so that foreign technologies become Chinese technologies through an indigenization process that many of the multinational CEOs I talk to believe is grossly unfair to the innovators and dreamers at the heart of their companies.

Pervasive technology theft, forced technology transfer, including within joint ventures, and different models of internet governance and cross-border data flows are also contributing factors. . . .

So, such a balkanization of technology could further harm global innovation, not to mention the competitiveness of firms around the world.

Meanwhile, the integration of people, especially the brightest young students, could also stall — as Washington potentially bans Chinese students from studying whole categories of science and engineering subjects.

If all this persists—across all four baskets of goods, capital, technology, and people—I fear that big parts of the global economy will ultimately be closed off to the free flow of investment and trade.

And that is why I now see the prospect of an Economic Iron Curtain—one that throws up new walls on each side and unmakes the global economy, as we have known it.

Emphasis added.

Although former Secretary Paulson talks about a general opening up of the Chinese economy, I believe that he has taken his eye off the ball.  At the same Economic Conference Henry Kissinger stated that the both the US and China must tell the other country what the red lines are.  The key red line in the 301 case and in US China economic policy in general is IP Theft and Forced Technology Transfer.

The fact that Republicans and Democrats are united in opposing China is illustrated by a November 4th Editorial in the Washington Post entitled “The US Must Take Action to Stop Chinese Industrial Espionage”, which stated:

“SPEAKING IN the White House Rose Garden in September 2015, Presidents Barack Obama and Xi Jinping announced a breakthrough. The United States and China pledged that neither nation “will conduct or knowingly support cyber-enabled theft of intellectual property, including trade secrets or other confidential business information for commercial advantage.” But Mr. Xi’s promises were flimsy and short-lived. The agreement has collapsed. China is again trying to steal its way to greatness, and that calls for a resolute response.

The latest sign of trouble, but hardly the only sign, came in the indictments unsealed last week by the Justice Department. The United States charged that a state-owned Chinese company attempted to steal trade secrets from Micron, a semiconductor company based in Idaho that is the only U.S. maker of “dynamic random-access memory,” or DRAM, vital memory chips for computers, mobile devices and other electronics. . . .

China lacked DRAM technology until recently, and the Micron case is another example of China’s quest to climb the ladder of economic development by stealing overseas technology and copying, re-engineering and manufacturing it, leapfrogging what would otherwise be decades of difficult and expensive work. This is not the sort of espionage seeking state secrets that all countries undertake, but a very targeted stealing to help China’s companies profit and conquer markets. The companies also receive robust capital infusions from the state. After the 2015 Rose Garden announcement, the Chinese stealing subsided for a while, so fewer U.S. companies were hit, but then the pace accelerated again in 2017.

Mr. Sessions insisted that “cheating must stop.” Mr. Obama had also insisted: “I indicated that it has to stop.” In fact, China’s industrial espionage is not a passing fancy but the pillar of a long-term drive to become a global economic, military and political power, with ambitions to rival the United States. Sadly, the hopes of the past two decades, that Beijing would become a fair competitor playing by international rules, have been dashed.

It is a good first response to indict the perpetrators in the Micron case, and for Mr. Sessions to bolster resources and attention to the threat. Beyond that, however, the United States must see the Chinese espionage for what it truly represents: the pursuit of superpower might by stealing the labor and investment of others. The economies of the United States and China are inexorably entwined, which will make confronting the espionage threat even harder. But it must be done. In the end, China will respond only to compulsion.

Emphasis added

The key point of the Washington Post editorial is that the Post is owned by Jeff Bezos, CEO of Amazon and a good Democrat. The Washington Post is a very pro- Democratic newspaper.  When the Washington Post is saying that the only way to end China’s IP theft is “compulsion”, that means both Republicans and Democrats are saying the same thing.  When two ends of a very divided nation unite against China, that is not good for China.

COALITION TO ISOLATE CHINA-OTHER COUNTRIES JUMP ON THE US IP TRAIN

Although many Chinese believe that the only country pushing back on China is the United States, that simply is incorrect.  In July 2018 Jean Claude Juncker, the European Commission President, met with President Trump to discuss a potential trade war.  Juncker made it clear that he came to Washington to make a trade deal, and that the EC would work with the US against China on IP theft, forced technology transfer and overcapacity.

At the end of the recently negotiated US Mexico Canada Trade Agreement, there is a specific Article 32.10 “Non-Market Country FTA”, which provides that “a Party shall inform the other Parties of its intention to commence free trade agreement negotiations with a non-market country.”  China is a non-market country.

Section 32.10 (3) goes on to provide:

“Entry by any Party into a free trade agreement with a non-market country, shall allow the other Parties to terminate this Agreement on six-month notice and replace this Agreement with an agreement as between them (bilateral agreement).”

In other words, if Canada or Mexico negotiate a FTA with China, the United States can terminate the new Mexico Canada Trade Agreement.

Also as indicated above, China stole Japanese technology for the high speed rail network.  In all likelihood, Japan will work with the US and other countries to oppose China’s policy of IP theft and Forced Technology Transfer.  On IP, China will face a united front by the US, EC, Canada, Mexico, Japan and probably Korea against it.

XI TRUMP MEETING END OF NOVEMBER at G-20

President Xi and President Trump are expected to meet on the side of the G-20 meeting in Buenos Ares, Argentina on Nov 30 to December 1st.  As indicated above, the recent proposal from the Chinese government appears to be only an outline of the areas the Chinese government is willing to negotiate on and the areas it is not willing to negotiate on.

If the Chinese proposal was a concrete proposal and action plan, the Chinese government would be meeting now with the United States Trade Representative.  Until USTR Lighthizer is involved in the US China negotiations, I do not expect any deal to get done.

The question is whether Xi Trump meeting can lead to a detailed outline of the areas of negotiation to the extent that Trump is willing to postpone the increase on tariffs to 25% on January 1st.  There is no indication that the United States and China are anywhere near that stage.

On November 19, 2018, the South China Morning Post published the attached article, https://www.scmp.com/news/china/diplomacy/article/2174026/after-apec-tensions-expect-extra-pressure-when-xi-jinping-and, about how the recent APEC meeting has put even more pressure on the Trump/Xi meeting at the end of November at the G-20:

After Apec tensions, expect ‘extra pressure’ when Xi Jinping and Donald Trump meet at G20 . . .

Atmosphere described as ‘extremely tense’ at Pacific nations summit, and observers say it reflects reality of rivalry between China and the US.  Washington will be seeking to maximise pressure on Beijing ahead of crunch meeting at G20 summit, according to analysts

Beijing should prepare for tough talks when Chinese President Xi Jinping and US President Donald Trump meet at the G20 summit after open hostility between the two nations at the Apec gathering, observers say.

That hostility resulted in the 21 Pacific Rim leaders for the first time failing to reach a consensus on a formal declaration at the Asia-Pacific Economic Cooperation meeting in Port Moresby over the weekend, and it is expected to overshadow future trade negotiations between Beijing and Washington.

The rift was on full display when Xi and US Vice-President Mike Pence traded barbs at the summit on Saturday, neither of them listening to each other’s speeches and both lashing out about the trade war, Xi attacking America’s protectionism and Pence taking aim at Beijing’s “Belt and Road Initiative”.

Three delegates from Papua New Guinea described the atmosphere between China and the United States at the summit as “extremely tense”.

Chinese delegates on Saturday left the hall after Xi made his speech, and before Pence gave  his.

“Some left the venue, but those who were still at the venue were just standing outside the hall – they chose not to listen to Pence’s speech,” one of the delegates from Papua New Guinea said. . . .

Liu Weidong, a China-US affairs specialist from the Chinese Academy of Social Sciences, said while the trade war was hurting both China and the US, Beijing may face more pressure.

“This meeting [between Xi and Trump] means more to China than to the US, but negotiators and decision-makers from both sides will come under extra pressure in the next fortnight.”

Xi has tried to position China as a champion of free trade in the face of Trump’s “America first” protectionism, but according to analysts he will have a difficult time convincing leaders of major powers like Germany, France and the European Union, who share many of Washington’s concerns about China – even if  they are worried about being caught in the middle.

“Beijing needs to be prepared,” Liu said. “[The Western powers] may not firmly stand with either China or the US, but they would tacitly approve of some of the US measures that could further press China.”

Liu added that Beijing would have to do something about intellectual property rights protection and lower tariffs to end the trade war.

It is interesting to note that Liu is from the same Academy of Social Sciences that says that stealing the high speed rail technology is the way China should proceed in the future.

Moreover, the fact that the Chinese side refused to even listen to Pence’s speech indicates how far the countries are to any resolution.  If one side refuses to even listen to the arguments, no resolution can be reached.

IN XIAO SHI DA

My hope and prayer is that China truly wants to be a friendly competitor with the United States, not a strategic rival or even an adversary.

Four-character Chinese sayings are an old form of conveying deep thoughts about China.  This situation reminds me of the old Chinese saying, “In Xiao Shi Da”, because of the little, lose the big.  Because of the Chinese desire to steal foreign technology, Chinese companies may lose the entire US market, the $500 billion plus US market.  The Chinese government’s actions may result in Chinese exports being shut out of the US market for years at the cost of trillions of US dollars.

GUO TUI MIN JIN BECOMES GUO JIN MIN TUI

Meanwhile, the Chinese economy appears to be changing from a private economy with a smaller state-owned economy to an economy dominated by State-Owned companies.  When China joined the WTO, China’s economic genius was Zhu Rongyi.  In the following November 14th article, https://www.scmp.com/news/china/politics/article/2173020/inside-story-propaganda-fightback-deng-xiaopings-market-reforms, the South China Morning Post states that the reason Zhu came to power was Deng Xiaoping.  As the article states:

“Liu, who had first-hand knowledge of the articles, said Deng was spending the Lunar New Year holiday in Shanghai in 1991 when he asked then Shanghai party boss Zhu Rongji to go to the Xijiao Hotel where he was staying.

“He summoned Zhu Rongji and talked about the market economy and reform. It was a personal conversation. It was in- depth and not the official line. It was the true thoughts [of Deng] – that is, if you want to reform you have to introduce a market economy,” he said.

Liu said Zhu was very excited that Deng confided his thoughts to him, and relayed the conversation to his secretary and Shi Zhihong in the car on their way back from the hotel.”

At the time that China joined the WTO and Premier Zhu was in charge, the four character saying was “Guo Tui Min Jin”, “State-Owned phase out, private sector phase in”.  The new four character saying under Xi Jinping is “Guo Jin Min Tui”, “State Owned phase in, private sector phase out”.

In the attached November 19th article,  https://www.scmp.com/business/companies/article/2173678/can-communist-partys-unprecedented-endorsement-calm-frayed-nerves, the South China Morning Post is asking whether the Chinese government is suffocating the private industry:

Private entrepreneurs have borne the brunt of Beijing’s diktats, everything from a policy to cut excess industrial capacity in steel and coal, to crackdowns on corruption and pollution, with non-state companies forming nearly all of the 11,000 firms that vanished since 2016, China Merchants Bank International’s chief economist Ding Anhua said in September.

Profit growth is plunging at private enterprises. Bond defaults have surged to a new high. Scores of listed companies have sold controlling stakes to the government for a financial lifeline this year. And a string of China’s richest businessmen have been swept up in corruption probes.

The last straw that sent public sentiment tumbling came in September, when an obscure blogger named Wu Xiaoping wrote that the private sector “had completed its historic mission” of reinvigorating state-owned enterprises, and should now “fade away.”

The essay, which brought back memories of Mao Zedong’s purge of capitalists half a century before, went immediately viral on China’s internet, riding on widespread fears that such radical thinking might be re-emerging.  . . .

But many are sceptical that Xi’s prescription is enough to calm jitters in the business community. Nor enough to answer the high-stakes question hovering: is the powerful state suffocating the most dynamic, vigorous part of China’s economy, at the very time when growth is slowing down amid a trade war with the world’s largest economy?

“Private enterprises are in a dire moment now,” said Sheng Hong, executive director of the independent Chinese think tank Unirule Institute of Economics. “The country could risk a great recession.” . . . .

The private sector accounts for 60 per cent of China’s gross domestic product and 80 per cent of jobs, according to official statistics.

But figures could be even higher by independent estimates. A study led by Sheng of Unirule concluded that more than 90 per cent of the newly added national output since 2016 came from the private sector, which is also the source of all new jobs created since 2000. . . .

Corporate taxes account for 67 per cent of all commercial profits, the 12th highest tax in 190 economies, much higher than the 44 per cent in the US or the 31 per cent in the UK,   according to the World Bank.

In contrast to private owned companies, state owned companies pay almost no taxes at all.

The United States and many countries fear that the new Chinese model is to focus on the State-Owned industry, funnel government monety to those state-owned companies to target foreign technology.

TSUNAMI, BIG WAVE, OF CHANGE US IMPORTERS, FOREIGN COMPANIES AND EVEN CHINESE COMPANIES MOVE TO THIRD COUNTRIES TO ESCAPE TRADE WAR

The US China trade war along with the internal war in China against private industry, however, have led to a tsunami, tidal wave, of change as US Importers look for second sources of supply, and US and foreign companies in China and even private Chinese companies look to move some or all of their production out of China to third countries.

WE CAN HELP

Because of this tidal wave of change, my firm has formed alliances with consultants on the ground in Vietnam, Thailand, Philippines and even Ukraine to help companies find second sources of supply in those countries.  We are now working with consultants on the ground in those countries to help find second sources of supply and set up manufacturing sites.

Steve Dickinson and other partners at Harris have substantial experience drafting supplier contracts for US importers to minimize risk, and drafting contracts to set up manufacturing operations in other countries.  The Trade and Customs group can also help importers meet the requirements under the trade and customs laws and General System of Preferences so as to reduce and in the case of GSP eliminate ordinary Customs duties on imported products.

SECTION 301 PROCEDURES

As to the procedures in the Section 301 case, please see my last blog post at https://uschinatradewar.com/us-china-trade-war-trump-trade-war-speech-301-tariff-200-billion-in-imports-301-product-exclusion-process-widening-ad-cvd-orders-exclusions-section-201-nafta-us-eu-agreement-new-ad-case/ for a detailed explanation of the 301 case, three outstanding lists and opportunity to request a product exclusion request.

There are presently three separate lists. Depending upon which list imports are on, different options are available.

List 1 is for the 25% tariff on the initial $34 billion in imports, FIRST SET OF $34 BILLION.  If your imported product is on this list, your only option was to file a product exclusion request by October 9th.  According to a November 12th Politico article, to date:

“U.S. companies have filed close to 10,000 requests for certain products to be excluded from a 25 percent tariff that Trump imposed on $34 billion worth of Chinese goods in July.  . . . About 816 of requests have been denied and around 370 have been tentatively approved, subject to a final sign-off by U.S. Customs and Border Protection. The others are still in either Stage 1 or Stage 2 of the review process.”

List 2 is for the 25% on the $16 billion in imports, USTR OFFICIAL $16 BILLION PRESS RELEASE.  If your products are on that list, the 25% tariffs took effect on August 23rd.  Your only option is to file a product exclusion request by December 18th.  According to the November 12th Politico article:

“Companies have also filed close to 500 requests for products to be excluded from a second batch of tariffs on $16 billion worth of Chinese goods that went into effect in August.

List 3 is for the 25% on the $200 billion in imports, $200 BILLION USTR NOTICE.  No exclusion process has been set up yet for products on the $200 billion list.

BRIEF COMMENTS ON NEW NAFTA NOW US MEXICO CANADA TRADE AGREEMENT

As many will know because of the press updates, the United States and Canada reached agreement with Mexico on a New NAFTA, now known as the USMCA, the US Mexico Canada Agreement. To see the text of the New USMCA go to this link at the United States Trade Representative, https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement/united-states-mexico.

Note that the term “Free Trade” has been removed.  Trump has made one point clear in these trade negotiations.  Despite the fancy statements, these trade agreements are not “free trade agreements”.  They are government managed trade.

If the North American Free Trade Agreement (“NAFTA”) were truly a free trade agreement, Canada would not have had 275% tariffs on exports of dairy products to Canada.

But the US Mexico Canada Trade Agreement (“USMCA”) does have many changes and yes, the US is a beneficiary.

Besides the Nonmarket Economy Provision mentioned above, the new agreement reduces substantially the 275% on US dairy product exports to Canada.

With regards to automobiles, North American content goes up to 75%,

There is also a requirement that to qualify for North American content, the labor wages must be $16 an hour or higher, which means less jobs going to Mexico.

Another area, which is near and dear to my heart, is that Canada and British Columbia have reduced its very high tariffs and import restrictions on US wine, including Washington State Wine.

The Agreement also provides for a sunset review.  Ever six years, the three countries will meet to decide whether to keep the Agreement going and more importantly whether to re-negotiate certain provisions.

The Agreement will also expire in 16 years, which will lead again to more negotiations.

In other words, there are many changes in the US Mexico Canada Trade agreement and companies should follow the link above to see how the Agreement will affect each company.

If anyone has any questions about the Section 301 case, the trade war with China, IP Protection, movement to third countries, antidumping or countervailing duty law, customs laws and any other trade or customs questions, please feel free to contact me.

Best regards,

Bill Perry

 

US CHINA TRADE WAR – TRUMP TRADE CRISIS – PRINCIPLES TO REMEMBER WHEN ANALYZING TRUMP’S TRADE ATTACKS

White House Washington DC

TRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

US CHINA TRADE WAR — JUNE  30, 2018

Dear Friends,

Have had a difficult time writing this blog post because Trump’s trade policy has been so difficult to figure out.  Watching all these trade actions is like watching a pinball machine.

This first article will be an overview setting certain principles to keep in mind when analyzing Trump’s trade policy.  This article will then be followed by a series of articles on each specific trade action.

This overview article, however, will concentrate on answering some questions.  First, is there a method to Trump’s trade madness?  (Shakespeare Quote Hamlet)  What are the principles driving Trump’s trade policy?  What is President Trump’s problem with the WTO?  Will President Trump lose the midterms because of his trade policy and the collateral damage on downstream steel and aluminum users and the retaliation impact on US agriculture industry?

There are so many major trade actions going on, all creating real winners and true losers in the US economy that it is difficult to see a pattern.  This many trade actions also stretch the resources of the US government.  USTR Lighthizer is involved in intense NAFTA negotiations with Canada and Mexico, which are complicated by the demands of agriculture, but also negotiations with China and numerous other countries.  President Trump does not pick his battles, but apparently risks trade attacks against every country and the resulting retaliation.

Finally, although not a fan of Trump, on June 28, 2018, Julian Zelizer, a CNN political analyst, stated that Democrats have “badly underestimated Trump”:

While Congress and the courts have significant power when it comes to checking legislative initiatives from the Oval Office, a president who is intent on dismantling policies — such as stripping away regulations or withdrawing from international agreements — can get a lot done if he or she is determined.  . . .

The possibility for President Trump to seriously transform American policy keeps growing and the potential for a two-term presidency can no longer be dismissed.

See https://www.cnn.com/2018/06/28/opinions/democrats-badly-underestimated-trump-zelizer/index.html.

Trump’s impact on trade policy cannot be underestimated.

If anyone has any questions or wants additional information, please feel free to contact me at my e-mail address bill@harrisbricken.com.

Best regards,

Bill Perry

MYRIAD US TRADE ATTACKS, RETALIATION BY TRADE PARTNERS AGAINST US EXPORTS, G-7 DEBACLE AND THE TRADE ATTACKS ON CHINA—IS THERE A METHOD TO PRESIDENT TRUMP’S TRADE MADNESSS?

SEVERAL POINTS TO CONSIDER

STRONG ECONOMY AND TRADE DEFICIT

To understand Trump’s trade policy, one should start with several simple facts.   First, the US economy is roaring with the lowest unemployment rate in decades and the lowest Black and Hispanic unemployment rates in history.

Second, in 2017 the US Trade Deficit in goods with the World was $810 billion, almost a trillion dollars.  The US trade deficit in goods with China in 2017 was $375 billion, EC $151 billion, Mexico $70 billion and Canada $17 billion.

Trump firmly believes that the US cannot follow the same trade path because the US simply cannot afford it.  Recently, President Trump stated that the United States will no longer do stupid trade, but smart trade and in trade the US will no longer be the world’s piggy bank.

One of Trump’s key promises in the election was that he would fix the trade problem. That is why President Trump tore up the Trans Pacific Partnership and announced the renegotiation of NAFTA.  President Trump keeps his campaign promises.

Trump also probably believes that the US economy is strong enough so that he can risk tough trade talks and even a trade war if necessary.  But can the US economy withstand a world trade war on so many different fronts?

SO MANY TRADE ACTIONS

In spring it looked like Trump would negotiate separate trade deals with Mexico, Canada and EU to stop retaliation in the Section 232 Steel and Aluminum cases.  In June, the risk of a global trade war increases with the breakdown in negotiations and actual tariffs and retaliation against US exports in the Section 232 cases, the threat of tariffs on $50 billion to $250 billion on Chinese imports in the Section 301 Intellectual Property case, NAFTA negotiations??, ZTE Mess, and the breakdown on trade in the G-7 talks in Canada.  EC, Canada, Mexico, China, India and numerous other countries have implemented retaliation lists against US exports because of the Section 232 tariffs.

Trump also is about to release another attack with a Section 232 case on automobiles, even though all the US automobile companies oppose the case.

Trump is demanding fair and reciprocal trade, not stupid trade.  See June 20, 2018 Trump speech in Minnesota at https://www.youtube.com/watch?v=Ao4SdNUG4X8.

THE SPEED OF TRUMP AND THE OBAMA LESSON

But there are several other issues at work here.  Sebastian Gorka, formerly with the Trump White House and a Fox News commentator, often talks about “the speed of Trump”.

Some back history here.  Rahm Emanuel, President Obama’s former Chief of Staff, made a point that a crisis should not be wasted stating, “You never let a serious crisis go to waste. And what I mean by that it’s an opportunity to do things you think you could not do before.”

But if one looks back on the Obama Presidency, many crises were let go to waste.  In the first two years of his Presidency, Obama had a majority in the House of Representatives and a filibuster proof 60 Democratic majority in the Senate.  But very few new legislative bills were enacted into law.

During that first two years, Democratic Senators and Congressmen warned President Obama that he had to do something to increase jobs.  But Obama decided to concentrate on healthcare for all.

Then before the first midterms, Obama lost the Ted Kennedy Senator seat to Republican Scott Brown, who promised to stop the push for Obamacare.  Because the Republicans now had 41 Senators, if the Republicans stayed strong, Obamacare could not be passed in Congress as regular legislation.  Then in the first midterms in November 2009 President Obama lost the House of Representatives, which went Republican.

So, President Obama and the Democrats in the Senate pushed through Obamacare on Christmas Eve, December 24, 2009, late at night using the reconciliation process, which required only 51 votes.  This was important because once the new Congressional term were to begin in 2010 the Democrats no longer had a majority in the House of Representatives.

Although President Obama won reelection in 2012, in the second midterms in 2014, Obama lost the Senate.  Now facing a Republican House and Senate, President Obama was forced to rely on a pen and phone to move his policy through.

But since Obama relied on a pen and a phone, the next President Trump could undo the vast majority of Obama’s policies with his own pen and phone.  That is just what President Trump has done.  Regulations have been cut enormously in the Trump Administration.  President Obama’s legacy is in tatters, in part, because President Obama did not use his time wisely.

In effect, the Obama record was a teachable moment for Donald Trump.  Trump knows that he may only have 2 years with a House and Senate majority so he has to move swiftly to do deals and make change. Trump has moved swiftly to undo Obama’s policies and legislate his own policy.

That may be the reason Trump is risking a trade war with the World.  Trump is hoping that in the first midterms he can do better than President Obama and hold the House and gain seats in the Senate, but that is a hope and not a sure thing.

In his book Art of the Deal, Trump stated that if you are going to do anything, do it big, which brings us to several more points.

TRUMP FEARS NOTHING AND LIKES CHAOS

The Washington Post recently published an op-ed entitled, “You can smell Trump’s fear”, but that commentator has completely misread Donald Trump. On June 19th, despite the constant drumbeat of attacks of separating children at the border, attacks on trade, and numerous other issues, Trump was cool and calm at a speech to the National Federation of Independent Businesses.  See https://youtu.be/ZiSnXNfbQ7k.

Am reminded about the famous statement of a Union soldier who watched General Ulysses Grant at the Battle of the Wilderness writing orders with shells exploding all around him: “Ulysses don’t scare worth a damn!”  Donald Trump does not scare worth a damn.

Trump also likes chaos and he creates the chaos by often taking a new look at established positions.  He reframes and resets issues, starts discussions from an entirely new point of view.

Substantial change to Federal policy, however, means that many oxen will be gored, the status quo will be changed, and entrenched interests do not like change.  Trump, however, apparently likes to ride the back of the chaos tiger.

On June 10, 2018, Jim Hanson, President of Security Studies Group, in an article on Fox News entitled “Trump’s willingness to walk away at the G7 and North Korea summits shows his foreign policy is working,” stated:

“This brings us to the biggest wild card President Trump brings to the world stage: he is a change agent. It would even be fair to say he creates chaos and misdirection – and then looks for an advantage. This drives many of his critics to distraction.

But when you are dealing with longstanding problems and well-entrenched interests, metaphorically knocking over a few apple carts or a conference table or two can break that deadlock. . . .

Peace through strength and fair trade are an excellent one-two punch and they work well together.  . . . The Trump administration has a plan and it is working successfully around the world.”

Although Trump is not afraid, he is concerned, and his one concern right now is the impact of his own trade policy on his base, including manufacturing and agriculture.

THE WTO PROBLEM—THE MFN PRINCIPLE BLOCKS RECIPROCITY

Recently it was reported that Trump has stated privately that he wants to withdraw from the World Trade Organization (“WTO”).  Trump cannot do this, however, without Congressional approval.

Trump has also made clear that he wants his trade policy to be reciprocal.  In other words, US tariff rates should mirror the tariff rates of other countries.  But there is a problem with that position—The WTO and its bedrock Most Favored Nation principle.

Once a country, such as China, becomes an “MFN” country, the United States cannot treat China “less advantageously than any other country with MFN status”.

This MFN principle puts low tariff countries, such as the US, at a major disadvantage in trade negotiations.  If China has a tariff of 30% on car imports, the US cannot raise its tariff on China car imports to 30%, because its car tariff for the rest of the World is 2%.  Since China is an MFN country, Trump must charge China the same tariff as it has with other countries.

One exception to the MFN principle is Free Trade Agreements (“FTA”), but if a country, such as the United States, already has low tariffs to encourage free trade, it is at a major disadvantage because it must reduce tariffs further or make some other concession in a FTA to get tariff reductions from other countries.

The MFN principle, however, is why President Trump has looked for other ways to raise tariffs on specific countries, such as the Section 232 National Security cases and the Section 301 intellectual property case against China.

AMERICANS ARE COMING AROUND TO TRUMP’S ECONOMIC TRADE NATIONALISM

Because of the enormous trade deficit in goods, Trump has succeeded in persuading many Americans that the US weakness on trade has put the US at an unfair trade disadvantage.

On June 11th, it was reported that a Quinnipiac University Poll found that a majority of swing voters, 55 percent, support tariffs on Chinese imports.  80 percent of Republican voters support Trump’s trade actions to date.

Because of Trump, the average American is learning about the many trade barriers to US exports.  Trump’s call is for reciprocity.

Why should Canadians put tariffs of over 275% on US dairy products?

Why should British Columbia put up what amounts to an 80% tariff, the highest tariff in the World, on US wine to protect large British Columbia wine producers? Both the dairy and wine problems make President Trump’s point that NAFTA is not a FTA, but a FFTA, a Fake Free Trade Agreement.

Why should Europe have higher tariffs on US cars of more than 10% when US tariffs are only 2%?

Why should China get away with charging much higher tariffs on US exports and have policies to force US companies to give up their technology?

All of these issues are causing public opinion in the US to turn away from free trade. Many American voters, American free trade periodicals, Republican and Democratic politicians are coming around to Trump’ tough trade position.

G-7 TALKS

At the G-7 talks in early June, President Trump stared down Chancellor Merkel and others on trade and slammed Prime Minister Trudeau for his criticism of the US after Trump left the talks.  See photo at https://www.theguardian.com/world/2018/jun/10/angela-merkel-photo-donald-trump-diplomacy.  The photograph of the Merkel Trump stare down speaks volumes.

After the breakdown of the G-7 talks on trade, Trump sent out a tweet stating:

“Fair trade is now to be called fool trade if it is not reciprocal.  Not fair to the people of America! $800 billion trade deficit.  Why should I, as president of the United State, allow countries to continue to make massive trade surpluses, as they have for decades, while our farmers, workers & taxpayers have such a big and unfair price to pay?”

During the G-7 talks, Trump stated to reporters that the US would no longer accept “ridiculous and unacceptable” tariffs imposed by other countries on US exports and threatened to “stop trading” with nations that would not lower their tariffs.

Trump further stated: “We’re like the piggy bank that everybody’s robbing – and that ends,”

In a speech on June 25th in South Carolina, Trump described the G-7 dust up with Canada in detail.  See speech on youtube at https://www.youtube.com/watch?v=eyf8Uie16tE.

On June 12, 2018, Investors Business Daily, a free trade periodical, which has opposed Trump on trade, stated in an editorial entitled “G-7 President Trump Didn’t Sign G7’s Leftist Agenda – Smart Move”:

“President Trump created a quite a stir among the other Western leaders by refusing to sign the “communique” that capped the G7 summit. But he was right to do so. . . .That’s particularly true of trade.

The summit communique, for instance, exhorts G7 members to “reduce tariff barriers, non-tariff barriers and subsidies.”

A reasonable goal, most economists would agree. The G7 leaders get angry at Trump because he believes that current trade deals, while good on some levels, actually are unfair to the U.S.  . . .

But what did Trump say at his press conference as he left the fruitless G7 confab . . . .?

“You want a tariff-free (trade system), you want no barriers, and you want no subsidies because you have some cases where countries are subsidizing industries, and that’s not fair,” Trump said, elaborating his own ideas about trade . . . . “So you go tariff-free, you go barrier-free, you go subsidy-free.”

Sounds pretty free trade to us. The fact that he questions current trade deals doesn’t signal a hatred of free trade. It does show a disdain for deals that pretend to be free trade but are really government managed trade. Often to the U.S.’ detriment. .  . .”

WILL TRUMP LOSE THE MIDTERMS BECAUSE OF HIS TRADE POLICY?

On November 6, 2018, voters in the midterms will vote based on many issues, including immigration, taxes or simply firmly held beliefs of never Trump or pro-Trump.  But in contrast to many past elections, trade policy will be an important because of the impact on Trump’s base.  Trade and the collateral damage caused by the Trump trade policy could be the fly in the ointment of Trump ‘s desire to hold the Republican Congress.

President Trump on June 28th spoke at the opening of the new FoxConn Plant in Wisconsin, in part, because of his concern about the impact of trade retaliation on Wisconsin farmers.  See https://www.youtube.com/watch?v=HhihQ52gyc8.

COLLATERAL DAMAGE—STEEL ALUMINUM USERS AND FARM BELT

In March 2018, President Trump and the Commerce Department in the Section 232 cases levied 25% tariff on Steel imports and 10% tariff on Aluminum imports.  Originally the EC, Canada and Mexico were to be exempted from the tariffs if trade deals were negotiated with the US.  No trade deals were negotiated.

On May 1st, President Trump imposed the tariffs against the three countries and predictably all three countries retaliated by levying billions in dollars in tariffs on US exports.  The tariffs and counter tariffs will be described in an upcoming article.  In the Section 232 cases alone, 10,000 exclusion requests have been filed by US steel and aluminum users, and the Commerce Department has only addressed a hundred from 18 different companies.

The retaliation by trade partners, including Canada, EC, Japan, India, Mexico and China, is already taking its toll on US farmers.  In contrast to the rest of the US economy, farm incomes are down.

STEEL AND ALUMINUM USERS

Downstream steel/aluminum users are now being deeply hurt by the Section 232 tariffs.  Many users have to compete in the downstream export markets, and they cannot compete if US prices for the steel and aluminum inputs are significantly higher than world market prices.

One indicator of the injury to the downstream industries is the many trade cases filed in the last year by injured US industries against downstream steel products including: Steel Propane Cylinders, Steel Racks, Stainless Steel Flanges, Forged Steel Fittings, Certain Steel Wheels, Certain Tool Chests and Cabinets, Carbon Steel Flanges, and Certain Carbon Closing Staples.

The Section 232 tariffs are forcing companies, such as Harley Davidson, the well-known motorcycle producer, to move some of its production offshore, and threatens the very existence of the largest US steel nail producer, Mid-Continent Nail, because it is a downstream steel user.

AUTOMOBILES 232 CASE

In contrast to Section 232 Steel case which the US Steel Industry supported, the US automobile industry opposes the Section 232 on automobiles.  On June 29th, General Motors filed comments, General_Motors 232 Autos Comments, and state in part:

“increased import tariffs could lead to a smaller GM, a reduced presence at home and abroad for this iconic American company, and risk less—not more—U.S. jobs. . . .

Combined with the other trade actions currently being pursued by the U.S. Government—namely the 232 Steel and Aluminum tariffs and the Section 301 tariffs against Chinese imports—the threat of additional tariffs on automobile imports could be detrimental to our company . . . .”

What used to be good for General Motors was good for the US economy.  But now President Trump and Secretary Ross think they know better.

AGRICULTURE

Trade is not a Republican or a Democratic issue.  It is a regional issue.  As part of his base, Trump has the manufacturing states of Michigan, Ohio, Pennsylvania and Wisconsin, the Rust Belt, which has been badly injured by imports from China and other countries.  The Rust Belt does not want more trade agreements.  The Blue Collar working class in the Rust Belt were a major reason Trump won the Presidency.

But Trump’s other constituency is the rural agriculture states, including Kansas, Iowa, Wyoming, Montana, North Dakota and South Dakota to name a few, all of which are dependent on exports. In contrast to other parts of the US economy, farm incomes are falling and have not increased in 15 years.  On June 26th CBS New Money Watch reported that according to the CDC, farmers are committing suicide in “staggering numbers”, a higher rate than other occupational groups.

IOWA IS HOLDING OUT FOR TRUMP

Iowa is ground zero for the farm vote.  On June 25, 2018, in an article entitled “’We’re riding a tiger’: The Iowa GOP bets it all on Trump– The president’s trade war could cripple the state, but Republicans trust in him as negotiator- in-chief” Politico reported:

“Donald Trump’s trade war with China could cost Iowa farmers hundreds of millions of dollars and do untold damage to the state economy.

But you’d never know it from talking to Republicans at the recent state GOP convention here. When Iowa Republican Party Chairman Jeff Kaufmann asked more than 1,100 delegates a defining question — who was still behind President Donald Trump? — there was no hesitation. In an exuberant display of unity, more than 1,100 delegates sprang to their feet, whistling, cheering and offering prolonged applause. . . .

The Republicans’ patience with their president amid an escalating trade war is as remarkable as it is politically perilous in an agricultural swing state that has historically held a deep disdain for trade meddling.
On June 15, Trump announced 25 percent tariffs on $50 billion in Chinese goods and China promised to exact retaliatory tariffs, including on a key Iowa export: soybeans. . . .

With nearly $2 billion in soybean exports to China, [Iowa] has the largest exposure to the tariffs of any state in the nation . . .

GOP leaders are convinced Trump will deliver a better deal for Iowa in the end . . . .
None of it guarantees Trump will be able to replicate his 2016 victory here. A White House policy that’s viewed as hostile to farmers could precipitate a backlash from the dozens of rural counties that swung for Trump in 2016 after previously backing Barack Obama. Those are the kinds of counties Trump needs to win states like Iowa and Wisconsin in 2020. . . . .

Even the most loyal of Republicans acknowledged that volatility surrounding trade issues could scramble the state’s political equation.

“As of right now, I’d say we’re supportive of him trying to make free trade freer. We’re willing to stick with him through the negotiation,” Kaufmann said. “If nothing has changed, and we’re in an all-out trade war, and it’s six to eight months from now and you ask me this question, I may have a different answer.”

CONCLUSION

Will trade voters stick with Trump because they know something has to be done because the trade deficits are too big?  $800 billion simply is not sustainable.

But Trump has a limited amount of time.  As we get closer to the midterms, if Trump has nothing to show on trade, including trade agreements, and only retaliation and injured manufacturers and farmers, there will be hell to pay.  So, Trump has a chance to make major changes in the trade area, but he cannot blow the chance and waste the crisis.  That Obama mistake is one that Trump cannot afford to make.

Now the burden is on USTR Robert Lighthizer and Secretary Wilbur Ross at Commerce to negotiate and finalize trade agreements.

If anyone has any questions about these cases or about the Trump Trade Crisis, the antidumping or countervailing duty law, customs, False Claims Act or 337 IP/patent law, please feel free to contact me.

Best regards,

Bill Perry

US CHINA TRADE WAR–TRUMP’S TRADE WAR, INCREASED US EXPORTS, SECTION 232 STEEL/ALUMINUM CASES, RETALIATION BY EC/CHINA, TPP??, SECTION 201 SOLAR CELLS CASE, TAXES AND TRADE, NEW AD, CVD, 337 CASES

TRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

TRADE IS A TWO WAY STREET

 

US CHINA TRADE WAR STEEL/ALUMINUM TARIFFS EXCLUSION NOTICE UPDATE MARCH 18, 2018

Dear Friends,

On March 8th, Trump issued his tariffs of 25% on imported steel and 10% on imported aluminum in the Section 232 National Cases.

Attached are two documents of interest.

Commerce just issued the atttached EXCLUSION FED REG STEEL AND ALUMINUM exclusion Federal Register notice for the Steel and Aluminum Section 232 Cases.

Two important points about exclusion requests.  First, there is no time limit.  Exclusion requests can be filed at any time, but they must be on specific forms.

Second, foreign producers and US importers need not apply.  The only entities that can request an exclusion are the actual US companies using the steel or aluminum in their production process.

The second document is the attached extensive two part retaliation list issued by the EC in response to the Steel and Aluminum tariffs.  TWO EU RETALIATION LISTS  The document speaks for itself and is very extensive covering numerous different US products exported to the EC.

According to the EU, Part A of the list includes products worth €2.8 billion, which the EU can target with tariffs of 25 percent at any moment after notifying the list to the WTO.

Part B lists those products which would be targeted only after three years. This is because WTO rules allow immediate retaliation only on that amount of trade for which EU steel exports to the U.S. have not increased over the past years.

If anyone has any questions about these documents, please feel free to contact me.

Best regards,

Bill Perry

US CHINA TRADE WAR STEEL AND ALUMINUM TARIFFS UPDATE MARCH 9, 2018

Dear Friends,

On March 8th, Trump issued his tariffs of 25% on imported steel and 10% on imported aluminum.

As explained below, there are some exceptions, but now let the retaliation trade games begin.

The chickens have come home to roost.  For too many years, the average American has not been educated on the benefits of trade.  With $2.3 trillion in US exports in 2017, the United States has a lot to lose in this trade war.

If anyone has any questions or wants additional information, please feel free to contact me at my e-mail address bill@harrisbricken.com.

Best regards,

Bill Perry

TRUMP’S STEEL AND ALUMINUM TARIFFS

On March 3, 2018, President Trump formally announced the imposition under Section 232, National Security law, of tariffs of 25% against Steel imports and 10% on Aluminum imports.  See the attached proclamations, Presidential Proclamation on Adjusting Imports of Aluminum into Presidential Proclamation on Adjusting Imports of Steel into th.

The tariffs will take effect March 23rd “with respect to goods entered, or withdrawn from warehouse for consumption and shall continue in effect, unless such actions are expressly reduced, modified, or terminated.”

The terms “entered, or withdrawn from warehouse for consumption” are Customs terms, which means if steel products have not been entered/imported or withdrawn from a Customs bonded warehouse by 12:01AM on March 23rd, the tariffs will apply to those goods.

A Customs bonded warehouse is where products are stored before entry/importation of the products, in this case, steel and aluminum products, into the United States.  So long as the Steel and Aluminum has been entered/imported into the US before March 23rd, it will be ok, but afterwards the products will be hit by a tariff.

The actual steel products covered by the tariff are:

  • For the purposes of this proclamation, “steel articles” are defined at the Harmonized Tariff Schedule (HTS) 6-digit level as: 7206.10 through 7216.50, 7216.99 through 7301.10, 7302.10, 7302.40 through 7302.90, and 7304.10 through 7306.90, including any subsequent revisions to these HTS

This probably means that all steel products will be covered, but (2) provides:

“In order to establish increases in the duty rate on imports of steel articles, subchapter III of chapter 99 of the HTSUS is modified as provided in the Annex to this proclamation. Except as otherwise provided in this proclamation, or in notices published pursuant to clause 3 of this proclamation, all steel articles imports specified in the Annex shall be subject to an additional 25 percent ad valorem rate of duty with respect to goods entered, or withdrawn from warehouse for consumption, on or after 12:01 a.m. eastern daylight time on March 23, 2018.

Emphasis added.

If this Steel case follows the recent Solar Cells 201 Proclamation process, we will not see the Annex until the Presidential Proclamation is published in the Federal Register in a few days.

But there are doorways for countries and companies to get their products out. For countries that have a “security relationship” with the United States, not Russia or China, they can negotiate a deal with the US.  As the Proclamation specifically states in paragraph 9:

Any country with which we have a security relationship is welcome to discuss with the United States alternative ways to address the threatened impairment of the national security caused by imports from that country. Should the United States and any such country arrive at a satisfactory alternative means to address the threat to the national security such that I determine that imports from that country no longer threaten to impair the national security, I may remove or modify the restriction on steel articles imports from that country and, if necessary, make any corresponding adjustments to the tariff as it applies to other countries as our national security interests require.

Also within 10 days of the Proclamation, Commerce is to come up with an exclusion process to get products out of the tariffs, if the products are not produced in the US and if the exclusion request is made by a US company affected by the Tariff.  Foreign companies need not apply, only their US importers and more importantly the US steel using customers can apply.   The Proclamation specifically states in subparagraphs 3 and 4:

“…..The Secretary . . . is hereby authorized to provide relief from the additional duties set forth in clause 2 of this proclamation for any steel article determined not to be produced in the United States in a sufficient and reasonably available amount or of a satisfactory quality and is also authorized to provide such relief based upon specific national security considerations. Such relief shall be provided for a steel article only after a request for exclusion is made by a directly affected party located in the United States.  , , ,

Within 10 days after the date of this proclamation, the Secretary shall issue procedures for the requests for exclusion described in clause 3 of this proclamation. . . .”

We probably will not know more about the exclusion process until Commerce publishes a notice in the Federal Register.

THE TRADE CHICKENS COME HOME TO ROOST

Although there is an out for negotiations, we can expect other countries, including China and the EC, to retaliate against the steel and aluminum tariffs issued by the US.

But the real lesson of these tariffs is the failure over many past Presidencies to educate the average American about the benefits of trade.  President Trump pushed on by Breitbart refers to free traders as globalists.  Apparently, any person who believes in free trade does so because he supports the interests of the World and not the United States.

But free traders are not globalists.  They strongly believe in free trade because that is in the interest of the United States and the average American.  Free trade has caused the US economy to grow multiple times creating millions of jobs for Americans.

The average American simply does not realize that the US exported in 2017 $2.3 trillion in goods and services, $1.5 trillion in goods.  Half of all agricultural products are exported and one third of Iowa corn is exported to Mexico.

Pundits who favor the tariffs point to the rust belt states of Michigan, Ohio, Pennsylvania and Wisconsin that voted for Trump, but ignore the agricultural states of Kansas, Iowa, Wyoming, North Dakota, South Dakota, Montana and many other states that voted for Trump.  These pundits ignore the farmers.

But of that $1.5 trillion in goods, only $132 billion was agricultural products, exports of industrial supplies and materials at $462 billion and exports of capital goods except automotive at $532 billion were much more important.  Exports of Automotive vehicles and parts at $157 billion, consumer goods at $197 billion and export of other goods at $62 billion were also very important.

See the article on my blog, www.uschinatradewar.com, “Trump and Many Americans Simply Do Not Realize How Much the US Exports” and the Commerce Department report on 2017 Imports and Exports attached to that article.

$2.3 trillion in US exports are a lot of jobs and if these tariffs are the first step to a global trade war, many Americans are going to be very badly hurt by Trump’s trade war.

MARCH 3, 2018 UPDATE

Dear Friends,

Trump has his trade war, but it is not just against China.  This trade war is the United States against the World.  On March 2nd President Trump announced tariffs of 25% on steel imports and 10% on aluminum imports under Section 232 National Security law.  Section 232, however, is not a trade exception, such as 201 or antidumping and countervailing duty cases, approved by the World  Trade Organization (“WTO”) so that gives the other countries  the right to retaliate and they will retaliate.

If anyone has any questions or wants additional information, please feel free to contact me at my e-mail address bill@harrisbricken.com.

Best regards,

Bill Perry

TRUMP’S TRADE WAR AGAINST THE WORLD

On March 1, 2018, President Trump announced that next week he will impose under Section 232, National Security law, tariffs of 25% against Steel imports and 10% on Aluminum imports.

Many countries around the World, including the EU, Canada, Mexico, China and other countries, immediately threatened trade retaliation against US exports.  Europe is talking about tariffs on US imports of Harley Davidson Motorcycles, Jack Daniels Bourbon and blue jeans.  China is talking tariffs on US agricultural exports, such a Sorghum Grain and Soybeans.

To see the advice the President is getting one has to look no further than the statements by USTR Robert Lighthizer on February 27th, on the Laura Ingraham show on Fox News stating that it was ridiculous to think that we were going to get into a trade war with China and other countries over the 232 cases.  But the reaction of numerous countries to Trump’s announcement of tariffs on Steel and Aluminum imports shows that Lighthizer’s statement was ridiculous.  Lighthizer is Trump’s principle advisor on trade laws and trade agreements, but this statement shows how Lighthizer truly misjudged the situation.

The major problem is that Lighthizer and Trump are focused on the trade deficits rather than the enormous size of US exports at $2.4 trillion.  With $2.4 trillion in exports, there is a lot of targets for retaliation.

Secretary Wilbur Ross states that steel tariffs are about jobs and security and simply leveling the playing field.  See https://www.bloomberg.com/news/videos/2018-03-02/wilbur-ross-says-steel-tariffs-are-about-jobs-and-security-video.

On March 2, 2018, Trump tweeted, “trade wars are good, and easy to win.”  But in wars be they trade wars or real wars, no one really wins everybody loses.

Both the Wall Street Journal and Investors Business Daily both disagree with the Trump trade war.  On March 2, 2018, the Wall Street Journal stated in an editorial entitled “Trump’s Tariff Folly, His tax on aluminum and steel will hurt the economy and his voters”, stated:

Donald Trump made the biggest policy blunder of his Presidency Thursday by announcing that next week he’ll impose tariffs of 25% on imported steel and 10% on aluminum. This tax increase will punish American workers, invite retaliation that will harm U.S. exports, divide his political coalition at home, anger allies abroad, and undermine his tax and regulatory reforms. The Dow Jones Industrial Average fell 1.7% on the news, as investors absorbed the self-inflicted folly.

Mr. Trump has spent a year trying to lift the economy from its Obama doldrums, with considerable success. Annual GDP growth has averaged 3% in the past nine months if you adjust for temporary factors, and on Tuesday the ISM manufacturing index for February came in at a gaudy 60.8. American factories are humming, and consumer and business confidence are soaring.

Apparently, Mr. Trump can’t stand all this winning. His tariffs will benefit a handful of companies, at least for a while, but they will harm many more. “We have with us the biggest steel companies in the United States. They used to be a lot bigger, but they’re going to be a lot bigger again,” Mr. Trump declared in a meeting Thursday at the White House with steel and aluminum executives.

No, they won’t. The immediate impact will be to make the U.S. an island of high-priced steel and aluminum. The U.S. companies will raise their prices to nearly match the tariffs while snatching some market share. The additional profits will flow to executives in higher bonuses and shareholders, at least until the higher prices hurt their steel- and aluminum-using customers. Then U.S. steel and aluminum makers will be hurt as well.

Mr. Trump seems not to understand that steel-using industries in the U.S. employ some 6.5 million Americans, while steel makers employ about 140,000. Transportation industries, including aircraft and autos, account for about 40% of domestic steel consumption, followed by packaging with 20% and building construction with 15%. All will have to pay higher prices, making them less competitive globally and in the U.S.

Instead of importing steel to make goods in America, many companies will simply import the finished product made from cheaper steel or aluminum abroad. Mr. Trump fancies himself the savior of the U.S. auto industry, but he might note that Ford Motor shares fell 3% Thursday and GM’s fell 4%. U.S. Steel gained 5.8%. Mr. Trump has handed a giant gift to foreign car makers, which will now have a cost advantage over Detroit. How do you think that will play in Michigan in 2020?

The National Retail Federation called the tariffs a “tax on American families,” who will pay higher prices for canned goods and even beer in aluminum cans. Another name for this is the Trump voter tax.

The economic damage will quickly compound because other countries can and will retaliate against U.S. exports. Not steel, but against farm goods, Harley-Davidson motorcycles, Cummins engines, John Deere tractors, and much more.

Foreign countries are canny enough to know how to impose maximum political pain on Republican Senators and Congressmen in an election year by targeting exports from their states and districts. Has anyone at the White House political shop thought this through?

Then there’s the diplomatic damage, made worse by Mr. Trump’s use of Section 232 to claim a threat to national security. In the process Mr. Trump is declaring a unilateral exception to U.S. trade agreements that other countries won’t forget and will surely emulate.

The national security threat from foreign steel is preposterous because China supplies only 2.2% of U.S. imports and Russia 8.7%. But the tariffs will whack that menace to world peace known as Canada, which supplies 16%. South Korea, which Mr. Trump needs for his strategy against North Korea, supplies 10%, Brazil 13% and Mexico 9%.

Oh, and Canada buys more American steel than any other country, accounting for 50% of U.S. steel exports. Mr. Trump is punishing our most important trading partner in the middle of a Nafta renegotiation that he claims will result in a much better deal. Instead he is taking a machete to America’s trade credibility. Why should Canada believe a word he says?

***

Mr. Trump announced his intentions Thursday, so there’s still time to reconsider. GOP Senators Orrin Hatch (Utah) and Ben Sasse (Nebraska) spoke up loudly against the tariffs, but a larger business and labor chorus is required. Mr. Trump is a bona fide protectionist so he won’t be dissuaded by arguments about comparative advantage. But perhaps he will heed the message from the falling stock market, and from the harm he will do to the economy, his voters, and his Presidency.

The Investors Business Daily followed suit stating in a March 2, 2018 editorial entitled “Sorry, Mr. President: Your Trade Protectionism Will Cost The U.S. Dearly”:

Trade: Protectionism is a political feel-good policy that does nothing for the economy. It’s a big cost with very few tangible benefits. That’s why President Trump has made a big mistake in imposing big tariffs on steel and aluminum.

We understand, of course, that President Trump feels beholden to his constituencies in the U.S. who have been hurt by foreign competition, particularly in basic industries like steel and aluminum. But the 25% tariff on steel and 10% tariff on aluminum that Trump seeks to impose will lead to higher prices for all, the loss of thousands of jobs and a political-crony windfall for a handful of big companies. . . .

We have no doubt that what Trump says is true. But if so, it should be remedied through trade talks, not a trade war.

And make no mistake: The broad nature of Trump’s tariffs, hitting all exporters to the U.S., will invite some kind of retaliation from those who’ve been hit.

Already, EU Commission President Jean-Claude Juncker is threatening to respond in kind: “We will not sit idly while our industry is hit with unfair measures that put thousands of European jobs at risk,” he said. “The European Union will react firmly and commensurately to defend our interests.” . . .

Beijing is already looking at imposing trade penalties on U.S. sales of sorghum there, and may soon also target our sales of soy, too. Meanwhile, India, emboldened by the U.S. turn toward protectionism, might use Trump’s moves as a reason to protect its own wheat and rice sectors from U.S. imports.

So the steel and aluminum industry’s gains will be the loss of others.

Trump’s justification for tariffs is “national security.” But, as some have pointed out, the U.S. military uses only about 3% of domestic steel output, and much of our imported steel comes from allies like Canada. So the “threat” really isn’t much of one.

Of greater concern is what the higher prices for steel and aluminum — remember, a tariff is actually a tax — will do to our domestic economy.

As the R Street Institute think tank reminds us, “According to 2015 U.S. Census data, steel mills employ about 140,000 Americans, while steel-consuming industries, including automakers and other manufacturers who rely on imported steel, employ more than 5 million. It is estimated that nearly 200,000 jobs and $4 billion in wages were lost during the 18 months during 2002 and 2003 that President George W. Bush imposed tariffs on imported steel …” . . .

In short, trade protection, especially tariffs, is a very bad deal for consumers and workers. But it’s very profitable for politically connected corporations. That’s why the financial markets melted down on Thursday. Will this event mark the end of the Trump bull market? It’s too soon to tell, but it bears watching. While most stocks fell on Thursday, steel and aluminum shares had a great day. Good for them, bad for the rest of us.

Maybe so, but what’s truly tragic is that Trump’s penchant for trade protection will in part offset the benefits to the economy from other free-market policies he has put in place, including tax cuts, deregulation, withdrawal from the Paris Accords on climate change and badly needed changes to ObamaCare.

We understand why he walked away from the Trans-Pacific Partnership trade deal and reopened NAFTA. He thought they were flawed, and they were.

But protectionism is a bad road to travel. Let’s hope this move by President Trump is merely a negotiating ploy, and not a long-term policy. If it’s the latter, buckle up — we’re in for a bumpy ride.

CNN has called Trump ignorant on trade, but the only one more protectionist than Donald Trump is the Democrats, who were all applauding Trump’s decision to impose tariffs.  In truth Trump’s ignorance reflects the ignorance of many Americans, who simply believe that the US does not export much and all imports are unfairly traded because they are all dumped.

For years, however, the Commerce Department has created dumping rates by using a policy called zeroing, which allowed Commerce to create dumping rates when there simply were none.  Also with regards to China, Commerce creates dumping rates because it refuses to use actual prices or costs in China, instead using surrogate values from import statistics in 5 to 10 different countries to construct a cost.

Commerce, in effect, is a hanging judge.  That would not matter but when that faulty premise is used to justify a trade war than the US truly does have problems.

Americans also are ignorant because they simply do not understand that in 2017 the US exported $2.4 trillion in goods and services, $1.6 trillion in goods.  See the Commerce Department report below in my post on US exports.

That reality means that foreign countries have many, many retaliation targets against US exports.  This trade war will not be pretty and many Americans and American companies will be hurt.  No one wins a trade war.  Trade wars are a lose lose situation.

US CHINA TRADE WAR FEBRUARY 24, 2018

Dear Friends,

In my last blog post, I asked whether President Trump’s economic juggernaut could be stopped by a trade war.  At the start of the Trump Administration, economic growth was a meager about 2% and there was a true unemployment crisis.  But one way to cure the economy and the trade problem is by making US companies more competitive and that is just what Trump and the Republicans have done with their tax bill and cutting regulations.  Economic growth is approaching 3% or higher.  Unemployment, including Black and Hispanic unemployment, is the lowest in decades.

In January, however President Trump had not yet started a trade war yet.  What a difference one month can make. In January President Trump imposed large tariffs on imports of solar cells and washing machines, wants to impose tariffs on imports of steel and aluminum pursuant to Commerce’s recommendations in section 232 National Security cases and wants to hammer China with more tariffs for intellectual property violations.  It appears that President Trump wants to solve all his disputes with foreign countries by raising tariffs.

But as indicated below, Trump’s desire for more tariffs simply reflects the feeling of many Americans that tariffs should go up to protect various US industries because Trump and many Americans simply do not understand how much the US exports.  The average American has been led to believe that imports are bad, exports are good and US exports very little.  That is the reason for the trade deficits and, therefore, all imports must be unfairly traded.  Trump’s and the average American’s belief is very dangerous thinking because it ignores the reality that the US in 2017 exported over $2 trillion in goods and services.  People in glass houses should not throw tariff stones and the United States has a very big glass house.  Belittling US exports is truly playing with trade war fire.

Trump and many average Americans do not understand what goes around comes around.  Trump, in fact, is inviting trade retaliation and igniting a trade firestorm.  In response to the self-initiation of the Aluminum Sheet case, the Chinese government has upped the game and responded with its own trade case against $1.25 billion of US agricultural exports of Sorghum Grain to China.  There are strong indications that the Chinese government is looking at antidumping and countervailing duty cases against $13.9 billion in US exports of soybeans to China, which will equal to 10% of US agricultural exports in total.

Pursuant to WTO trade rules, the EC, Japan, Korea and China are all asking for trade compensation for the Solar and Washing Machine tariffs imposed on their imports, and these same countries are sure to retaliate if Trump issues high tariffs on imports of steel and aluminum from these same countries.

Meanwhile, the Wall Street Journal is reporting that the US agricultural industry is hurting and one of the reasons is trade disputes and now trade retaliation.  President Trump and many Americans should be careful what they wish for, because they may get it.

But there are rays of sunlight in the US economy, President Trump and Vice President Pence have made noises about possibly rejoining the Trans Pacific Partnership (“TPP”).  More importantly, the Trump tax cuts and cut in regulations has made US producers much more competitive and created a manufacturing renaissance.  A trade war, however, could kill the economic golden goose.

Exclusions are a big issue in the Section 201 Solar case and in a stunner the ITC voted against Boeing in the Bombardier Civil Aircraft case.  More trade cases are being filed against imports.

But there is a remedy to trade problems that is not protectionist and does not invite retaliation.  That is making US companies more competitive.  As stated below, Trade Adjustment Assistance for Companies, a program personally approved by President Reagan, works and is able to save companies injured by imports.  Since 1984, the Northwest Trade Adjustment Assistance Center, which I am involved in, has been able to save 80% of the companies that got into the program.  If you save the companies, you save the jobs that go with those companies.

If anyone has any questions or wants additional information, please feel free to contact me at my e-mail address bill@harrisbricken.com.

Best regards,

Bill Perry

PRESIDENT TRUMP’S ADMINISTRATION APPEARS TO BE PREPARING FOR A TRADE WAR AND THE CHINESE GOVERNMENT HAS ALREADY CREATED A RETALIATION LIST WITH AGRICULTURE BEING THE NUMBER ONE TARGET

As stated above, up to now, President Trump has not started a trade war, but that appears to be changing.  As stated below, on January 21st, President Trump announced large tariffs on imports of solar cells and washing machines and the target countries are already asking for trade compensation, tariffs on US exports.  Every day President Trump appears to use the tariff hammer to deal with different foreign policy disputes and it looks like tariffs on imported steel and aluminum products are coming.

On February 4th, in a meeting with State Department, Defense Department, and Homeland Security officials, Trump promised to use tariffs to deal with immigration problems and put tariffs on the goods of countries and sanction others that refuse to take their citizens/nationals back upon deportation.  Trump stated:

“But if they don’t take them back, we’ll put sanctions on the countries. We’ll put tariffs on the countries. They’ll take them back so fast your head will spin. We’ll just tariff their goods coming in, and they’ll take them back in two seconds. You have a lot of people from those countries, and they’ll take them back.”

This is just one example where President Trump indicates his strong belief that Tariffs on imports are the weapon to use to pressure countries to fall into line with US policy interests.

Moreover, President Trump has promised his base during the election to be very tough on trade.  But President Trump unfortunately does not realize there is a price to pay for a trade war—retaliation against US exports.

DESPITE THE REAGAN WARNING MANY AMERICANS APPARENTLY WANT INCREASED TARIFFS TO PROTECT US INDUSTRIES EVEN IF US EXPORTS GET SMASHED

But President Trump’s favorable view of tariffs on imports may simply reflect the beliefs of many Americans that trade is bad.  Exports are good, but all imports are bad.  Therefore, if there is a trade deficit, that must mean that trade and imports are hurting US industry because all imports are unfairly traded and the solution is simply put more trade barriers up.

Such a way of thinking is perpetuated by a Commerce Department that finds dumping in almost 100% of the cases, especially against China, because Commerce uses fake numbers, surrogate values from 5 to 10 different countries, to create dumping margins in Chinese cases.  Literally, over the past few decasdes, the number of cases in which the Commerce Department reached a no dumping and no countervailing duty case, turning the case off can be counted on less than two hands.  Commerce is a hanging judge, but when that hanging judge creates a myth that all imports into the US  are dumped and subsidized, that is when real probelms begin.  Although Paul Ryan, Speaker of the House, once stated that 70% of all customers are outside the United States, that point apparently has been forgotten and does not register with the average American, who thinks that putting up high tariffs will solve the trade problems and protect US manufacturing.

On January 26, 2018, Rasmussen Reports in an article entitled “Americans Still Favor Use of Protective Tariffs” stated that polls show that Americans favor tariffs:

“President Trump this week imposed heavy tariffs on foreign manufacturers of washing machines and solar panels to protect U.S. businesses. Americans by a two-to-one margin think tariffs are a good way to go.

The latest Rasmussen Reports national telephone and online survey finds that 50% of American Adults believe the federal government should place tariffs on goods from countries that pay very low wages to their workers. Twenty-six percent (26%) oppose tariffs on such goods even though the low wages mean these manufactured items often cost less than comparable American products. One-in-four (24%), however, are undecided.”

On February 6, 2018, Breitbart reported on the Rasmussen Poll in an article entitled “Americans Increasingly Support Tariffs to Protect US Against Globalization”, stating:

“Americans are increasingly supportive of tariffs on cheap, imported goods from foreign countries to protect American industries and workers against wild globalization.

In a poll by Rasmussen Reports, roughly 50 percent of Americans said the federal government should “place tariffs on goods from countries that pay very low wages to their workers,” as opposed to only 26 percent of Americans who said tariffs should not be imposed on foreign countries.

About 24 percent of Americans said they were “not sure” if the government should use tariffs to protect American industries.

Additionally, a plurality of Americans, about 44 percent, said the federal government is not doing “enough” to protect U.S. manufacturers and businesses from foreign competition” from globalization which has been exacerbated by endless multinational free trade agreements supported by the Democratic and Republican party establishments.

The support for protective tariffs has increased from two years ago, in 2015, when 47 percent of Americans polled by Rasmussen Reports said the federal government should place tariffs on foreign countries dumping cheap, imported products in the U.S.

In that 2015 poll, a plurality of Americans, about 40 percent, said free trade agreements like NAFTA and KORUS “take jobs away” from Americans.

The support for tariffs is positive news for President Trump’s administration, which is combatting globalization by imposing tariffs to protect American industries. In the Trump administration’s latest “America First” trade move, the White House placed a 30 percent tariff on imported solar products.

The tariff, as Breitbart News reported, has already resulted in a Chinese solar company announcing plans to build a solar plant in the U.S. rather than overseas.

The Trump administration’s pro-American trade initiatives are a break from over two decades of globalist trade agendas of past administrations under President George W. Bush and President Obama. For years, both political establishments have joined forces to push multinational free trade deals that outsource and offshore Americans’ jobs to foreign nations.

As Breitbart News reported in 2016, South Carolina is just one example of a state that was devastated by NAFTA, with the state losing about one-third of its manufacturing jobs since 1994 when the free trade agreement was signed.

In Trump’s most significant pushback against the Democratic and Republican apparatus on free trade and global initiatives, rather than individual nation-state efforts, he ended the Trans-Pacific Partnership (TPP) free trade agreement and the Paris Climate Agreement. . . .”

But President Ronald Reagan understood that the there is a price to pay for tariffs on imports—retaliation against US exports.  As President Reagan stated in a speech on June 28, 1986:

“That’s because international trade is one of those issues that politicians find an unending source of temptation. Like a 5-cent cigar or a chicken in every pot, demanding high tariffs or import restrictions is a familiar bit of flimflammery in American politics. But cliches and demagoguery aside, the truth is these trade restrictions badly hurt economic growth. . . .

We had an excellent example of this in our own history during the Great Depression. Most of you are too young to remember this, but not long after the stock market crash of 1929, the Congress passed something called the Smoot-Hawley tariff. Many economists believe it was one of the worst blows ever to our economy. By crippling free and fair trade with other nations, it internationalized the Depression. It also helped shut off America’s export market, eliminating many jobs here at home and driving the Depression even deeper. . . .

But I think you all know the inherent danger here. A foreign government raises an unfair barrier; the United States Government is forced to respond. Then the foreign government retaliates; then we respond, and so on. The pattern is exactly the one you see in those pie fights in the old Hollywood comedies: Everything and everybody just gets messier and messier. The difference here is that it’s not funny. It’s tragic. Protectionism becomes destructionism; it costs jobs.”

Like Breitbart, many Americans believe that the US simply does not export much.  The cost of President Trump’s protective tariffs, however, will be very high when US exports in 2017 were over $2 trillion.  On January 21st, President Trump imposed high tariffs on imports of solar cells and washing machines.  On January 24th, the Wall Street Journal in an editorial entitled “Trump Starts His Trade War”, stated:

“Can Donald Trump stand prosperity? Fresh from a government shutdown victory and with the U.S. economy on a roll, the President decided on Tuesday to kick off his long-promised war on imports—and American consumers. This isn’t likely to go the way Mr. Trump imagines.

“Our action today helps to create jobs in America for Americans,” Mr. Trump declared as he imposed tariffs on solar cells and washing machines. “You’re going to have a lot of plants built in the United States that were thinking of coming, but they would never have come unless we did this.”

The scary part is he really seems to believe this. And toward that end he imposed a new 30% tariff on crystalline silicon photovoltaic cells and solar modules to benefit two bankrupt companies, and a new 20%-50% tariff on washing machines to benefit Whirlpool Corp. The tariffs will hurt many more companies and people, and that’s before other countries retaliate.

The solar tariff is a response to a petition filed at the International Trade Commission by two U.S.-based manufacturers—Chinese-owned Suniva, which filed for bankruptcy last year, and German-owned SolarWorld Americas, whose parent company filed for bankruptcy last year. Under Section 201 of U.S. trade law, the companies don’t need to show evidence of dumping or foreign subsidies. They merely have to show they were hurt by imports, which is to say by competition.

The two companies once employed some 3,200 Americans. But the wider solar industry, which depends on price-competitive cells as a basic component, supports some 260,000 U.S. jobs.

Costs will rise immediately for this value-added part of the industry, which the Solar Energy Industries Association (SEIA) says includes the manufacture of “metal racking, high tech inverters, machines that improve solar output by tracking the sun and other electrical products.”

The Journal reported Tuesday that the Trump tariff may spur an unnamed panel manufacturer to invest in a new plant in Florida that will create 800 new jobs. But SEIA says it expects that the tariff will cost 23,000 U.S. jobs this year alone. It will also mean that billions of dollars of solar investments are likely to be postponed or canceled. Utility companies facing green-energy mandates from state governments will also suffer as it gets more costly to deliver solar- produced electricity.

Mr. Trump will also make doing the laundry great again, or at least more expensive, with a new 20% tariff on the first 1.2 million imported washing machines every year. Above that the tariff will go to 50%. Don’t even think about assembling a washer with foreign parts, which get whacked with a 50% tariff above 50,000 imported units in the first year. . . .

Manufacturers will also lose flexibility in sourcing parts, which is critical to competitiveness. In South Carolina, where Samsung has a new $380 million appliance plant, the Trump tariffs aren’t welcome. Republican Gov. Henry McMaster is worried they’ll hurt the investment climate and invite retaliation.

Mr. Trump conducts trade policy as if U.S. trading partners have no recourse. With exports of $30.9 billion in 2016 and among the country’s highest level of exports per capita, South Carolina knows better. By justifying tariffs solely on the failure to compete, Mr. Trump is inviting other countries to do the same for their struggling companies. Their case at the World Trade Organization will also be a layup, allowing legal retaliation against U.S. exports.

By the way, if Mr. Trump thinks these new border taxes will hurt China, he’s mistaken again. China ran a distant fourth as a producer of solar cell and modules for the U.S. in 2017, after Malaysia, South Korea and Vietnam. Korea and Mexico are the two largest exporters of washing machines to the U.S. Mr. Trump’s tariffs are an economic blunderbuss that will hit America’s friends abroad and Mr. Trump’s forgotten men and women at home.”

TRUMP AND MANY AMERICANS SIMPLY DO NOT REALIZE HOW MUCH THE US EXPORTS AND PEOPLE IN GLASS HOUSES – –

President Trump and many Americans simply do not understand that despite the trade deficit, in 2017 total US exports of goods and services was $2.4 trillion.  $1.622 trillion was US exports of goods, such as machinery, semiconductor chips and other items.  China and other countries have many ripe targets for retaliation against the US.

On February 16, 2018, in the attached report, 2017 TRADE DATA, the U.S. Census Bureau U.S. Bureau of Economic Analysis of the Commerce Department reported that for full year 2017:

Exports were $2,329.3 billion in 2017, up $121.2 billion from 2016. Imports were $2,895.3 billion in 2017, up $182.5 billion from 2016.

In other words, US exports in 2017 of goods and services were $2.3 trillion and imports were $2.8 trillion creating a trade deficit of $566.0 billion.  With regards to US exports, of the $2.3 trillion, export of services was $777.9 billion.  Services include exports of financial services, express delivery, media and entertainment, distribution, telecommunications and computer service.  Exports of goods was over $1.5 trillion, including industrial supplies and materials, crude oil, capital goods, including industrial machines and aircraft engines.

Although exports of agricultural products are important at about $132 billion, exports of industrial supplies and materials at $462 billion and exports of capital goods except automotive at $532 billion are much more important.  Exports of Automotive vehicles and parts at $157 billion, consumer goods at $197 billion and export of other goods at $62 billion are also very important.

The focus of this piece is on exports because much to the surprise of many in the Trump Administration and possibly Trump himself and the average American, these US Commerce statistics establish that the US exports a lot of goods to various countries around the World and this creates tempting targets for retaliation and it is not just agriculture.  People in glass houses should not throw stones and putting up tariff barriers to imports invites a trade retaliation firestorm.

When I mentioned US exports, one self-proclaimed conservative responded, “You mean apples.”  Uh, no exports of industrial goods are much larger than exports of agricultural products.

If Trump creates a trade war, the United States has a lot to lose.

STATE OF THE UNION—TRADE RECIPROCITY OR MANAGED TRADE??

In his January 30, 2018 State of the Union address, President Trump did not mention trade much but stressed in his speech on his economic policies have helped bring back manufacturing to the US and increased US jobs, stating:

“3 million workers have already gotten tax cut bonuses — many of them thousands and thousands of dollars per worker. And it’s getting more every month, every week. Apple has just announced it plans to invest a total of $350 billion in America, and hire another 20,000 workers. And just a little while ago, ExxonMobil announced a $50 billion investment in the United States, just a little while ago. . . .

Very soon, auto plants and other plants will be opening up all over our country. This is all news Americans are totally unaccustomed to hearing. For many years, companies and jobs were only leaving us. But now they are roaring back. They’re coming back. They want to be where the action is. They want to be in the United States of America. That’s where they want to be. . . .”

But President Trump then went on to state about trade:

“America has also finally turned the page on decades of unfair trade deals that sacrificed our prosperity and shipped away our companies, our jobs, and our wealth. Our nation has lost its wealth, but we’re getting it back so fast. The era of economic surrender is totally over. From now on, we expect trading relationships to be fair and, very importantly, reciprocal.

We will work to fix bad trade deals and negotiate new ones. And they’ll be good ones, but they’ll be fair. And we will protect American workers and American intellectual property through strong enforcement of our trade rules.”

In response to the State of the Union address, on January 31st, John Brinkley in an article in Forbes entitled “With No Accomplishments To Report, Trump All  But Skips Trade In SOTU” stated:

“Last week, at the World Economic Forum meeting in Davos, Switzerland, President Trump suggested he was open to rejoining the Trans-Pacific Partnership. That was surprising, given that one of the first things he did as president was withdraw the United States from it.

Last night, in his State of the Union address, he devoted all of 78 words to trade policy, including nothing he hadn’t said before, nothing about the TPP, nothing about NAFTA (which he recently called a “bad joke”) and nothing direct about the U.S. trade deficit.

“From now on,” he said, “we expect trading relationships to be fair and, very importantly, reciprocal.”

The Merriam-Webster Dictionary defines “reciprocal” as “mutually corresponding.” If Trump wants every dollar of imports to be matched by a dollar of exports, that is an impossible goal. Tinkering around with NAFTA and the Korea-U.S. Free Trade Agreement, as his administration is doing, will have no appreciable effect on the U.S. trade deficits with Mexico and South Korea.

By now, he’s heard enough from the U.S. Chamber of Commerce, his friends in the business world, even his own secretary of agriculture, about how important trade is to them. None of them asked him to renegotiate NAFTA or the Korea agreement.

None of them asked him to withdraw from the TPP. You’ll recall that it was delegates to the 2016 Democratic Convention who held up “No TPP” signs and that Hillary Clinton and Bernie Sanders ran away from the agreement as though it were a rattlesnake.

Trump and Sanders were dead wrong about the TPP and about trade in general, but at least they believed what they said. Clinton, on the other hand, was dead wrong, and she knew it.

“We will work to fix bad trade deals and negotiate new ones,” Trump said last night. Does he still believe this strategy is going to lead to reciprocal trade? Or is he just saying what his base wants to hear? . . . .

Bottom line: Trump’s State of the Union claims that “America has also finally turned the page on decades of unfair trade deals” notwithstanding, he has yet to make good on any of his trade-related threats and promises. We still have all the trade deals we had a year ago, and the U.S. trade deficit has increased.”

On February 12th in an article entitled “Trump Says US Will impose A Reciprocal Tax on Imports”, Breitbart reported:

“President Donald Trump said on Monday that the U.S. government will impose a “reciprocal tax” on imports from countries that levy tariffs against American made goods.

“We’re going to charge countries outside of our country–countries that take advantage of the United States, some of them are so-called allies but they’re not allies on trade,” Trump said during a White House meeting on infrastructure. “We’re going to be doing very much a reciprocal tax and you’ll be hearing about that during the week and coming months.”

Commerce Secretary Wilbur Ross applauded the idea, saying that the U.S. needs to “claw back” the revenue other countries raise by taxing U.S. products.

The U.S. has very low tariffs compared with some of our biggest trading partners. The trade-weighted average of U.S. tariffs is just 2.4 percent. China’s is 4.4 percent.”

While Congress has the authority to set taxes and tariffs, the law authorizes the president to unilaterally impose tariffs in certain circumstances. In January, for example, the administration announced that it would impose tariffs on washing machines and solar products. The administration could potentially expand its use of these types of sanctions instead of waiting on Congress to pass new tariffs.”

Under the Constitution, however, the Congress controls trade, not the President and any new reciprocal tariff would probably have to go through Congress, which would not agree to such a new law.  On January 30th, Politico reported in an article entitled “Republicans seek to Tame Trump on Trade”:

“The GOP has long been a party of free traders. During the past two years of President Barack Obama’s presidency, Senate Republicans labored to pass a bill giving him the ability to quickly negotiate new trade deals. Now they have a president of their own party who prefers to scrap trade deals and slap tariffs on other nations.

Senate Finance Chairman Orrin Hatch (R-Utah), who led the fight to give Obama so-called Trade Promotion Authority, said he wants to hear Trump “extrapolate” concrete policies, because “right now they’re just suggestions.”

“I’m not uncomfortable. But I’m not comfortable either,” Hatch said of Trump’s trade stance. “I’m a free-trade guy. And I believe that this ought to be a free-trade country, especially when it comes to NAFTA and our hemisphere.”

Republican sources said GOP senators’ disagreements with Trump on trade surface far more often in party lunches than what the president said on Twitter or the chaotic story of the day from within the White House. Senators will often wait to complain about Trump’s policies until Tuesdays, when Vice President Mike Pence often visits the GOP lunch, hoping that bending Pence’s ear will help moderate Trump.

And in some cases, Trump has listened. His decision to impose tariffs on solar panels wasn’t as severe as some senators had feared. And Trump opened the door last week to re-engaging on the Trans-Pacific Partnership, a massive deal negotiated by Obama with Pacific Rim countries that Trump rejected shortly after taking office. The Trump administration has also sought to soothe some senators over NAFTA in recent weeks, according to GOP senators.”

But if by reciprocity, Trump means busting up barriers to US exports, that is fine with me and fine with President Reagan.  President Reagan and many successive Presidents have taken aggressive enforcement actions to break down barriers to US exports and investment.  If China has high tariffs on certain exports or bars US exports or investment in certain sectors, why should the US open up its border to Chinese imports and investment in those sectors?

But the major problem with such a new reciprocal tariff is the WTO Agreement and the bedrock agreement of Most Favored Nation.  The MFN principle provides that once a country becomes part of the WTO, with its general tariffs, it must treat all imports equally and cannot discriminate against imports from different countries, except with a Section 201 Escape Clause case or if dumping, subsidization or other unfair trade practices are involved.  Thus, a reciprocal tariff will invite retaliation by foreign countries pursuant to the WTO Agreement.  That is why many knowledgeable persons in the trade field have pushed for free trade agreements that lower tariffs, where the US has much to gain.

But because of his focus on trade deficits, if Trump means managed trade, not free trade, to reduce trade deficits, which means putting up high tariff walls to imports to equalize competition, count me and many other countries out, which will have no inclination to negotiate a bilateral trade deal with the US.

THE US BUILT THE WTO FREE TRADE MODEL THAT TRUMP APPARENTLY WANTS TO TEAR DOWN

On February 6, 2018, in an article entitled “US Leadership in International Trade: Recalibration or Retreat?” in The Diplomat, Mercy Kuo interviewed Ambassador Rufus Yerxa, president of the National Foreign Trade Council (NFTC) and deputy director general of the WTO from 2002 to 2013.  On a personal note, I used to work with Ambassador Yerxa many years ago at the International Trade Commission.  During this interview, Ambassador Yerxa made two very important points about the Trump trade policy:

“Is the U.S. retreating from or recalibrating its leadership role in international trade?

There is clearly a significant danger for the United States and for world trade generally if the Trump administration applies its concept of economic nationalism in the wrong way – by building trade barriers in sectors where we are uncompetitive, withdrawing from our trade alliances, or starting trade wars with excessive use of unilateral tariffs or other forms of trade retaliation. The dangers are three-fold: first, we will be turning inward and losing our competitiveness; second, by shelving our existing preferential free-trade arrangements just when our competitors are expanding theirs, we will lose our competitive position in export markets; and third, by abandoning WTO principles and acting unilaterally, we will make it more likely that other countries will write global trade standards without us and further isolate us from the global economy.

So far, the Trump administration’s rhetoric on this idea of economic nationalism has far exceeded its actions. But the administration’s worrying belief in mercantilist trade polices as a panacea for all our economic ills runs the risk of moving our country decisively in the direction outlined above. In the end, such a philosophy may cause our economy and our workers far more harm than good. American industries are willing to support a tougher line on enforcement of trade rules, as well as a more resolute stand against the nationalistic, unfair trade, and investment policies of China. But these things need to be done in the context of our broader support for the open trading system we led the world in building. If we send the signal that we do not believe in that system – even though it is there because of our leadership – we will lose the support we have built over 70 years for free and fair trade, and with it we will lose our leverage to shape the future of globalization.

What might the World Trade Organization (WTO) look like without U.S. involvement?

It is not a very pretty thought. The WTO system was designed to reflect core U.S. values, such as non- discrimination, transparency, and respect for the rule of law. These values are embedded in the organization’s rules, and help to commit other countries to the basic ideals of free market economics that America was built upon. For example, the WTO has some fairly effective rules about subsidy practices, dumping, and non-tariff measures (such as technical barriers to trade). These are important safeguards for U.S. industries.

For the U.S. to disengage from the WTO system, particularly at this critical moment in the globalization process, would leave the door open for politically influential countries such as China and Russia to push a trade model based much more on state-run capitalism and authoritarian economics than on our free market principles. This could pose a long-term problem that could take decades to repair. In fact, it took decades for us to push the Europeans in the right direction on state intervention, and the WTO’s predecessor, the GATT, was an important tool in that effort. Now the Europeans have a respectable state aids code and have adopted far greater discipline on agriculture subsidies. But if China, Russia, and others with less attachment to free market economics become the dominant force in the WTO, the Europeans themselves could be drawn back towards their earlier model, just as a matter of survival! That would not be a good world for Americans.”

AGRICULTURE HAVING A HARD YEAR BECAUSE OF TRUMP’S TRADE POLICY

The argument that consumers will be hurt by rising import prices simply carries no weight either with the Trump Administration or the US Congress.  If prices go up a few dollars at Wal Mart, no one in Washington DC other than the economic intellectuals care.  What does carry weight, however, is the strong argument that trade protectionism seriously damages US companies, including agriculture, and the strong and justified fear that many US companies, including US agriculture and manufacturing companies, will be badly hurt by trade retaliation.  President Trump’s decision to tear up the Trans Pacific Partnership, without trying to renegotiate it, may have appealed to those people in his base that are not knowledgeable about trade, but this decision to tear up the TPP and the failure to create more US free trade agreements puts many US agriculture companies at risk.

As stated before in past blog posts, no one in the Trump Administration or the Congress assessed the real costs to US industry of not doing the Trans Pacific Partnership.  Every day those costs are becoming clearer and clearer.

On February 15, 2018, Capital Press in an article entitled “Wheat industry seeks to re-enter TPP” describes in detail what the withdrawal from the TPP means for the US wheat industry and what that means for US jobs:

“If the United States doesn’t re-enter the Trans-Pacific Partnership, Northwest wheat exports to Japan could drop by half within a few years, says the leader of the Washington Grain Commission.

The Pacific Northwest currently exports roughly 800,000 metric tons of Western white wheat, a popular blend of soft white wheat and subclass club wheat, to Japan each year, commission CEO Glen Squires said.

Hard red winter and hard red spring wheat exports would also be impacted, affecting Montana and North Dakota, and other states exporting off the West Coast, Squires said.

Japan wants the U.S. in TPP, and is not interested in bilateral agreements, Squires said.

Wheat industry representatives met in Washington D.C. last week. Many legislators are aware of the concerns about the Trans-Pacific Partnership proceeding without the United States, Squires said. It will essentially amount to a tariff on U.S. wheat, putting the country at a price disadvantage in key markets compared to competing wheat-producing countries that are remain in the trade pact.

Changes under TPP will occur over nine years, but Squires said the impact on shipments could be much faster.

“This is a massively big deal,” he said.

Reduced demand would result in lower wheat prices, Squires said.

A national coalition of agricultural commodities is forming to address the situation, Squires said. The industry will appeal to the Trump administration to rejoin the trade deal.

“President Trump is the guy who can negotiate, and get us back involved,” Squires said. “It’s clearly a big impact: It’s the equivalent of handing our competitors a $500 million check per year.” . . .

Squires warned of “ripple effects” throughout the industry, which could happen as soon as U.S. wheat becomes uncompetitive in overseas markets. . . .

Without exports to Japan, the grain commission estimates volume would drop by 62.5 million bushels. That equals 19,000 fewer rail cars and nearly 70 bulk vessels each year. Impact would be felt by port facilities, barges, elevator longshoremen, ship handlers, and other industry members, Squires said.

Every $1 billion in farm exports supports more than 8,000 jobs in 2016. Wheat export losses of $500 million per year would lead to reductions in the work force across the supply chain, Squires said. . . .”

Emphasis added.

Keep in mind that rural America and farmers are a key constituency of the Trump Presidency. Trump won the Presidency not only because of Michigan, Ohio, Pennsylvania and Wisconsin, but also the states of Iowa, Kansas, Nebraska, Wyoming, Montana, North Dakota, South Dakota, Idaho, Utah, Arizona, and many other states where farmers and agriculture are very important for the economy of those States.

Yet the Wall Street Journal reported on February 8, 2018 that in contrast to the rest of the economy, Farm Incomes are falling:

“Farm Belt Braces for Falling Incomes, Trade Disputes

Farm incomes are forecast to decline 7% to $60 billion in 2018.

U.S. farmers are gearing up for another tough year.

Farm incomes are expected to hit their lowest point since 2006 and borrowing costs are rising, federal data shows, as a deepening slump in the agricultural economy enters its fifth year.

A string of bumper corn and soybean harvests has added to a glut of grain world-wide, eroding prices for U.S. farmers. Foreign rivals like Russia and Brazil are also chipping away at U.S. dominance in the global grain trade, helping to fuel a multiyear downturn that is pushing some farmers out of business.

“The state of the rural economy is fragile,” Agriculture Secretary Sonny Perdue told lawmakers during a hearing of the House Agriculture Committee on Tuesday. “There’s a lot of stress and a lot of duress on the farms today.”

The U.S. Department of Agriculture on Wednesday forecast that farm incomes would fall 7% to $60 billion in 2018 on lower crop and livestock revenue, less than half of the record $124 billion farmers earned in 2013. Farmers are already borrowing more to keep farms running. . . .

As spring planting looms, farmers are looking to South America for clues on demand for their own crop. The USDA boosted its forecast for Brazil’s soybean harvest on Thursday, and cut its projection for U.S. exports of the oilseed this season thanks to stiffer competition from South America.”

As stated many times in past blog posts, President Trump’s decision to rip up the Trans Pacific Partnership and talk about more tariffs on various trade areas has led to many foreign countries, including China, to not look at the US as a reliable partner in the trade area.  It has also resulted in many foreign countries, including Mexico, China, Japan and the EC, to switch sourcing products from the US and turn to alternative sources of supply.  Since almost 50% of all agriculture products are exported, one third of Iowa corn is exported to Mexico, agriculture and the farm states are starting to feel real pain because of the Trump trade policy.

TRANS PACIFIC PARTNERSHIP (“TPP”) RISES AGAIN???

As mentioned in my last blog post, Trump’s trade team is starting to realize that countries do not want to negotiate bilateral trade deals with the US.  Even though NAFTA may ultimately be renegotiated, the real problem is that with Trump’s policy of weaponizing trade agreements, no other country will enter into a trade agreement with the US.  As Robert Zoellick, the former United States Trade Representative (“USTR”) under President George W. Bush, stated on January 7th in the Wall Street Journal in an article entitled “Trump Courts Economic Mayhem”:

“No country wants to do a bilateral deal with Mr. Trump now because he demands managed trade, not fair competition. He wants excuses to raise barriers, not rules to boost trade.”

As stated above, that is a huge problem for US farmers because almost 50% of farm products produced in the US are exported.

Because of this failure, if Trump keeps going down this road, the US may conclude no free trade agreements.  This would have a devastating impact on US exporters, including US agricultural companies.  The entire World is moving to free trade agreements and because of Most Favored Nation principle, the US with lower tariffs than many other countries would benefit the most.   Because of this reality, in my last blog post I suggested that Trump might want to renegotiate the TPP, but only under strict conditions.

Lo and behold, in January and February there were noises from the President and the Administration about coming back to the TPP.

On January 23rd, in an article entitled, “TPP Members Reach Agreement on Major Trade Pact”, the Wall Street Journal reported:

“TOKYO—Negotiators from 11 Pacific Rim nations agreed Tuesday on a Trans-Pacific Partnership trade deal, the Japanese minister in charge of TPP said, a year after President Donald Trump withdrew the U.S. from the talks.

Negotiators gathered again in Tokyo Tuesday and cleared away the remaining sticking points, said Toshimitsu Motegi, the Japanese minister handling the talks. He said the 11 nations aim to sign the agreement on March 8 in Chile. . . .

The TPP deal came just a half-day after the Trump administration slapped steep tariffs on imported solar panels and washing machines, a move to implement Mr. Trump’s harder line on trade that he has touted since his election campaign.

Japan has depicted itself as a free-trade champion that can assume the kind of leadership role previously taken by U.S. administrations.

“Now in some parts of the world, there is a move toward protectionism, and I think the TPP-11 is a major engine to overcome such a phenomenon,” Mr. Motegi said.

He said the deal was “epoch-making for Japan as well as for the future of the Asia-Pacific region.” He also reiterated a hope frequently expressed by Japanese officials that once the 11- nation TPP is up and running, the U.S. might consider rejoining the deal.

The TPP agreement could also provide a framework for a future Nafta deal should the current one be scrapped by the Trump administration, according to people familiar with the trade talks. Senior Mexican officials see the TPP agreement as an indication that the free-trade train is rolling forward with regional pacts, with or without the U.S. aboard, as Nafta is being renegotiated.”

On January 26, 2018, during a meeting at the World Economic Forum in Davos, Switzerland, Trump discussed trade and eventually turned to the TPP stating:

“The United States is prepared to negotiate mutually beneficial, bilateral trade agreements with all countries. This will include the countries in TPP, which are very important. We have agreements with several of them already. We would consider negotiating with the rest, either individually, or perhaps as a group, if it is in the interests of all.”

In response to a question in an interview with CNBC’s Joe Kerne, Trump further stated:

“I would do TPP if we were able to make a substantially better deal.  The deal was terrible, the way it was structured was terrible. If we did a substantially better deal, I would be open to TPP.”

During his Davos address, however, Trump did not mention the TPP and instead put forth a very tough statement on trade:

“The United States will no longer turn a blind eye to unfair economic practices, including massive intellectual property theft, industrial subsidies, and pervasive state-led economic planning.  These and other predatory behaviors are distorting the global markets and harming businesses and workers, not just in the U.S., but around the globe.”

In line with the tough stance against international trade, during Davos Economic Forum, on January 24th, in an article entitled, “U.S. Commerce Secretary Slams Beijing for Protectionist Actions Under Free-Trade Rhetoric” the Wall Street Journal reported:

“The Chinese have for quite a little while been superb at free-trade rhetoric and even more superb at highly protectionist activities,” U.S. Commerce Secretary Wilbur Ross told a trade panel Wednesday in Davos, Switzerland. Mr. Ross went on to blame both Beijing and the European Union for unfairly benefiting from higher tariffs and challenged the other two big economies to lower their import duties to U.S. levels.

“We really are the least protectionist, and unfortunately we have the trade deficits to show for it,” Mr. Ross said.

The Trump administration is seeking to push its own trade message at the annual Davos economic gathering, which is closely linked to globalization and multilateralism. Mr. Ross backed the administration’s bilateral approach to negotiating trade agreements and defended President Donald Trump’s exit from the unratified 12-nation Trans-Pacific Partnership agreement a year earlier, saying there was “no political appetite” for the pact in either party.”

But then the TPP story continued to grow.  During his visit to Tokyo last year in 2017, Vice President Mike Pence stated as far as the Trump administration is concerned, the TPP is a “thing of the past.” But during his most recent trip to Tokyo in February 2018, his tune seemed to change.  On February 7th, Kyodo News reported that in discussions with Japanese Deputy Prime Minister Taro Aso, Vice President Pence “referred to the possibility of the United States returning to the Trans-Pacific Partnership free trade deal.”  Apparently, Pence’s statement was in response to a question from the Deputy Prime Minster about Trump’s statement at Davos.  Apparently, Pence and Aso then exchanged views on the strategic importance of the TPP.

On January 31st, the famous economist Robert Samuelson in an article in Investors Business Daily entitled “Trump Dumped TPP A Year Ago – -What Did it Accomplish” stated:

“As President Trump appraises the state of the union, it’s worth remembering what still ranks as one of the worst decisions of his presidency: the withdrawal of the United States from the Trans-Pacific Partnership, or TPP. It happened just about a year ago.

You’ll recall that the TPP was an agreement between the U.S. and 11 other countries — Australia, Japan, New Zealand, Canada, Mexico, Singapore, Malaysia, Vietnam, Brunei, Chile and Peru — representing about 40% of the world economy.

Rejecting the TPP was, for Trump, a highly symbolic act buttressing his assertions that the United States has made bad trade deals that have diverted jobs, incomes and influence to foreign countries. He pledged to do better.

The reality is just the opposite, as a short analysis by economist Jeffrey Schott of the Peterson Institute makes clear. It turns out that the other 11 countries weren’t willing to sacrifice the TPP’s benefits. They decided to adopt the agreement anyway — without the United States — calling it the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or (a mouthful) CPTPP. It’s scheduled to be signed on March 8 in Chile.

The new agreement makes the United States “the biggest loser” from the whole TPP episode, writes Schott. For starters, there will be lower exports and incomes. Economic simulations done by researchers at the Peterson Institute estimated that the TPP would ultimately raise U.S. gross domestic product by $131 billion, or 0.5% of GDP. Those gains are now gone.

Schott notes that a number of TPP provisions advocated by the United States but opposed “by most other countries” have been dropped in the new agreement. These include “obligations regarding patents on certain pharmaceutical products, procedures involving investor-state disputes, prohibitions on the illegal taking and trade in wildlife” and restrictions on government-owned firms.

The biggest winner in the TPP episode is, almost certainly, China. Although China wasn’t a member of the TPP, Trump’s decision to withdraw leaves other Pacific-rim countries less dependent on the United States for their trade and more dependent on China — and, therefore, more subject to Chinese economic and political influence.

Rarely has the United States embraced a policy that, in contrast to the supporting rhetoric, is so contrary to its own interests. Even Trump may recognize this. In his speech at the World Economic Forum in Davos, he hinted obliquely that he might resume negotiations with the other TPP nations “if it is in the interests of all.”

The open question now is whether the president will repeat his mistake by repudiating the North American Free Trade Agreement (NAFTA), the trade pact among the United States, Mexico and Canada that Trump has sharply criticized. The damage would be even greater.”

During the time when the TPP was being discussed in Congress, its passage was in trouble because many Senators and Congressmen believed the US did not get enough and many Senators and Congressmen wanted a a better deal.  But now there is no deal and the costs of not doing the TPP are becoming clearer.

On February 16th, 25 Republican Senators, many from agriculture states, such as Hatch, Grassley, Ernst, Enzi, Gardner, McCain and Daines, sent the attached letter to President Trump, 021618 Letter to POTUS on TPP1, strongly urging him to rejoin the Trans Pacific Partnership stating:

“Mr. President:

We write in support of your recent comments expressing interest in re-engaging with the Trans­ Pacific Partnership (TPP) to bring about a stronger agreement for the United States. Reducing barriers to trade and investment, protecting American intellectual property rights, and leveling the playing field for U.S. businesses, manufacturers, farmers, fishermen, and ranchers is of utmost importance, and we ask that you prioritize engagement with the TPP so that the American people can prosper from the tremendous opportunities that these trading partners bring.

As you know, increased economic engagement with the eleven nations currently in the TPP has the potential to substantially improve the competitiveness of U.S. businesses, support millions of U.S. jobs, increase U.S. exports, increase wages, fully unleash America’s energy potential, and benefit consumers. Increasing access to a region and market that has a population of nearly 500 million can create widespread benefits to the U.S. economy. An improved TPP would therefore bolster and sustain the economic growth America has experienced over the past year facilitated by the regulatory reductions and reforms enacted by your Administration and the substantial tax cuts that you signed into law.

Further, TPP can serve as a way to strengthen ties with our allies in the region, counter the influence of the People’s Republic of China (PRC), and increase pressure on the PRC to adopt substantive and positive economic reforms. Re-engaging on TPP would also provide another platform to modernize trade with Canada and Mexico. . . .

In summary, we encourage you to work aggressively to secure reforms that would allow the United States to join the agreement. We share your commitment for free trade agreements that benefit the American people, and we stand ready to work closely with you toward achieving a TPP agreement that meets this objective.”

As predicted many times in prior blog posts, the costs of not joining the TPP are becoming clearer and clearer and the real economic pain of not joining the TPP is also becoming starkly clear.

RETALIATION BEGINS– FIRST SORGHUM GRAIN NEXT SOYBEANS??

As stated above, when the US imposes trade restrictions, US trading partners will respond with their own trade restrictions retaliating against US exports.  But Trump and the average American may simply believe that neither the EC nor China will retaliate against US exports, causing economic pain to the US.  Think again as the retaliation has already started and it will hurt.

MOFCOM SELF-INITIATED ANTIDUMPING (“AD”) AND COUNTERVAILING DUTY (“CVD”) CASES AGAINST SORGHUM GRAIN FROM THE US

On December 1, 2017, in the first time in over a decade, the Commerce Department self-initiated an antidumping and countervailing duty case against imports of aluminum sheet from China.

On February 4, 2018, the Ministry of Commerce (“MOFCOM”) in China retaliated by self-initiating its own antidumping and countervailing duty case against 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.

Notices of appearance are due at MOFCOM by February 24th.

Although the Trump Administration and many Americans may believe that the US government does not provide subsidies to its producers, as mentioned in the MOFCOM announcement, it will be investigating large US agricultural subsidies for sorghum grain, such as Crop Insurance Program, Price Loss Protection Program, Agricultural Risk Protection Program, Marketing Loan Program, Export Credit Guarantee Program, Market Access Program and Foreign Market Development Partner Program.

Some of the US companies that may be the targets of this MOFCOM action are: 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, and Zeeland Farm Services.

This case is important because it signals the possible start of a trade war with China.  The US self-initiates antidumping and countervailing duty cases against China; China self-initiates antidumping and countervailing duty cases against the US.

SOYBEANS?

On February 7th, Bloomberg reported that the Chinese government is looking at possibly self-initiating trade cases against Chinese imports of US soybeans.  In the article entitled, “China Studying Impact of Trade Measures Against U.S. Soy, Sources Say” Bloomberg stated:

“China is studying the potential impact of trade measures imposed on soybeans imported from the U.S., valued last year at $13.9 billion, according to people familiar with the matter.

Speculation is mounting over China’s response to U.S. tariffs on imported solar panels and washing machines announced last month. The Ministry of Commerce has been looking into the consequences of measures against U.S. soybeans since January . . . . That includes anti-dumping and anti-subsidy probes. . . .

China’s soybean imports have climbed to a record as expansion in large-scale livestock farming and a shortage of protein-rich feed grains boost soy-meal consumption. While the U.S. counts China as its biggest soybean market, the Asian country last year bought more of the oilseed from Brazil.”

If Section 232 Tariffs are imposed against US imports of EC Steel, the EC is planning to retaliate immediately against US exports of Harley Davidson Motorcycles from Wisconsin (Paul Ryan Republican Speaker of the House) and Jack Daniels Bourbon from Kentucky (Mitch McConnell, Republican Senate Majority).

SECTION 232 STEEL AND ALUMINUM CASES—THE REAL TRADE WAR BEGINS

President Trump must make a decision in the Section 232 National Security Cases against imports of steel and aluminum by April 11, 2018 in the Steel Case and April 19, 2018 in the Aluminum case. This article will concentrate on the Steel 232 case and mention Aluminum at the end because the Steel case is bigger, but both cases will have devastating consequences on downstream US producers and through retaliation on US exports.  Truthfully, if President Trump does what Commerce Secretary Ross is recommending and imposes very high tariffs on imports of steel and aluminum, he will ignite a trade war with many other countries, which will become red hot.  This will be a shooting trade war with retaliation aimed at US exports and this protectionism will become destructionism—killing US jobs.

Trump’s decisions in these two Section 232 cases will give us a much better idea of whether President Trump wants a trade war or not.  Both the EC, China and other countries are drawing up retaliation lists aimed at US exports of various products.

As background, on April 20, 2017, President Trump and the Commerce Department in the attached press announcement and fact sheet along with a Federal Register notice, Section 232 Investigation on the Effect of Imports of Steel on U.S Presidential Memorandum Prioritizes Commerce Steel Investigation _ Department of Commerce, announced the self-initiation of a Section 232 National Security case against imports of steel from every country.  See video of Trump signing the Executive Order with Secretary Ross and Steel Producers at https://www.youtube.com/watch?v=EiVfNOl-_Ho.

Commerce held a hearing on May 24th in this case.  The video of the hearing can be found at https://www.commerce.gov/file/public-hearing-section-232-investigation-steel-imports-national-security.

Under the terms of the executive order, the interagency group was to present a report to the White House within 270 days that identifies goods that are essential for national security and analyzes the ability of the defense industrial base to produce those goods.

Since the Secretary reported affirmatively, the President has 90 days to determine whether it concurs with the Secretary’s determination and “determine the nature and duration of the action that, in the judgment of the President, must be taken to adjust the imports of the article and its derivatives so that such imports will not threaten to impair the national security” – – April 11, 2018 in the Steel Case and April 19, 2018 in the Aluminum case.

Although Commerce Secretary Wilbur Ross pledged to get the Section 232 Steel and Aluminum reports to President Trump’s desk by the end of June 2017, that did not happen as the Administration began to realize the impact a broad tariff on steel or aluminum raw material inputs would have on downstream users, which are dependent on high quality, competitively priced raw materials to produce competitive downstream products made from steel and aluminum.

On February 16, 2018, Commerce Secretary Wilbur Ross released to the public the attached Section 232 National Security reports on Steel and Aluminum, Section 232 Reports _ Department of Commerce the_effect_of_imports_of_aluminum_on_the_national_security_-_with_redactions_-_20180117 the_effect_of_imports_of_steel_on_the_national_security_-_with_redactions_-_20180111.  These Reports recommend substantial Import restraints on imports of steel and aluminum.  In the attached statement accompanying the reports, Section 232 Reports _ Department of Commerce, Secretary Ross stated:

“I am glad that we were able to provide this analysis and these recommendations to the President.  I look forward to his decision on any potential course of action.”

In response to questions of whether the US would be vulnerable to challenges in the WTO, Ross said he would not be surprised if some countries filed World Trade Organization challenges, but he was confident that the United States was on firm legal ground.  Ross went on to state:

“National security is a very broadly encompassing topic … it is not just the narrow definition of defense needs, it also covers infrastructure needs and other needs.  So we believe and our counsel believes that this is a perfectly valid interpretation of national security the way that it’s used in Section 232, which is much broader than you might think in terms of usual parlance.”

STEEL REPORT AND RECOMMENDATIONS

The Commerce Department statement accompanying the Steel Report summarizes the findings and sets out the remedies recommended by the Department:

“The Department of Commerce found that the quantities and circumstances of steel and aluminum imports “threaten to impair the national security,” as defined by Section 232.

The reports are currently under consideration by the President, and no final decisions have been made with regard to their contents. The President may take a range of actions, or no action, based on the analysis and recommendations provided in the reports. Action could include making modifications to the courses of action proposed, such as adjusting percentages.

STEEL SUMMARY

The Commerce Department statement accompanying the Steel Report summarized the Key Findings of the Steel Report as follows:

The United States is the world’s largest importer of steel. Our imports are nearly four times our exports.

Six basic oxygen furnaces and four electric furnaces have closed since 2000 and employment has dropped by 35% since 1998.

World steelmaking capacity is 2.4 billion metric tons, up 127% from 2000, while steel demand grew at a slower rate.

The recent global excess capacity is 700 million tons, almost 7 times the annual total of U.S. steel consumption. China is by far the largest producer and exporter of steel, and the largest source of excess steel capacity. Their excess capacity alone exceeds the total U.S. steel-making capacity.

On an average month, China produces nearly as much steel as the U.S. does in a year. For certain types of steel, such as for electrical transformers, only one U.S. producer remains.

As of February 15, 2018, the U.S. had 169 antidumping and countervailing duty orders in place on steel, of which 29 are against China, and there are 25 ongoing investigations.

Recommendations of the Steel Report:

Secretary Ross has recommended to the President that he consider the following alternative remedies to address the problem of steel imports:

A global tariff of at least 24% on all steel imports from all countries, or

A tariff of at least 53% on all steel imports from 12 countries (Brazil, China, Costa Rica, Egypt, India, Malaysia, Republic of Korea, Russia, South Africa, Thailand, Turkey and Vietnam) with a quota by product on steel imports from all other countries equal to 100% of their 2017 exports to the United States, or

A quota on all steel products from all countries equal to 63% of each country’s 2017 exports to the United States.

Each of these remedies is intended to increase domestic steel production from its present 73% of capacity to approximately an 80% operating rate, the minimum rate needed for the long-term viability of the industry. Each remedy applies measures to all countries and all steel products to prevent circumvention.

The tariffs and quotas would be in addition to any duties already in place. The report recommends that a process be put in place to allow the Secretary to grant requests from U.S. companies to exclude specific products if the U.S. lacks sufficient domestic capacity or for national security considerations.

Any exclusions granted could result in changed tariffs or quotas for the remaining products to maintain the overall effect.”

ACTUAL SECTION 232 STEEL REPORT

In the actual Section 232 Steel report itself, the Department stated:

“CONCLUSION

The Secretary has determined that the displacement of domestic steel by excessive imports and the consequent adverse impact of those quantities of steel imports on the economic welfare of the domestic steel industry, along with the circumstance of global excess capacity in steel, are “weakening our internal economy” and therefore “threaten to impair” the national security as defined in Section 232.

The continued rising levels of imports of foreign steel threaten to impair the national security by placing the U.S. steel industry at substantial risk of displacing the basic oxygen furnace and other steelmaking capacity, and the related supply chain needed to produce steel for critical infrastructure and national defense.

In considering “the impact of foreign competition on the economic welfare of individual domestic [steel] industries” and other factors Congress expressly outlined in Section 232, the Secretary has determined that the continued decline and concentration in steel production capacity is “weakening of our internal economy and may impair national security.” See 19 U.S.C. § 1862(d).

Global excess steel capacity is a circumstance that contributes to the “weakening of our internal economy” that “threaten[s] to impair” the national security as defined in Section 232. Free markets globally are adversely affected by substantial chronic global excess steel production led by China. While U.S. steel production capacity has remained flat since 2001, other steel producing nations have increased their production capacity, with China alone able to produce as much steel as the rest of the world combined. This overhang of excess capacity means that U.S. steel producers, for the foreseeable future, will face increasing competition from imported steel as other countries export more steel to the United States to bolster their own economic objectives.

Since defense and critical infrastructure requirements alone are not sufficient to support a robust steel industry, U.S. steel producers must be financially viable and competitive in the commercial market to be available to produce the needed steel output in a timely and cost efficient manner. In fact, it is the ability to quickly shift production capacity used for commercial products to defense and critical infrastructure production that provides the United States a surge capability that is vital to national security, especially in an unexpected or extended conflict or national emergency. It is that capability which is now at serious risk; as imports continue to take business away from domestic producers, these producers are in danger of falling below minimum viable scale and are at risk of having to exit the market and substantially close down production capacity, often permanently.

Steel producers in the United States are facing widespread harm from mounting imports. Growing global steel capacity, flat or declining world demand, the openness of the U.S. steel market, and the price differential between U.S. market prices and global market prices (often caused by foreign government steel intervention) ensures that the U.S. will remain an attractive market for foreign steel absent quotas or tariffs. Excessive imports of steel, now consistently above 30 percent of domestic demand, have displaced domestic steel production, the related skilled workforce, and threaten the ability of this critical industry to maintain economic viability.

A U.S. steel industry that is not financially viable to invest in the latest technologies, facilities, and long-term research and development, nor retain skilled workers while attracting a next-generation workforce, will be unable to meet the current and projected needs of the U.S. military and critical infrastructure sectors. Moreover, the market environment for U.S. steel producers has deteriorated dramatically since the 2001 Report, when the Department concluded that imports of iron ore and semi-finished steel do not “fundamentally threaten” the ability of U.S. industry to meet national security needs.

The Department’s investigation indicates that the domestic steel industry has declined to a point where further closures and consolidation of basic oxygen furnace facilities represents a “weakening of our internal economy” as defined in Section 232.  The more than 50 percent reduction in the number of basic oxygen furnace facilities – either through closures or idling of facilities due to import competition – increases the chance of further closures that place the United States at serious risk of being unable to increase production to the levels needed in past national emergencies. The displacement of domestic product by excessive imports is having the serious effect of causing the domestic industry to operate at unsustainable levels, reducing employment, diminishing research and development, inhibiting capital expenditures, and causing a loss of vital skills and know-how. The present capacity operating rates for those remaining plants continue to be below those needed for financial sustainability. These conditions have been further exacerbated by the 22 percent surge in imports thus far in 2017 compared with 2016. Imports are now consistently above 30 percent of U.S. domestic demand.

It is evident that the U.S. steel industry is being substantially impacted by the current levels of imported steel. The displacement of domestic steel by imports has the serious effect of placing the United States at risk of being unable meet national security requirements. The Secretary has determined that the “displacement of domestic [steel] products by excessive imports” of steel is having the “serious effect” of causing the “weakening of our internal economy.” See 19 U.S.C. § 1862(d). Therefore, the Secretary recommends that the President take corrective action pursuant to the authority granted by Section 232. See 19 U.S.C. § 1862(c).

RECOMMENDATION

Prior significant actions to address steel imports (quotas and/or tariffs) were taken under various statutory authorities . . . all at lower levels of import penetration than the present level, which is above 30 percent.

Due to the threat of steel imports to the national security, as defined in Section 232, the Secretary recommends that the President take immediate action by adjusting the level of imports through quotas or tariffs on steel imported into the United States, as well as direct additional actions to keep the U.S. steel industry financially viable and able to meet U.S. national security needs. The quota or tariff imposed should be sufficient, after accounting for any exclusions, to enable the U.S. steel producers to be able to operate at about an 80 percent or better of the industry’s capacity utilization rate based on available capacity in 2017. . . .

By reducing import penetration rates to approximately 21 percent, U.S. industry would be able to operate at 80 percent of their capacity utilization. Achieving this level of capacity utilization based on the projected 2017 import levels will require reducing imports from 36 million metric tons to about 23 million metric tons. If a reduction in imports can be combined with an increase in domestic steel demand, as can be reasonably expected rising economic growth rates combined with the increased military spending and infrastructure proposals that the Trump Administration has planned, then U.S. steel mills can be expected to reach a capacity utilization level of 80 percent or greater. This increase in U.S. capacity utilization will enable U.S. steel mills to increase operations significantly in the short-term and improve the financial viability of the industry over the long-term.

Recommendation to Ensure Sustainable Capacity Utilization and Financial Health

Impose a Quota or Tariff on all steel products covered in this investigation imported into the United States to remove the threatened impairment to national security. The Secretary recommends adjusting the level of imports through a quota or tariff on steel imported into the United States.

Alternative 1 – Global Quota or Tariff

1A.      Global Quota

Impose quotas on all imported steel products at a specified percent of the 2017 import level, applied on a country and steel product basis.

According to the Global Trade Analysis Project (GTAP) Model, produced by Purdue University, a 63 percent quota would be expected to reduce steel imports by 37 percent (13.3 million metric tons) from 2017 levels. Based on imports from January to October, import levels for 2017 are projected to reach 36.0 million metric tons. The quotas, adjusted as necessary, would result in imports equaling about 22.7 million metric tons, which will enable an 80 percent capacity utilization rate at 2017 demand levels (including exports). Application of an annual quota will reduce the impact of the surge in steel imports that has occurred since the beginning of 2017.

1B.      Global Tariff

Apply a tariff rate on all imported steel products, in addition to any antidumping or countervailing duty collections applicable to any imported steel product.

Similar to what is anticipated under a quota, according to the Global Trade Analysis Project (GTAP) Model, produced by Purdue University, a 24 percent tariff on all steel imports would be expected to reduce imports by 37 percent (i.e., a reduction of 13.3 million metric tons from 2017 levels of 36.0 million metric tons). This tariff rate would thus result in imports equaling about 22.7 million metric tons, which will enable an 80 percent capacity utilization rate at 2017 demand levels (including exports).

Alternative 2 –Tariffs on a Subset of Countries

Apply a tariff rate on all imported steel products from Brazil, South Korea, Russia, Turkey, India, Vietnam, China, Thailand, South Africa, Egypt, Malaysia and Costa Rica, in addition to any antidumping or countervailing duty collections applicable to any steel products from those countries. All other countries would be limited to 100 percent of their 2017 import level.

According to the Global Trade Analysis Project (GTAP) Model, produced by Purdue University, a 53 percent tariff on all steel imports from this subset of countries would be expected to reduce imports by 13.3 million metric tons from 2017 import levels from the targeted countries. This action would enable an increase in domestic production to achieve an 80 percent capacity utilization rate at 2017 demand levels (including exports). The countries identified are projected to account for less than 4 percent of U.S. steel exports in 2017.

Exemptions

In selecting an alternative, the President could determine that specific countries should be exempted from the proposed 63 percent quota or 24 percent tariff by granting those specific countries 100 percent of their prior imports in 2017, based on an overriding economic or security interest of the United States. The Secretary recommends that any such determination should be made at the outset and a corresponding adjustment be made to the final quota or tariff imposed on the remaining countries. This would ensure that overall imports of steel to the United States remain at or below the level needed to enable the domestic steel industry to operate as a whole at an 80 percent or greater capacity utilization rate. The limitation to 100 percent of each exempted country’s 2017 imports is necessary to prevent exempted countries from producing additional steel for export to the United States or encouraging other countries to seek to trans-ship steel to the United States through the exempted countries.

It is possible to provide exemptions from either the quota or tariff and still meet the necessary objective of increasing U.S. steel capacity utilization to a financially viable target of 80 percent. However, to do so would require a reduction in the quota or increase in the tariff applied to the remaining countries to offset the effect of the exempted import tonnage.

Exclusions

The Secretary recommends an appeal process by which affected U.S. parties could seek an exclusion from the tariff or quota imposed. The Secretary would grant exclusions based on a demonstrated: (1) lack of sufficient U.S. production capacity of comparable products; or (2) specific national security based considerations. This appeal process would include a public comment period on each exclusion request, and in general, would be completed within 90 days of a completed application being filed with the Secretary.

An exclusion may be granted for a period to be determined by the Secretary and may be terminated if the conditions that gave rise to the exclusion change. The U.S. Department of Commerce will lead the appeal process in coordination with the Department of Defense and other agencies as appropriate. Should exclusions be granted the Secretary would consider at the time whether the quota or tariff for the remaining products needs to be adjusted to increase U.S. steel capacity utilization to a financially viable target of 80 percent.”

RETALIATION??

On February 17, 2018, the Chinese government threatened retaliation if President Trump imposes import restrictions on steel imports.  On February 20, 2018, EC officials stated that they would react “swiftly and appropriately” to Section 232 tariffs placed on EC steel imports into the US.  See https://www.express.co.uk/news/world/921415/harley-davidson-jack-daniels-trade-sanctions-european-union-trade-war-us.

Two of the EC retaliation targets would be Harley Davidson motorcycles and Jack Daniels Bourbon.

WILL PRESIDENT TRUMP IMPOSE IMPORT RESTRICTIONS IN THE SECTION 232 STEEL CASE BY APRIL 11?

My firm belief is that Trump will impose import restraints and the only question is how tough they will be.  Although other commentators have suggested that President Trump might punt and bring a WTO case or more antidumping and countervailing duty cases, my belief is that President Trump wants to levy tariffs because that is what he promised his base. “Damn the torpedoes full speed ahead”.  Trump also believes that all steel imported into the US is dumped and subsidized as the Commerce Department finds dumping and subsidization in almost 100% of the cases.

On February 13th, Breitbart in an article entitled “Chinese Steel Dumping Takes Center Stage as President Trump Mulls Tariffs, Quotas” quoted President Trump in a meeting at the White House with both parties in the House and the Senate:

“Last year, I directed the Secretary of Commerce to investigate whether steel and aluminum imports are threatening to impair U.S. national security,” Trump said. “You see what’s happened with our steel and aluminum industries. They are being decimated by dumping from many countries—in particular one, but many countries.”

That “particular one” Trump was referring to is China. Trump said:

“They are dumping and destroying our industry and destroying the families of workers and we can’t let that happen. Secretary Ross submitted the result of the investigation to me last month. My administration is now reviewing the reports and considering all options. Part of the options would be tariffs coming in as they dump steel, they pay tariffs—substantial tariffs—and the United States would actually make a lot of money, and probably our steel industry and our aluminum industry would come back into our country. Right now, it’s decimated. It will make a decision and I will make a decision that reflects the best interests of the United States including the need to address over-production in China and other countries. You have countries that are so over-producing and what they’re doing is they’re dumping it on us and you look at what empty steel factories and plants and it’s a very sad thing to look at. I’ve been looking at it for two years as I went around campaigning.”

But on February 13th, International Trade 360 in an article entitled, “Lawmakers Caution Trump On Steel Trade Restrictions,” reported:

“A bipartisan group of 19 lawmakers from both chambers of Congress met with Trump at the White House, in a session that was slated to take place behind closed doors before it was abruptly opened up to media members. During the meeting, Trump made clear he is still actively considering import curbs on steel and aluminum in a pair of closely watched cases.

“I want to keep prices down, but I also want to make sure that we have a steel industry and an aluminum industry, and we do need that for national defense. If we ever have a conflict, we don’t want to be buying steel for a country we are fighting … What we are talking about is tariffs and/or quotas,” he said at the meeting. . . .

Though the statute is meant to exclusively address a security threat, the administration has repeatedly signaled that it may use the law as a cudgel against unfairly traded goods. Trump did this again during Tuesday’s meeting, saying that foreign steel and aluminum producers are “dumping and decimating our industries.”

While domestic steel and aluminum producers have repeatedly urged the administration to move forward with steep import restrictions, downstream manufacturers and other stakeholders have preached caution.

Leading that charge at Tuesday’s meeting was Sen. Roy Blunt, R-Mo., who said that the president must thread a delicate needle.

“We need to be careful here that we don’t start a reciprocal battle on tariffs,” Blunt said. “We make aluminum, and we make steel in Missouri, but we buy a lot of aluminum, and we buy a lot of steel as well.”

In one exchange, Sen. Pat Toomey (R‐Pa.) pressed Trump to move “very, very cautiously” and to only go after countries that engage in unfair trading practices. “That’s all countries,” Trump replied.

Sen. Pat Toomey, R-Pa., echoed Blunt’s concerns, urging the president to “go very, very cautiously here.”

In another, Sen. Mike Lee (R‐Utah) warned that restrictions could cost jobs in other industries, but the president dismissed his concerns. “It will create a lot of jobs,” Trump said.

House Ways and Means Committee Chairman Kevin Brady, R-Texas, gave an even blunter assessment of the situation. He likened the Section 232 process to the use of “old- fashioned chemotherapy,” remarking that “it can often do as much damage as good.”

As other lawmakers warned that any tariff hikes or other restrictions could ultimately raise prices on consumers, Trump seemed mostly undeterred, opting instead to focus on the steel and aluminum production jobs such a move might salvage.

“You may have a higher price, but you have jobs,” he said.

“If we ever have a conflict, we don’t want to be buying steel from a country that we’re fighting because somehow that doesn’t work very well,” Trump said at the meeting. “We hopefully will not have any conflicts but … we cannot be without a steel industry. We cannot be without an aluminum industry. So what we’re talking about is tariffs and/or quotas.”

On February 19, 2018, in an editorial the Wall Street Journal warned President Trump on the Section 232 Cases:

“How to Punish American Workers

Steel and aluminum tariffs would cost more jobs than they save.

The economy is picking up steam, but President Trump could reduce the benefits of his tax cuts and regulatory rollback with protectionism. This risk became more serious after the Commerce Department on Friday recommended broad restrictions on aluminum and steel imports that would punish American businesses and consumers. . . .

But the evidence in Commerce’s reports belies this conclusion. And the wide-ranging economic damage from restricting imports would overwhelm the narrow benefits to U.S. steel and aluminum makers.

Start with national security, which Commerce construes broadly to include “economic welfare.” There’s little risk that the U.S. couldn’t procure sufficient steel and aluminum for defense even during a war. Defense consumes 3% of U.S.-made steel and about one-fifth of high-purity aluminum. U.S. steel mills last year operated at 72% of capacity while aluminum smelters ran at 39%. Both have ample slack to raise production for defense and commercial demands. . . .

Commerce nonetheless complains that China has driven down steel and aluminum prices by flooding the global market. Yet Commerce has already imposed 164 anti-dumping and countervailing duties on steel imports including more than two dozen on China. The department has also slapped tariffs on Chinese aluminum. Despite these tariffs, Commerce says rising imports “continue to weaken the U.S. steel industry’s financial health.”

Perhaps Mr. Ross missed the domestic manufacturers’ rosy earnings reports last month. Nucor ’s earnings soared by two-thirds in 2017 to $1.3 billion amid a 35% spike in the price of scrap metal. Steel Dynamics reported record sales, income and shipments last year. Even U.S. Steel posted a $387 million profit after a $440 million loss in 2016. Tariffs have padded profits amid growing U.S. demand.

As for aluminum, 18 smelters have shut down over the last decade amid rising electricity and declining aluminum prices. But production of secondary aluminum from scrap metal has been increasing, resulting in a 3% increase in employment across the industry between 2013 and 2016.

As a remedy for this non-problem, Commerce is proposing a global tariff of 24% on all steel imports; a 53% tariff on a dozen countries including China, Turkey and South Korea; or a global quota equaling 63% of existing imports. For aluminum, Commerce wants a global tariff of 7.7%; a 23.6% tariff on imports from China, Hong Kong, Russia, Venezuela, and Vietnam; or a global quota equal to 86.7% of imports.

Each option would raise prices for U.S. industries such as construction, transportation and mining. About 16 times more workers are employed today in U.S. steel-consuming industries than the 140,000 American steelworkers. Economists Joseph Francois and Laura Baughman found that more U.S. workers lost jobs (200,000) due to George W. Bush’s 2002 steel tariffs than were employed by the entire steel industry (187,500) at the time. Job losses hit Ohio (10,553 jobs lost), Michigan (9,829) and Pennsylvania (8,400).

About a quarter of a car’s cost is tied to steel, which is also a key component of domestically-produced wood chipper knives used in lumber, sawmills and landscaping. The oil-and-gas industry uses steel in drilling equipment, pipelines, production facilities, terminals and refineries. Aluminum inputs make up nearly half of the cost of a beer can.

Raising the cost of steel and aluminum inputs would impel many manufacturers to move production abroad to stay competitive globally. Does Mr. Trump want more cars made in Mexico? Mr. Ross has suggested letting businesses petition the government to exclude certain steel and aluminum products from the quotas or tariffs. But this review would be politicized and cause production delays.

Oh, and don’t forget that other countries could retaliate with trade barriers that hurt American exporters.

Commerce’s recommendations aren’t needed since the steel and aluminum industries are benefiting tremendously from Mr. Trump’s economic agenda. Tax reform is making it less expensive to retool mills, increased defense spending will also lift demand, and the Environmental Protection Agency’s withdrawal of the Obama Clean Power Plan contains electric prices. Why would Mr. Trump undercut his achievements with trade barriers that harm American workers and consumers?”

RETALIATION TARGETS ARE BEING PLANNED

EUROPEAN UNION

Axel Eggert, director general of the EUROFER steel lobby, warned the U.S. not to “pull the trigger on a new trade war,” adding: “The EU has an arsenal of trade remedies and safeguards available to defend its interests. These can be ready to launch in very short order in response to an economic threat, and EU industry will demand their immediate application.”

Gerd Götz, director general of the European Aluminum association, said that none of Ross’ proposed measures would address the root of the problem, which is Chinese overproduction, but instead do “great harm to Europe” ‐ to which the EU would then have to react by imposing trade restrictions, too.  Gotz stated: “We call on the EU to be ready to protect our strategic sectors.”

US GROUPS RAISE RETALIATION CONCERNS

“Business Roundtable also stated that it is concerned that acting on the Commerce Department’s recommendations to use Section 232 to restrict steel and aluminum imports will result in foreign retaliation against U.S. exporters and harm the U.S. economy.

The American Automotive Policy Council, which represents Ford, General Motors and Chrysler‐Fiat, asked Trump to fashion a solution that won’t “diminish the global competitiveness of America’s automotive industry” by leading American carmakers to pay higher prices for steel and aluminum. This would place the U.S. automotive industry, which supports more than 7 million American jobs, at a competitive disadvantage.”

The American Institute for International Steel, which represents foreign steel producers, made the same point and urged Trump to reject Ross’ recommendations, rather than “risk the nation’s well‐being in order to benefit a few politically favored companies.”

AIIS Chairman John Foster stated:

“The national security foundation for the recommended tariffs and quotas is simply an unfortunate attempt to circumvent normally applicable WTO rules.  If the United States chooses to abandon long‐standing principles of free trade that we have helped establish, and that have contributed so much to our national prosperity, Pandora’s box will be opened, and other countries will be sure to assert ‘national security’ reasons for protecting many other politically sensitive products from export competition.

The retaliatory measures that will follow will drive up manufacturing costs, inflate prices, shrink high‐value U.S. exports, and push the United States and the world toward recession.”

On February 21st, in Investors Business Daily in a op-ed piece entitled “Seriously, Steel Industry Protection Is The Wrong Way To Go“, Vernonique de Rugy and Christine A. McDaniel stated:

Their justification is that Chinese and other foreign steel producers benefit from unfair subsidies in their own countries. As a result of foreign competition, domestic steel’s market share is down to 70%. Numbers like this would make any other business owner’s head spin, but these executives think they deserve more. . . .

But for years this industry has avoided competition. As a result, they have not taken the tough steps needed to lean up and succeed on their own. With decades of special protections, billions in subsidies, and bloated executive compensation packages, it is no wonder U.S. producers are not competitive in this market with a low-wage country like China.

Thanks to his statements like last summer’s “Tariffs. I want tariffs,” these well- organized domestic steel executives see an opportunity with a president overly sympathetic to their pleas.

In an ideal world, no government would bankroll domestic companies. The urge to protect our own people against aggressive foreign subsidies is understandable, but not all protections actually help our country.

In particular, import taxes are known to be a net negative for the overall U.S. economy, and with intermediate inputs like steel the costs are more severe. Data from the Bureau of Labor Statistics show that 5.4 million workers are directly employed by steel-using sectors. The American Iron and Steel Institute reports that the steel industry directly employs 140,000 people in the United States. . . .

The steel industry’s historic unwillingness to compete and the government’s continued handouts are why they are in such poor shape today. It is why they are at the doorstep of the White House yet again asking the president, along with every American consumer, for help.

It doesn’t have to be this way.

ALUMINUM

The full Section 232 Commerce report on aluminum is attached, the_effect_of_imports_of_aluminum_on_the_national_security_-_with_redactions_-_20180117.  The attached Commerce Department Summary statement on the Aluminum report, Section 232 Reports _ Department of Commerce, states as follows:

Key Findings of the Aluminum Report:

Aluminum imports have risen to 90% of total demand for primary aluminum, up from 66% in 2012. From 2013 to 2016 aluminum industry employment fell by 58%, 6 smelters shut down, and only two of the remaining 5 smelters are operating at capacity, even though demand has grown considerably.

At today’s reduced military spending, military consumption of aluminum is a small percentage of total consumption and therefore is insufficient by itself to preserve the viability of the smelters. For example, there is only one remaining U.S. producer of the high-quality aluminum alloy needed for military aerospace. Infrastructure, which is necessary for our economic security, is a major use of aluminum.

The Commerce Department has recently brought trade cases to try to address the dumping of aluminum. As of February 15, 2018, the U.S. had two antidumping and countervailing duty orders in place on aluminum, both against China, and there are four ongoing investigations against China.

Recommendations of the Aluminum Report:

Secretary Ross has recommended to President Trump three alternative remedies for dealing with the excessive imports of aluminum. These would cover both aluminum ingots and a wide variety of aluminum products.

A tariff of at least 7.7% on all aluminum exports from all countries, or

A tariff of 23.6% on all products from China, Hong Kong, Russia, Venezuela and Vietnam. All the other countries would be subject to quotas equal to 100% of their 2017 exports to the United States, or

A quota on all imports from all countries equal to a maximum of 86.7% of their 2017 exports to the United States.

Each of the three proposals is intended to raise production of aluminum from the present 48% average capacity to 80%, a level that would provide the industry with long-term viability. Each remedy applies measures to all countries and all steel products to prevent circumvention.

The tariffs and quotas would be in addition to any duties already in place. The report recommends that a process be put in place to allow the Secretary to grant requests from U.S. companies to exclude specific products if the U.S. lacks sufficient domestic capacity or for national security considerations.

Any exclusions granted could result in changed tariffs or quotas for the remaining products to maintain the overall effect.

SECTION 201 ESCAPE CLAUSE SOLAR CELLS/WASHING MACHINE DECISIONS

On January 22, 2018 the United States Trade Representative’s office (“USTR”) announced affirmative Section 201 decisions in the Solar Cells and Washing Machines cases and issued tariffs.

But one interesting point is that the Suniva, the US company that filed the Section 201 Solar Cells case, is majority owned by a Chinese Solar Manufacturer, Shunfeng International Clean Energy Ltd.

The remedies for the two Section 201 are specifically set forth below.

SOLAR CELLS

In the Solar Cells case, the remedy is:

Safeguard Tariffs on Imported Solar Cells and Modules
Year 1 Year 2 Year 3 Year 4
Tariff increase 30% 25% 20% 15%
  • First 2.5 gigawatt of imported cells are excluded from the additional tariff

But in talking to one small solar cell importer, at the most during the year they import a total of 1 megawatt.  This tells me that the new tariffs first will not be retroactive and second probably will kick in after several months each year, when total imports reach the 2.5 Gigawatt level.  According to the Presidential Proclamation, however, the 30% tariff wasapplied to imports starting February 7, 2018.

The 201 tariffs are applicable to imports from almost all countries, including China, Malaysia, Germany, Canada and Mexico, except for the countries excluded in the Annex attached to the Presidential Proclamation.  In future years, when total imports of solar cells and modules reach the 2.5 gigawatt level, the new tariff kicks in.  So, for example, if total imports of solar cells and modules into the US reach the 2.5 gigawatt level on May 15, 2019, imports after that will be hit with a tariff.

WASHING MACHINES

The Washing Machines Remedy is set forth below.  This is similar to the Solar Cells Remedy in the sense that the first 1.2 million washers will have a lower tariff and the higher tariff will not kick in until after total imports reach the 1.2 million unit level.

Also 50,000 units of covered parts are excluded from the tariff.

Tariff-Rate Quotas on Washers
Year 1 Year 2 Year 3
First 1.2 million units of imported

finished washers

20% 18% 16%
All subsequent imports of finished

washers

50% 45% 40%
Tariff of covered parts 50% 45% 40%
Covered parts excluded from tariff 50,000 units 70,000 units 90,000 units

So the point of both remedies is import quickly into the US market.  The first imports into the country in the Solar Cells case will have no tariff and in the Washing Machines case will have a lower tariff.

JANUARY 25 PRESIDENTIAL PROCLAMATION AND EXCLUSION NOTICE IN FEDERAL REGISTER

On January 25th, the Solar Cells Presidential Proclamation with Annexes and exclusions was published in the attached Federal Register notice, FEDERAL REGISTER NOTICE PRESIDENTIAL PROCLAMATION SOLAR CELLS.  According to the Annex I (f), the 30% tariff was applied to imports starting February 7, 2018.

In addition, a number of countries are excluded in Annex 1(b) from the tariff, including India, Ukraine, Indonesia, Turkey and many other countries, so long as their share of imports does not exceed 3%.

On February 14, 2018, the United States Trade Representative’s office (“USTR”) published the attached Federal Register notice, USTR EXCLUSION FED REG NOTICE, and allows companies to petition for exclusion by March 16.  The Federal Register also sets forth a number of exclusions, which were already set forth in the Proclamation.

EXCLUSIONS IN ANNEXES

Some of those exclusions are:

“Presidential Proclamation 9693 of January 23, 2018 (83 FR 3541) excluded certain particular products:

10 to 60 watt, inclusive, rectangular solar panels, where the panels have the following characteristics: (A) Length of 250 mm or more but not over 482 mm or width of 400 mm or more but not over 635 mm, and (B) surface area of 1000 cm2 or more but not over 3,061 cm2), provided that no such panel with those characteristics shall contain an internal battery or external computer peripheral ports at the time of entry;

1 watt solar panels incorporated into nightlights that use rechargeable batteries and have the following dimensions: 58 mm or more but not over 64 mm by 126 mm or more but not over 140 mm;

2 watt solar panels incorporated into daylight dimmers, that may use rechargeable batteries, such panels with the following dimensions: 75 mm or more but not over 82 mm by 139 mm or more but not over 143 mm;

Off-grid and portable CSPV panels, whether in a foldable case or in rigid form containing a glass cover, where the panels have the following characteristics: (a) A total power output of 100 watts or less per panel; (b) a maximum surface area of 8,000 cm2 per panel; (c) does not include a built-in inverter; and where the panels have glass covers, such panels must be in individual retail packaging (in this context, retail packaging typically includes graphics, the product name, its description and/or features, and foam for transport);

3.19 watt or less solar panels, each with length of 75 mm or more but not over 266 mm and width of 46 mm or more but not over 127 mm, with surface area of 338 cm2 or less, with one black wire and one red wire (each of type 22 AWG or 24 AWG) not more than 206 mm in length when measured from panel edge, provided that no such panel shall contain an internal battery or external computer peripheral ports;

27.1 watt or less solar panels, each with surface area less than 3,000 cm2 and coated across the entire surface with a polyurethane doming resin, the foregoing joined to a battery charging and maintaining unit, such unit which is an acrylonitrile butadiene styrene (‘‘ABS’’) box that incorporates a light emitting diode (‘‘LED’’) by coated wires that include a connector to permit the incorporation of an extension cable.”

Emphasis added.

One exclusion that many companies are looking at is “off-grid and portable CSPV panels”, but there are a number of conditions quoted above that must be met to exclude the products in question.

Also the February 14th notice set up a number of criteria that must be met to get any additional exclusion from the Order.

COUNTRIES REQUEST TRADE COMPENSATION AT THE WORLD TRADE ORGANIZATION (“WTO”) FOR SECTION 201 TARIFFS

Article 8.1 of the WTO Agreement on Safeguards, which includes Section 201 tariffs, requires countries proposing to impose a safeguard measure, like Trump’s restrictions on solar and washing machine imports, to compensate other WTO member countries for trade losses. That could be in the form of reduced duties on products of interest to those countries.

The EU, China, Taiwan and Korea have formally asked the U.S. to discuss compensation for trade losses due to President Donald Trump’s safeguard measures on solar cells.

If no agreement is reached on compensation within 30 days of their requests, the EU, China, Taiwan and South Korea can begin proceedings to impose retaliatory tariffs on the U.S. However, the parties would first need to prove to a WTO dispute settlement panel that the U.S. applied the restrictions in a way that violated the safeguards agreement.

In the past, the US has lost a number of Section 201 cases at the WTO for imposing tariffs in a manner that violated the safeguards agreement.

In addition, several Canadian solar manufacturers on Wednesday filed a case at the Court of International Trade in New York City challenging the Trump administration’s imposition of tariffs. The companies say the tariff violates NAFTA and they say the majority of the International Trade Commission found that Canadian solar manufacturers did not constitute a sufficient quantity of U.S. solar imports as to cause injury. They call on the court to enjoin the tariffs and then ask for an expedited resolution of the case.

SOLAR CELLS AND SOLAR PRODUCTS ANTIDUMPING/COUNTERVAILING DUTY CASES

POSSIBLE EXCLUSIONS??

The Commerce Department in the attached preliminary determination in late December, REVOCATION OF SOLAR CELLS ORDER, proposed to exclude certain small solar cells from the Antidumping and Countervailing Duty orders.  Specifically, the proposed exclusion is:

“Excluded from the scope of these orders are panels with surface area from 3,450 mm2 to 33,782 mm2 with one black wire and one red wire (each of type 22 AWG or 24 AWG not more than 206 mm in length when measured from panel extrusion), and not exceeding 2.9 volts, 1.1 amps, and 3.19 watts. No panel shall contain an internal battery or external computer peripheral ports.”

So exclusions are also happening from the AD and CVD orders.

2016-2017 SOLAR CELLS FROM CHINA ANTIDUMPING/COUNTERVAILING DUTY REVIEW INVESTIGATIONS

On February 23, 2018, Commerce published its attached Federal Register notice initiating the 2016-2017 Solar Cells Review Investigation, CHINA SOLAR CELLS REVIEW INITIATION NOTICE.  In that review, Quantity and Value Questionnaire responses are due at Commerce by March 6, 2018.

NEW SECTION 232 CASE AGAINST URANIUM IMPORTS

On January 16th, Ur-Energy USA Inc. and Energy Fuels Resources Inc. filed a section 232 petition at Commerce claiming that imports of uranium from state-owned and state-subsidized companies in Russia, Kazakhstan and Uzbekistan now fulfill 40 percent of U.S. demand, compared to the less than 5 percent satisfied by U.S. production. The Denver-based companies claim that imports from China will grow in the coming years. The companies also argue the volume of imports from Russia will only grow after a decades-old agreement that restricted imports from that country in exchange for suspending anti-dumping duties expires in 2020.  The Petition states:

“The U.S. uranium industry needs immediate relief from imports that have grown dramatically and captured almost 80% of annual U.S. uranium demand. Our country cannot afford to depend on foreign sources — particularly Russia, and those in its sphere of influence, and China — for the element that provides the backbone of our nuclear deterrent, powers the ships and submarines of America’s nuclear Navy, and supplies 20% of the nation’s electricity.”

ITC STUNNER—BOEING LOSES INJURY CASE IN BOMBADIER CIVIL AIRCRAFT CASE AT INTERNATIONAL TRADE COMMISSION (“ITC”)

In the attached decision, ITC-Public-Opinion-Aircraft, on February 13, 2018, in a stunning reversal, the ITC reached a negative, no injury, determination in the Civil Aircraft from Canada/Bombardier antidumping and countervailing duty cases.  In those cases, the Commerce Department had determined that the Canadian government had given subsidies of over 200% to Bombardier and because Bombardier refused to participate at the Commerce Department in the antidumping case, very high dumping margins.

But for the Commerce Department to issue antidumping and countervailing duty orders and for Boeing to win the Antidumping (“AD”) and Countervailing Duty (“CVD”) cases, it had to win the injury case at the ITC.  The ITC found no competition between the Canadian imports and Boeing’s planes and reached a negative, no injury, determination.  When Boeing lost the case at the ITC, it truly lost the case.  The case was terminated and over with.

Prior to the ITC determination, I had predicted that there was a 95% chance that ITC would reach an affirmative, injury determination.  What was the basis for my prediction and why did I get it wrong?  The ITC reaches injury/affirmative determinations in about 2/3 of the cases or about 66%.  But in big ticket cases, like Steel, Lumber and other cases, the ITC goes affirmative in a vast majority of them.  Also in this case, Bombardier had refused to participate in the AD case at Commerce.  That is not looked on kindly by the ITC Commissioners.

But the February 13th decision by the ITC was a true shocker and a real Boeing loss.  One Commissioner, Williamson, is very pro domestic industry.  In many cases where the ITC reaches a negative, no injury, determination, Commissioner Williamson will vote with the domestic industry.  But the ITC decision was a 4-0 unanimous no injury determination.  Why and what does this decision stand for?

First, pursuant to the Statute, the ITC is made up of 6 Commissioners, no more than 3 Commissioners from the same political party.  Right now, however, there are only 4 Commissioners on the ITC and none were appointed by President Trump.  3 Commissioners were appointed by President Obama and Commissioner Williamson originally was appointed by President George W. Bush.

The ITC is a very independent agency, possibly the most independent agency in the US Government because under the Constitution Congress controls trade, not the President.  So Congress wanted its own trade agency and it set up the ITC.  The ITC’s budget goes directly to Congress and does not go through the Administration’s Office of Management and Budget, and the ITC in contrast to every other government agency has the right to represent itself in Court.

The point being is that the ITC is very insulated from trade politics and President Trump has no direct control over the agency.  But more importantly, the ITC’s decision in the Boeing case was a legal determination.  When you read the ITC’s determination, it becomes very clear that the ITC found that imports of 100 to 150 seat aircraft from Canada did not compete with Boeing’s aircraft because Boeing produces bigger airplanes.  Because there were so very few sales in the case, the Commission could zero in on those few sales to Delta.  Based on those sales, the ITC simply could not find enough economic competition between the Canadian imports and Boeing’s planes to justify an affirmative injury determination.

As the Commission stated in certain relevant pages of its determination:

“Nevertheless, the record also shows that the higher standard seating capacity of the [Boeing] 737-700 and 737 MAX 7 limits competition between those models and the [BOMBARDIER] CS100 for some purchasers. Boeing has emphasized that airlines have a strong economic incentive to minimize empty seats by using LCA that are no larger than necessary on particular flights because using an LCA with more seats than required would result in unfilled seats, higher costs per seat, and lower profits. Respondents agree. In a standard two-class configuration, the seat count differential between the CS100 and the 737 MAX 7 is 30 seats, which is greater than the 24 seat differential between the 737 MAX 7 and the 737-800 that Boeing characterizes as significant “for airlines that try to fill every seat on every flight they operate.” Given this, there can be limited competition between the CS100 and the 737-700 and MAX 7 for sales to a purchaser seeking 100- to 150-seat LCA with a seat count toward the low end of the subject range.

The record shows that differences in seat count precluded competition between subject imports and the domestic like product for the only firm order for C Series LCA by a U.S. purchaser. . . .

In sum, we find that there is a likelihood of substantially increased subject import volume and market share based on Bombardier’s single sale for importation of subject planes during the period of investigation. Given that Boeing’s 100- to 150-seat LCA did not meet the purchaser’s requirements for this sale, however, and Boeing did not offer any new aircraft for this sale, we do not find that Bombardier secured this sale at Boeing’s expense. There is also insufficient evidence for us to conclude that Bombardier is likely to secure additional sales for importation of subject 100- to 150-seat LCA in the imminent future, or that any purchases of subject imports in the imminent future would likely be at the domestic industry’s expense. . . .

Based on the preceding considerations, we conclude that subject imports are not likely to have a significant adverse impact on the domestic industry in the imminent future. It is likely that any subject imports that enter in the imminent future would be the result of Bombardier’s single U.S. sale during the period of investigation for which Boeing was not directly competitive. Bombardier has not made any additional sales in the United States. There is insufficient evidence for us to conclude that additional orders for 100- to 150-seat LCA are imminent, that Bombardier would secure these orders, or that any orders secured by Bombardier would come at Boeing’s expense. We are mindful of the statutory requirement that a threat determination may not be made on the basis of mere conjecture or supposition, and thus do not find threat of material injury by reason of subject imports.

  1. Conclusion

For the reasons stated above, we determine that an industry in the United States is not threatened with material injury by reason of imports of 100- to 150-seat LCA from Canada that are sold in the United States at less than fair value and that are subsidized by the GOC.”

Emphasis added.

TWO IMPORTANT POINTS ABOUT THE ITC DETERMINATOIN AND BOEING’S LOSS

The importance of the Boeing negative determination is to make two very important points.  First AD and CVD cases are not nearly as political as you would think.  They are legal determinations, and the ITC can reach a negative no injury determination and turn the entire case off.

The second point is that many respondents in trade cases, especially in China, India and elsewhere, do not understand how important the ITC is in AD and CVD proceedings.  Many respondents simply give up at the ITC.  Bombardier, however, fought the Boeing case during the entire proceeding and mobilized companies and governments to speak out at the ITC about the case in favor of the respondents.  This evened out the playing ground and made it easier for the ITC to reach a negative injury determination if it was inclined to do so.  Bombardier also made sure that there was enough evidence on the ITC’s administrative record to make sure the ITC had the evidence to reach a negative determination.

Although fighting an ITC case takes time, resources and a lot of money to hire lawyers and consultants, Bombardier’s win at the ITC is a total victory.  The case has ended and Boeing lost the case.

BOEING’S WTO FIGHT WITH AIRBUS COULD PROVIDE MORE TRADE RETALIATION

On February 11, 2018 the Seattle Times in an article entitledBoeing’s biggest trade fight could spark a U.S. confrontation with Europe” went on to state about the next big trade fight by Boeing against Airbus and the EC:

“Boeing’s lawyers, still smarting from the shock of losing their U.S. trade- court case against Bombardier’s C Series jets, are now awaiting an imminent ruling in a bigger trade fight over government subsidies.

In a case against Airbus that’s slogged on for nearly 15 years and has seemed endless, Boeing now insists it’s within sight of a final victory.

And though the dispute long predates President Donald Trump, his administration’s hard-nosed “America First” posture on trade disputes – ready to impose tariffs rather than negotiating settlements – adds a new edge of rancor and risk.

The U.S. filed suit against Airbus at the World Trade Organization (WTO) in 2004, and since then the gears of that court have ground slowly without any perceivable impact.

Yet Boeing’s top lawyer, Michael Luttig, said in an interview that the law is about to catch up with Airbus and the European Union (EU).

“Boeing committed itself some 15 years ago … and it has never blinked since,” said Luttig. “Today, we are months away from the imposition of tariffs.”

Airbus is staring back, also refusing to blink

A senior Airbus executive and trade lawyer, who asked not to be named because of the continuing legal proceedings, compared Luttig’s threat of tariffs to “a nuclear strike” and pointed to the parallel EU case before the WTO that accuses Boeing of taking subsidies.

“The EU would be well-prepared to respond in kind and with much greater force,” said the Airbus legal executive. “The EU will survive that first nuclear strike and will retaliate with megatons to the U.S.’s kilotons.”

In a speech in London last month, Airbus CEO Tom Enders said that under Trump, the U.S. is “no longer fighting for opening markets but to close the U.S. market to foreign competitors.”

Citing the CSeries case, he accused Boeing of “ruthlessly surfing on this ‘America-First’ wave.”

The risk that a multinational trade war could erupt with some of the nation’s closest allies looks suddenly higher.

A WTO endgame

In September 2016, after multiple procedural steps and appeals, the last ruling in the United States’ WTO case against Airbus found that the European jet maker had fallen far short of remedying the harm to Boeing from illegal subsidies.

The EU immediately appealed. What’s ahead this year, by late spring, is the final decision on that appeal.

Boeing’s lawyers expect the court to largely uphold the 2016 decision

And Boeing says, that’s it. It’s the end of the appeals.

If Airbus loses, said Bob Novick, Boeing’s outside counsel on the WTO dispute since 2003 and former general counsel to the U.S. Trade Representative, the U.S. would then immediately request authorization to impose retaliatory sanctions.  Boeing anticipates that the WTO will set the level of sanctions at $10 billion to $15 billion.

The U.S. government could then slap punitive tariffs up to that amount on whatever EU goods it selects for maximum political impact.

Boeing’s tough talk may be partly a negotiating ploy. Still, if the WTO hands this loaded weapon to the U.S. government, it’s unlikely the Trump administration’s trade hawks will be shy about using it.

Jeff Bialos, a partner in the international law firm Eversheds Sutherland and a former Commerce Department official handling major trade litigation, said that typically at such an endpoint in a trade dispute, the two governments would negotiate some agreed settlement.

“The issue is, will the Trump administration, with its views on trade . have the ability to negotiate solutions?” Bialos said. “The jury is out. We are going into uncharted waters.”

Bill Perry, a Seattle-based international trade lawyer with Harris Bricken and a former U.S. Commerce Department attorney, thinks Trump will take “a very hard line.”

He pointed to the administration’s imposition last month of tariffs on imported solar panels, to punish China for selling finished panels in the U.S. below their cost, and on washing machines, targeting Korean manufacturers.

“Could this be the first row of bricks in a protectionist wall Trump intends to put up?” Perry asked.

At the very least, the stage looks set for brinkmanship, if not an open trade war.

A duel with pistols drawn

Boeing lawyers expect the imminent threat of tariffs to focus minds in the EU and perhaps to precipitate settlement talks in which they would then have the upper hand.

The top Airbus executive warned that Boeing is on the hook for its own illegal subsidies in the parallel WTO case filed by the EU – and so whatever the U.S. does, the EU can and will match.

“Boeing can try for sanctions. And if they do, we will too,” he said.

In the EU case against Boeing, the last ruling in June found that Boeing had failed to remedy the harm to Airbus from just one set of subsidies: the tax reduction that was part of Washington state’s aerospace incentives.

Boeing has appealed that ruling.

An awkward detail for the EU is that its case against Boeing was filed as a countersuit some nine months after the U.S. filed against Airbus, and so it lags the U.S. case by roughly that amount of time.

The decision on Boeing’s appeal won’t come out until late this year or even next year.  In the meantime, the U.S. may act.  The Airbus executive dismissed the delay between the cases – “a few months” – as insignificant. He compared it to a pistol duel, where one person gets to fire first, but knows that the other will survive and will get a chance to fire back.

The EU will have plenty of ammunition, he contended. When the time comes to add up the compensation needed, he said the EU will count every airplane Boeing sells, including future sales. “Every sale of a 787 is a subsidized sale and every one will count against Boeing when judgment day comes,” the Airbus executive said.

Trade war consequences

If Boeing’s 15-year pursuit of Airbus at the WTO has been tenacious, the legal attack it launched on Bombardier last April was even more fiercely aggressive. And even though it failed, pushing the case had consequences for Boeing.

Geoffrey Geertz, a researcher on the politics of trade at the Washington, D.C.-based Brookings Institution, pointed out that in the Delta jet sale won by Bombardier’s CSeries that was central to the case, “there wasn’t much at stake” for Boeing because it wasn’t offering its own jets against the smaller aircraft.

Yet pursuing the case alienated both the Canadian and British governments, putting at risk large defense contracts, including a contract to supply Canada with F/A-18 jet fighters valued at more than $5 billion.  It also antagonized major commercial-airplane customer Delta. In a subsequent sales campaign in December that mattered much more to Boeing, Delta chose to go with Airbus when it bought100 larger planes.

“Boeing might be rethinking whether that was a miscalculation,” Geertz said.

An open trade war with major economic partners could be even more damaging, not only for Boeing but for the U.S.  That’s a belief central to traditional, pre-Trump Republican Party policy.

President Ronald Reagan in 1986 dismissed congressional demands for import tariffs as “flimflammery” and warned against the dangers of protectionism.

“The truth is these trade restrictions badly hurt economic growth,” Reagan said.

The unpredictable consequences of tariffs are evident in the case of REC Silicon, which produces polysilicon, a raw material used in making solar panels, at a $1.7 billion manufacturing plant in Moses Lake.

The Chinese solar-panel industry once imported polysilicon largely from the U.S.

But after an earlier round of the solar-panel trade fight, China in 2014 retaliated by imposing tariffs on U.S. polysilicon that forced REC to cut 500 jobs.

A letter sent to Trump by REC employees in early January said that “now the remaining jobs are at risk” and urged Trump to announce “a comprehensive settlement” with China.  Instead, Trump applied new tariffs. The risk is a tit or-tat response.

Last month, in retaliation for the Commerce Department’s initiation in December of a trade case against imports of aluminum sheet from China, the Chinese government started its own case against U.S. exports of sorghum grain to China.

“It signals the possible start of a trade war with China,” said trade lawyer Perry in a newsletter to clients this month. “There is a price to pay for U.S. tariffs and trade actions.”

Fight or settle?

No company is more dependent on free trade than Boeing, which sells both its commercial jets and its defense products worldwide.

Yet Boeing sees itself at a huge disadvantage against Airbus because of the types of subsidies the European jet maker has available.

Yes, Boeing gets tax breaks and so pays less tax on the income from the planes it rolls out each year. But it has to take all the risk and shoulder the multibillion-dollar cost when it develops a new airplane.

Airbus gets upfront government loans amounting to billions of dollars to defray the cost in advance – with no repayment necessary if the new airplane project fails.

Luttig insists that “there is no such thing as free trade unless all of the global industry participants abide by the rules.”

“Free trade is, by definition, trade in accordance with the rules of fair trade,” he added.

Airbus says it wants a different endgame to the WTO case: a negotiated settlement that would reset the rules.

The Airbus legal executive said a multinational deal could lay out agreed limits to government support in the aircraft industry for the long-term future.

“We sit down with all participants in this game, including the Chinese, the Russians, the Japanese, the Canadians, the Brazilians and maybe more, and have a good discussion globally,” he said.

Such an agreement might then constrain China’s behavior as its aviation champion COMAC develops future airplanes to compete against Boeing.

Brookings researcher Geertz said pursuing such a settlement makes sense because “the long-term game for Airbus and Boeing is figuring out what they are going to do about COMAC.”

In an interview at Boeing’s Chicago headquarters before the loss in the Bombardier case, Chief Executive Dennis Muilenburg steadfastly eyed his shorter-term target.

“Airbus, as has been determined through the WTO proceedings, has an unresolved more than $23 billion illegal subsidy that still needs to be addressed,” Muilenburg said. “We have to stand on a principle of global fair competition.”

Boeing’s case against Airbus may be stronger than the one against Bombardier.

Still, with one trade-court decision gone awry, Boeing’s leadership must now weigh anew the risks of a trade war against the likelihood that a legal victory could enforce a fair competitive landscape for the future.

BUT TRUMP’S ECONOMIC POLICIES TO DATE HAVE CREATED OTHER RAYS OF LIGHT—A ROARING ECONOMY WITH MANUFACTURING COMING BACK TO THE US—CUTTING TAXES AND REGULATIONS WORKS

As stated in the last blog post, probably the most important development from the trade point of view in the last few months, however, is the passage of the tax bill.  Trump’s economic policies along with the Tax Bill are leading to record economic growth and record unemployment.

On February 1, 2018, in an article entitled “300 firms giving tax cut bonus, Costco dismisses Pelosi’s ‘crumbs’ attack,” the Washington Examiner stated:

“The number of companies offering employees higher wages, expanded insurance and retirement benefits and cash bonuses up to $3,000 has surged to 300 as more see benefits from the new GOP tax cuts.

The payouts, praised by President Trump, are going to some 3 million employees.

Again on Thursday at a Massachusetts town hall, House Minority Leader Nancy Pelosi called the bonuses “crumbs.”

Not only are companies crediting Trump in their announcements, one major employer, Costco, disputed Democratic sneers that the bonuses are “crumbs” and hide bigger profits.

During a shareholders meeting this week, Costco chief Craig Jelinek said the attack by Pelosi was not “thoughtful.”

According to the National Center for Public Policy Research, the comments came in response to a question from their counsel Justin Danhof. What’s more, said Danhof, Jelinek said that critics were just “throwing stuff out there.”

The Costco executive noted that the wholesaler pays higher than average wages and added that the tax cuts may benefit customers.

The growing list of companies paying so-called “Trump bonuses” is at 300, according to list keeper Americans for Tax Reform and ATR Vice President John Kartch.

ATR President Grover Norquist said, “Every two weeks from February to November Americans will be reminded that one party cut their taxes and raised their pay. And the other tried to stop it.”

According to the Americans For Tax Reform, the actual number today February 23, 2018 is over 400 companies and includes the following companies:

“Plexus Corp., Solara Company, Kraft Heinz Company, CUNA Mutual Group, CarMax Inc., Valley Bank, Quake Manufacturing, Wirco Inc., Blue Cross and Blue Shield of North Carolina, Prospector Hotel and Gambling Hall, Fontainebleau, Mission Produce, Mastercard Inc., Civista Bank, Gulf Power Company, Fidelity Bank, Dyersville Die Cast, Unum, Sheely’s Furniture and Appliance, Henry Schein, Inc., R+L Carriers, The Gateway Tavern, OneMain Holdings, Inc., The Stowaway, Duck Inn Pub, Sail Loft, Speedwell Tavern, Pilgrim Bank, Xante Corporation, J.M. Smucker Company, Iowa-American Water Co., Somerset Savings Bank, Amboy Bank, Citizens Bank of West Virginia, Dot Foods, Sound Financial Bancorp Inc., Pitney Bowes, Shred-X, LiDestri Food and Drink, U.S. Special Delivery, Huntington Ingalls Industries, Middlefield Banc Corp., Cintas Corporation, PepsiCo., Protective Life Corporation, St. John’s Properties Inc., Insperity, U-Haul, Leak Sealers, Mill Steel Company, Payne Trucking.”

Some of the other additional companies on the list are:

“1A Auto, Inc. (Westford, Massachusetts), 1st Source Corporation (South Bend, Indiana), 1st Summit Bank (Johnstown, Pennsylvania), AaLadin Industries, Inc. (Elk Point, South Dakota), AAON (Tulsa, Oklahoma), AbbVie, Inc. (North Chicago, Illinois), Adams Community Bank (Adams, Massachusetts), Advance Financial (Nashville, Tennessee), Advanced Sciences and Technologies, LLC (Berlin, New Jersey), Aflac (Columbus, Georgia), Ally Financial Inc. (Charlotte, North Carolina), Altria Group Inc. (Richmond, Virginia), Amarillo National Bank (Amarillo, Texas), Amboy Bank (Old Bridge, New Jersey), American Airlines (Ft. Worth, Texas), American Express (New York, New York), American Family Insurance (Madison, Wisconsin), Apple (Cupertino, California), AT&T (Dallas, Texas), AutoNation, Bank of America (Charlotte, North Carolina), BB&T (Winston-Salem, North Carolina), Best Buy (Richfield, Minnesota), Boeing Company (Chicago, Illinois), Cabot Oil & Gas Corporation (Houston, Texas), Capital One (McLean, Virginia), CarMax Inc. (Richmond, Virginia), The Charles Schwab Corporation (San Francisco, California), Charter Communications, Inc. (Stamford, Connecticut), Chipotle Mexican Grill (Denver, Colorado), Cigna Corporation (Bloomfield, Connecticut), Comcast (Philadelphia, Pennsylvania), Exxon Mobil, FedEx (Memphis, Tennessee), Fiat Chrysler (Auburn Hills, Michigan),  Home Depot (Atlanta, Georgia), Honeywell (Morris Plains, New Jersey), Hostess Brands, Inc. (Kansas City, Missouri), Humana (Louisville, Kentucky), Smucker Company (Orrville, Ohio), JPMorgan Chase & Co. (New York, New York), JetBlue (New York, New York), Kraft Heinz Company (Pittsburgh, Pennsylvania and Chicago, Illinois), Lowes (Mooresville, North Carolina), Mastercard Inc. (Purchase, New York),  Merck (Kenilworth, New Jersey), MetLife Inc. (New York, New York), Nationwide Insurance (Columbus, Ohio), Pfizer Inc. (New York, New York).”

The point is that the entire list of companies providing bonuses, increases in 401Ks and other contributions to both employees and customers because of the tax bill is mind numbing.  The entire list can be found at Americans for Tax Reform at https://www.atr.org/list.     

One can disagree with President Trump, but the fact is he is putting money back into the average American’s pocket.

The good news keeps on coming.  On February 13th Bloomberg reported:

“Optimism among small companies in the U.S. rose more than forecast in January, fueled by a record number of owners who said now was a good time to expand, according to a National Federation of Independent Business survey released Tuesday.

Six of the 10 components that make up the small-business optimism index increased in January, producing one of the strongest readings in the 45-year history of the survey. The figures show sustained, sturdy business sentiment since the November 2016 election. A measure of plans to boost capital spending in coming months increased by 2 points to 29 percent, consistent with other data indicating robust outlays for equipment. One in five small companies said they plan to boost hiring, unchanged from the prior month, as finding qualified workers remains problematic and underscores a tight job market.The new tax law “produced the most recent boost to small-business optimism,” NFIB’s William Dunkelberg and Holly Wade said in a report. “And federal government-related cost pressures continue to abate, offering a more supportive business climate for small firms. Consumer spending remains supportive, and business spending and housing remain strong.”

The bottom line is that many average Americans are being affected positively by the Trump tax bill.  This may explain why on February 23rd the Rasmussen Reports stated that Trump’s popularity had shot to 50%.  The tax bill is a gift that will keep on giving to Trump and the Republican party.

SECTION 301 CASE AGAINST CHINA ON FORCED TECHNOLOGY TRANSFERS

In an attached August 18th Federal Register notice based on an August 14th Presidential Memorandum, 301 INITIATION NOTICE Presidential Memorandum for the United States Trade Representative whitehouseg, President Trump pulled the trigger on the Section 301 Intellection property case against China.  The Section 301 investigation could take a year and probably will lead to negotiations with the Chinese government on technology transfer.  If the negotiations fail, the US could take unilateral action, such as increasing tariffs, or pursue a case through the World Trade Organization.  Unilateral actions under Section 301, however, also risk a WTO case against the United States in Geneva.

The United States Trade Representative (“USTR”) held a hearing on October 10th at the International Trade Commission.  During the October 10th hearing, only two US companies appeared to argue that their IP was stolen by Chinese government actions.

Acting Assistant USTR for China Terry McCartin, commenting on the dearth of business witnesses, said some companies had expressed concern “about retaliation or other harm to their businesses in China if they were to speak out in this proceeding.”

On January 18th, it was reported that President Trump was considering a big “fine” as punishment for China’s alleged theft of intellectual property.  In an interview, Trump stated,

“We have a very big intellectual property potential fine going, which is going to come out soon.”

Although Trump did not define what he means by “fine,” Section 301 allows the US to impose retaliatory tariffs on Chinese goods or other trade sanctions until China changes its policies.

Trump further stated:

“We’re talking about big damages. We’re talking about numbers that you haven’t even thought about.”

Trump said he will be discussing this action in his State of the Union address on January 30th.  Trump also recently stated that he hopes there will not be a trade war with China. “I don’t think so, I hope not. But if there is, there is.”

NAFTA NEGOTIATIONS CONTINUE AND PROBABLY WILL NOT BE TERMINATED

NAFTA negotiations continue and there is hope that the agreement will not be terminated.  But no one can say for certain at this time.

TRADE ADJUSTMENT ASSISTANCE FOR FIRMS/COMPANIES – A BETTER ALTERNATIVE TRADE REMEDY WHICH ACTUALLY WORKS

As stated in numerous past newsletters, there is another more productive way to solve the Steel crisis and fix the trade problem and help US companies, including Steel and other companies, adjust to import competition.  This program has a true track record of saving US companies injured by imports.

This was a problem personally approved by President Ronald Reagan.  The Trade Adjustment Assistance for Firms/Companies program does not put up barriers to imports.  Instead the TAA for Companies program works with US companies injured by imports on an individual basis to make them more competitive.  The objective of TAA for Companies is to save the company and by saving the company it saves the jobs that go with that company.

But as stated in the video below, for companies to succeed they must first give up the mentality of international trade victimhood.

In contrast to TAA for workers, TAAF or TAA for Companies is provided by the Economic Development Administration at the Commerce Department to help companies adjust to import competition before there is a massive lay-off or closure.  Yet the program does not interfere in the market or restrict imports in any way.

In addition, the Federal government saves money because if the company is saved, the jobs are saved and there are fewer workers to retrain and the saved company and workers end up paying taxes at all levels of government rather than being a drain on the Treasury.  To retrain the worker for a new job, the average cost per job is $50,000.  To save the company and the jobs that go with it in the TAA for Companies program, the average cost per job is $1,000.

Moreover, TAA for Firms/Companies works.  In the Northwest, where I am located, the Northwest Trade Adjustment Assistance Center, http://www.nwtaac.org/, has been able to save 80% of the companies that entered the program since 1984. The Mid-Atlantic Trade Adjustment Assistance Center, http://www.mataac.org, uses a video, http://mataac.org/howitworks/, to show in detail how the program resulted in significant turnarounds for four companies. The reason the TAA for Firms/Companies is so successful—Its flexibility in working with companies on an individual basis to come up with a specific adjustment plan to make them competitive once again in the US market as it exists today.  For a sample recovery plan, see http://mataac.org/documents/2014/06/sample-adjustment-plan.pdf, which has been developed specific to the strengths, weaknesses and threats each company faces.

But TAA for Companies has been cut to the bone.  On August 22, 2017, the U.S. Commerce Department announced $13.3 Million to Boost Competitiveness of U.S. Manufacturers.

Are such paltry sums really going to help solve the manufacturing crisis in the Steel and other industries?  Of course not!!

But when the program was originally set up, the budget was much larger at $50 to $100 million.  If the program was funded to its full potential, yes steel companies and other companies could be saved.

To those libertarian conservatives that reject such a program as interference in the market, my response is that this program was personally approved by your icon, President Ronald Reagan.  He understood that there was a price for free trade and avoiding protectionism and that is helping those companies injured by import competition.  But teaching companies how to be competitive is a much bigger bang for the buck than simply retraining workers.  And yes companies can learn and be competitive again in the US and other markets.

NEW RECENT TRADE CASES

ANTIDUMPING AND COUNTERVAILING DUTY CASES

CAST IRON SOIL PIPE

On January 23, 2018, Cast Iron Soil Pipe Institute filed antidumping and countervailing duty case against Certain Cast Iron Soil Pipe from China.

RUBBER BANDS

On January 30, 2018, Alliance Rubber Co. filed antidumping and countervailing duty cases against Certain Rubber Bands from Thailand, China, and Sri Lanka.

UNIVERSAL TRADE WAR CONTINUES

FOREIGN ANTIDUMPING AND COUNTERVAILING DUTY LAW AND CASES

CHINA AD/CVD NEWSLETTERS

Attached are newsletters from Chinese lawyer Roland Zhu and his trade group at the Allbright Law Office about Chinese trade law and ongoing Chinese trade cases. Team’s newsletter-EN Vol.2018.04 Team’s newsletter-EN Vol.2018.05 Team’s newsletter-EN Vol.2018.06 Team’s newsletter-EN Vol.2018.07

SECTION 337 AND IP CASES

FUEL PUMP ASSEMBILES

On January 31, 2018, Carter Fuel Systems, LLC filed a section 337 case against imports of Fuel Pump Assemblies Having Vapor Separators.  The named respondent in the case is:

Wenzhou Jushang (JS), Performance Parts Co. Ltd., China.

JUMP ROPE SYSTEMS PRODUCTS

On February 13, 2018, Jump Rope Systems LLC filed a section 337 case against imports of Jump Rope Systems Products.  The named respondent in the case is:

Suzhou Everise Fitness Co., Ltd., China.

If anyone has any questions about these cases or about the Trump Trade Crisis, Taxes and Trade, Section 201 Solar Case, Section 232 case on Steel, Aluminum or Uranium or US trade policy, the antidumping or countervailing duty law, trade adjustment assistance, customs, False Claims Act or 337 IP/patent law, please feel free to contact me.

Best regards,

Bill Perry

US CHINA TRADE WAR–CHINA RETALIATION, 201 REMEDIES, VITAMIN C, TRUMP AND TRADE, TAX BILL, SECTION 301 CHINA, SECTION 201 SOLAR CELLS, SECTION 232 STEEL AND NEW CASES

TRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

US CHINA TRADE WAR FEBURARY 5, 2017 CHINA TRADE RETALIATION UPDATE

Dear Friends,

What goes around comes around.  President Trump has threatened retaliation against China and countries for various misdeeds by raising tariffs.  But the Chinese government has now upped the game and responded with its own trade case against US agricultural exports of Sorghum Grain to China.

MOFCOM SELF-INITIATES ANTIDUMPING AND COUNTERVAILING DUTY CASE AGAINST SORGHUM GRAIN FROM THE US

On December 1, 2017, in the first time in over a decade, the Commerce Department self-initiated an antidumping and countervailing duty case against imports of aluminum sheet from China.

On February 4, 2018, Ministry of Commerce (“MOFCOM”) in China retaliated by self-initiating its own antidumping and countervailing duty case against 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.

Notices of appearance are due at MOFCOM by February 24th.

In addition to dumping, the case targets large US agricultural subsidies for sorghum grain, such as Crop Insurance Program, Price Loss Protection Program, Agricultural Risk Protection Program, Marketing Loan Program, Export Credit Guarantee Program, Market Access Program and Foreign Market Development Partner Program.

Some of the US companies that may be the targets of this MOFCOM action are: 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, and Zeeland Farm Services.  Attached is a list of more potential US target companies, US exporters of grain sorghum to China

This case is important because it signals the possible start of a trade war with China.  The US self-initiates antidumping and countervailing duty cases against China; China self-initiates antidumping and countervailing duty cases against the US.

President Trump has been threatening to levy numerous tariffs against China and other countries, but this Sorghum Grain trade case indicates that there is a price to pay for US tariffs and trade actions. Many in Washington DC are used to dealing with Japan, Taiwan and South Korea with regards to trade, but those countries are dependent on the United States for their national security.  Throw a trade rock at those countries, and they rarely throw one back.

China, however, is not dependent on the United States for its national security.  Throw a trade rock at China, and they will throw one back.  Moreover, this Sorghum Grain case is aimed directly at President Trump’s constituency—agriculture and the rural states.

Both the Wall Street Journal and Investors Business Daily in numerous editorials have warned the Trump Administration that the only major economic issue that could stop the rise in the economy is a trade war.  Trump and the Republicans have tied their political star to the rising US economy.  But if 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 Trump and the Republicans the most—agriculture.

If anyone has any questions about this case, please feel free to contact me.

US CHINA TRADE WAR JANUARY 25, 2018 SOLAR CELLS 201 UPDATE

Dear Friends,

Attached is the Solar Cells Presidential Proclamation with Annexes, which was published today January 25th in the Federal Register, FEDERAL REGISTER NOTICE PRESIDENTIAL PROCLAMATION SOLAR CELLS.  According to the Annex I (f), the 30% tariff will be applied to imports starting February 7, 2018.

In addition, a number of countries are excluded in Annex 1(b) from the tariff, including India and Ukraine, so long as their share of imports does not exceed 3%.

Within 30 days, the United States Trade Representative’s office (“USTR”) will publish a Federal Register notice, which will allow companies to petition for exclusion.  The Proclamation specifically also states that the President has “determined to exclude certain products from this action and goes on to state in paragraph 15, 4:

Within 30 days after the date of this proclamation, the USTR shall publish in the Federal Register procedures for requests for exclusion of a particular product from the safeguard measure established in this proclamation. If the USTR determines, after consultation with the Secretaries of Commerce and Energy, that a particular product should be excluded, the USTR is authorized, upon publishing a notice of such determination in the Federal Register, to modify the HTS provisions created by Annex I to this proclamation to exclude such particular product from the safeguard measure described in paragraph 8 of this proclamation.

Consumer products with solar cells, such as solar-powered backpacks and lanterns, will likely be excluded from the tariffs, but it will be tough to get other products out.

If anyone has any questions about these cases or wants additional information, please feel free to contact me at my e-mail address bill@harrisbricken.com.

Best regards,

Bill Perry

JANUARY 23, 2018 UPDATE

Dear Friends,

A number of clients and news outlets have called me because yesterday, the United States Trade Representative’s office issued its Section 201 determinations in the Solar Cells and Washing Machines 201 cases.  The USTR announcements are attached. 201 USTR ANNOUNCEMENT SOLAR WASHING MACHINES President Trump Approves Relief for U.S

This update will address these two remedy announcements and also the decision by the US Supreme Court to look at the Vitamin C Antitrust case.

Best regards,

Bill Perry

IT BEGINS? SECTION 201 SOLAR CELLS/WASHING MACHINE DECISIONS

Yesterday, the United States Trade Representative’s office (“USTR”) announced affirmative Section 201 decisions in the Solar Cells and Washing Machines cases and issued tariffs.  The question is whether these decisions represent the first layer of bricks that President Trump puts up in a protectionist wall around the US.  We will have to wait and see.  The real test will be what President Trump does in the Section 232 cases on Steel and Aluminum.

But one interesting point is that Suniva, the US company that filed the Section 201 Solar Cells case, is majority owned by a Chinese Solar Manufacturer, Shunfeng International Clean Energy Ltd.

In the 1980s, as a result in part of a Section 201 case against imports of Automobiles and a Voluntary Restraint Agreement issued by the Japanese Government, Japanese car companies set up manufacturing operations in the United States.  Many Chinese solar companies may follow Shunfeng’s lead and set up manufacturing operation in the US.  That is especially true as the new Trump Tax Bill kicks in dropping corporate tax rates to 21%.

The remedies for the two Section 201 cases are specifically set forth below.

SOLAR CELLS

In the Solar Cells case, the remedy is:

Safeguard Tariffs on Imported Solar Cells and Modules
Year 1 Year 2 Year 3 Year 4
Tariff increase 30% 25% 20% 15%
  • First 2.5 gigawatt of imported cells are excluded from the additional

It is still unclear how this will work in the sense that imports of the first 2.5 gigawatt are excluded from the additional tariff.  But in talking to one small solar cell importer, at the most during the year they import a total of 1 megawatt.  This tells me that the new tariffs first will not be retroactive and second probably will kick in after several months each year, when total imports reach the 2.5 Gigawatt level.

As stated before, these 201 tariffs are applicable to imports from all countries, including China, Malaysia, Germany, Canada and Mexico.  When total imports of solar cells and modules reach the 2.5 gigawatt level, the new tariff kicks in.  So, for example, if total imports of solar cells and modules into the US reach the 2.5 gigawatt level on May 15th, imports after that will be hit with a tariff.

WASHING MACHINES

The Washing Machines Remedy is set forth below.  This is similar to the Solar Cells Remedy in the sense that the first 1.2 million washers will have a lower tariff and the higher tariff will not kick in until after total imports reach the 1.2 million unit level.

Also 50,000 units of covered parts are excluded from the tariff.

Tariff-Rate Quotas on Washers
Year 1 Year 2 Year 3
First 1.2 million units of imported

finished washers

20% 18% 16%
All subsequent imports of finished

washers

50% 45% 40%
Tariff of covered parts 50% 45% 40%
Covered parts excluded from tariff 50,000 units 70,000 units 90,000 units

So the point of both remedies is import quickly into the US market.  The first imports into the country in the Solar Cells case will have no tariff and in the Washing Machines case will have a lower tariff.

VITAMIN C ANTITRUST CASE RISES FROM THE ASHES

With the Second Circuit Appeal Court ruling in September 16, 2016 against the US importers, many assumed that the Vitamin C antitrust case against the Chinese companies was dead.  But on January 12, 2018, in the attached notice, 011218zr_3d9g (1), the Supreme Court announced that it was accepting the importers’ petition for certiorari in the Animal Science Products, et al v. Hebei Welcome, et al., Vitamin C Antitrust case.  But the appeal is specifically limited to question 2 raised in the Animal Science Products’ Petition for Certiorari:

  1. Whether a court may exercise independent review of an appearing foreign sovereign’s interpretation of its domestic law (as held by the Fifth, Sixth, Seventh, Eleventh, and D.C. Circuits), or whether a court is “bound to defer” to a foreign government’s legal statement, as a matter of international comity, whenever the foreign government appears before the court (as held by the opinion below in accord with the Ninth Circuit).

So the question for the Supreme Court is whether the Chinese government’s characterization of its own law is conclusive in the proceeding.

If anyone has any questions about these cases or wants additional information, please feel free to contact me at my e-mail address bill@harrisbricken.com.

Best regards,

Bill Perry

US CHINA TRADE WAR JANUARY 20, 2017 BLOG POST

Dear Friends,

Have been in China and then intensely involved in a steel antidumping and countervailing duty case on cold drawn mechanical tubing (“CDMT”) and only now can come up for air and turn my attention to the blog.

Moreover, there are so many mixed signals coming out of the White House on trade it is difficult to know which way Trump is going to go.  As indicated below, the problem is probably retaliation by other countries and agriculture.  Trump wants to be tough on trade but half of all US agriculture products are exported.  One third of all Iowa corn is exported to Mexico.

Trump cannot kill NAFTA or be so tough on trade that US agriculture exports become the target of retaliation.  Trump is winning and the Republicans stand a chance of holding their own in the mid-term elections if the US economy is doing very well.  But taking a very protectionist stance by killing imports could very well backfire and hurt the US economy deeply.  If the US economy goes down, Trump and the Republicans go down.

But this could be the month where the direction of Trump’s trade policy starts to truly come into focus.  President Trump has to decide whether to impose additional tariffs on Solar Cells by January 26th and on Washing Machines by February 4th. But more importantly in the next 90 days, President Trump has to decide whether to impose additional tariffs on steel imports pursuant to Section 232 national security case.  After Steel comes aluminum and possibly a new case on uranium.  In addition, in the Section 301 case against intellectual property and China, Trump is talking about “fines” against China, whatever that means.  Does that mean a trade war with China?

More importantly, the most important development in trade may be the passage of the Trump/Republican tax bill, which has slashed corporate taxes to 21%.  This dramatic tax reduction is creating a manufacturing renaissance in the United States.  Apple has announced that it is repatriating almost $250 billion from overseas, much of which will be used to create new manufacturing facilities in the United States.

Unemployment, including Black and Hispanic unemployment, is the lowest in decades.  One way to cure the trade problem is by making US companies more competitive and that is just what Trump and the Republicans have done.

If anyone has any questions or wants additional information, please feel free to contact me at my e-mail address bill@harrisbricken.com.

Best regards,

Bill Perry

WILL TRADE UPSET THE TRUMP ECONOMIC JUGGERNAUT IN JANUARY 2018?

TO DATE TRUMP HAS NOT IGNITED A TRADE WAR

Despite many warnings of doom and gloom regarding trade, some from this newsletter, President Trump apparently has taken a cautious approach to trade.  Although Trump has torn up the Trans Pacific Partnership (“TPP”) and threatened to pull out of the North American Free Trade Agreement (“NAFTA”), Trump so far has gone slow on trade.  NAFTA has not been torn up, and to date President Trump has not imposed draconian tariffs on imports of steel and aluminum pursuant to the Section 232 National Security cases, probably in response to the many US producers that use imported steel and aluminum to produce downstream products made of steel.  Trump is learning that trade is “complicated”.

The Cold Drawn Mechanical Tubing (“CDMT”) case illustrates the problem with being tough on trade.  During the preliminary injury investigation at the ITC, one of my clients Voest Alipine Rotec (“Rotec”) told the US International Trade Commission (“ITC”) that if the ITC reached an affirmative preliminary injury determination, it would move offshore.  The ITC went affirmative and as Rotec testified in December at the ITC final hearing, Rotec opened up a new production facility in Mexico to take care of all of its export business, cutting US jobs.  When companies cannot get competitive raw materials, including steel products, they move offshore

TRUMP’S POLICIES HAVE CREATED AN ECONOMIC BOOM—CUTTING TAXES AND REGULATIONS WORKS

As indicated below in the article on the Tax Bill, another very important reason for Trump’s go slow approach is that the US economy is climbing upward like a rocket, and President Trump does not want to do anything to damage the trajectory of the economy.  On election day, the Dow Jones average was 18,259.  It has now climbed to over 26,000 creating over $5 trillion in new wealth.  Trump’s policy of cutting regulations and the passage of the Trump tax bill are major reasons for the huge surge in the economy.

Democratic officials under President Obama told the American public to get ready for the new normal—US economic growth domestic product (“GDP”) could not get higher than 2.2% and would never go over 3%.  In the first year of the Trump Presidency, the US GDP is 3.2%.  With the elimination of regulations and the new Trump tax bill, which cut the corporate tax from 35 to 21%, many economists are now forecasting in 2018 a US GDP above 4%.

When the GDP goes up, all boats rise, and everyone, including the lower and middle class, are better off.  Rising GDP means jobs and more jobs, exactly what Candidate Trump promised.  Unemployment is the lowest it has been in decade.  Hispanic and Black unemployment is the lowest it has been in decades.  Manufacturing is having one of its best years since 2004.

When all boats rise that means the lower middle class and middle-class incomes go up also, and that is Trump’s core constituency. The Republican’s road to victory in the upcoming midterms in 2018 and Trump’s reelection in 2020 is dependent upon the economy.  As President Clinton himself stated, “It’s the economy stupid.” If the economy is rising, everyone’s income goes up as there are more jobs, which means more voters pulling the Republican lever in the voting booth, and there is a chance the Republicans can hold their own in the mid-terms.  The economy goes down and the Republicans will be crushed.

During the first term of President Obama, Democratic Senators and Congressmen were warning President Obama to focus on jobs for the lower and middle-class workers.  President Obama ignored the advice and focused on health care and an infrastructure program that did not work.  The average American wants a job, not a handout, because jobs lead to the American dream– a house to own and a good middle-class life.

Trump understands this desire and has focused on this core principle, which is exactly what he promised to do as a candidate.

Newt Gingrich, former speaker of the House and Presidential candidate and one of the true thinkers in the Conservative Wing of the Republic party, is predicting a great political surprise—the size of the Republican victory in the midterms.  Directly contrary to the many statements of Democrats and pundits in the mainstream media, Gingrich makes the strong political argument that because of the sharp rise in the US economy, Republicans will do very well in the midterms.  See http://www.foxnews.com/opinion/2017/12/28/newt-gingrich-get-ready-for-great-political-surprise-2018.html.  People may not like the Trump package, but his economic policy so far is working.

SLAMMING TRADE AND STOPPING IMPORTS COULD STOP THE ECONOMIC BOOM

But the one problem with Trump’s economic initiative, which could be the flaw in his and the Republican strategy, is trade.  If Trump embarks on a sharp protectionist push, withdrawing from NAFTA and raising tariffs for many products coming into the US, that could drop economic growth like a rock.  All the business investor publications, such as the Wall Street Journal and the Investors Business Daily, are warning Trump to go slow on trade and not rip up the global trading system.  If Trump decides to create a trade war with other countries, the economy will slow and the Republicans will have no hope of winning the midterms and Trump will be a one term President.

One major reason for that is agriculture.  On January 9, 2018 in an editorial entitled “Will Trump Punish the Farm Belt?” the Wall Street Journal raised this very point:

“The U.S. economy is starting to grow at a faster pace, and deregulation and tax reform are pointing to an investment boost in 2018. But the big economic policy question now is whether President Trump is going to dampen this new growth enthusiasm by imposing tariffs and kicking off a global trade war.

That issue was in high relief Monday in Nashville, where Mr. Trump delivered a speech [to the American Farm Bureau] touting his policies for the rural U.S. economy that benefits from free trade. Mr. Trump can rightly point to White House progress on reducing government barriers to growth in American agriculture. . . .

But farmers are scared stiff that Mr. Trump might take a protectionist turn that would impose more government barriers. Highly efficient and productive, U.S. farmers thrive in a competitive global market. But tariffs are border taxes that raise costs for U.S. producers and consumers. . . .

Mr. Trump already walloped U.S. farm exporters when he dropped out of the Trans-Pacific Partnership, which has given Europe, Australia and Canada an edge to meet growing Asian demand for high-value farm products. After Japan imposed 50% “safeguard” tariffs on frozen beef last July, U.S. imports dropped by a quarter. Imports from Australia, which has a trade deal with Japan and supplies about half of its frozen beef, increased by 30%.

Foreign leaders are working fast to lock in trade deals that are leaving the U.S. behind. In December the European Union finalized a “cars-for-cheese” pact with Japan that will slash tariffs on most dairy, meat and wine to zero from up to 30%. Canada last year reached an agreement with the EU that will make 99% of their exports duty-free.

Mr. Trump is also contemplating tariffs against China for stealing U.S. intellectual property. This should be addressed, but the danger is that U.S. agriculture is sure to be a top target for reprisal if the President gets into a trade war with Beijing. China is one of America’s top farm markets, with agricultural exports tripling over the past decade to $21.4 billion, including $14.2 billion in soybeans. Australia and Brazil can replace many U.S. exports in a trade spat.

The greatest danger to the Farm Belt is that Mr. Trump might withdraw from the North American Free Trade Agreement. The U.S. sends about $18 billion a year in farm products to Mexico and $23 billion to Canada, which together account for a third of American farm exports. Since Nafta came into force in 1994, farm exports to Mexico and Canada have more than quadrupled. Soybean exports to Mexico have quintupled.  . . .

Responding to Mr. Trump’s trade threats, Mexico is already seeking alternative commodity suppliers. Last year Mexico reached deals to increase imports of wheat from Argentina and corn from Brazil as a hedge against U.S. withdrawal.

Mr. Trump devoted only a couple of lines to trade in his Nashville speech, and we hope it reflects what Mr. Trump has learned about trade on the job. More likely, it means Mr. Trump still hasn’t resolved the debate among his economic advisers.

One argument Mr. Trump should hear is that a U.S. withdrawal from Nafta would most hurt states like Iowa and Wisconsin that gave him his election victory. That’s especially true if the U.S. imposes additional protectionist measures—such as steel tariffs—that invite retaliation. After the U.S. blocked Mexican trucks from delivering goods across the border in 2009, Mexico slapped tariffs on U.S. table grapes, potatoes, juices, almonds and wines.

Trashing Nafta would be among the great self-inflicted wounds in history. It would also tell other countries that the U.S. can’t be trusted to keep its word on trade, which would make it impossible to cut the bilateral trade deals the President says he wants. This is a strategy for making America weaker.

Many Senators and Congressmen from Agricultural states, such as Iowa, Wisconsin, Wyoming and Montana, which all voted for Trump, have warned the President to go slow on trade and not tear up the North American Free Trade Agreement (NAFTA).  These Agricultural states are part of Trump’s base and one of the major reasons he won the Presidency.  In a January 7, 2018 article entitled “Farmers Seek a Tempered Nafta Stance”, the Wall Street Journal further stated:

“When President Donald Trump addresses the U.S. agricultural community Monday, farmers will be looking for signs that a recent push to lobby him in support of the North American Free Trade Agreement has been successful.

That effort, which has included Republican senators from farm states offering charts and graphs illustrating the benefits of the trade deal, has left some hopeful that the administration has softened an earlier tough stance on Nafta. Fueling those hopes has been the president’s refraining from harsh anti-Nafta rhetoric since his last tweet regarding the pact in August.

“We’re doing everything we can to have our voices heard,” said Sen. Deb Fischer (R., Neb.), a rancher and one of several lawmakers who attended a steak lunch with Mr. Trump in December. Sen. Joni Ernst (R., Iowa) brought a chart showing a negative impact of Mr. Trump’s anti-Nafta messages on hog futures. Last week, Senate Agriculture Committee Chairman Pat Roberts (R., Kan.) led another group to the White House to reinforce the message.

White House officials say Mr. Trump has continued to meet with “stakeholders on all sides” on the issue. One official familiar with the strategy said that in staying relatively quiet on Nafta, the president is giving U.S. negotiators maximum leverage in the talks.

Farm-state lawmakers say that in their sessions with him, Mr. Trump has been reassuring about Nafta, which has opened Mexican and Canadian markets to duty-free exports of billions of dollars in U.S. products. . . .

But trade, and Nafta in particular, is foremost on the farm community’s mind. The U.S. in 2016 sent $16.4 billion in agricultural and food products to Mexico and $23.4 billion to Canada, according to government figures. Farmers worry that without Nafta, the two U.S. neighbors would have the right to put tariffs on products from the U.S. and could turn to other countries for supplies of soybeans, corn and other farm products.  . . .

“While the president is increasingly listening to the dire concerns of farmers and ag state lawmakers, nobody has a sense of whether he’ll heed their warnings,” said former Democratic Sen. Max Baucus, co-chairman of Farmers for Free Trade, which seeks to preserve existing agreements that lower tariffs on agricultural exports.  . . .

Labor unions and left-leaning consumer groups have supported the tough stance. But business and farm lobbies have continued to lobby the administration by pointing to the benefits Nafta has brought over the last quarter century.

The farm-state lawmakers say they think they have made a difference.

“He said quite bluntly he had thought everyone wanted to get rid of Nafta, and that’s not right,” Ms. Ernst said in an interview. “I can’t speak to what the president intends to do going forward, but I think his perspective has changed a little bit.”

After the December meeting, Mr. Roberts said Mr. Trump reassured him about Nafta’s fate. “Before I could even say, ‘Merry Christmas, Mr. President,’ he looked at me and put his thumb up and said we’re going to be all right on Nafta,” Mr. Roberts said on C-Span last month.  . . .

In his last public comments on Nafta, at a political rally in Florida, Mr. Trump left open the possibility of any outcome. “We’re gonna hopefully keep Nafta,” he said, then added: “But there’s a chance we won’t. And that’s OK.”

On January 7th the Wall Street Journal published an article by Robert Zoellick, a United States Trade Representative (“USTR”) under President George W. Bush, entitled “ Trump Courts Economic Mayhem”.  One point that Zoellick made, which I agree with, is that there are not going to be any new trade agreements under this President because he wants managed trade, not free trade.  Trump promised many new trade agreements with other countries, but it takes two to tango and the other countries have a choice on whether to enter in a new trade agreement with the US.  As Zoellick stated:

“President Trump’s new National Security Strategy argues that the U.S. must compete in a hostile world. Yet the White House also wants to retreat behind trade barriers. The Trump administration has stacked up a pile of trade cases that will come tumbling down early in 2018. More important than any specific case is the signal of a strategy of economic defeatism.

The U.S. is ready to block steel and aluminum imports through a rarely used “national security” rationalization. As an alternative, Commerce Secretary Wilbur Ross had tried negotiating capacity cuts in Chinese production, but Mr. Trump waved him off with a demand for tariffs.

Because most of China’s metal exports already face U.S. tariffs of more than 80%, Mr. Trump’s tactic will likely trigger retaliation from other countries.

Next up are “safeguards” to block imports of solar panels and washing machines. Imposing “safeguards” doesn’t even require a claim of unfairness. On top of this, last year (through Sept. 20) the Commerce Department conducted 65 investigations of alleged low-cost or subsidized imports. That figure is a 16-year high, up 50% from the year before. . . .

No country wants to do a bilateral deal with Mr. Trump now because he demands managed trade, not fair competition. He wants excuses to raise barriers, not rules to boost trade. That’s why Mr. Trump will use his indictment of China’s intellectual-property practices to justify more protectionism, not solve the problems. During the president’s recent trip to China, when Beijing proposed opening some of its financial markets to U.S. companies, the Trump team dismissed this as the old way of doing business. The new way is to block Chinese exports. . . .

The U.S. is abandoning the challenge of setting new trade standards, whether for data, e- commerce or transnational services. America once attracted the world’s talent, but Mr. Trump’s hostility is driving people away. If he pulls the U.S. out of Nafta, even financial markets might recognize that his economic isolationism poses a risk to growth.

True competitors honestly assess their weaknesses, adapt and then grow stronger. Those are the qualities that made America great. This will be the year that trade policy could define Trump’s fearful America.”

Emphasis added.

COULD JANUARY BE THE MONTH WHEN TRUMP’S TRADE POLICY CHANGES DIRECTION

But there is some indication that Trump is listening to his critics.  Trump has told Lighthizer to do no harm in the NAFTA negotiations and to date has not created a trade war with China.  But as indicated below in the articles on Solar Cells, Section 301 and the Section 232 Steel and Aluminum cases, President Trump will soon be at a trade crossroads and no one is sure which way he will jump.

TRUMP TAX BILL ALONG WITH CUTTING REGULATIONS HAS LED TO A US ECONOMIC BOOM

Probably the most important development from the trade point of view in the last few months, however, is the passage of the tax bill.  Many Democratic politicians, economic pundits and millennials predict that the trickle-down economics of lower taxes and less regulations simply will have no beneficial effect on the US economy and the lower and middle classes.  Instead, many economists and millennials advocate the Obama style redistribution, taking from the rich and giving to the poor.

Despite the fact that the Dow Jones average has gone up from 18,259 on the day Trump was elected to over 26,000, these same people strongly believe that Trump simply cannot be responsible for any uptick in the US economy.  The economy is rising because of Obama’s policies, but the facts and many economists are refuting the false statements.  On January 4th, Apple announced that it would pay $38 billion in taxes to the US government to repatriate $246 billion of overseas profits back to the US.  As the Wall Street Journal reported:

“The tech giant said Wednesday it plans $30 billion in capital spending in the U.S. over five years that will create more than 20,000 new jobs. It didn’t specify how much of that spending was already planned, but said the total will include building a new facility that initially will house customer-service operations, and $10 billion toward data centers across the country. Apple also is expanding from $1 billion to $5 billion a fund it established last year for investing in advanced manufacturing in the U.S.

Apple said its one-time tax payment was the result of recent changes to U.S. tax law, under which companies can pay a one-time tax of 15.5% on overseas cash holdings repatriated to the U.S. The company said in November that it had earmarked $36 billion to cover deferred taxes on its $246 billion.”

Meanwhile, as reported in the Wall Street Journal on January 11, 2018, as a result of the tax bill:

“Wal-Mart Stores Inc. would raise starting pay to $11 per hour for all its U.S. employees and hand out one-time bonuses as competition for low-wage workers intensifies and new tax legislation will add billions to the retailer’s profits.

The giant retailer is the largest private employer in the world with 2.3 million employees, including around 1.5 million in the U.S. Its current starting salary in the U.S. is $10 an hour after workers take a training course. The new wage increase will take effect in February.

This is the third U.S.-wide minimum wage increase at the company since 2015 as it works to improve its 4,700 U.S. stores while investing heavily to compete with Amazon.com Inc. online.

The company said the salary change would add $300 million to its annual expenses and it expects to take a $400 million charge in the current quarter for the one-time bonus. The amount of the bonus will vary based on length of service, reaching up to $1,000 for an individual with 20 years of service.”

As Scott S. Powell, a well-known economist of the Discovery Institute, stated on January 12th in Investors Business Daily, “The Tax Cuts and Jobs Act of 2017 Is Already Delivering”:

“If there is one thing about which most economists understand and agree it’s the law of supply and demand. A derivative of that law is that demand and velocity of transactions tend to diminish as costs increase. While few individuals disagree about this, many in the collective body of economists have become so politicized that when it comes to the  cost  of  variables,  such  as  taxes  and  regulations, that  consensus  all  but vanishes.

Indeed, to listen to many of the pundits and  experts  there  seems  to  be  confusion, denial  and  disagreement  about  how the cost of regulations and taxes actually affect economic  activity. . . .

Recently, Princeton economics professor and former vice chairman of the Federal Reserve Alan Blinder stated in the Wall Street Journal that there was little economic evidence  “that  tax  benefits  showered  on  corporations  will  translate mostly  into  higher wages  and vastly  faster economic  growth.”

It’s not at all difficult to grasp the reasons for the markedly different economic performance of the Obama years as compared to what we have experienced in just one year of  the  Trump  administration. Obama’s best year of his two terms delivered a 2.6% growth rate, and he was the only president in some 88 years (since Herbert Hoover) to have failed to deliver economic growth of 3% in any one year he was in office.

In contrast, in the first two full quarters  of  the Trump  administration, the  economy experienced 3.2%  growth.

During his eight years, Obama oversaw an output of some 3,069 regulatory rules and nine new taxes that were part of the Obama Care health law, adding nearly $900 billion in costs to the U.S. economy, and a record 572,000 pages to the Federal Register. In contrast, in his first 11 months, Trump has eliminated some 66 significant rules while adding only three, which equates to a ratio of 22 to 1 — far exceeding the standards of his Executive Order 13771 requiring 2 old rules to be eliminated for every new one added.

The stock market closed out 2017 with a record increase for the eighth year of economic expansion, largely due to deregulation and anticipation of tax cuts.

No sooner had the ink dried on President Trump’s signature on the Tax Cuts and Jobs Act of 2017 on December 22, then more than a dozen companies, such as AT&T, Comcast NBC, Boeing, American Airlines, Southwest Airlines and Kansas City Southern, announced special $1,000 bonuses to more than 300,000 employees, and tens of billions of dollars of spending increase on plant, capacity, facilities and workforce development.

2018 has come in like a lion with the Tax Cuts and Jobs Act delivering more headline news. Now it’s reported that more than one million American workers at some 60 companies will be receiving pay raises and/or bonuses — undeniably attributable to the reduction of corporate tax rates from 35% to 21%. Wells Fargo, PNC, Bank of America, Fifth Third Bank, and BB&T, to name just a few — all cranked up minimum wages paid to $15/hour and spread the new-found wealth anticipated from tax savings in generous bonuses to more than a hundred thousand employees.

President Trump said from the beginning that lowering tax rates, simplifying the tax code, and making American companies more competitive would be the fuel that propels our economy to new heights.

It’s baffling that political bias can obviate empirical evidence and common sense. One surely doesn’t need   a Ph.D.  in economics to grasp how tax and regulatory costs affect behavior.

By helping companies become more competitive  through  lower  tax  rates, a  simplified tax code, incentivized capital investment, and removal of regulatory barriers, President  Trump  and  the  Republican  Congress  have  actually  delivered, in  the  first  year of  working  together, the  essential  foundation  to  make  America  great  again.”

On January 17, Stephen Moore, another well-known economist, stated in Investors Business Daily in an article entitled “Trump Tax Cut Is Already Working”:

“With the recent announcement of Walmart’s increasing starting wages and Fiat Chrysler’s opening a new plant (with 2,500 jobs) in Michigan, there are now more than a hundred companies that have offered bonuses and benefit hikes to their workers due to the tax cut. An estimated 1 million workers have benefited. This after less than one month.

Liberals disparage all of this as a “publicity stunt.” To hundreds of thousands of families, this is a wonderful stunt, and let’s hope to see a lot more examples of it in the weeks and months ahead.

The stock market has reached multiple new highs since the tax bill took effect on Jan. 1. Workers are more optimistic about the job market than any time in at least a decade.

I helped work with candidate Donald Trump to refine this tax reform plan, and I was ridiculed as too optimistic on how it might help the economy. But already Trump’s economic accomplishments have managed to exceed my lofty expectations. The tax cut isn’t the only factor here, but you’d have to be wearing ideological blinders to not see a link.

We are also learning that taxes influence how politicians behave.  . .

California and New York officials are investigating whether their states can convert income tax payments into tax-deductible charitable contributions to the state government. Good luck with that.

Why would they go to all this trouble if taxes didn’t matter to constituents? . .  . .

that charities are subject to the old adage: If you tax something, you will get less of it.

Well, yes, every politician in America should hold that thought — especially when they contemplate higher taxes on work, profits, savings and so on. But in this case, higher growth from lower tax rates is likely to lead to more income, and thus more, not less, charitable giving — just as we saw in the 1980s when tax rates fell from 70% to 28%.

The timeless economic lesson here is that taxes profoundly influence how and where we live our lives. We tax cigarettes and booze because we want people to consume less of them. There are proposals all over the country to tax soda pop, sugar and carbon emissions so we consume or produce less of them.

So why is it so hard to accept the reality that if we lower taxes on virtuous activities — work, investment, starting a business or saving for retirement — we will get more of these? And why is anyone surprised that this is already starting to happen?

By the way, government officials in China, Mexico, India and much of Europe are angry about America slashing its corporate tax rate from 35% to 21%: That giant sucking sound is capital and jobs from all over the world coming to low-tax America.

Meanwhile, Democrats in Congress — every one of whom voted against the tax bill — keep running around the country saying that their top agenda item, if they win the midterm elections, is to repeal this policy that is already creating jobs. Wouldn’t it be wonderful if they started rooting for America rather than against it?”

But even before the tax bill, Maria Bartiromo, the well-known Fox Business consultant, was telling her friends buy US stocks.  As Ms. Bartiromo stated in a December 14, 207 article entitled “Dow 24000 and the Trump Boom”:

“I’m not in the habit of giving stock tips or making market calls. I’ve never claimed to be an investment strategist. But after spending years reporting on business and finance, I was convinced on the night of Nov. 8, 2016, that the conventional market wisdom was way off target. . . .

When I sat down around 10:30 on election night for a Fox News panel discussion, Dow futures were down about 700 points. Markets like certainty; it was understandable that some investors were selling. Mr. Trump seemed to present more uncertainty than Hillary Clinton, who was essentially promising a continuation of the Obama administration. Mr. Trump’s talk about ripping up the North American Free Trade Agreement, for example, created big unknowns and potentially significant risks.

The election night selloff turned out to be a huge buying opportunity. Companies had been sitting on cash—not investing or hiring. Obama Care compliance was a nightmare for many business owners. It made them wonder what other big idea from Washington would haunt them in the future. Mrs. Clinton was likely to increase business costs further, while Mr. Trump had vowed to reduce them. Even in the middle of the election-night market panic, the implications for corporate revenue and earnings growth seemed obvious.

The next morning, with the Trump victory confirmed, I told my colleague Martha MacCallum that I would be “buying the stock market with both hands.” Investors began doing the same.

U.S. markets have added $6 trillion in value since the election, with investors around the world wanting in on America’s new growth story. The Federal Reserve Bank of Atlanta is now forecasting the third straight quarter of U.S. gross domestic product growth around 3%.

It’s not just an American growth story. For the first time in a long time the world is experiencing synchronized growth, which is why Goldman Sachs and Barclays among others have recently predicted 4% global growth in 2018. The entire world benefits when its largest economy is healthy, and the vibrancy overseas is reinforcing the U.S. resurgence.

As the end of the Trump administration’s first year approaches, it’s a good time to review the progress of the businessman elected on a promise to restore American prosperity.

Year One has been nothing short of excellent from an economic standpoint. Corporate earnings have risen and corporate behavior has changed, measured in greater capital investment.

Business people tell me that a new approach to regulation is a big factor. During President Obama’s final year in office the Federal Register, which contains new and proposed rules and regulations, ran to 95,894 pages, according to a Competitive Enterprise Institute report. This was the highest level in its history and 19% higher than the previous year’s 80,260 pages. The American Action Forum estimates the last administration burdened the economy with 549 million hours of compliance, averaging nearly five hours of paperwork for every full-time employee.

Behind these numbers are countless business owners who have told me they set aside cash for compliance, legal fees and other costs of regulation. That money could have been used to fund projects that strengthened their businesses. President Trump has charted a new course, prioritizing the removal of red tape and rolling back regulations through executive orders. The Federal Register page count is down 32% this year. Mr. Trump says red tape becomes “beautiful” when it is eliminated, and people who manage businesses certainly agree.     . . .

Much has changed this year. Companies from Broadcom to Boeing have announced they’ll move overseas jobs back to the U.S. American companies hold nearly $3 trillion overseas and may soon be able to bring that money home without punitive taxation. Businesses have begun to open up the purse strings, which is why things like commercial airline activity are rising substantially as executives seek new opportunities. Companies are looking to invest in growth. . . .

After reaching Dow 24000, where can markets and the economy go from here? I’m not going to make predictions, but it stands to reason that the economy is better off when federal policy doesn’t discourage people who have a demonstrated ability to work, earn, spend and invest.”

On January 7, 2018, Charles Gasparino, another business reporter for Fox News, stated in the New York Post, “On the economy, Trump Has Been Crazy Like a Fox”:

“With the Dow crossing 25,000, it’s worth pointing out the pitfalls that could reverse some of those gains — and how to avoid them.

One thing we don’t have to worry about is the economic sanity of President Trump.

In fact, it’s safe to say that the current president, for all his temperamental flaws and petty insecurities, makes his tightly wound predecessor, Barack Obama, look like a raving madman when it comes to showing sense on economic growth. Armchair psychiatrists are having a field day diagnosing the president’s mental state from afar, especially after his increasingly bizarre tweeting, but the market says otherwise.

Consider: The United States had one of the highest corporate tax rates in the world — so high that companies (and jobs) were fleeing to places like Ireland. That’s why it was perfectly sane to lower the corporate tax rate from 35 percent to 21 percent as Trump just did, and presto: Corporations are announcing plans to hire more workers, and the economy, which was expected to slow after seven years of weak growth, is heating up. The markets are predicting that growth with their surge.

Likewise, regulations have been strangling businesses for years while making it difficult for banks to lend to consumers and small business. Trump went out and hired perfectly sane regulators who basically pulled the federal government’s boot off the neck of the business community.

It was described to me as a de facto tax cut by one business owner that gives him leeway to hire more people. A major win for the working class.

And since so many of my fellow journalists are at it, let me do a little psychoanalysis of what an economically insane person might do as president.

An insane president would threaten a significant tax increase immediately upon taking office following a financial crisis, and then eventually impose one on individuals and small businesses still in recovery.

He’d impose job-crushing regulations on these same businesses as unemployment rose. He’d put a cumbersome mandate on businesses that upends the entire health care system just as the economy was finally turning a corner.

A really insane president would blow nearly $1 trillion on a stimulus plan with little planning and direction, wasting much of the money on boondoggles (see: Solyndra) and then laugh at the lack of “shovel ready” jobs created. He’d then try to spread his delusion to the masses, telling them to ignore historically low wage growth, anemic economic growth and the massive amount of people who dropped out of the work force because the stock market rallied, thanks in large part to the Fed printing money instead of his own fiscal policies.

Is Barack Obama crazy? No, but his post-2008 economic policies were. Are all Trump’s tweets sane? No, but smart investors with lots of skin in the game think his policies are perfectly rational, and that’s why the markets are soaring along with the prospect of economic growth.

Can Trump just sit back and act like a clown for the rest of his presidency as the economy and markets lift all boats? No again. Relying on the markets or the economy to disguise abhorrent presidential behavior is a fool’s game. Corrections always occur, and will occur if corporate earnings don’t match the investor enthusiasm built into Dow’s recent rise.

An unexpected burst of inflation that would force the Fed to raise interest rates could hurt both stocks and GDP. Trump might indulge his inner populist and engage in a trade war with China, or repeal NAFTA, both of which would undoubtedly hurt economic growth and stocks.

For all the good things about the business side of the tax reform bill, other parts are more complicated: Small businesses got a sliver of the tax breaks given to corporations; same goes for working-class people who don’t pay much in federal income taxes in the first place. But people who do pay a lot may get crushed when tax season rolls around. Individuals in high-tax states (like New York) could get hammered because the plan barely lowers the top rate and plugs so many deductions.

To pay for their higher taxes, these people could curb their personal spending, meaning less economic growth and possibly lower stock prices.

But none of these hiccups suggest a madman is at the helm of the US economy, which is something to consider the next time you hear Donald Trump is crazy.”

After sending out my newsletter, Harry C. Moser, President of the Reshoring Initiative contacted me and stated:

“Nice piece. I attach our data showing that reshoring and FDI job announcements in 2017 were up over 200% from 2016 to about 240,000, confirming your thesis. “

See his attached powerpoint.  Reshoring & FDI trends 4 slides

WILL 2018 BE THE YEAR OF THE US CHINA TRADE WAR?

As indicated above, the real concern is whether this January and 2018 will be the year a trade war start with China followed by a NAFTA crackup.

In November 2017 I was in Beijing during the Trump visit.  Xi Jinping and Chinese government officials know how important Trump is to their own economy and they gave Trump a “state visit plus”.  Chinese television stated that no US President was given such a welcome since President Nixon.  To see pictures and a video of Trump’s visit to China from Chinese television, which was broadcast all over China, see https://www.dropbox.com/sh/sx2x6qpy7cf77a1/AAAFty0_SwObgVvT-tXbVknVa?dl=0.

During and after the China visit, the US press stated that President Xi played Trump, but the Chinese media at the same time was saying that Trump played President Xi.

But pundits are predicting that 2018 is the year of the US China trade war.  I suspect that although President Trump will issue tariffs in the Section 201 Solar Products and Washing Machines cases, there will be no real trade war so long as the Chinese government opens up its own economy to foreign investment and imports.  Lighthizer is favoring changing Investment guidelines under CFIUS to ban all Chinese investment in areas where China bans US investment.  Essentially reciprocity.

Opening up Chinese barriers to US trade and investment is a strategy every Administration has followed with China be it Bill Clinton, George W. Bush or Barak Obama.  Trump, Wilbur Ross and USTR Lighthizer will keep up extreme pressure on China to open its markets to US exports and investment.  If China refuses, there could well be a trade war.  But such a trade war would be for the right reason.

But if Trump puts up protectionist high tariffs on Solar Cells, Washing Machines, steel, aluminum products, and China imports, that will be when the damage to the economy will happen.

SECTION 301 CASE AGAINST CHINA ON FORCED TECHNOLOGY TRANSFERS

In the attached August 18th Federal Register notice based on an August 14th Presidential Memorandum, Presidential Memorandum for the United States Trade Representative whitehouseg, President Trump pulled the trigger on the Section 301 Intellection property case against China.  The Section 301 investigation could take a year and probably will lead to negotiations with the Chinese government on technology transfer.  If the negotiations fail, the US could take unilateral action, such as increasing tariffs, or pursue a case through the World Trade Organization.  Unilateral actions under Section 301, however, also risk a WTO case against the United States in Geneva.

The United States Trade Representative (“USTR”) held a hearing on October 10th at the International Trade Commission.  During the October 10th hearing, only two US companies appeared to argue that their IP was stolen by Chinese government actions.

Acting Assistant USTR for China Terry McCartin, commenting on the dearth of business witnesses, said some companies had expressed concern “about retaliation or other harm to their businesses in China if they were to speak out in this proceeding.”

On January 18th, it was reported that President Trump was considering a big “fine” as punishment for China’s alleged theft of intellectual property.  In an interview, Trump stated,

“We have a very big intellectual property potential fine going, which is going to come out soon.”

Although Trump did not define what he means by “fine,” Section 301 allows the US to impose retaliatory tariffs on Chinese goods or other trade sanctions until China changes its policies.

Trump further stated:

“We’re talking about big damages. We’re talking about numbers that you haven’t even thought about.”

Trump said he will be discussing this action in his State of the Union address on January 30th.  Trump also recently stated that he hopes there will not be a trade war with China. “I don’t think so, I hope not. But if there is, there is.”

NAFTA PROBABLY WILL NOT BE TERMINATED. IF IT IS, REPUBLICANS, INCLUDING TRUMP, CAN KISS THE ELECTIONS GOODBYE

On August 16th, United States, Canada and Mexico sat down together for the first round of talks to formally reopen NAFTA.  On July 17th, the USTR released its attached “Summary of Objectives for the NAFTA Renegotiation”, USTR NAFTA RENGOTIATION OBJECTIVES.  On January 28th, there will be a major NAFTA negotiation round in Montreal.

But because of the warnings of the impact of a termination on the US economy and his own constituents, President Trump probably will not terminate NAFTA.  Negotiations will be slow, but the three countries eventually will come to a deal.  On January 17, 2018, Politico reported that Senator Chuck Grassley of Iowa, who if very concerned about the impact of a withdrawal from NAFTA on agriculture, is now feeling more optimistic:

“Sen. Chuck Grassley said he took “some comfort” in Trump’s recent remarks at the American Farm Bureau Federation’s convention in which the president refrained from directly threatening to withdraw from NAFTA. . . .

Grassley also warned that if negotiations aren’t completed by a self-imposed March deadline and that deadline is not extended, “then there is no hope of agreement” because of the upcoming Mexican presidential election and the 2018 midterm elections in the U.S. Upon hearing that Trump said he would be “a little bit flexible” with regards to a NAFTA decision based on Mexico’s July election, Grassley said that “ought to give some comfort to the people that he is fairly reasonable on a timetable.”

On January 17th in an article in the Wall Street Journal entitled “Killing Nafta Would Ruin American Farmers”, Karl Rove, a well-known Republican strategist, predicted that if President Trump withdraws from NAFTA, that would hurt farmers and they would not vote Republican in the midterms or for Trump at reelection time:

“In a Wall Street Journal interview last week, President Trump said if he were to “terminate” the North American Free Trade Agreement, it “would be frankly a positive for our country.”

This bluster could be a negotiating ploy before the next trilateral Nafta talks, set for Jan. 28 in Montreal. If not, Mr. Trump should stop threatening. Withdrawing from Nafta would immediately kill American jobs, while handing Democrats the midterm elections on a silver platter. . . .

Nafta is especially important to American farmers and ranchers. U.S. agricultural exports to Mexico and Canada were $8.9 billion in 1993, before the agreement kicked in. Today, they are $39 billion, accounting for 30% of America’s farm exports.

These exports are critical in many states with key elections this year. In North Dakota, which Mr. Trump won by 36 points, Republicans want to flip the Senate seat held by Democrat Heidi Heitkamp. But the state’s commerce commissioner, Jay Schuler, says North Dakota exports 84% of its crops—worth $3.5 billion—to Mexico and Canada. Withdrawing from Nafta would subject those products to high foreign tariffs in force before the deal took effect, leaving farm families very unhappy.

Republicans also hope to flip Senate seats in Missouri and Indiana, both of which Mr. Trump carried by 19 points. The GOP is fighting to keep governorships in Iowa and Kansas, which the president won by 9 points and 21 points, respectively.

These campaigns will be much more difficult if farm economies are ruined by Nafta termination. Missouri is a major producer of corn, soybeans, beef and turkey; Indiana of corn and soybeans; Iowa of corn, soybeans and pork; and Kansas of wheat, corn and beef. Much of this is exported to Mexico. If the U.S. pulled out of Nafta, Mexican tariffs would snap back to 75% on American chickens, high-fructose corn syrup and potatoes, 45% on turkey, and 25% on beef. . . .

Then there are the car-making states. In the almost quarter-century since Nafta went into effect, the U.S. auto industry has built a hemispheric supply chain to help it compete with European and Asian auto makers.

Indiana, Michigan, Ohio and Tennessee each have important Senate races, and all but Indiana have governor’s contests, too. In each of those states, at least 9% of the workforce is tied to autos, and in Michigan the figure is 20%. Their exports of cars and auto parts range from $5.9 billion in Tennessee to $26 billion in Michigan.

If Mr. Trump made good on his Nafta threat, he would disrupt the auto industry’s supply chain, making American-made cars more expensive at home and less competitive abroad. Does he really want to blow up these states’ economies—along with those of roughly a dozen other states with auto production (including Missouri, Pennsylvania and West Virginia)?

I haven’t even gotten to the crucial elections in border states like Texas and Arizona, which are important way stations for trade with Mexico and whose economies would face major difficulties if Nafta disappears.

In discussing Nafta, Mr. Trump keeps getting his numbers wrong. Last week he declared that the U.S. has a $71 billion trade deficit with Mexico and “we lose $17 billion with Canada.” Actually, after counting sales of goods and services, the trade deficit with Mexico in 2016 was just $55.6 billion. With Canada, the U.S. ran a $12.5 billion surplus.

Does Mr. Trump ignore the U.S. advantage in services—everything from insurance to banking to logistics—because it undermines his anti-Nafta case? Or, despite coming from the service industry himself, does he think service jobs are less worthy than manufacturing ones? Try defending that proposition to employees at Travelers (a big insurance player in Canada) or FedEx and UPS (which provide logistics and shipping there) or Wal-Mart (Mexico’s largest retailer) or MetLife (which insures 78% of Mexican government employees) or Citibank (which owns Mexico’s second-biggest bank).

Any trade agreement that is two decades old needs updating. Nafta is no exception, especially given the growth of e-commerce and the digital economy. But bad policy is bad politics. Killing Nafta would damage Republicans in agricultural, auto and border states and help elect more Democrats in 2018, strengthening the party’s impeachment efforts. Mr. President, it isn’t worth it.”

THE TRADE WEAKNESS IN DONALD TRUMP’S ECONOMIC POLICY—NO TRADE DEALS TO DATE OR ON THE HORIZON—MAYBE TIME TO RENEGOTIATE THE TPP??

As stated in my last blog post, President Trump dropped the Trans Pacific Partnership (TPP) Agreement, has made noises about dropping the US Korea agreement and may kill the North American Free Trade Agreement (“NAFTA”) with Mexico and Canada.  Even though NAFTA may ultimately be renegotiated, the real problem is that with Trump’s policy of weaponizing trade agreements, no other country will enter into a trade agreement with the US.  As Robert Zoellick, the former USTR under Bush, states above:

“No country wants to do a bilateral deal with Mr. Trump now because he demands managed trade, not fair competition. He wants excuses to raise barriers, not rules to boost trade. That’s why Mr. Trump will use his indictment of China’s intellectual-property practices to justify more protectionism, not solve the problems.”

As stated above, that is a huge problem for US farmers because almost 50% of farm products produced in the US are exported.

During the time when the TPP was being discussed in Congress, its passage was in trouble because many Senators and Congressmen believed the US did not get enough and many Senators and Congressmen wanted a a better deal.

On January 21, Tokyo will be hosting TPP talks for the other 11 countries that have decided to go forward with the TPP.  Maybe President Trump should consider a renegotiation of the TPP.  If the other 11 countries refuse to renegotiate the deal with the US, nothing lost, but the other 11 countries might be very interested if the US indicated possibly joining the TPP but under very strict conditions.  The appeal of the US market is huge to the other countries and that would give President Trump and USTR Lighthizer the chance to show off their negotiating skills.  Moreover, that would be one way for the US and Trump’s constituents, especially in the Agriculture area, to get a trade agreement they can benefit from with a number of other countries.  Nothing ventured, nothing gained

SECTION 201 SOLAR CELLS CASE

On May 17, 2017, Suniva filed a Section 201 Escape Clause against all Solar Cell imports from all countries at the US International Trade Commission (“ITC”).  On May 23, 2017, in the attached Federal Register notice, ITC iNITIATION NOTICE SOLAR CELLS, the ITC decided to go ahead and institute the case.

The ITC had to determine whether “crystalline silicon photovoltaic (“CSPV”) cells (whether or not partially or fully assembled into other products) are being imported into the United States in such increased quantities as to be a substantial cause of serious injury, or the threat thereof, to the domestic industry producing an article like or directly competitive with the imported articles.”

The ITC reached an affirmative injury determination in the case on September 22, 2017, and then proposed a remedy to the President.

The Commission issued its report to the President on November 13, 2017.  The United States Trade Representative (“USTR”) has held remedy hearings. and President Trump must issue his remedy determination on January 26th.  Many Solar Cells users along with newspaper editorials have urged the President to do nothing because of the bad impact on downstream solar companies, but many commentators expect the President to  issue tariffs against solar cell imports.

President Trump also faces a February 4th deadline to impose trade relief in response to the ITC 201 Affirmative decision on Washing Machines.

SECTION 232 STEEL AND ALUMINUM CASES PICK UP—SECTION 232 STEEL REPORT GOES TO THE PRESIDENT

As mentioned in the last newsletter, the Section 232 Steel and Aluminum cases appeared to stall, but the cases picked up steam again.  On January 11, 2018, the Commerce Department sent the final Section 232 Steel Report to the President.  On that day Commerce announced:

“Today Secretary of Commerce Wilbur Ross formally submitted to President Donald J. Trump the results of the Department’s investigation into the effect of steel mill product imports on U.S. national security. After this submission, by law, the President has 90 days to decide on any potential action based on the findings of the investigation.”

Commerce will release a public report after the President makes his decision in 90 days.

Across the board tariffs on steel imports would create enormous collateral damage on the many US producers that use steel as a raw material input to produce downstream steel products.  Such a remedy would probably result in the loss of 100s of thousands of US job.

That is the problem with purely protectionist decisions.  They distort the US market and simply transfer the problems of the steel industry to other downstream industries.

NEW SECTION 232 CASE AGAINST URANIUM IMPORTS

On January 16th, Ur-Energy USA Inc. and Energy Fuels Resources Inc. filed a section 232 petition at Commerce claiming that imports of uranium from state-owned and state-subsidized companies in Russia, Kazakhstan and Uzbekistan now fulfill 40 percent of U.S. demand, compared to the less than 5 percent satisfied by U.S. production. The Denver-based companies claim that imports from China will grow in the coming years. The companies also argue the volume of imports from Russia will only grow after a decades-old agreement that restricted imports from that country in exchange for suspending anti-dumping duties expires in 2020.  The Petition states:

“The U.S. uranium industry needs immediate relief from imports that have grown dramatically and captured almost 80% of annual U.S. uranium demand. Our country cannot afford to depend on foreign sources — particularly Russia, and those in its sphere of influence, and China — for the element that provides the backbone of our nuclear deterrent, powers the ships and submarines of America’s nuclear Navy, and supplies 20% of the nation’s electricity.”

NO SYMPATHY FOR BOMBARDIER IN BOEING FIGHT.

Recently, a number of reporters have contacted me about the Civil Aircraft from Canada, Bombardier-Boeing, case because the US International Trade Commission (“ITC”) will vote on the injury case on January 26th.  I have told the reporters that there is a 95% chance that the ITC goes affirmative and that Antidumping and Countervailing Duty orders are issued.

As stated in prior newsletters, I have no sympathy for Bombardier because the Quebec Government directly invested $1 billion into Bombardier’s production process, which resulted in a very high CVD rate. The entire purpose of the US CVD law and CVD laws along with WTO Subsidy Agreement and the WTO Civil Aircraft Agreement is that private companies should not have to compete in commercial markets against the Government and that is just what has happened at Bombardier.

Also Bombardier refused to participate and cooperate in the Commerce Department’s antidumping case, which was a fatal error, resulting in a very high Antidumping Rate based on All Facts Available.  Essentially an AFA rate is a penalty for a respondent refusing to cooperate in the Commerce Department’s investigation.  The Canadian Government would have reached an identical decision in the Antidumping Case if a a respondent refused to provide requested information in its questionnaire response.  The EC would take the same position.

WINE FIGHT AGAINST BRITISH COLUMBIA AND CANADA

In the attached complaint filed by the United States against Canada on Wine, WTO WINE COMPLAINT, on October 2, 2017 the Trump administration revived an Obama-era World Trade Organization case against Canadian rules that have allegedly kept U.S. wine off grocery store shelves in British Columbia.

On January 16th, the Australian Government jumped into the case, challenging the Canadian government’s handling of wine sales, accusing Ottawa of practices that appear to discriminate against imported wine.  Australia says that the Canadian government and four provinces – British Columbia, Ontario, Quebec and Nova Scotia – use taxes, duties and a range of distribution, licensing and sales measures that unfairly affect imported wine. It argues that such practices are in violation of the 1994 General Agreement on Tariffs and Trade.  Australian Trade Minister Steven Ciobo stated:

“While it would have been preferable to resolve this issue bilaterally, it is appropriate to commence dispute proceedings given the lack of progress.”

In fact, BC Wine regulations are probably the most protectionist in the World, worse than China requiring the equivalent of an 80% tariff to sell imported wine.  BC protectionist measures on wine simply feed into the Trump argument that NAFTA is not a true free trade agreement.

TRADE ADJUSTMENT ASSISTANCE FOR FIRMS/COMPANIES – A BETTER ALTERNATIVE TRADE REMEDY WHICH ACTUALLY WORKS

As stated in numerous past newsletters, there is another more productive way to solve the Steel crisis and fix the trade problem and help US companies, including Steel and other companies, adjust to import competition.  This program has a true track record of saving US companies injured by imports.

This was a problem personally approved by President Ronald Reagan.  The Trade Adjustment Assistance for Firms/Companies program does not put up barriers to imports.  Instead the TAA for Companies program works with US companies injured by imports on an individual basis to make them more competitive.  The objective of TAA for Companies is to save the company and by saving the company it saves the jobs that go with that company.

But as stated in the video below, for companies to succeed they must first give up the mentality of international trade victimhood.

In contrast to TAA for workers, TAAF or TAA for Companies is provided by the Economic Development Administration at the Commerce Department to help companies adjust to import competition before there is a massive lay-off or closure.  Yet the program does not interfere in the market or restrict imports in any way.

In addition, the Federal government saves money because if the company is saved, the jobs are saved and there are fewer workers to retrain and the saved company and workers end up paying taxes at all levels of government rather than being a drain on the Treasury.  To retrain the worker for a new job, the average cost per job is $50,000.  To save the company and the jobs that go with it in the TAA for Companies program, the average cost per job is $1,000.

Moreover, TAA for Firms/Companies works.  In the Northwest, where I am located, the Northwest Trade Adjustment Assistance Center, http://www.nwtaac.org/, has been able to save 80% of the companies that entered the program since 1984. The Mid-Atlantic Trade Adjustment Assistance Center, http://www.mataac.org, uses a video, http://mataac.org/howitworks/, to show in detail how the program resulted in significant turnarounds for four companies. The reason the TAA for Firms/Companies is so successful—Its flexibility in working with companies on an individual basis to come up with a specific adjustment plan to make them competitive once again in the US market as it exists today.  For a sample recovery plan, see http://mataac.org/documents/2014/06/sample-adjustment-plan.pdf, which has been developed specific to the strengths, weaknesses and threats each company faces.

But TAA for Companies has been cut to the bone.  On August 22, 2017, the U.S. Commerce Department announced $13.3 Million to Boost Competitiveness of U.S. Manufacturers for the TAA for Firms/Companies program.

Are such paltry sums really going to help solve the manufacturing crisis in the Steel and other industries?  Of course not!!

But when the program was originally set up, the budget was much larger at $50 to $100 million.  If the program was funded to its full potential, yes steel companies and other companies could be saved.

To those libertarian conservatives that reject such a program as interference in the market, my response is that this program was personally approved by your icon, President Ronald Reagan.  He understood that there was a price for free trade and avoiding protectionism and that is helping those companies injured by import competition.  But teaching companies how to be competitive is a much bigger bang for the buck than simply retraining workers.  And yes companies can learn and be competitive again in the US and other markets.

NEW RECENT TRADE CASES

ANTIDUMPING AND COUNTERVAILING DUTY CASES

ALUMINUM SHEET-FIRST SELF-INITIATED COMMERCE CASE IN MANY YEARS

On November 28, 2017, the Department of Commerce (Commerce) announced the self-initiation of antidumping duty (AD) and countervailing duty (CVD) investigations of imports of common alloy aluminum sheet from the People’s Republic of China (China).  This is the first time Commerce has self-initiated an antidumping and countervailing duty case in probably over 10 years.

SODIUM GLUCONATE, GLUCONIC ACID, AND DERIVIATIVE PRODUCTS

On November 30, 2017, PMP Fermentation Products, Inc. filed AD and CVD cases against imports of Sodium Gluconate, Gluconic Acid, and Derivative Products from China and France.

PLASTIC DECORATIVE RIBBON

On December 27, 2017, Berwick Offray, LLC filed AD and CVD cases against imports of Plastic Decorative Ribbon from China.

LARGE DIAMETER WELDED PIPE

On January 17, 2018, American Line Pipe Producers Association filed AD and CVD cases against imports of Large Diameter Welded Pipe from China, Canada, Greece, India, Korea and Turkey.

UNIVERSAL TRADE WAR CONTINUES

FOREIGN ANTIDUMPING AND COUNTERVAILING DUTY LAW AND CASES

CHINESE ANTIDUMPING CASES AGAINST US

BUTAN-1 FROM US, TAIWAN AND MALAYSIA

On December 29, 2017, China’s Ministry of Commerce initiated an antidumping investigation against Imports of Butan-1-ol from US, Taiwan and Malaysia.  The four US companies targeted by the case are:

1)  Eastman Chemical Company

2)  The Dow Chemical Company

3)  BASF Corporation

4)  OXEA Corporation

CHINA AD/CVD NEWSLETTERS

Attached are newsletters from Chinese lawyer Roland Zhu and his trade group at the Allbright Law Office about Chinese trade law.  Team’s newsletter-EN Vol.2018.01 Team’s newsletter-EN Vol.2018.02 Team’s newsletter-EN Vol.2018.03.

SECTION 337 AND IP CASES

NO NEW RECENT 337 CASES AGAINST CHINA

If anyone has any questions about these cases or about the Trump Trade Crisis, Taxes and Trade, NAFTA, FTAs, , including the impact on agriculture, the impact on downstream industries, the Section 232 cases, the 201 case against Solar Cells, US trade policy, the antidumping or countervailing duty law, trade adjustment assistance, customs, False Claims Act or 337 IP/patent law, please feel free to contact me.

Best regards,

Bill Perry

US CHINA TRADE WAR–TRUMP AND TRADE, LIGHTHIZER AS USTR, BORDER ADJUSTMENT TAXES, MANUFACTURING CAN COME BACK TO THE US, TAA FOR COMPANIES, WTO CASES AGAINST ALUMINUM AND NME STATUS, AND 337

Washington Monument After the Snow Washington DCTRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

US CHINA TRADE WAR JANUARY 12, 2017

Dear Friends,

This blog post contains several articles about recent developments in the Trump Transition and its impact on trade.  January 20th, inauguration day, is only 8 days away and Trump will be President.  The transition, however, moves quickly.

Although the past appointments of Governor Branstad of Iowa as Ambassador to China and Wilbur Ross to Commerce, two persons who know China well, indicate no potential trade war, the two latest appointments of Bob Lighthizer to USTR and Peter Nararro as Chairman of the National Economic Advisors indicate that protectionism, especially against China, is back on the menu.

Trump may be trying to use uncertainty to create leverage and a deal with the Chinese and other governments on trade and other topics.  Bob Lighthizer will be the hammer of the Trump trade policy that will negotiate those deals.

But the next question is how will Trump help revive manufacturing in the United States and help the Rust Belt states, Wisconsin, Michigan, Pennsylvania and Ohio, which put him in the White House?

One answer may be taxes, the border adjustment kind, which may, in fact, be a response to the Value Added Taxes levied on US exports.  Trump and Congress have apparently decided to fight fire with fire—mercantilism to fight mercantilism, border adjustment taxes to fight value added taxes, which put US exports at a major disadvantage.

No longer will the US take a passive approach to foreign trade barriers to US exports.  Trump and his team will raise US trade barriers to counter the trade barriers erected by other countries.  Reciprocity is the name of the game.

Moreover, the recent noises from many US companies indicate that they like what Trump is doing and manufacturing will move back to the US.  Low corporate taxes, less regulations and the threat of trade barriers will bring manufacturing back to the US.  In fact, it may even encourage Chinese and other foreign companies to move production to the United States.  Trump will do everything possible to increase jobs in the United States.

Also the US China Trade relationship is getting out to an interesting start in 2017 with the filing today, January 12, 2017, of a major WTO case against China on Aluminum.

Hopefully Trade Adjustment Assistance for Companies, which is the only effective US trade remedy that saves companies and the jobs that go with them, will expand.  But TAA for Companies is not TAA for Workers.  They are very different programs.

In addition, with regards to the recent WTO complaint China filed against the US and the EC for failing to give it market economy status under their antidumping and countervailing duty laws, Canada and Japan have now jumped into the case because of the impact on their trade laws.

Under the Universal Trade War theme, attached are newsletters from Roland Zhu of the Allbright Chinese law firm on Chinese trade law.

Finally, a recent 337 intellectual property case was filed against China on Basketball Backboard Components.

If anyone has any questions or wants additional information, please feel free to contact me at my e-mail address bill@harrisbricken.com.

Best regards,

Bill Perry

PS, If anyone wants to unsubscribe to the newsletter, please let me know and I will remove them from the list.

TRADE AND TRADE POLICY

TRUMP’S APPOINTMENTS NOW BECOME MORE PROTECTIONIST AND TOUGH ON TRADE—BUT MAYBE THAT IS WHAT IS NEEDED IN THIS ENVIRONMENT

After the first two appointments of Governor Branstad as ambassador to China and Wilbur Ross as new Commerce Department secretary, the two recent appointments of Bob Lighthizer as United States Trade Representative (“USTR”) and China critic, Peter Navarro, to head the National Trade Council indicate that the Trump Administration will take a much tougher line on trade and China.  Full disclosure in the late 1980s, as described more below, I worked for Bob Lighthizer at Skadden, Arps, and he is certainly a much tougher negotiator than any trade negotiator China or other countries have dealt with before.

Recently on Bloomberg news, I heard one bank spokesman say that their research group gives a 25% chance that under Trump the US will return to a Smoot Hawley situation, such as in the 1930s.  Although Lighthizer is a very tough guy, he is also a very experienced trade lawyer with substantial contacts in Congress so hopefully he will be pragmatic enough not to simply put up the protectionist walls and return the US to the 1930s.

But let there be no mistake, the Trump Administration will erect barriers to imports to offset the many trade barriers other countries, including Mexico, China and the EC, have erected against US exports.  Reciprocity will be the new approach to trade policy.

USTR FROMAN ADDS A PARTING SHOT

As present USTR Froman of the Obama Administration is leaving, he issued on January 5, 2017 the attached Cabinet Exit Memo, USTR-Exit-Memo.  In that Cabinet Exit Memo, Froman stated that the United States cannot withdraw from Globalization.  The issue is whether the US can shape globalization so as to benefit the US.  Froman also warned that if the US withdraws, the major beneficiary will be China.  As Froman stated:

“The fundamental economic question of our time is not whether we can stop globalization, but whether we can use all the tools at our disposal to shape globalization in a way that helps the majority of Americans, and reflects not just our economic interests, but our values.”

Froman went on to emphasize the importance of Agreements, such as the Trans Pacific Partnership (“TPP”):

“These agreements offer a positive vision for American leadership in the global economy.  This vision is vitally important, because in the absence of U.S. guidance and leadership, the world is likely to turn to alternative policy models that will put the United States at a permanent disadvantage.”

Froman went on to argue that the US can only counter China through negotiations that set high standards for the World’s trading countries:

“If we step back from a global leadership role, it will be our loss and China’s gain.  This alternative vision would place a large portion of America’s industry at risk of lost exports and create powerful incentives to invest in Asia in order to sell in Asia. Should this alternative come to dominate the next generation of trade agreements, the consequence will be an erosion of economic security and opportunity for all Americans.”

Froman apparently is arguing that the trade game cannot be changed and only small changes can be made through negotiations, such as the TPP, because globalization is here to stay.  Trump intends to overturn the trade policy table all together.

TRUMP PICKS AN ENFORCER ROBERT LIGHTHIZER AS NEXT UNITED STATES TRADE REPRESENTATIVE (“USTR”)

On January 3, 2017 Donald Trump announced that he has picked a very tough negotiator, Robert Lighthizer, a Skadden, Arps partner, as the next United States Trade Representative (“USTR”).  In doing so, Trump stated:

“Ambassador Lighthizer is going to do an outstanding job representing the United States as we fight for good trade deals that put the American worker first.  He has extensive experience striking agreements that protect some of the most important sectors of our economy, and has repeatedly fought in the private sector to prevent bad deals from hurting Americans. He will do an amazing job helping turn around the failed trade policies which have robbed so many Americans of prosperity.”

Almost 20 years ago, I worked with Lighthizer in the late 1980s at Skadden, Arps.  Before joining Skadden, Arps, Lighthizer was a Deputy USTR and was legendary.  One of my colleagues at Skadden told me that as a Deputy USTR when Lighthizer was negotiating with the Japanese government on a trade deal, he took one proposal from the Japanese government, folded it into a paper airplane and threw it out the door.

After Lighthizer joined Skadden in the late 1980s, Lighthizer brought in US Steel as a client and went on to represent US Steel for decades bringing many antidumping and countervailing duty cases against steel products from various countries.  Being the former Chief of Staff to Senator Robert Dole, the former Senate Majority leader, Lighthizer has extremely good contacts with the Republicans in Congress.

From my personal experience with Lighthizer, he will be an extremely tough negotiator with an agenda of protecting US companies from import competition and he will not be a friend of China, but that may be a good thing.  In contrast to the tough approach on trade of President Trump, Lighthizer may be the best choice free traders could get.  Lighthizer is a very experienced trade lawyer, who is not an ideologue, but a pragmatic deal maker.

More importantly, Trump’s appointment of an experienced tough trade lawyer as the USTR indicates that Trump does not really want a trade war.  He wants better, tougher deals more in line with US interests, such as a renegotiated NAFTA and possibly even a renegotiated TPP.  Trump is seeking to hire one of Washington’s top trade lawyers to negotiate tougher international trade agreements and then enforce them more vigorously.  Lighthizer, in effect, will be the hammer of Trump’s trade policy.

The desire for a much tougher trade policy is bipartisan.  Many Democratic lawmakers agree with Trump and many Republicans on a tougher trade policy.  On January 3rd, AFL-CIO President, Richard Trumka met with nine House Democrats to urge renegotiation of the North American Free Trade Agreement with Mexico and Canada and stating that he does not think Trump “has enough Republican support to do it, and rewriting the rules of trade is a necessary first step in righting the economy for working people.”

In response to the appointment, Senator Orrin Hatch of Utah, the chairman of the Senate Finance Committee, who knows Lighthizer very well and will hold hearings on his nomination, stated:

“Ensuring our past, present, and future trade agreements are the best possible deals for American workers and job creators is a shared goal supported by pro- trade lawmakers and the Trump Administration alike. As the incoming administration undertakes this enormous responsibility, Bob will be a critical player in ensuring that America’s trade agenda reflects U.S. commercial interests, while helping set the standard for global trade. Armed with bipartisan Trade Promotion Authority, the incoming Trump Administration has a unique opportunity to pursue new, bilateral trade pacts of the highest caliber that can be submitted to Congress for an up or down vote with no amendments. As the world and our economic competitors move to expand their global footprints, we can’t afford to be left behind in securing strong deals that will increase access to new markets for American-made products and services, protect our intellectual property rights abroad, and ensure domestic businesses can successfully compete in the 21st century global economy. I look forward to a vigorous discussion of Bob’s trade philosophy and priorities when he comes before the Finance Committee.”

Bill Brock, the former USTR under President Reagan, stated:

“He is in most ways, if not many ways, in line with Trump’s comments during the campaign.  He’s very bright, he’s very aggressive.”

There was speculation prior to the Lighthizer appointment that USTR would take a secondary role in trade negotiations.  In fact, Lighthizer’s appointment indicates that Trump wants to make USTR under Lighthizer’s leadership the tip of sword in changing and negotiating tough trade agreements and enforcing them.  Of Trump’s trade advisors, only Lighthizer has government experience.

Alan Wolff, another former senior American trade official who represented the steel industry as co- counsel in many trade cases with Lighthizer, referred to Lighthizer’s broad knowledge of trade law and went on to state:

“Those who say U.S.T.R. will be subordinated to other agencies are mistaken.  He’ll be a dominant figure on trade, in harmony with Wilbur Ross and Navarro.”

Lighthizer’s appointment is a clear indication that the Trump Administration will focus on the enforcement of trade agreements and on the letter of the law.  Lighthizer is not a bull in a China shop.  He is a very smart, tough trade lawyer and negotiator, and he will do everything possible to protect the US industry.

And Lighthizer will be very tough with China.  In the attached 2010 statement testimony to the US-China Economic and Security Review Commission, LIGHTHIZER 2010 STATEMENT US CHINA ECONOMIC SECURITY COMMISSION, Lighthizer stated:

Misjudging Incentives for Industries to Shift Production Wholesale to China and then Ship Back to the United States. . . . In other words, supporters assumed that since the United States had been granting MFN status to China for decades, granting MFN on a permanent basis would make no significant difference to how companies would serve this market.

But this assumption failed to account for the many incentives Western companies had to bet on the other side, and use China as a manufacturing platform to serve the U.S. market. As shown throughout this paper, China practices numerous forms of mercantilism – including subsidies, currency manipulation, and government programs that encourage developing new products in China – that give companies strong reasons to move production to that country. China’s relatively weak labor and environmental policies have a similar effect. China also manipulates raw material markets in a manner that encourages manufacturers to move there.  . . .

Many experts agree that our trading relationship with China presents a serious threat to our economy and the effective functioning of the WTO.  How should U.S. policymakers respond to these problems? As described in more detail below, I believe they should stop being so passive, take a number of straightforward steps to mitigate the harm caused by Chinese mercantilism, and consider more imaginative steps to deal with China.

We must stop being so passive. For ten years now, U.S. policymakers have done very little as China pursued policies that have resulted in an enormous trade imbalance. This approach has not worked, and it is past time for the U.S. government to become more aggressive. . . .

Lighthizer went on to state:

Indeed, I would take the argument even further. Trade policy discussions in the United States have increasingly been dominated by arcane disputations about whether various actions would be “WTO ­consistent” – treating this as a mantra of almost religious or moral significance.  The fact is that the WTO is built upon a framework of mutual concessions and purported mutual benefits from expanded trade and open markets. WTO commitments are not religious obligations, do not (and should not be construed to) impinge upon national sovereignty, and are not subject to coercion by some WTO police force. Viewing them as such – and implicitly establishing this viewpoint as the inviolate touchstone of all U.S. trade policy – is at odds with the structure of the WTO itself, not to mention the vociferous and repeated statements made by proponents of the WTO when it was established.

In this regard, WTO commitments represent mutually beneficial, market ­opening stipulations by individual countries. Where a country fails to fully implement commitments it has made, other countries are given the right to reciprocally suspend market­ opening commitments of their own – in an amount precisely equivalent to, and no greater than, the value of trade they have lost as a result of the derogation that has occurred. In this way, the entire WTO system is in a very real sense premised upon the assumption of relatively equal costs and benefits among and between WTO participants – whereby compliance with WTO norms is encouraged by the knowledge that derogations will result in the suspension of equivalent trade concessions. Where this relationship does not hold – that is, where a trade relationship has become so unbalanced that the threat of retaliation pales in comparison to the potential benefits of derogation – it only makes sense that a sovereign nation would consider what options are in its own national interest (up to and including potential derogation from WTO stipulations).

This need not be seen as some fundamental threat to the integrity of the WTO system.  Indeed, let me state explicitly that I am not advocating that the United States leave the WTO – that body is too important to us and the global trading system. I am merely pointing out that derogation may be a common sense, economically rational analysis by participants in the system – whereby potential decisions to derogate from WTO rules give rise to compensatory rights of other parties within the system.

Indeed, such an approach is plainly anticipated by the WTO agreements and has been acknowledged by U.S. policymakers. Properly understood, WTO rules do not infringe on the ability of individual nations to make their own sovereign decisions about economic policies –subject to the rights and obligations that flow from the WTO agreements themselves and any derogation of those agreements.   In this regard, U.S. officials have consistently stated that WTO commitments do not interfere with our national sovereignty, and that WTO rulings cannot alter U.S. law. These points were made repeatedly by Members of Congress during the debate over whether the United States should join the WTO. Furthermore, USTR has plainly stated that WTO legal panels “have no authority to change U.S. law or to require the United States or any state or local government to change its laws or decisions.” USTR has specifically explained that other countries cannot force the United States to comply with WTO law; instead, their only available response is to retaliate by withdrawing trade benefits . . .

In the context of U.S. ­China trade – whereby the United States is consistently running trade deficits viewed by virtually all rational observers as catastrophic and unsustainable – it is certainly advisable to consider all options available. To the extent that the United States were to consider more dramatic action to address the problem – such as tariffs or quantitative limitations that would arguably derogate from WTO commitments – the prospect of reciprocal denial of trade benefits by China must of course be assessed. At some point, however – where goods imports from China exceed $300 billion while U.S. exports to China are below $70 billion – one must ask whether potential retaliation from China really would or could even remotely offset the benefits to the United States of more aggressive trade measures. . . .

Of course, none of the policies I have suggested can be effective unless U.S. policymakers have the will to implement them in a strong and determined manner. For years, our economic position vis ­a ­vis China has deteriorated because U.S. policymakers have refused to take the inevitable risks associated with challenging Chinese mercantilism. As a result, we are now burdened with a trade imbalance that everyone agrees is unsustainable. Wringing our hands and hoping for the best is not the answer. We need strong leaders who are prepared to make tough decisions, and who will not be satisfied until this crisis has been resolved.

“One must ask whether potential retaliation from China really would or could even remotely offset the benefits to the United States of more aggressive trade measures.”

On the other hand, although Lighthizer’s statements show that he will be very tough on China, as certain trade experts have stated, in light of the very tough trade policy of the next President Donald Trump, Lighthizer’s appointment may be the best that free traders could hope for from this new Administration.  Lighthizer is a very smart, experienced political operator with excellent contacts in Congress, especially on the Republican side of the aisle, and a tough, outstanding negotiator.  But these experts also believe that Lighthizer is not a blind ideologue, but a pragmatic, rational deal maker.  After driving a very hard bargain and reaching a deal, he could end up even keeping NAFTA and possibly even the TPP.  Relations with China may actually improve, but only after a better deal is reached.

PETER NAVARRO TO HEAD NATIONAL TRADE COUNCIL

In another sign that the Trump Administration will take a much tougher line on China, on December 21, 2016, Trump announced that he has picked Peter Navarro, a China critic, to be the head of a new National Trade Council.   A Harvard trained economist, who is a professor at the University of California, Irvine, Navarro has taken a very strong position on China.  He is the author of a book, “Death by China”, which became a 2012 documentary film in which a Chinese knife stabs a map of the United States causing blood to throw.  See http://deathbychina.com/.  Navarro, in effect, argues that China is waging an economic war by subsidizing exports to the United States and blocking imports into China creating an enormous trade deficit.

Trump has stated that he will persuade China to change its policies by applying pressure through trade laws, designating China a currency manipulator, and, if necessary imposing high tariffs on Chinese imports.  As indicated below, however, those tariffs may actually be border adjustment taxes.

In a statement, Mr. Trump described Mr. Navarro as “a visionary economist” and said he would “develop trade policies that shrink our trade deficit, expand our growth and help stop the exodus of jobs from our shores.”

On December 23, 2016, in response the China Daily stated:

That individuals such as Navarro who have a bias against China are being picked to work in leading positions in the next administration, is no laughing matter. The new administration should bear in mind that with economic and trade ties between the world’s two largest economies now the closest they have ever been, any move to damage the win-win relationship will only result in a loss for both sides.

Still, Chinese companies in the US should be on high alert to a more difficult business climate.

US TRADE POLICY MAY CHANGE AND THREATS DO NOT HELP THE US CHINA TRADE RELATIONSHIP

There is an old saying in Chinese “Bei Mi Yang Feng You Dou Mi Yang Chao Ren” (杯米养朋友,斗米养仇人) one cup of rice makes a friend, thousands of cups of rice make an enemy.  Another old saying in English, give a person $5 make a friend, give a person $100 make an enemy.

Since World War II the United States has been a relatively open market and many foreign countries, including China, have benefitted.  As described more below, with border adjustment taxes and the current US economic situation, that situation may well change and could change dramatically.  Many countries will be very upset when the US starts to close down, in effect, favoring domestic products over imports.  When markets are taken away and countries lose their bag of rice, they will not be happy.

Mexico’s peso is in free fall and has fallen to the lowest level against the US in decades.  Mexico is in crisis because under pressure from Trump US companies are canceling plans to set up production facilities in Mexico and moving production facilities back to the US.  Mexico is not happy.

China is upset with the Lighthizer appointment and is talking about retaliation.  On January 4th, in response to the Lighthizer appointment, China’s state-run Media, the Global Times, warned Trump of ‘Big Sticks’ if he seeks a Trade War:

“There are flowers around the gate of China’s Ministry of Commerce, but there are also big sticks hidden inside the door — they both await Americans.”

When a current US China trade deficit of well over $300 billion, however, that threat rings hollow.

On January 9, 2017, State-run Chinese tabloid Global Times warned U.S. President-elect Donald Trump that China would “take revenge” if he reneged on the one- China policy, only hours after Taiwan’s president made a controversial stopover in Houston.

When the Chinese State-Controlled media, such as the Global Times, castigates Trump as an “ignorant child” and threatens the Trump Administration with Chinese retaliation, it is waving a red flag in front of a bull.  The new Trump Administration will not be intimidated.  It will not be bullied.  Threats will not work with this Administration.

So it is a much better idea to let cooler heads prevail and negotiate.  As stated above, the Trump Administration wants a deal and the Chinese government and other governments are extremely good negotiators so negotiate.

Let’s keep any Trade War at the cold war stage and not let it break out into a hot Trade War where every country, including the United States and China, are burned.

BORDER ADJUSTMENT TAXES MAY BE THE NEW TRADE PROTECTIONIST BARRIER TO IMPORTS

As stated in my last blog post, Trump and Republicans in Congress may be creating an alternative to tariffs to spur US manufacturing and that is taxes.  Tariffs have become so passé.  There is now an attempt in Congress to give American-made products a big tax advantage over their foreign competitors through border adjustment taxes, and, in effect, counter the value added taxes used in other countries to deter imports.

The key issue is a plan to fundamentally remake the tax system by taxing US companies based on where they sell their goods, not where the business happens to be located. As part of that, Republican tax legislators want to include what experts call “border adjustments” — new taxes on imports as well as tax rebates on exports.

Another fancy term for this new tax is “destination-based cash flow tax with border adjustment” or DBCFT.  This plan would replace the current corporate tax code with something known among experts as a “border-adjustable, destination-based” tax system.  Under their proposal, imports would be charged the same 20 percent tax that domestic companies would face. Exports would be excused from taxes.  It would amount to a fundamental change, with the government taxing companies based on where they sell their wares, rather than where the business is located.

The way this tax would work is if a U.S. company sold a product for $100 and it spent $70 on its workers’ pay, under the Republican plan the remaining $30 would be subject to the 20% tax. That would produce a $6 tax bill. An imported version of the same product would be forced to pay the 20% tax on the entire $100 sale, producing a $20 tax bill.

The best case for a border adjustment tax is an article by Stephen Moore, an expert on economic issues at the Heritage Foundation, in the International Business Daily in which he argues that a Border Adjustment Tax, in effect, is equivalent to the Value Added Tax that countries use to kill imports.  See http://www.investors.com/politics/columnists/stephen-moore-we-need-tax-reform-not-tariffs/.

As Moore states:

If America’s competitors were intentionally trying to design a tax system to destroy the American economy, they probably couldn’t come up with a dumber tax system than the way the United States currently taxes our own businesses.

To fully appreciate the stupidity of the American corporate tax, consider this simple example:

If you are an American company making cars in Michigan, you have to pay a 35% profits tax on the car made here and then if the car is sold across the border to Mexico, the Mexicans slap a 16% value added tax on the car, so it is taxed on both sides of the border. Almost all countries tax goods produced in the United States this way.

Now let us say that the auto factory is moved from Michigan to Mexico City. Now the car produced in the factory in Mexico is not taxed by the Mexicans if the auto is sold in the United States.

Even more amazing:  the U.S. imposes no tax on the imported car. To summarize, the car is taxed twice if it is built in America and then sold abroad and never taxed if it is built abroad and sold here in the U.S. And we wonder why companies are moving out in droves for China, India, Ireland, Mexico and the like.

Donald Trump is right. What we have in America is not free trade. It is stupid trade with the deck sacked against American producers and workers. Our federal tax is effectively a 35% tariff imposed on our own goods and services.

It doesn’t help matters that our 35% rate is the highest in the industrial world. Yet the corporate tax- despite being onerous and complex — and despite depressing employment, investment and wages here at home — raises very little revenue for the government. . . .

To create a level playing field, the U.S. has to reconstitute our tax system.  This can be accomplished by lowering the tax rate and then turning the tax on its head so we are taxing our imports, but not our exports. In other words, we should tax activities based on where they are consumed, not where they are produced.

This is called a border adjustable tax system, and here are the reasons we need to do it:

  • A border adjustable tax will end all talk of tariffs and trade wars.

tariffs violate our trade agreements and often lead to retaliatory measures by other countries. The free traders will rightly object loudly to these trade barriers.

A better solution is to impose the Trump 15% corporate income tax on goods when they are brought into the U.S. and exempt from tax goods produced in the U.S. but sold outside the U.S.

In other words, our corporate tax would be based on where goods are consumed, not on where they are produced.  This tax does not violate trade laws and only mirrors the valued added tax systems foreigners use to gain advantage over us. . . .

In exchange for a border adjustable tax, the U.S. should eliminate all existing tariffs and duties which can now range from 2% on shoes to 25% on toys. . .

Retailers like Walmart will complain . . .

We have to make things in America to make America great again. Tax reform is the key to making that happen.

In effect, taxes, whether border adjustment or value added, have become the new tariffs.  But if one is to look at it rationally, tariffs were always taxes.  In fact, after the American Revolution, the first tax the US Government used to run the government was tariffs on imported goods.

The fact that border adjustment taxes will hurt retailers is evidenced by Trump’s criticism of large internet retailer Amazon when he stated that Amazon will have “such problems” during his Presidency because of this new tax system.  Jeff Bezos, who owns Amazon also owns the Washington Post, and that newspaper has not been Trump’s friend.

The argument against the DBCFT is made by Brian Garst in the attached article, CFP_PolicyBrief_Border_Adjustment, entitled the “Political and Economic Risks of a Destination-Based Cash Flow Tax,” published in January 2017.  In the Article, Brian Garst argues:

The DBCFT would be a new type of corporate income tax that disallows any deductions for imports while also exempting export-related revenue from taxation.  This mercantilist system is based on the same “destination” principle as European value-added taxes, which means it is explicitly designed to preclude tax competition. . . . This mercantilist approach typically is associated with credit-invoice value-added taxes (VATs) that exist in European nations.

Garst goes on to state that in addition to retailers another target industry is energy because the United States is a net importer of oil and petroleum products.  Trump might argue, however, that when he is done cutting regulations the United States will be a net exporter of oil and petroleum products.  But Garst also points out that when other countries adopt the DBCFT, there will be more taxes on US exports.

More importantly, Garst points out what happens when the Democrats come back into power:

“In this case, left-leaning politicians would see the DBCFT not as something to be undone, but as a jumping off point for new and higher taxes.  A highly probable outcome is that the United States’ corporate tax environment becomes more like Europe, consisting of both consumption and income taxes.”

Garst goes on to add that the eventual result of higher taxes, no matter what they are called, is bigger government and slower economic growth.

On December 19, 2016, however, Chairman Brady of House Ways and Means stated that U.S. companies that rely on imports will “have to adjust” to a House Republican plan and that such a plan is a priority of the Trump Administration.  As Brady stated on a December 18th CSPAN program:

“We cannot leave in place any tax policies that encourage our companies to move their operations overseas just to sell back to the United States.  We want to listen to and find solutions with those who rely a lot on imported goods coming into America.”

The plan would apply a 20 percent corporate tax to revenues earned from goods and services consumed within the United States, while exempting economic activity outside the U.S, amounting to a 15 percent cut in the nominal corporate tax rate and eliminating corporate taxes on U.S. exports.

The opposition to this new tax system is not only from retailers but from US producers, which either assemble products in the US from imported parts or use cheaper raw materials to produce competitive value added products.  Many manufacturing groups that rely on global supply chains, such as Boeing and other companies, should be very concerned about this new policy.

But the border adjustment tax proposal has allowed Trump to call out automobile companies, such as GM, which produce substantial cars in Mexico and praise Ford Motor Co. for its decision to scrap plans for a $1.6 billion factory in Mexico.  The threat of a border adjustment tax is enough during this Presidential transition period to cause US companies to bring production back to the US.

Many businesses that rely on imported raw materials or component parts, will not be able to deduct the cost of imported goods under the GOP plan, the full value of these goods is taxed instead of just the value added in the U.S.  This means that even if Congress lowers the corporate tax rate from 35 percent to the Republicans’ proposed 20% or 15%, companies could still see an effective increase in their tax rates.

Jennifer Safavian, the executive vice president of government affairs at the Retail Industry Leaders Association, recently made this point stating:

“With this tax on imports, we actually will see our effective tax rate increase.  It will increase, in some cases, double or three times the amount we’re paying right now. Some companies are concerned that they will actually have to go out of business because they’ll owe more in taxes than they’ll actually bring in in income.”

COULD MANUFACTURING RETURN TO THE UNITED STATES?

As stated above, during just this Presidential transition period, the threat of border adjustment taxes and a dramatic change in trade policy, along with cuts to corporate taxes to as low as 15 to 25% and regulations rollback, has caused many companies, such as Ford, Softbank, Fiat, Sprint and Carrier, to announce their reduction or abandonment of offshore production and their movement back to the United States.  Jack Ma at Alibaba also met with Trump to state that he believes 1 million more jobs can be added in the US from small and medium size business.

In December 2016, small business optimism in the United States has soared to levels not seen in over ten years.  The National Federation of Independent Business Index jumped 7.4 points in December the highest since 2004.  Trump and Congress are using carrots and sticks to move US production and jobs back to the United States.

With almost 40% of the US population on some form of welfare, the situation has to change.  Even here in Seattle, one dramatic example of the state of economy during the Obama Administration has been the dramatic rise in homeless camps.  The election of Trump means change.  And change it will be.

Recently, a Chinese entrepreneur asked me how could manufacturing move from China back to the United States because China has so many advantages.  In October 2016, Fuyao Glass announced a $1 billion investment into Moraine Ohio and Plymouth Michigan to start producing windshields in the United States.  When Chinese media and the government asked the owner Cho Tak Wong why he was moving production to the United States.  There were two answers: higher wages in China and higher tax rates.

Wages in China have steadily moved upward and the lower wage countries now are Vietnam, Bangladesh and other countries.  Much of China’s textile manufacturing capability has moved to Bangladesh in the search of lower wages.

Another major problem in China is taxes.  Although the US has the highest corporate tax rate of 35% in the developed countries, higher than China, China has corporate tax rates ranging from 25 to 33%.  More importantly, China has a personal income tax rate of 45% with US tax rates for the highest incomes ranging from 35 to 39.6%.

When I started working in China in the 1990s and all the way until about 5 to 10 years ago, although the tax rates were high, the Chinese government was very liberal on deductions.  The more expenses the company and the person had, the lower the actual tax rate.  Thus Chinese employees were always looking for a “fapiao”, a receipt so that they could claim expenses.

But several years ago, the Chinese government cracked down and started to enforce the actual tax rates.  High tax rates give companies and individuals a real incentive to leave the place where they are located.  Residents vote with their feet.  We can see that in the United States, where high tax rates in the states of New York and California have caused companies and people to move to lower tax states like Texas and Washington State, which has no state personal income tax.  An old economic saying, when you tax more of anything, you get less of it.

China and the United States are competing with other countries to attract foreign investment and even domestic investment in their own countries.  Higher tax rates and excessive regulations cause companies to move and seek better places to produce products.

Another reason to move to another country is trade restrictions.  In the early 2000s, Windshields from China were hit with a US antidumping case.  I represented two companies in the case, Xinhe and Benxun; Fuyao was represented by another law firm.  Antidumping rates in this case went down to single digits and eventually the case went away.  But this does not mean a new case could not be brought.

Fuyao coming to the US to escape potential US trade cases is nothing new.  Many, many Japanese companies, including automobile companies, Toyota and Honda, auto part companies, such as Nippon Denso, television producers, such as Sanyo, portable electric typewriter companies, such as Brother, and photography companies, such as Fuji, set up production operations in the United States to get around US antidumping orders and other trade restrictions.  In fact, Chinese solar companies, such as Wanxiang Energy, have started producing solar panels in the United States to get around move US antidumping and countervailing duty orders against Chinese solar cells and solar panels.

So manufacturing can move back to the United States if the business environment is better than other countries.  When companies move back to the US and economic growth increases significantly, all boats rise and that means more good paying jobs and the average American will do better.

TRADE ADJUSTMENT ASSISTANCE FOR FIRMS/COMPANIES – A BETTER ALTERNATIVE TRADE REMEDY WHICH ACTUALLY WORKS

TAA FOR FIRMS/COMPANIES IS NOT TAA FOR WORKERS

In my blog post last month, an open letter to the new Commerce Department secretary was included about the Trade Adjustment Assistance for Firms/Companies program.  It is important, however, to distinguish TAA for Companies from TAA for Workers.  The two programs are very different.

TAA for Workers is government money given to displaced workers to retrain workers.  On January 12, 2017, Jamie Dimon of Chase spoke out on Good Morning American about TAA for Workers.  In the past when Dimon has spoken out for TAA for Workers, financial publications, such as Forbes, have spoken out against the program because they view the $711 million program as an entitlement, a handout to workers, that does not save jobs.

The TAA for Firms/Companies program, however, is very different from the TAA for Workers program because the objective of TAA for Companies is to save the company and by saving the company save the jobs that go with that company.  I believe that publications, like Forbes, might change their tune if they knew that President Reagan probably personally approved the TAA for Firms/Companies program.  Why do I say this? Jim Munn.

Congress started the TAA adjustment assistance programs in 1962 as part of the Trade Expansion Act and as a means of securing support for the Kennedy Round of multilateral trade negotiations.  Trade Adjustment Assistance essentially was a tradeoff.  If Unions and Workers would support trade liberalization, including free trade agreements, workers would be compensated because of the disruption caused by increased imports.

In the early 1980s, President Reagan himself put in requirements to set up standards so that Trade Adjustment Assistance for Workers would not simply be an open ended entitlement.   President Reagan, however, was puzzled by the TAA for Companies and asked an old friend, Jim Munn, here in Seattle to look into the program.

As stated in the attached 2002 obituary, JIM MUNN, Jim Munn was a famous criminal lawyer in Seattle and an early supporter and personal friend of Ronald Reagan.  I am now on the Board of Directors of the Northwest Trade Adjustment Assistance Center (“NWTAAC”).  When I started my involvement in NWTAAC, I was told that the Center was in place because President Reagan himself asked Jim Munn to look into the program.

Both President Reagan and Jim Munn were firmly opposed to government interference in the marketplace.  What did Jim Munn discover when he looked into the Trade Adjustment Assistance Program for Companies?  It works.  Jim Munn decided to head up NWTAAC for the next 22 years.

In contrast to TAA for workers, TAAF or TAA for Companies is provided by the Commerce Department to help companies adjust to import competition before there is a massive lay-off or closure.  Yet the program does not interfere in the market or restrict imports in any way.

Right now the total cost to the US Taxpayer for this nationwide program is $12.5 million dollars—truthfully peanuts in the Federal budget.  Moreover, the Federal government saves money because if the company is saved, the jobs are saved and there are fewer workers to retrain and the saved company and workers end up paying taxes at all levels of government rather than being a drain on the Treasury.

As stated in my last blog post, TAA for Firms/Companies works.  In the Northwest, where I am located, the Northwest Trade Adjustment Assistance Center, http://www.nwtaac.org/, has been able to save 80% of the companies that entered the program since 1984. The Mid-Atlantic Trade Adjustment Assistance Center, http://www.mataac.org, uses a video, http://mataac.org/howitworks/, to show in detail how the program resulted in significant turnarounds for four companies. The reason the TAA for Firms/Companies is so successful—Its flexibility in working with companies on an individual basis to come up with a specific adjustment plan to make them competitive once again in the US market as it exists today.  For a sample recovery plan, see http://mataac.org/documents/2014/06/sample-adjustment-plan.pdf, which has been developed specific to the strengths, weaknesses and threats each company faces.

But as also stated in my last blog post, in this environment with so many injured companies, funding for TAA for Firms/Companies has to be increased so it can do its job.

An article from David Holbert, Executive Director Northwest TAAC, below states how the program works in more detail.

IMPORTS HAVE LANDED – SOMETHING HAS TO CHANGE

David Holbert, Executive Direct Northwest TAAC

The issue of trade competition and lost jobs is well discussed in the media.  I work with small and medium-sized enterprises (SMEs) who are negatively affected by import competition, what is often called “trade impact” in policy lingo. It’s a big issue. According to the U.S Trade Representative, the United States’ 30 million SMEs account for nearly two-thirds of net new private sector jobs in recent decades. This is one in a series of posts about trade impact.

In a previous post I talked about recognizing trade impact. Once a company figures out that imports are the cause of sales declines, they must respond. That response depends on the specifics of the trade threat.

Companies work within a set of cost and market access factors. Where those factors are shared, a new competitor or an established one upping their game, is usually a manageable theat. Some alteration in course might be recommended, but it is all in the range of expectations in a competitive landscape. Imports, however, generally perceive a significant advantage before they enter a market – whether that’s in design, technology, scale, or cost. Extreme cost differentials tend to be the province of imports and, more specifically, imports from low-labor cost, low-regulation sources. New arriving imports tend to be very strong competitors if not disrupters.

Before the imports arrived, customers had seen value in the available options. Now those customers can see a better cost-benefit exchange with the imported product.  Unattended, the new entrant (the import) will gain market share – the only questions are how much and how fast.

Imports may have any of several weaknesses:

  • Importers are probably bearing a loss producing level of initial expense to establish a brand, set up sales capability, and establish distribution and service networks. The domestic company already is established, or can become so more easily.
  • Importers often have to order and ship in large quantities. It takes time for delivery to occur. What is an advantage in a standard product/price sensitive segment is a disadvantage in a customized / price elastic segment. Customization is almost always an advantageous capability for the domestic company
  • Importer service capability and quality can be weak. Service can be a challenge for those in different time zones, and speaking different languages. In low-cost economies, businesses often display a culture that values cost and quantity over all else. Quality and service are likely comparative strengths of the domestic company.

If the price differential is minor, improvements in operations without changing the business model may close the gap. The challenge is not less urgent, just less extensive. Every business I’ve worked with has a list of pending improvements. Now would be the time to implement some of these. Topping the list would the ones that lead to revenue faster. At this stage, the domestic company is probably losing sales. To the extent that you need a “plan”, that list is probably it. Let’s call it the minimum required response.

If the price differential is large, the business will face the uncharted territory of strategic change. That change will likely affect product, systems, processes, distribution, promotion, and pricing.  In other words, everything.

Just as every business owner has a list of pending improvements, they also have more than one idea about a serious change in course. That is very likely an incomplete list. How could it be otherwise? Whatever the right change may be, the confidence to take that leap will almost certainly be absent. That is where TAA comes in.  Most people don’t realize how thin of a line of viability businesses walk. It took a lot to get to the point where things work. A lot of what seemed like good ideas were proven wrong along the way. Changing that formula under conditions of less than certainty and necessity is almost always a bad idea. With trade impact, a business may have a condition of necessity. Now that business has to work on certainty.

It is not exactly clear how to get to that state of envisioning a strategic change with confidence and assurance. For a business owner, this is a life’s work. For the record, there are consultants that are capable in this area. Not that hiring in help is necessarily a solution.  What is clear is that a full range of options and information supporting them become precious commodities.

Here are how some companies with TAA help dealt with trade impact:

A commercial products company makes a specialized tool and faced a sudden entry of imports at close to half the price. The company’s plan was to radically improve operations in the same market position. The owners had been complacent in a mature market. The plan included such actions as developing an automated version of the tool, emphasizing service and parts replacement capability, and revising sales and promotion activity. This works in commercial markets because buyers are informed and easily value factors like quality, service, and durability.

A contract manufacturer that machines metal parts specializing in titanium had lost their single industry customer base to imports. The owner recognized that their capabilities would be valued in the aerospace industry. Achieving AS9100 (aerospace industry quality certification) was an essential step. Entering the industry and becoming known among buyers was the larger challenge. This works because at the time aerospace was growing in the region.

  • A nut grower was priced out of its commodity market position by imports. The owners had thought of packaging for consumers and private labeling. With TAA help, they gained the confidence to proceed. It was exactly the right move –they removed a layer of distribution and gained back their profit margin. The company grew at tech industry rates.
  • A safety products producer was being displaced in large retailers by imports priced about 50% lower. With outside TAA consultants, they developed a radical plan to concentrate on commercial uses of their products that emphasized perpetual restocking rather than consumer products as final articles. This entailed converting from producing hundreds of low-cost, finished products a week to producing dozens of high-cost units and thousands of micro-orders of replacement articles. The company reversed sales declines in a surprisingly short time.

Threats from imports tend to be severe. They may have an insurmountable cost advantage. Under these conditions, the domestic company cannot win by just trying harder – something has to change. The first thing that has to change is the plan for the business. Deferred improvements might become urgent necessities. Incompletely conceived ideas about a change in the business model might have to be seriously considered. In future posts, I’ll talk about challenges of implementation.

Our role at the Northwest Trade Adjustment Assistance Center is to help small and medium-sized companies that are negatively affected by trade. Sometimes called “made in America grants” this federal program offers a matching fund for outside expertise of up to $75,000 for qualifying companies.  NWTAAC serves companies in Washington, Oregon, Idaho and Alaska. You can learn more about us at NWTAAC.org.

NEW US WTO CASE AGAINST ALUMINUM FROM CHINA

On January 12, 2017, in the attached notice, Obama Administration Files WTO Complaint on China’s Subsidies to Aluminum Produ, USTR announced that it was bringing a WTO case against China for its subsidies to aluminum producers.  As the notice states in part:

United States Trade Representative Michael Froman announced today that the United States has launched a new trade enforcement complaint agains the People’s Republic of China at the World Trade Organization (WTO) concerning China’s subsidies to certain producers of primary aluminum.  This action follows numerous bilateral eforts by the Obama Adminisration to persuade China to take strong seps to address the excess capacity situation in its aluminum sector.  The complaint fled today begins a process to address U.S. concerns that China’s subsidies appear to have caused “serious prejudice” under WTO rules to U.S. interests by artifcially expanding Chinese capacity, production and market share and causing a significant lowering in the global price for primary aluminum. Today’s announcement marks the 16th trade enforcement challenge the Obama Adminisration has launched agains China at the WTO.

“This lates challenge once again demonsrates the Obama Adminisration’s unwavering commitment to ensuring a fair and level playing field for American workers and businesses,” said United States Trade Representative Michael Froman. “Artifcially cheap loans from banks and low-priced inputs for Chinese aluminum are contributing to excess capacity and undercutting American workers and businesses. Today’s action follows significant engagement by this Adminisration on excess capacity and demonstrates our commitment to hold China to its trade obligations. Our record of tough enforcement with China speaks for itself: When China cheats, we’ve been right there, securing recourse for our workers, farmers, ranchers and businesses. This is the 16th time we have taken action agains China at the WTO, and we’ve won every challenge that has been decided.”

CANADA AND JAPAN JUMP INTO CHINA’S WTO CASE AGANST THE US AND EC FOR FAILURE TO GIVE CHINA MARKET ECONOMY STATUS IN AD AND CVD CASES

As indicated in the past blog post, pursuant to the China WTO Accession Agreement, from the Chinese point of view December 11, 2016 is the date when countries can no longer treat China as a nonmarket economy under their antidumping (“AD”) and countervailing duty (“CVD”) law.  Neither the United States nor the EC declared China a market economy country on December 11th so predictably China filed a WTO complaint against the US and EC over their price comparison methodologies used in their AD and CVD laws.

On January 5, 2017, Canada and Japan decided to jump into the WTO case as third-party observers, citing the case’s potential to dramatically alter global antidumping laws.  As Canada stated in its announcement:

“In many cases, Canadian exports to the United States compete directly with exports from China. As a result, Canada has a substantial trade interest in these proceedings which concern the ability of U.S. investigating authorities to properly determine normal values for allegedly dumped Chinese exports.”

As the Japanese Government stated:

“The legal basis of China’s complaint identified in its requests, if accepted, appears to affect anti-dumping investigation practice of many WTO Members … and in turn have substantial impact on international trade involving products originating in China.  Japan is one of the major importers of goods … from China and one of the users of anti-dumping measures.”

The dispute is at the consultation stage, but will soon move on to a WTO panel.

FOREIGN ANTIDUMPING AND COUNTERVAILING DUTY LAW AND CASES

UNIVERSAL TRADE WAR CONTINUES

With the election of Donald Trump, as stated in my last newsletter, the Universal Trade War will continue.  In addition to the US bringing AD and CVD cases, countries around the World, such as EC, Canada, Mexico, Brazil, Argentina, India, Turkey, Ukraine, Russia, China, Indonesia, Malaysia, Korea, Japan, Taiwan, Australia, Thailand, South Africa, and Vietnam, all are filing antidumping and countervailing duty cases against each other and the United States.  These countries have adopted the US law which finds dumping in 90% of the cases.  The US and the EC have created a Frankenstein in the antidumping law and the whole World has adopted it.

Compromise is the best way to settle trade disputes, but it is very difficult, if not impossible, to settle US antidumping and other trade cases.  What is “fair” trade for the United States is “fair” trade for every other country.  Many countries want to make their industries Great again.

Because of this situation, this part of the newsletter will concentrate on trade cases in other countries and how other countries see the trade problem with the United States.

CHINA

CHINA AD/CVD NEWSLETTERS

Attached are newsletters from Chinese lawyer Roland Zhu and his trade group at the Allbright Law Office about Chinese trade law.  Team’s newsletter-EN Vol.2016.47 Team’s newsletter-EN Vol.2016.48 Team’s newsletter-EN Vol.2017.01 Team’s newsletter-EN Vol.2017.02.

SECTION 337 AND IP CASES

NEW 337 CASES AGAINST CHINA

BASKETBALL BACKBOARD COMPONENTS

On December 30, 2016, in the attached ITC notice, BASKETBALL 337, Lifetime Products, Inc. filed a section 337 patent case against Russell Brands, LLC d/b/a Spalding, Bowling Green, Kentucky; and Reliable Sports Equipment (Wujiang) Co. Ltd.,   China.

If you have any questions about these cases or about Trump and Trade, border adjustment taxes, US trade policy, the antidumping or countervailing duty law, trade adjustment assistance, customs, False Claims Act or 337 IP/patent law, please feel free to contact me.

Best regards,

Bill Perry

US CHINA TRADE WAR–TRUMP AND TRADE, TRADE DROP, TAA FOR COMPANIES THE ANSWER, EC NME PROBLEM, UNIVERSAL TRADE WAR, CUSTOMS AND 337

White House Fountain Snow Pennsylvania Ave Washington DCTRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

US CHINA TRADE WAR NOVEMBER 14, 2016

Dear Friends,

This blog post contains several articles about trade and Trump after his victory on November 8th.  The Trump victory will have a significant impact on trade policy.  As stated below, the TPP is dead.  The Republican Congress will not oppose Trump and bring the TPP to the Congressional floor in the Lame Duck.  The TPP may only come back when and if the trade safety net, including Trade Adjustment Assistance for Firms/Companies, is fixed.

The trade impact on the Rust Belt states, Wisconsin, Michigan, Pennsylvania and Ohio, is a major reason for the Trump victory.  Trump’s victory means that trade wars may escalate.  But with the increase in trade wars, global trade has already started falling and that means a 2015 drop of $200 billion in US exports.  Exports create US jobs too and when exports fall US jobs fall.

As Congressman Don Bonker states, trade conflicts with China and other countries will increase both from the US and the Chinese side. Trump may well self-initiate trade cases against China and China will bring cases against the US.  But Congressional Republicans will try to limit Trump’s protectionist nature.

Xi Jinping of China has already stated that the Chinese government wants to work with President Trump because of the importance of the US China economic relationship.

Complicating the situation is that last week the EC has proposed a change to its antidumping and countervailing to allow it to continue to treat China as a nonmarket economy country or as a country which distorts its market by government practices.

On the other hand, we can expect Congress to work very close with President Trump on different policy initiatives to make the United States a much more fertile ground for US manufacturing.  This will mean cuts in Corporate tax rates and the reduction in production curtailing regulations.  Trump will try and do everything possible to increase jobs in the United States.  Hopefully, that will mean more support to Trade Adjustment Assistance for Companies, which is the only effective US trade remedy that saves companies and the jobs that go with them.

Under the Universal Trade War theme, there are articles by Chinese lawyers on Chinese antidumping law, along with newsletter from an Indian lawyer about Indian trade law.  Many of these cases in other countries target the United States.

In addition, there is an article about Customs Evasion in the Aluminum Extrusions antidumping case and several recent 337 intellectual property cases against China.

If anyone has any questions or wants additional information, please feel free to contact me at my e-mail address bill@harrismoure.com.

Best regards,

Bill Perry

TRADE AND TRADE POLICY

TRUMP VICTORY AND WHAT IT MEANS FOR TRADE

Donald Trump won the Presidency on November 8th, and on January 20, 2017 Trump will become the 45th President of the United States.  What does this mean for trade?

TPP IS DEAD

With the Trump victory, Republicans in the House and the Senate will not fight Trump and will not bring the Trans Pacific Partnership (“TPP”) to the floor during the Lame Duck session. According to recent press reports, Trump might try and renegotiate TPP, but as written, TPP  is dead.

Several weeks ago during the heat of the campaign, Paul Ryan, Speaker of the House of Representatives, stated that he could no longer campaign with Donald Trump.  ln a speech on November 9th, the day after the Trump victory, House Speaker Paul Ryan ate humble pie.

In his speech, Ryan made it very clear that Trump’s victory was the most “incredible political feat” of his lifetime.  For a video of Paul Ryan’s speech, see https://www.bing.com/videos/search?q=paul+ryan+speech+video+after+trump+victory&view=detail&mid=556B672FB48D720BC373556B672FB48D720BC373&FORM=VIRE

Ryan also made it clear that he was extremely grateful because Trump was the first time Republican Presidential candidate to win Wisconsin’s electoral votes, his home state, since 1984.  Ryan also stated that Trump had coat tails.  Trump’s victory allowed down ballet Republicans to win.  The most important example of that was Wisconsin Republican Senator Ron Johnson, who was in a very tough reelection campaign.  Trump’s victory helped Ron Jonson win and allowed the Republicans to hold on to the Senate by a 51 to 49 plurality.

The simple political reality is that Trump’s victory allowed the Republicans to hold a majority in the Senate and the House.

As Paul Ryan stated,

“Donald Trump heard a voice in this country that no one else heard.  He connected in ways with people that no one else did.  He turned politics on its head.  And now Donald Trump will lead a unified Republican government.”

There is no way that Paul Ryan is going to oppose Trump and bring the TPP to the floor of Congress in the face of that political feat.  Let the next Administration deal with this issue.  As explained below, the TPP will probably stay dead until Congress and the Administration fix the Trade Adjustment Assistance for Firms/Companies program and make many US companies competitive again so they can withstand competition from imports.

It should be noted that those Republicans that distanced themselves from Trump, such as Republican Senator Kelly Ayotte of New Hampshire, lost their races.  In light of the Trump victory and his opposition to Trump, Governor John Kasich will have little weight when he argues for the TPP.

TRUMP’S PROTECTIONIST ARGUMENT TO THE RUST BELT STATES DROVE HIS VICTORY

The big surprise in the Trump victory was that traditionally Democratic states, the Rust Belt, of Wisconsin, Michigan and Pennsylvania and Ohio all went for Trump.  To illustrate the shock to the Democratic party, Hilary Clinton did not even campaign in the State of Wisconsin because the Democrats assumed they had Wisconsin in the bag.  Why did these Rust Belt states go for Trump?  Trade.

The person who forecast this victory was Michael Moore, the very famous Democratic gadfly and movie producer.  In a true statement against interest, last summer Michael Moore explained why he, the Good Democrat, believed that Trump would win the election—the Rust Belt and Trade.  http://michaelmoore.com/trumpwillwin/.  Donald Trump spoke out against the US automobile companies moving their manufacturing to Mexico.  Trump threatened that if they did, a President Trump would impose a 35% tariff on all these cars coming back to the United States.  The Auto executives were stunned, but the Working Class in Michigan stood up and cheered.  See Moore’s powerful video predicting the Trump victory https://www.youtube.com/watch?v=YKeYbEOSqYc.  As Moore stated, Donald Trump is the “human Molotov cocktail” that these working people want to throw through the establishment window.

After the election, Moore also made it clear that it was not racism that allowed Trump to win.  As Moore stated, millions of Americans, who voted for Barak Hussein Obama for two terms, voted for Donald Trump.  See Moore’s video at http://dailycaller.com/2016/11/11/michael-moore-millions-of-trump-voters-elected-obama-twice-theyre-not-racist-video/.  To paraphrase Bill Clinton, the reason Trump won was “the economy stupid” and one of the major economic issues was trade.

Ohio’s Cuyahoga County Republican Party Chairman Robert S. Frost stated that he believes that Trump’s trade message had a deep and profound effect on the regional electorate in Ohio:

“The economy has been going gangbusters, the U.S. has been expanding its trade relationships … but there are people here who [were] working, at many times, very skilled jobs that they took a great deal of pride in. They felt like they were left behind in this economy, and Donald Trump spoke right to that in places like Youngstown to Detroit to Milwaukee.”

Exit polls showed that half of Michigan’s voters are of the opinion that free trade takes away jobs, and those trade skeptics broke for Trump by a 57 to 36 percent margin over Democratic nominee Hillary Clinton.  There are similar stories to be found in Ohio and Pennsylvania, where 47 percent and 53 percent of voters respectively felt that free trade hurts workers and jobs.

Trump’s arguments are the same protectionist arguments that Rust Belt Democrats have used to be elected for decades, but the Workers had seen no change.  By upending conventional Republican wisdom on trade, Trump opened the door to a whole new group of voters.  These workers in the Rust Belt are Nixon’s Silent Majority, the Reagan Democrats, that went for Trump.

As Frost further stated:

“Organized labor had thought that the Democrats had had their backs for the last 25 years, but they look around and see where they are, and they wonder why they had placed their faith there. Donald Trump went against what had been Republican orthodoxy on trade. Part of how we got there is that Hillary Clinton … began taking an internationalist position of trade for trade’s sake, as opposed to representing an American position on trade.”

Trump appealed to the emotions of workers who felt wronged by a steady pattern of trade liberalization that is, in their minds, was about to get much worse if the U.S. Congress had been able to ratify the Trans-Pacific Partnership accord,

On October 18, 2016 in an article in Real Clear Politics entitled “The Trump Trade Doctrine: A Path to Growth & Budget Balance”. Wilbur Ross & Peter Navarro explained why they believed the Trump Trade Policy would work:

Budget-deficit hawks often insist that the only way to balance the Federal budget is to raise taxes or cut spending. The far smarter path to balance the budget is simply to grow our economy faster.

From 1947 to 2001, the U.S. real gross domestic product grew at an annual rate of 3.5 percent. Since 2002, that rate has fallen to 1.9 percent — at the cost of millions of jobs and trillions of dollars of additional income and tax revenues.

Donald Trump’s economic plan will restore America’s real GDP growth rate to its historic norm.  It proposes tax cuts, reduced regulation, lower energy costs, and eliminating America’s chronic trade deficit. . . .

This new normal argument — it should more appropriately be called the “new dismal” — also ignores the self-inflicted negative impacts from poorly negotiated trade deals and the failure to enforce them. These bad deals include, most notably, NAFTA, China’s entry into the World Trade Organization in 2001, and, most recently, Hillary Clinton’s debilitating 2012 U.S.-Korea Free Trade Agreement.

In 2012, then Secretary of State Hillary Clinton promised that the “cutting edge” South Korean deal would create 70,000 new jobs. Instead, the US has lost 95,000 jobs and America’s trade deficit with South Korea has roughly doubled. Moreover, workers in the U.S. auto industry, particularly in states such as Michigan, Ohio, and Indiana, have been hard hit. . . .

Donald Trump has pledged to renegotiate every one of America’s bad trade deals according to the principles of the Trump Trade Doctrine. The Trump Trade Doctrine states that any new or renegotiated deal must increase the GDP growth rate, decrease the trade deficit, and strengthen the U.S. manufacturing base. . . .

Some critics will argue that reducing the flow of cheap imports from locales such as China, Mexico, and Vietnam will be inflationary and act as a regressive tax by denying lower-income households cheap imports. In reality, four decades of one-sided globalization and chronic trade deficits have shifted wealth and capital from workers to the mobile owners of capital and reduced the purchasing power of Americans.

A visit to cities like Johnstown, Pennsylvania, and Flint, Michigan, reveals quickly the falsehoods and broken promises of those who preach the gains from trade deficits — which are often financed by those who turn a profit from offshoring production. Trump’s proposals will reverse these trends, concentrate more wealth and purchasing power in the hands of domestic workers and result in substantially higher employment. This will more than offset any price increases. Moreover, as products develop a competitive advantage in America and increase their production and margins, prices per unit will go down.

To those alarmists who insist Trump’s trade policies will ignite a trade war, we say we are already engaged in a trade war — a war in which the American government has surrendered in before even engaging. Unfair trade practices and policies of our competitors are simply overlooked or ignored. As a well-documented result, America has already lost tens of thousands of factories, millions of jobs, and trillions in wages and tax revenues.

Donald Trump will simply put our government on the field in defense of American interests. As Trump pursues a policy of more balanced trade, our major trading partners are far more likely to cooperate with an America resolute about balancing its trade than they are likely to provoke a trade war.

This is true for one very simple reason: Our major trading partners and deficit counterparties are far more dependent on our markets — the largest in the world — than we are on their markets.

Consider that in 2015, we ran a trade deficit in goods of $746 billion. 76 percent of that trade deficit in goods concerned just four countries: China ($367 billion); Germany ($75 billion); Japan ($69 billion); and Mexico ($61 billion).

If we look at the bilateral relationships of America with each of these countries, improvement in our trade balance is clearly achievable through some combination of increased exports and reduced imports, albeit after some tough, smart negotiations — an obvious Trump strength.   The same possibilities exist with countries where we are running smaller, but nonetheless significant, deficits, such as Vietnam ($31 billion), South Korea ($28 billion), Italy ($28 billion), and India ($23 billion).

Such deficit reduction negotiations will not be wild-eyed, hip-shooting exercises. A key part of the Trump strategy will be to divert some of the products our deficit counterparties import to U.S. suppliers.

For example, many of our trading partners with which we run large trade deficits import substantial hydrocarbons from elsewhere. It would not be difficult for, say, China, Japan, Germany, and South Korea to buy more U.S. hydrocarbons. Trump intends to end the regulatory constraints on hydrocarbon production and hydrocarbon exports, resulting in as much as $95 billion gains for the U.S.

Our deficit counterparties also import lots of industrial equipment and supplies of plastics and other materials, some from the U.S. already. There is ample room here for them — along with countries like India, Mexico, and Vietnam — to switch vendors.

Trump’s strategic approach to trade negotiations would begin with product-by-product and country-by-country analyses. Our negotiators would set goals that are achievable and pursue them fiercely. No prior administration has ever approached trade as surgically as a Trump Administration would.

As a business person, rather than a politician, Trump understands this: There is no more reason to let our major trading partners take advantage of us than there is for a large private company to permit its vendors to do so.

You will notice we have not mentioned tariffs. They will be used if necessary against mercantilist cheating, but only in a very precise and defensive way.

Ultimately, our view is that doing nothing about unfair trade practices is the most hazardous course of action — and the results of this hazard are lived out every day by millions of displaced American workers and deteriorating communities. We simply cannot trade on their one-sided terms; they are just too destructive to the U.S. growth process.

At the end of the day — and on November 8th — voters have a very clear choice between Trump’s smart path to rapid growth and budget balance and Hillary Clinton’s new dismal world of economic stagnation. At least on the economy, this choice is clear.

Emphasis added.

The problem with the argument, however, is that it is based on the economic situation decades ago when the US was the largest market in the World.  That is no longer true.  China with its 1.2 billion population has a larger market than the US.  House Speaker Paul Ryan has cited many times that 75% of the World’s consumers are outside the United States.

The real problem with Trump’s trade policy is uncertainty.  No one knows how aggressive Trump will be in a new Administration.  Through the Commerce Department self-initiating antidumping and countervailing duty cases and bringing Section 201 Escape Clause cases against the World, a President Trump can certainly increase protectionist barriers in the US.

A President Trump can unravel NAFTA and dump the TPP, but if the US erects substantial barriers to US imports, countries around the World will respond by increasing barriers to US exports.

NOT RETALIATION RECIPROCITY

The problem with protectionism is that trade is a two-way street and what the US can do to countries, they can do back.  In my last blog post, I stated that although many US politicians, including Donald Trump, want to adopt a mercantilist trade policy which favors pushing exports and protecting US industries from imports, the US politicians simply do not understand retaliation.  In this blog post, I want to restate this because the issue is not retaliation.  It is reciprocity.

Retaliation implies a tit for tat response.  You attack us.  We attack you.  The United States files an antidumping case targeting $4 billion in imports of Solar Cells from China, and China responds with a meritless Chinese antidumping case targeting $2 billion in imports of Polysilicon from the United States.  But that is not what truly happened.  In the Chinese polysilicon case, for example, the Chinese polysilicon industry was truly being hurt by US imports.

The real issue is reciprocity.  If the US can use its antidumping and countervailing duty laws to find dumping and subsidization in more than 90% of the cases, the Chinese governments and governments around the World can make the same finding with regards to imports from the United States.  What goes around comes around.

Free trade agreements, such as the TPP and the TTIP, which would break this cycle are now dead as the US and each country wants to put its industries first and make their country and industries great again.  The rise in economic nationalism results in trade wars in which country after country will fire trade guns against each other.

The argument that trade wars are already going on is true, but what the pundits do not realize is that under Trump the trade wars will get bigger.  The US has antidumping and countervailing duty orders covering $30 billion in imports from China.  The Chinese government has orders blocking about $10 billion in imports from the US, including polysilicon, chicken, numerous chemical products, and steel products.  Just recently, the Chinese government has issued an antidumping order blocking over $1 billion in Chinese imports from the United States of distiller grains, and now there is talk about a case targeting $15 billion of imports of US soybeans.  What goes around comes around.

In a November 11th editorial, entitled “The Message Of Donald Trump’s Stunning Victory” the International Business Daily stated that the one policy which has to be reined in by Republicans in Congress is trade:

“Republicans will also have to work hard to temper Trump’s anti-free-trade instincts.  A trade war is the one big risk Trump’s presidency represents for the economy.  Trump has repeatedly the he is all in favor of free trade, and the GOP needs to hold him to those words.”

TRADE IS FALLING AROUND THE WORLD

Moreover, on October 30, 2016, Binyamin Applebaum in an article entitledA Little-Noticed Fact About Trade: It’s No Longer Rising” found that trade around the world is dropping, including a drop of $200 billion in US exports:

“The growth of trade among nations is among the most consequential and controversial economic developments of recent decades. Yet despite the noisy debates, which have reached new heights during this Presidential campaign, it is a little-noticed fact that trade is no longer rising. The volume of global trade was flat in the first quarter of 2016, then fell by 0.8 percent in the second quarter, according to statisticians in the Netherlands, which happens to keep the best data.

The United States is no exception to the broader trend. The total value of American imports and exports fell by more than $200 billion last year. Through the first nine months of 2016, trade fell by an additional $470 billion It is the first time since World War II that trade with other nations has declined during a period of economic growth. . ..

But there are also signs that the slowdown is becoming structural.  Developed nations appear to be backing away from globalization.

The World Trade Organization’s most recent round of global trade talks ended in failure last year. The Trans-Pacific Partnership, an attempt to forge a regional agreement among Pacific Rim nations, also is foundering. It is opposed by both major-party American presidential candidates. Meanwhile, new barriers are rising. Britain is leaving the European Union. The World Trade Organization said in July that its members had put in place more than 2,100 new restrictions on trade since 2008.

“Curbing free trade would be stalling an engine that has brought unprecedented welfare gains around the world over many decades,” Christine Lagarde, managing director of the International Monetary Fund, wrote in a recent call for nations to renew their commitment to trade. . . .

But even if growth rebounds, automation reduces the incentives to invest in the low- labor-cost developing world, and it reduces the benefits of such investments for the residents of developing countries.”

UNFAIR TRADE CASES DO NOT WORK; THEY DO NOT SAVE THE US COMPANIES

The problem with the potential Trump policy of bringing more unfair trade cases to solve the trade problem is that trade cases do not work.  They do not save the companies and the jobs that go with them.

Bethlehem Steel, a history that I am personally aware of, had 40 years of protection from steel imports through various antidumping and countervailing duty cases and orders.  Where is Bethlehem Steel today? Green fields.

Trying to stop a wave of low priced imports by filing an unfair trade cases is like putting finger in a dike when faced with a tidal wave engulfing the entire company and industry.

When an industry and company is faced with competition from imports it is so easy to engage in globalization/international trade victimhood.  We poor US companies cannot compete because all imports are dumped and subsidized.

For countries and companies faced with import competition, the easy solution is blame the foreigner.  The only way for a company to truly survive, however, is give up the globalization victimhood mindset and do what is necessary to make the company competitive again.

EXISTING PROGRAMS TO MAKE US MANUFACTURING COMPANIES MORE COMPETITIVE IS THE ANSWER TO THE TRADE PROBLEM — TAA FOR FIRMS/COMPANIES AND THE MEP MANUFACTURING PROGRAM– BUT THEY HAVE BEEN CUT TO THE BONE

As described in my September newsletter and uschinatradewar.com blog post, which can be found at http://uschinatradewar.com/us-china-trade-war-tpp-politics-taaf-the-answer-2-billion-missing-dumping-duties-as-cases-rise-customs-law-changes-solar-cells-337-customs-stop-infringing-imports/, free trade requires competitive US companies and industries.  For the US government to go forward with a free trade agenda and the passage of free trade agreements, it must restore the trade safety net.

The US Government already has successful programs to make US companies injured by imports competitive again, but they have been cut to the bone. Companies and Unions that want to take advantage of these programs and survive must first change their mindset and reject the defeatism of international trade/globalization victimhood.

Those programs are:

  • Trade Adjustment Assistance for Firms (Commerce)
  • The Hollings Manufacturing Extension Partnership (Commerce)

Economists and policy makers of all persuasions are now beginning to recognize the requirement for a robust response by this nation to foreign imports – irrespective of party affiliation or the particular free trade agreement under consideration at any given moment.  Companies, workers and Government officials need to stop blaming the foreigner and figure out what they can do to compete with the foreign imports. These two programs make US companies injured by imports competitive again.

Free trade does not have to be abandoned resulting in a lose lose situation for all countries.  When the US Government enters into Trade Agreements, such as NAFTA, the TPP, or the TTIP, Government action changes the market place.  All of a sudden US companies can be faced with a series of flash floods of foreign competition and imports that can simply wipe out US companies.  The US Government must restore the international trade safety net.

A starting point for a trade adjustment strategy would be for a combined Commerce-Labor approach building upon existing authorities and proven programs, that can be upgraded and executed forthwith.

Commerce’s Trade Adjustment Assistance for Firms (TAAF) has 11 regional (multi-state) TAAF Centers but the program has been cut to only $12.5 million annually. The system has the band-width to increase to a run rate of $50 million.  Projecting a four-year ramp up of $90 million (FY18-FY21), the TAA program could serve an additional 2,150 companies.

Foreign competitors may argue that TAA for Firms/Companies is a subsidy, but the money does not go directly to the companies themselves, but to consultants to work with the companies through a series of knowledge-based projects to make the companies competitive again.  Moreover, the program does not affect the US market or block imports in any way.

Does the program work?  In the Northwest, where I am located, the Northwest Trade Adjustment Assistance Center has been able to save 80% of the companies that entered the program since 1984.  The Mid Atlantic Trade Adjustment Assistance Center in this video at http://mataac.org/howitworks/ describes in detail how the program works and saved four companies and the jobs that go with them.  The reason TAA for Firms/Companies is so successful—Its flexibility in working with companies on an individual basis to come up with a specific adjustment plan for each company to make the companies competitive again in the US market as it exists today.

Increasing funding will allow the TAA for Firms/Companies program to expand its bandwidth and provide relief to larger US companies, including possibly even steel producers.  If companies that use steel can be saved by the program, why can’t the steel producers themselves?

But it will take a tough love approach to trade problems.  Working with the companies’ management and the Union to forget about Globalization victimhood and start trying to actually solve the Company’s problems that hinder its competitiveness in the market as it exists today.

In addition to TAA for Firms/Companies, another important remedy needed to increase competitiveness is Commerce’s Manufacturing Extension Partnership (MEP), which has a Center in each State and Puerto Rico.  MEP provides high quality management and technical assistance to the country’s small manufacturers with an annual budget of $130 million. MEP, in fact, is one the remedies suggested by the TAA Centers along with other projects to make the companies competitive again.

As a consequence of a nation-wide re-invention of the system, MEP is positioned to serve even more companies. A commitment of $100 million over four years would serve an additional 8,400 firms. These funds could be targeted to the small manufacturing firms that are the base of our supply chain threatened by foreign imports.

Each of these programs requires significant non-federal match or cost share from the companies themselves, to assure that the local participants have significant skin in the game and to amplify taxpayer investment.  A $250 million commitment from the U.S. government would be a tangible although modest first step in visibly addressing the local consequences of our trade policies. The Department of Commerce would operate these programs in a coordinated fashion, working in collaboration with the Department of Labor’s existing Trade Adjustment Assistance for Displaced Workers program.

TAA for Workers is funded at the $711 million level, but retraining workers should be the last remedy in the US government’s bag.  If all else fails, retrain workers, but before that retrain the company so that the jobs and the companies are saved.  That is what TAA for Firms/Companies and the MEP program do.  Teach companies how to swim in the new market currents created by trade agreements and the US government

In short – this serious and multi-pronged approach will begin the process of stopping globalization victimhood in its tracks.

Attached is a longer proposal, taaf-2-0-white-paper, on how to expand TAA for Firms/Companies and the MEP Program to make US companies more competitive again.

UNDER TRUMP TRADE CONFLICTS WITH CHINA WILL INCREASE

As readers may remember, my deep dive on the background of this election started with a February conversation and bet with my friend, former Democratic Congressman Don Bonker.  He firmly believed that Hilary Clinton would win in a landslide and the Democrats would win the Senate and the House.

I knew people that were going to vote for Trump and believed that although Clinton would probably win, it would be a close election and the Republicans would probably keep the Senate and definitely the House.  Trump won the election and the Republicans kept the Senate and the House.

Set forth below are Congressman Bonker’s thoughts on what he believes the Trump election means for future US Trade Policy regarding China.

‘Election Results:  U.S. China Relationship

Prepared by: Congressmen Don Bonker (Democrat)

Winston Churchill’s characterization of “democracy as the worst form of government except for all the others” was on full display in America’s 2016 presidential election.   Yesterday’s torrent of election results is revealing of America’s challenges ahead, not only domestically but internationally.  This report is focused on how the election results will affect the U.S. – China relationship.

CANDIDATES WEBSITE/POSITIONS ON CHINA

Hillary Clinton

Increase cooperation in areas of common interest

Reinforce alliances in the Asia-Pacific

Ratchet up the U.S. deterrent against Chinese cyberattacks

Take a stronger stance against China’s human rights record

Donald Trump

Increase U.S. military presence in and around the South China Sea

Investigate and punish China for unfair trade practices

Designate China a currency manipulator

Ratchet up the U.S. deterrent against Chinese cyberattacks

PRESIDENTIAL ELECTION RESULTS.   U.S. presidents are not elected by the popular vote but the so-called Electoral College – each of the 50 states select “electors” equal to the number of Congressmen — that determines the outcome.  The margin is significant in that a sweeping victory with over 300 electoral votes will demonstrate a public mandate that will make the newly elected Presidents’ governing more effective.  This year, Donald Trump’s victory with 289 electoral votes [which is now with Michigan and Arizona 309 votes] is not a big margin but his party being in control of both the Senate and House of Representatives, is a sufficient mandate, something of a populist uprising not seen in recent years.

The election of Donald Trump was unexpected and shocking, even troubling to many in the U.S. and around the world.  The electoral vote is revealing of why and how he won the election – his anti-trade and immigration messages resonated in the four or five rust-belt states that were expected to vote for Hillary Clinton.   Not unlike the Brexit vote, he played to the anger and fear that was directed at Wall Street and Washington, D.C., a movement that will definitely take the country in a new and perilous direction.

Most disconcerting is how a President Trump will conduct foreign policy given that he has no experience compared to Hillary Clinton, who served as Secretary of State and was expected to continue the Obama Administration’s policies and alliances with other countries.  The U.S. China relationship is all about economics and trade, so his Seven-Step Trade Plan is an indication of what lies ahead:

Immediate withdraw from TPP and a renegotiation of NAFTA.

Appoint the “toughest and smartest trade negotiators.

Direct Department of Commerce to “identify every violation of trade agreements a foreign country is currently using to harm our worker” and direct all Federal agencies to use “every tool under American and international law” to end abuses.

Instruct the Treasury Department to label China a currency manipulator, promising that any international devaluation would be met with sharply through tariffs and taxes.

The U.S. Trade Representatives would be instructed to bring trade cases against Beijing under both U.S. laws and the WTO.

If China does not stop its illegal activities, Trump said he would invoke specific safeguards and tariff protections under Section 201 of the Trade Act of 1974.

U.S. China Relationship

In past years, presidential candidates have been known for their “tough talk on China” during campaigns but eventually succumb to the geopolitical realities once they become president.  Donald Trump has gone way beyond tough talk in that he has been relentless in his China bashing and threats to take punishing actions based on unfair trade practices.

More alarming have been his comments threatening the U.S. – China relationship, on one occasion stating that “I’d love to have a trade war with China…if we did no business with China, frankly we will save a lot of money.”  This hopefully is more about rhetoric than policy and a sitting President and his advisors will be more realistic and engage China in ways that will be mutually beneficial.

Ultimately, it’s not so much about the rhetoric and issues but the relationship between the two heads of state.  President Obama and President Xi Jinping had a “trust” working relationship that may not go as easily with Donald Trump, but he is a master negotiator who knows how to work out deals with others.  Much will also depend on who will be his cabinet ministers and senior advisors.

U.S. – International.    Donald Trump’s election has many world leaders concerned given his pledge of radical actions that will project a different America.  For the past 50 years, America has been the undisputed leader worldwide but that is about to change, partly because both Donald Trump’s election is rooted in American anxiety, placing the blame on globalization and trade deals for job losses and economic hardship.  In recent years partisanship and politicalizing of U.S. foreign policy has intensified in a way that inhibits a President’s ability maintain America’s leadership globally.

What does this mean in terms of America’s leadership internationally?  The reverberating message and new mandate that comes out of the election may be alarming to foreign leaders in that a Trump Administration’s foreign policy will be unpredictable, to be sure, on both the economic and geopolitical fronts that will lead to greater uncertainty.  It will definitely be more protectionist given Mr. Trump’s ranting that trade deals have caused job losses and economic hardship.  More perplexing is whether a Trump presidency will abandon America’s alliances and commitments and embark on a course that is more self-serving.

Regardless of who was elected, one of the realities will be China possibly surpassing America as the world’s most powerful nation, which will be a dramatic wake-up call for a country that has proudly embraced this status for the past hundred years.  A Trump presidency taking the country down the path of isolationism may have America backing away from its global responsibilities compared to China’s highly focused set of objectives and its growing presence internationally.  Indeed, China has wisely avoided involvement in geopolitical and security issues, such as the Middle East, and instead is concentrating on economic and investment development, which rapidly advances their leadership standing around the world.

CONGRESSIONAL ELECTIONS    

Two weeks before the election, the Democrats were expected to take control of the U. S. Senate hopefully gaining enough seats to be the Majority Party that would be fully supportive of a Hillary Clinton presidency.  Instead the Republicans will now control both branches of the U.S. government.  However, it will not represent a consensus or cooperation given the deep divisions within the Republican Party, particularly how the Trump candidacy shattered political convention by criticizing Congressional leaders and charting his own path

U.S. Senate.  The Constitution specifies that one-third of the Senate positions are up every election year, which worked to the advantage of Democrats since most of the ballot positions were Republicans.  Yet the election results favored the Republicans who will maintain their 51-45 advantage for the next two years.  The Senate has the Constitutional authority to approve treaties and appointments to high-level positions and ambassadors.  There should be cooperation, given that the same party controls both branches, but Donald Trump has defied the conventional approach to doing business, so this will add to the uncertainty.

House of Representatives.  For the past six years the Republicans have been in control with a significant margin, despite divisions of within the Party that inhibits their ability to be productive.  Prior to the election, the Republicans held 247 of the 435 seats that are up for election every year, a safe margin.  While the Democrats did pick up eleven of the Republican held seats they will continue as the Minority Party for the next few years.

The same party in control of the White House and Congress would normally make for a productive session, but uncertainty lingers given the troubled relationship between Donald Trump and Speaker Paul Ryan.  Prior to the elections, a fractured Republican Party has been unified only by its opposition to President Obama’s policies, like Obamacare, so many questions remain about how the Speaker will preside over his own problems as he prepares to work with a Trump Administration.

In contrast to Congressman Bonker, my belief is that the US China relationship may, in fact, work out better than people think under President Trump.  While in China last month I met many Chinese who liked Trump, despite his trade policy, which was enlightening.

Although Trump will be tough in trade negotiations, Trump is a business man and likes to do deals.  That means he is truly open to negotiations.

Also many Conservative publications, such as the Wall Street Journal and Investors Business Daily (“IBD”), believe that Republican Congressional leaders, such as House Speaker Paul Ryan, may be able to prevent Trump from starting an all-out, hot, trade war against China.

But the US China cold trade war will definitely continue as there will be more US trade actions against China, and more Chinese trade actions against the US.  Both countries will feel the pain.

But the relationship will become even more complicated as the EC in response to the WTO December 11, 2016 deadline to grant China market economy status proposed on November 9th amending its antidumping and countervailing law to provide that although for WTO members normal value is determined on the basis of actual prices and costs in the foreign market, in certain circumstances, e.g., China, where prices and costs are distorted because of government intervention and not free market forces, the EC Commission can look at prices and costs outside China.

EC PROPOSES CHANGES TO ITS ANTIDUMPING AND COUNTERVAILING LAW TO IN EFFECT CONTINUE TO TREAT CHINA AS A NONMARKET ECONOMY COUNTRY

On November 9, 2016 the European Commission issued the attached proposed “Regulation of the European Parliament and Of The Council,” ec-china-market-economy-regs, on the way to calculate normal value for certain nonmarket economy countries, specifically China.

The EC Commission has proposed amending its antidumping law to provide that although for WTO members normal value is determined on the basis of actual prices and costs in the foreign market, in certain circumstances, where prices and costs are distorted because of government intervention and not free market forces, e.g., China, the EC Commission can look at prices and costs outside China, stating specifically if:

domestic prices and costs would not provide a reasonable basis to determine the normal value. This could be the case, for instance, when prices or costs are not the result of free market forces because they are affected by government intervention. Relevant considerations in this respect include, for instance, the fact that the market in question is to a significant extent served by enterprises which operate under the ownership, control or policy supervision or guidance of the authorities of the exporting country; the state presence in firms allowing the state to interfere with respect to prices or costs; the existence of public policies or measures discriminating in favour of domestic suppliers or otherwise influencing free market forces; and the access to finance granted by institutions implementing public policy objectives.

In such circumstances, it would be inappropriate to use domestic prices and costs to determine the value at which the like product should be normally sold (“the normal value”) and a new provision (Article 2(6)a) stipulates that the normal value would instead be constructed on the basis of costs of production and sale reflecting undistorted prices or benchmarks. For this purpose, the sources that may be used would include undistorted international prices, costs, or benchmarks, or corresponding costs of production and sale in an appropriate representative country with a similar level of economic development as the exporting country.

This methodology would allow the Commission to establish and measure the actual magnitude of dumping being practised in normal market conditions absent distortions.

For the sake of transparency and efficiency, the Commission services intend to issue public reports describing the specific situation concerning the market circumstances in any given country or sector. Of importance, the EU industry would be in a position to rely on and refer to the information contained in these reports when alleging in a complaint or a request for review that the domestic prices and costs in the exporting country are unsuitable to determine the normal value. Such reports and the evidence on which it is based would also be placed on the file of any investigation relating to that country or sector so that all interested parties would be in a position to express their views and comments.  . . .

In the light of experience gained in past proceedings, it is appropriate to clarify the circumstances in which significant distortions affecting to a considerable extent free market forces may be deemed to exist. In particular, it is appropriate to clarify that this situation may be deemed to exist, inter alia, when reported prices or costs, including the costs of raw materials, are not the result of free market forces because they are affected by government intervention. It is further appropriate to clarify that in considering whether or not such a situation exists regard may be had, inter alia, to the potential impact of the following: the market in question is to a significant extent served by enterprises which operate under the ownership, control or policy supervision or guidance of the authorities of the exporting country; state presence in firms allowing the state to interfere with respect to prices or costs; public policies or measures discriminating in favour of domestic suppliers or otherwise influencing free market forces; and access to finance granted by institutions implementing  public policy objectives. It is further appropriate to provide that the Commission services  may issue a report describing the specific situation concerning these criteria in a certain country or a certain sector; that such report and the evidence on which it is based may be placed on the file of any investigation relating to that country or sector . . . .

It is further appropriate to recall that costs should normally be calculated on the basis of records kept by the exporter or producer under investigation. However, where there are significant distortions in the exporting country with the consequence that costs reflected in the records of the party concerned are artificially low, such costs may be adjusted or established on any reasonable basis, including information from other representative markets or from international prices or benchmarks. In the light of experience gained in past proceedings, it is appropriate to further clarify that, for the purposes of applying the provisions introduced by this regulation, due account should be taken of all relevant evidence, including relevant assessment reports regarding the circumstances prevailing on the domestic market of the exporting producers and the evidence on which they are based, which has been placed on the file, and upon which interested parties have had an opportunity to . . .

Article 1

Regulation (EU) 2016/1036 is amended as follows:

In Article 2 the following paragraph 6a is inserted:

‘6a. (a) In case it is determined, when applying this provision or any other relevant provision of this Regulation, that it is not appropriate to use domestic prices and costs in the exporting country due to the existence of significant distortions, the normal value shall be constructed on the basis of costs of production and sale reflecting undistorted prices or benchmarks. For this purpose, the sources that may be used include undistorted international prices, costs, or benchmarks, or corresponding costs of production and sale in an appropriate representative country with a similar level of economic development as the exporting country, provided the relevant cost data are readily available. The constructed normal value shall include a reasonable amount for administrative, selling and general costs and for profits.

Significant distortions for the product concerned within the meaning of point (a) may be deemed to exist, inter alia, when reported prices or costs, including the costs of raw materials, are not the result of free market forces as they are affected by government intervention. In considering whether or not significant distortions exist regard may be had, inter alia, to the potential impact of the following: the market in question is to a significant extent served by enterprises which operate under the ownership, control or policy supervision or guidance of the authorities of the exporting country; state presence in firms allowing the state to interfere with respect to prices or costs; public policies or measures discriminating in favour of domestic suppliers or otherwise influencing free market forces; and access to finance granted by institutions implementing public policy objectives.

In Article 11(4), the following subparagraph is added:

‘In the case of a transition from a normal value calculated pursuant to the former Articles 2(7)(a) or 2(7)(b) to a normal value calculated pursuant to paragraphs 1 to 6a of Article 2, any review pursuant to this paragraph shall be deferred to the date on which the first expiry review following such transition is initiated.’

STEEL TRADE CASES

CERTAIN CARBON AND ALLOY STEEL CUT TO LENGTH PLATE FROM AUSTRIA, BELGIUM, CHINA, FRANCE GERMANY, ITALY, JAPAN, KOREA AND TAIWAN

On November 7, 2016, in the attached fact sheet, factsheet-multiple-ctl-plate-ad-prelim-11082016, Commerce announced its affirmative preliminary determinations in the antidumping duty investigations of imports of certain carbon and alloy steel cut-to-length plate from Austria, Belgium, China, France, Germany, Italy, Japan, Korea, and Taiwan.

For Austria, the antidumping rate is 41.97%.  For Belgium, the antidumping rate ranges from 2.41 to 8.5%.  For China, the antidumping rate is 68.27%.  For France, the antidumping rate ranges from 4.26 to 12.97%.  For Germany, the antidumping rate ranges from 0 to 6.56%.  For Italy, the antidumping rate ranges from 6.10 to 130.63%.  For Japan, the antidumping rate ranges from 14.96 to 48.64%.  For Korea the antidumping rate is 6.82%.  For Taiwan, the antidumping rate ranges from 3.51 to 28%.

CIRCULAR WELDED CARBON-QUALITY STEEL PIPE FROM OMAN, PAKISTAN, UNITED ARAB EMIRATES, AND VIETNAM

On October 24, 2016, Commerce in the attached fact sheet, pipe, announced its affirmative final determinations in the antidumping duty (AD) investigations of imports of circular welded carbon- quality steel pipe from Oman, Pakistan, the United Arab Emirates, and Vietnam, and countervailing duty (CVD) investigation of imports of circular welded carbon-quality steel pipe from Pakistan.

For Oman, the antidumping rate is 7.24%.  For Pakistan, the antidumping rate is 11.08% and the countervailing duty rate is 64.81%.  For United Arab Emirates the antidumping rates range from 5.58% to 6.43%.  For Vietnam the antidumping rate ranges from 0 to 113%

FOREIGN ANTIDUMPING AND COUNTERVAILING DUTY LAW AND CASES

UNIVERSAL TRADE WAR CONTINUES

With the election of Donald Trump, as stated in my last newsletter, the Universal Trade War will continue.  In addition to the US bringing antidumping and countervailing duty cases, countries around the World, such as EC, Canada, Mexico, Brazil, Argentina, India, Turkey, Ukraine, Russia, China, Indonesia, Malaysia, Korea, Japan, Taiwan, Australia Thailand, South Africa, and Vietnam, all are filing antidumping and countervailing duty cases against each other and the United States.  These countries have adopted the US law which finds dumping in 90% of the cases.  The US and the EC have created a Frankenstein in the antidumping law and the whole World has adopted it.

Compromise is the best way to settle trade disputes, but it is very difficult, if not impossible, to settle US antidumping and other trade cases.  What is “fair” trade for the United States is “fair” trade for every other country.  Many countries want to make their industries Great again.

Because of this situation, this part of the newsletter will concentrate on antidumping and countervailing duty cases in other countries.

CHINA

Set forth below are two articles by Chinese trade lawyers on how to respond in Chinese trade cases against the United States and other countries.

ROLAND ZHU, ALLBRIGHT LAW FIRM

A General Description of Anti-Dumping Regulation

of the People’s Republic of China

by Roland Zhu, Allbright Law Firm

In order to maintain foreign trade order and fair competition, China’s Ministry of Commerce (hereinafter referred to as “MOFCOM”) is responsible for conducting anti-dumping investigations against foreign exporters in case that imported products enter the market of the People’s Republic of China by way of dumping, and cause material damage or constitute a threat of material damage to an already established domestic industry, or cause a material impediment to the establishment of a domestic industry in accordance with the Foreign Trade Law of the People’s Republic of China, Regulations of the People’s Republic of China on Anti-Dumping and Interim Rules on Placing Cases on File for Antidumping Investigations, which are effective and applicable law.

Where there exists dumping or may exist dumping, an anti-dumping investigation may arise. A complete set of anti-dumping investigation procedure usually follows these steps:

  1. MOFCOM may place a case on file for antidumping investigations upon the application of an applicant; it may also place a case on file on its own initiative for anti-dumping investigations.
  2. MOFCOM shall, within 60 days as of its receipt of the application letter and the relevant evidence submitted by the applicant, examine whether the application is filed by the domestic industry or filed by representing the domestic industry, the contents of the application letter and the evidence attached to it, etc., and shall decide to initiate an investigation or not. Prior to the decision to initiate an investigation, the government of the exporting country (region) concerned shall be notified.
  3. MOFCOM shall publish the decision to initiate an investigation and notify the applicant, the known exporters and importers, the government of the exporting country (region) and other interested organizations and parties (hereinafter collectively referred to as “the interested parties”). As soon as the decision to initiate an investigation is published, MOFCOM shall provide the full text of the written application to the known exporters and the government of the exporting country (region).
  4. MOFCOM may conduct an investigation and collect information from the interested parties by, among other methods, sending questionnaires, using samples, holding public hearings and making on-the-spot verification.
  5. MOFCOM shall, on the basis of its findings, make a preliminary determination on dumping and injury, as well as on whether there exists a causal link between dumping and injury. The preliminary determination shall be published by MOFCOM.
  6. In cases where a preliminary determination on dumping, injury and the causal link between the two is affirmative, MOFCOM shall conduct further investigations on dumping, the dumping margin, the injury and its degree, and, make a final determination on the basis of its findings. The final determination shall be published by MOFCOM. Before the final determination is made, MOFCOM shall inform all known interested parties of the essential facts on which the final determination is based.
  7. An anti-dumping investigation shall be concluded within 12 months from the date of publication of the decision to initiate the investigation, and the period may be extended in special circumstances, but in no case shall the extension be more than 6 months.
  8. The anti-dumping measures taken by MOFCOM shall include provisional anti-dumping measures, price undertakings and anti-dumping duties. The period for applying the provisional anti-dumping measures shall not exceed four months from the effective date set forth in the public notice regarding the decision on provisional anti-dumping measures, and, in special circumstances, may be extended to nine months. The period for the levy of an anti-dumping duty and fulfillment of a price undertaking shall not exceed five years, and may be extended if, as a result of the review, it is determined that the termination of the anti-dumping duty would possibly lead to continuation or recurrence of dumping and injury.
  9. The review proceedings shall be conducted with reference to the relevant provisions of Regulations of the People’s Republic of China on Anti-Dumping. Any review shall be concluded within 12 months from the date of the decision of initiation of such a review.

Answers to General Questions about Chinese Antidumping cases are listed below or you may refer to the general description of Chinese anti-dumping regulations.

  1. Information on recent cases filed in China against other countries

Answer: Please see the table below, which summarizes recent cases filed in China during the year of 2016 against other countries are:

Initiation Date  Subject Merchandise  Investigation Type  Countries

1/12/2016  Dried Distiller Grains        AD and CVD             USA

2/5/2016    Pyridine                                AD Interim Review  Japan and India

4/20/2015   Vinyldine Chloride           Initial AD Review       Japan

Vinyl Chloride Copolymer Resin

9/22/2016     Sugar                        Safeguard       Multiple Countries  including Brazil/Argentina

  1. What agency makes the AD and CVD decision? What agency makes the injury determination? How long does the initial investigation take?  Are there mandatory companies?

Answer: The Trade Remedy and Investigation Bureau of the Ministry of Commerce of the People’s Republic of China (the “Bureau”) makes the AD and CVD decisions as well as the injury determinations. An anti-dumping or countervailing investigation shall be concluded within 12 months from the date of publication of the decision to initiate the investigation, and the period may be extended in special circumstances, but in no case shall the extension be more than 6 months. There are mandatory companies in China’s AD investigation. The applicant, the known exporters and importers, the government of the exporting country (region) and other interested organizations and parties can register to the Bureau in order to participate in this anti-dumping investigation within 20 days from the date of promulgation of the initial announcement. The Bureau selects the respondents among those who have submitted dumping sampling questionnaire by using sampling survey. For other interested parties, including those are not chosen to answer the investigation questionnaire and those don’t register to the Bureau, the Bureau may make determinations on the basis of the facts already known and the best information available.

  1. Is the Chinese antidumping and countervailing duty law prospective or retrospective, retroactive liability? Is there a public interest test? Are there annual reviews?  How long do the orders stay in place?

Answer:  For retrospective issues you mentioned above, according to the Article 93 of Legislation Law of the People’s Republic of China, Chinese antidumping and countervailing duty law shall not be retroactive, but the regulations formulated specially for the purpose of better protecting the rights and interests of citizens, legal persons and other organizations are excepted. The period for the levy of an anti-dumping duty shall not exceed 5 years, and may be extended as appropriate if, as a result of the review, it is determined that the termination of the anti-dumping duty would possibly lead to continuation or recurrence of dumping and injury. A midterm review may be conducted upon request by the interested parties and on the basis of examination of the relevant evidence submitted by the interested parties.

  1. Are there special rules for Non Market Economy Countries?

Answer:  There are no such special rules in China.

Attached are several weekly newsletters, teams-newsletter-en-vol-2016-38 teams-newsletter-en-vol-2016-39 teams-newsletter-en-vol-2016-40, issued by Roland Zhu and his trade group at the Allbright Law Office.

FRANK HANG, GLOBAL LAW OFFICE

How Should Foreign Companies Respond to an Antidumping Investigation in China

  1. Definition of Dumping

According to Chinese Law, dumping consists of three factors-Dumping, Injury and Causation. As for the calculation of Dumping Margin, the following shall be taken into consideration:

  • Dumping Margin= (Normal Value-Export Price)/CIF Price
  • Normal Value and Export Price shall be compared on the same level, usually ex-factory level
  • Comparison: a. weighted average Normal Value to weighted average Export Price; b. transaction-to-transaction comparison of Normal Value and Export Price; c. weighted average Normal Value to each transaction Export Price.

When calculating the Normal Value, the following methods are chosen by MOFCOM:

  • Domestic Sales Price
  • Constructed Value=Production Cost + S G & A + Reasonable Profit
  • Export Price to a Third Country (Region)

In terms of category of AD Duty, China’s normal practice is to assign antidumping rates to producers, not trading companies. And there are 3 different types of rates for the enterprises to bear:

  • Individual Rate
  • Weighted Average Rate
  • Country-wide Rate (Best Information Available, BIA)

When it comes to Injury Analysis, several factors shall be considered by MOFCOM: Imported Volume, Imported Price and other factors such as actual and potential decline of domestic industry in sales, profits, output, market share, productivity, return on investment or utilization of capacity, etc., factors affecting domestic prices; the magnitude of the margin of dumping, the actual or potential negative effects of the dumped imports on the domestic industry’s cash flow, inventories, employment, wages, growth, ability of capital raising or investment, etc.

Cumulative Assessment means that the margin of dumping established in relation to the dumped imports from each country (region) is no less than 2 percent, and the volume of such imports from each country (region) is not negligible. It is negligible if the volume of the dumped imports from a particular country (region) is found to account for less than 3 percent of the total imports of the like products, unless countries (regions) which individually account for less than 3 percent of the total imports of the like products collectively account for more than 7 percent of the total imports of the like products.

  1. AD Investigating Procedures

In China, the AD Investigating Authority is MOFCOM Trade Remedy and Investigation Bureau who is not only in charge of determination of dumping margin but also in charge of determination of injury and causation. 

Following procedures in a Chinese AD Investigation Case: Filing of the Petition are:

Filing Responding Registration, Issuing Questionnaires, Submitting Questionnaire Responses, Preliminary Determination, Public Hearing, On-site Verification, Final Determination, Price Undertaking, Administrative Reconsideration, Administrative Lawsuit, Interim Review, Sun-set Review, New Shipper Review, etc.

Within 10 working days after the deadline of filing the responding registration, the investigating authority will issue questionnaires to the registered companies. If the registered companies are numerous, the investigating authority will use sampling (usually 2 mandatory companies for each country/area).

It is important to note that foreign producers/foreign exporters must submit their responding registration documents to the investigating authority within 20 days as of the date of initiation through a PRC practicing attorney or by themselves. If they fail to do so, foreign producers will be treated as non-cooperative and MOFCOM will use the best information available (“BIA”) to make determination.

For the respondents, when submitting Questionnaire Response, they need to keep in mind that the questionnaire response must be submitted to the investigating authority within 37 days as of the date of the issuance of the questionnaires. The responding companies may apply for extension and the investigating authorities usually only give an extension of 7 days. And the questionnaire responses must be submitted through a PRC practicing attorney. After receiving the questionnaire responses, the investigating authority will review them and issue the supplementary questionnaires if certain questions require clarification or explanation further.

In an Interim Review, an application for interim review shall be filed within 30 days as of the expiration date of each year after the effective date of AD measures. The producers applying for interim reviews must have exported the subject merchandise to China within a period of 12 months prior to the application, and the export referred must have been made in sufficient quantities.

  1. Key Points of AD Defense Strategies
  • Establishing an overall responding strategy before submitting the questionnaire responses to MOFCOM;
  • Collaborating with the respondent’s department of administration, sales, production, finance, in-house counsel, foreign attorneys, PRC attorneys closely and efficiently;
  • Accountant’s role is important in the calculation of dumping margin;
  • Well-prepared for on-site verification;
  • Communicating effectively with MOFCOM officials at different levels;
  • Cooperate with other respondents on non-injury defense;
  • Leverage the exporting country (region)’s government;
  • Obtaining support from importers and down-stream companies.

INDIA

Attached is a newsletter, ls-international-trade-amicus-september-2016, from the Lakshmikumaran & Sridharan Law Firm in New Delhi on Indian antidumping law.

CUSTOMS LAW

ALUMINUM EXTRUSIONS

On October 26, 2016, the Wall Street Journal in an article entitled “Homeland Security Probes U.S. Aluminum Firms Over Chinese Imports” reported that Federal investigators had launched an investigation into whether Liu Zhongtian, a Chinese billionaire and the founder and chairman of aluminum giant China Zhongwang Holdings Ltd., was engaged in transshipment of aluminum extrusions to the United States in violation of US civil and criminal laws.

Commerce is investigating whether a New Jersey company, Aluminum Shapes LLC, imported pallets to remelt as a way to avoid a countervailing duty rate of 374%, part of a broader probe into Mr. Liu’s activities. The Commerce Department said preliminary findings would be released in coming weeks. Aluminum Shapes last month denied that the pallets were used as raw material for its plant.

Homeland Security is also investigating whether nearly one million tons of aluminum shipped to Aluminicaste Fundición de México, a factory once owned by Mr. Liu’s son, were part of an effort to evade U.S. tariffs by routing the metal through another country to disguise its origins.

SECTION 337 AND IP CASES

NEW 337 CASES

OPTICAL FIBERS

On October 31, 2016, DSM Deso Tech, Inc. and DSM IP Assets B.V. filed a 337 patent case against UV Curable Coatings for Optical Fibers, Coated Optical Fibers, and Products from China.  The relevant parts of the ITC notice along with the names of the Chinese respondent companies are below.

Commodity:

UV Curable Coatings for Optical Fibers, Coated Optical Fibers, and Products

Filed By:
Christine E. Lehman

Firm/Organization:
Finnegan, Henderson, Farabow, Garrett, & Dunner, LLP

Behalf Of:

DSM Deso Tech, Inc. and DSM IP Assets B.V.

Description:

Letter to Lisa R. Barton, Secretary, USITC; requesting that the Commission conduct an investigation under section 337 of the Tariff Act of 1930, as amended, regarding Certain UV Curable Coating for Optical Fibers, Coated Optional Fibers, and Products Containing Same. The proposed respondents are Momentive UV Coatings (Shanghai) Co., Ltd., China and OFS Fitel, LLC, Norcross, Georgia.

SWEETENERS

On October 27, 2016, Celanese filed a 337 patent case against High Potency Sweeteners, ACE-K, from China.  The relevant parts of the ITC notice along with the names of the Chinese respondent companies are below.

Commodity:

High-Potency Sweeteners

Filed By:

Joshua B. Pond

Firm/Organization:

Kilpatrick Townsend & Stockton LLP

Behalf Of:
Celanese International Corporation, Celanese Sales U.S. Ltd. and Celanese IP Hungary Bt

Description:

Letter to Lisa R. Barton, Secretary, USITC; requesting that the Commission conduct an investigation under section 337 of the Tariff Act of 1930, as amended, regarding Certain High-Potency Sweeteners, Processes for Making Same, and Products Containing Same. The proposed respondents are Suzhou Hope Technology Co., Ltd., China; Anhui Jinhe Industrial Co., Ltd., China; and Vitasweet Co., Ltd.,   China.

MOBILE ELECTRONIC DEVICES

On October 14, 2016, Qualcomm filed a 337 patent case against Mobile Electronic Devices from China.  The relevant parts of the ITC notice along with the names of the Chinese respondent companies are below.

Received:

Friday, October 14, 2016

Commodity:

Mobile Electronic Devices

Filed By:

Blaney Harper

Firm/Organization:

Jones Day

Behalf Of:

Qualcomm Incorporated

Description:

Letter to Lisa R. Barton, Secretary, USITC; requesting that the Commission conduct an investigation under section 337 of the Tariff Act of 1930, as amended, regarding Certain Mobile Electronic Devices. The proposed respondents are Zhuhai Meizu Technology Co., Ltd., China; Zhuhai Meizu Telecom Equipment Co., Ltd., China; Dest Technology Limited, China; LGYD Limited, China; and Overseas Electronics, Inc., Chicago, IL.

If you have any questions about these cases or about Trump and Trade, US trade policy, TPP, the antidumping or countervailing duty law, trade adjustment assistance, customs, False Claims Act or 337 IP/patent law in general, please feel free to contact me.

Best regards,

Bill Perry

 

US CHINA TRADE WAR–UNIVERSAL TRADE WAR, TPP IN LAME DUCK, SPOTTING POTENTIAL AD CASES, CUSTOMS, FALSE CLAIMS ACT, VITAMIN C ANTITRUST, IP AND 337

Lotus Garden Boat Buildings Yue Feng Pagoda Summer Palace BeijinTRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

US CHINA TRADE WAR OCTOBER 7, 2016

INTERVIEW ON WHAT US COMPANIES CAN DO IN THE PRESENT TRADE CRISIS

Just did an interview on what US companies can do to cope with the current trade crisis.  Hope you will find it of interest.  http://www.turbineagency.com/industry-insights/2016/10/25/accelerateb2b-how-do-global-trade-deals-really-impact-us-businesses

Dear Friends,

This blog post contains several new article and articles that have been posted on the Harris Moure blog, www.chinalawblog.com from the HM Trade Practice Group, including Adams Lee, Emily Lawson and myself.  The new articles also reflect my discussions during my recent three-week trip to China meeting with various Chinese companies, the Chinese Ministry of Commerce (“MOFCOM”), and Chinese trade lawyers.

The most important point is that the US China Trade War is expanding and has now become a universal trade war.  Although the US continues to bring numerous antidumping (AD) and countervailing duty (CVD) cases against China, the Chinese government is now bringing and will bring numerous AD and CVD cases against the US.

In the recent Chinese antidumping case against Distiller Grains from the US, the Chinese government has levied a 33% rate against $1.6 billion in US exports to China.  There are rumors that the Chinese government may soon bring AD and CVD cases targeting $15 billion in US exports of soybeans to China.

Meanwhile numerous countries have adopted their own AD and CVD laws modeled on the US and EU and are bringing cases not only against China, but also against the US.

The only recent trade developments that would break the retaliation cycle are the Trans Pacific Partnership (TPP) and the TTIP deal with Europe and both trade agreements are in serious trouble.

In addition, set forth below are articles on how to spot an AD and CVD trade case coming and what do when your company is a target of a trade case, magnesium and steel cases, trade cases against Europe, and Trade Adjustment Assistance by David Holbert, who heads the Northwest Trade Adjustment Assistance Center.  In addition, there are a number of articles on Customs law, False Claims Act, including an FCA case against Furniture and Customs enforcement action against Honey.  Finally, there is an article on recent Second Circuit Decision in the Vitamin C Antitrust Case and the antidumping back story, a Criminal Trade Secrets case, a new 337 case and the Section 337 article translated into Chinese.

If anyone has any questions or wants additional information, please feel free to contact me at my new e-mail address bill@harrismoure.com.

Best regards,

Bill Perry

TRADE POLICY AND TPP

US CHINA ANTIDUMPING TRADE WAR IS NOW A UNIVERSAL ANTIDUMPING TRADE WAR

As Donald Trump and Hilary Clinton duel during the Presidential debate about who can be more protectionist, during my recent trip to China I learned that what was once a US China Trade War has now become a universal trade war.  Country after country have adopted the US and EC Antidumping law and are filing case after case against other countries and the US.

Thus countries, such as EC, Canada, Mexico, Brazil, Argentina, India, Turkey, Ukraine, Russia, China, Indonesia, Malaysia, Korea, Japan, Taiwan, Australia Thailand, South Africa, and Vietnam, all are filing antidumping and countervailing duty cases against each other and the United States.  These countries have adopted the US law which finds dumping in 90% of the cases.  The US and the EC have created a Frankenstein in the antidumping law and the whole World has adopted it.

Although Donald Trump, Hilary Clinton and many US politicians want to adopt a mercantilist trade policy which favors pushing exports and protecting US industries from imports, the US politicians simply do not understand retaliation.  What the US can do to other countries, those countries can do back.  President Reagan understood the retaliation danger of protectionism and a mercantilist trade policy, but many present day US politicians do not.  So all of these countries are following the US lead and implementing a mercantilist trade policy.

Free trade agreements, such as the TPP and the TTIP, which would break this cycle are now all in deep trouble as each country wants to put its industries first and make their country and industries great again.  The rise in nationalism results in trade wars in which country after country will fire trade guns against each other.  As Jack Ma of Alibaba recently mentioned on CNN, real wars start when trade stops.  See http://money.cnn.com/2016/09/02/technology/jack-ma-alibaba-g20/

During my recent trip to China, in the attached notice, ddgs-list-of-dumping-margin-of-each-company_en ddgs-preliminary-finding-summary-translation_en, on September 23, 2016, the Chinese government announced a 33% preliminary antidumping duty targeting $1.6 billion in imports from the United States of DDGS, Distiller’s Dried Grains with or without Solubles, which is used as an ingredient for animal feed.

During this trip, officials at the Chinese Ministry of Commerce (“MOFCOM”) told me that more trade cases will be coming next year against the US.  In fact, there are rumors that the Chinese government will soon bring an AD and CVD case targeting $15 billion in US soybean exports to China.  This is the number one US export to China.  Now that China is bringing more trade cases against the US, these cases will hurt US companies and the jobs that go with them.

On the US side, the election of either Donald Trump or Hilary Clinton in November will mean more US trade cases next year against not only China, but many other countries as well.

On September 22, 2016, MOFCOM in China initiated an escape clause/safeguard action against Sugar from Brazil, Cuba, Guatemala, Australia, South Korea and Thailand alleging tariffs up to 155.90%.

On September 15, 2016, India brought its own antidumping case against Polybutadiene Rubber from South Korea, Russia, South Africa, Iran and Singapore.

Taiwan has brought a Steel antidumping case against China.

More and more cases will be filed in 2017 around the World and many will target the United States, China, and numerous other countries.  Compromise is the best way to settle trade disputes, but it is very difficult, if not impossible, to settle US antidumping and other trade cases.  What is “fair” trade for the United States is “fair” trade for every other country.  Many countries want to make their industries Great again.

TPP IN THE LAME DUCK KEEPS ON TICKING

As mentioned in my last blog post, I believe that if Hilary Clinton is elected, President Obama will push for the Trans Pacific Partnership (“TPP”) to come up for a vote during the Lame Duck Session.  Many Congressional leaders appeared to  oppose tbringing up TPP in the Lame Duck.  But with Hilary Clinton’s resurgence in the Polls after the first debate, there is more talk about the TPP coming up in the Lame Duck, the period after the Presidential election and before the end of the year, as President Obama pushes hard for passage of the legislation.

On September 16, 2016, Ohio Governor Republican John Kasich in an interview with CNN stated that he supports passage of the TPP and will support President Obama in this legislative push in the Lame Duck.  See http://edition.cnn.com/2016/09/15/politics/john-kasich-trans-pacific-partnership/index.html

Governor Kasich made clear that he feels “it’s his “responsibility and duty as a leader” — no matter the political cost — to help President Barack Obama push the Trans-Pacific Partnership through Congress.

Kasich stated that

“I have never been an ideological supporter of free trade. The ideologues used to come to me and be frustrated with me.  But when you look at these agreements in a real sense – and this one is much different than even NAFTA.”

Kasich added that when Russian and Chinese leaders oppose the TPP, that is one reason to vote for the TPP, “We have to do this.”

Kasich further stated,

“This is the first time the candidates in both major political parties say they are opposed to free trade. It’s astounding to me.  I welcome the fact that people will criticize me for putting my country ahead of my party.”

The interview came after Kasich met with President Obama in the Oval Office with former New York City Mayor Michael Bloomberg, former George W. Bush administration Treasury Secretary Hank Paulson, Atlanta Mayor Kasim Reed and others for a meeting on the 12-nation Pacific Rim deal.

Kasich further stated:

“This is an opportunity for the Congress to carry out its responsibility. Frankly, if I have to come down here and spend some time lobbying my Republican colleagues, I’m more than glad to do that.

There’s definitely some people I can call and talk to.  This is a big deal. I mean, if we were to just walk away with this — with both candidates saying they don’t want this — we turn our backs on Asia.

He also played down the political potency of Trump’s anti-trade position in manufacturing-heavy Ohio, saying it’s not why Trump might win the state.

On September 26, 2016, Robert Samuelson, a well-known economist, published an article entitled “Will TPP Rise from the Dead”, stating:

With Obama’s term ending and his already-modest influence eroding by the day, TPP seems dead. But it may still be in intensive care.

In a speech to the Peterson Institute for International Economics, a Washington think tank, Rep. Kevin Brady, R-Texas, chairman of the House Ways and Means Committee whose jurisdiction includes trade agreements, said that the TPP could still be ratified in the lame-duck session after the election and before a new Congress takes office.

Samuelson went on to state that Brady gave two major reasons to approve the TPP.

First, geopolitical:  The TPP would enhance US influence in the Pacific region and offset China’s growing economic and political power. TPP would give the United States a major role in regulating global commerce in the 21s century. The trade agreement codifies rules on “intellectual property” (patents, copyrights), data flows and state-owned firms

Ratification would be a strong signal to Asia that the United States intends to remain a Pacific power.

“The second reason is economic: Asia remains a fast-growing region. TPP would eliminate most tariffs among the 12 member countries, aiding American exporters in these markets. The advantage may be particularly important in services (tourism, consulting, finance and engineering), where U.S. firms are especially strong. In 2015, the United States had a $762 billion deficit in goods trade (machinery, steel, medical equipment) and a $262 billion surplus in services trade, leaving an overall deficit of $500 billion.  According to the Peterson Institute, the 12 countries in the TPP accounted for about 36% of the world economy and 24% of global trade in 2014.”

Samuelson goes on to quote Brady on why he does not dismiss TPP’s prospects as bleak, “People change once they get into office.”

Samuelson then states:

Translation: The campaign’s anti-trade and anti-globalization rhetoric might recede before the realities of governing. Although Brady didn’t say so, one implication is that a victorious Hillary Clinton might put up only token opposition to TPP, both because the case for approval is strong and because she might feel obligated to Obama for his political support.

But Brady went on to state that getting a deal would be difficult. With many Democrats adamantly opposed to TPP, President Obama would need to rely on Republicans to approve the agreement. But if President Obama cannot round up enough Democratic votes to ensure victory, Republicans will not go out on a political limb and bring the agreement up during the Lame Duck.

“We are running out of time,” Brady told the Peterson audience. As Samuelson stated, “The TPP may yet wind up in the political morgue.”

TRADE

CHINA IMPORTS: KNOW YOUR RISKS

By Adams Lee, Harris Moure International Trade Group

Every year U.S. producers file 10-15 petitions asking the U.S. government to investigate whether certain products imported into the US are sold at unfair prices (antidumping or AD) or are unfairly subsidized (countervailing duty or CVD). Many of the AD/CVD cases target products imported from China. Odds are good that at least two new AD/CVD petitions will be filed by Halloween and as many as five by year end.

Our clients often ask our international trade lawyers how they can determine the likelihood of a AD/CVD petition that could adversely affect their ability to compete in the US market. Each AD/CVD petition is unique to the product and industry it covers, but most AD/CVD investigations fall within a handful of categories. Understanding what has led to the filing of previous AD/CVD petitions can help you as a producer, exporter, or importer, recognize if and when to expect a new AD/CVD petition that could directly affect you. The following are some of the indicators you should be checking to determine whether your imported into the USA product will be next.

The Regulars. Certain domestic industries have been frequent filers of AD/CVD actions. Companies in these industries are veterans of AD/CVD actions; they don’t ask if a new petition will be filed, only when it will be filed.

  • Steel of all types (carbon steel, stainless steel, flat products, pipe, rebar, wire rod, wire, etc.) from all over the world. The latest wave of steel AD/CVD investigations are being completed with high AD/CVD margins in most cases.
  • Softwood Lumber from Canada. The latest round of the US-Canada Lumber wars is set to begin as new AD/CVD petitions are likely to be filed in October 2016. Filing a new AD/CVD petition may be necessary to push US-Canada negotiations to a meaningful level.

The Big Box Effect. When Walmart, Lowes, or Target switch their sourcing of a product from a domestic manufacturer to a foreign (read Chinese) one, it is quite common for the jilted domestic supplier to file an AD/CVD petition in an effort to save their business. Boltless steel shelving units, wood flooring, ironing tables, and candles are all examples of this, and all involving products from China.

US Products Squeezed by Imports. It is not uncommon for an AD/CVD petition to be filed by a US producer that makes a higher quality product but is starting to lose out to foreign producers with lower quality but cheaper products. Frozen shrimp from multiple countries, garlic from China, and wooden bedroom furniture from China are some examples of this.

Pressure from Downstream Customers. Many AD/CVD petitions involve products that are material inputs used to make a downstream finished product. Petitions can be triggered by larger downstream producers switching to, or just threatening to switch to imports to pressure smaller upstream suppliers to lower prices.  Many chemical products from China, tire products from China and other countries, kitchen racks from China are examples of this.

AD/CVD Actions on Upstream ProductsSometimes AD/CVD actions filed by other domestic industries trickle down and harm downstream domestic industries. For example, US wire rod producers filed AD/CVD petitions that resulted in AD/CVD duties against imported wire rod. But these wire rod duties ended up hurting US wire producers, who in turn filed their own AD/CVD duties against imported wire.

Dying Dinosaurs/Last Survivors. Some AD/CVD petitions are filed by the remaining members of a nearly extinct domestic industry dealing with decreasing demand and increased import pressure. Sometimes the AD/CVD actions allow the surviving US producers to stay in the US market protected from import competition.  Examples of this are wooden bedroom furniture, magnesium and innersprings from China.

Other Countries’ AD/CVD actions. The US is not the only country that acts to protect its domestic industries from unfair foreign trade. AD/CVD actions filed in Canada, India, the EU, Brazil, and even China are warning signs of industries facing tight competitive pressure. Imports blocked from one market are often diverted to other available markets. A prime example of this are products from China which first had AD/CVD filed in the EU before the US took action.

All of the above scenarios are good indicators of an imminent filing of a new United States’ AD/CVD petition, so if you are seeing these market conditions in your industry, an AD/CVD petition is probably in your near future.

WHAT SHOULD YOU DO WHEN THE CUSTOMS ANTIDUMPING AND COUNTERVAILING DUTY BOGEYMAN IS COMING AFTER YOUR IMPORTED CHINA PRODUCTS

By Adams Lee, Harris Moure International Trade Group

In China Imports Know Your Risks (above), I wrote about how companies can recognize impending antidumping (AD) or countervailing duty (CVD) petitions. In this post I address what you as an importer, exporter or foreign producer should do if you see an AD/CVD storm looming.

The first thing you should do is determine whether the AD/CVD petition will directly hit your primary operations. The second thing you should do is figure out how best to defend yourself interests if the AD/CVD petition is headed directly your way. The third thing you should do if you do get hit by AD/CVD duties is to figure out damage control going forward.

  1. New AD/CVD Petition – Are my products affected? AD/CVD petitions include a proposed scope definition that identifies the products covered. AD/CVD scope definitions can be complicated and unclear. They may be broader or narrower than the Customs tariff classifications normally used to identify such imports. Even if you think your products are outside the scope of the petition, U.S. Customs may disagree. U.S. Customs commonly demands that you first pay an AD/CVD deposit, assuming that your products are within the scope of the AD/CVD petition, and then Customs will return your deposit only if you get a Department of Commerce (DOC) ruling that your products are actually outside the scope. For example, with aluminum extrusions from China, the DOC has received around a hundred scope ruling requests to clarify whether certain products are included or excluded from the scope of that order.

Once you know the scope definition, you can evaluate the degree to which the AD/CVD action could impact your business.  Sometimes you and your customer can find alternatives to replace the subject AD/CVD products with either non-subject products or by your sourcing from non-subject countries. If you have options to switch away from the products covered by the AD/CVD action, it may not be necessary to participate in the AD/CVD investigation.

  1. AD/CVD investigations – How to defend? If your product is squarely within the scope of the AD/CVD petition and the U.S. market is worth fighting for, you should determine the best way to prepare for the AD/CVD investigation. If you have enough time before a petition is filed, you theoretically can try to adjust your sales to remedy whatever is causing the dumped or subsidized sales, most commonly by raising your prices for certain products or customers or by modifying your production operations by lowering or reallocating costs. Unfortunately, most companies are not proactive about planning to avoid AD/CVD actions and instead react only after a petition is filed. We find this especially true of our clients that import from China, as opposed to Europe.

Once an AD/CVD investigation is initiated, foreign producers and exporters and US importers should try to defend their interests before the two agencies responsible for making AD/CVD determinations: The International Trade Commission (ITC) determines whether a domestic industry is injured or threatened with injury by reason of the subject imports and the Department of Commerce (DOC) determines how much the subject imports are dumped or subsidized.

In ITC investigations, the best defenses are presented when the foreign producers, US importers, and US purchasers can organize and explain why the subject imports should not be blamed for any decline in the domestic industry’s performance. Because the ITC examines a broad range of data regarding the US market for the subject product, a comprehensive explanation of relevant market conditions is necessary to a winning argument.

In DOC investigations, the foreign producer and exporters are the primary respondents to the DOC’s questionnaires. These companies must provide extensive corporate structure, sales and cost data, often through multiple rounds of questionnaires. The DOC uses the submitted data to calculate AD/CVD margins.  Unaffiliated US importers usually do not need to submit data in DOC investigations and reviews, but they often will closely monitor the DOC’s proceedings because they will ultimately be responsible for paying the AD/CVD duties. See Sourcing Product From China: You Should Know About Importer of Record Liability.

The key to any AD/CVD defense is participating fully in both the DOC’s and the ITC’s investigations. If you don’t participate, you have no chance of winning. If a party does not respond on time or with complete responses, the DOC and the ITC can apply the adverse facts available that inevitably lead to higher AD/CVD margins. US importers should at least actively monitor DOC’s proceedings because their final AD/CVD liability often depends on how well the Chinese producers and exporters are able to respond to DOC’s questionnaires. It is not uncommon for the Chinese producer or exporter to mount a weak or no defense, leaving the U.S. importer essentially “holding the bag.” There are many things you can and should do to try to prevent this from happening to you.

  1. How to Plan for Life with AD/CVD. The overwhelming majority of AD/CVD petitions lead to orders for imposing AD/CVD duties.  But depending on the scope definition of the AD/CVD order, it may be possible for you to maintain your business operations by identifying alternative out-of-scope products or by switching your product sourcing to a non-subject country. But in switching sourcing, US importers should be careful to avoid actions that could be considered schemes designed primarily to evade AD/CVD duties, as the DOC can extend orders through circumvention investigations. Customs too can conduct its own investigation of duty evasion allegations.

Also, because the United States uses a retrospective AD/CVD system, foreign suppliers and US importers have the opportunity each year to try to lower their dumping margin. Since AD/CVD duties are “remedial”, foreign producers and U.S. importers have ample opportunity to adjust their production and sales operations so that they can sell “fairly” to the U.S. market, as defined by the U.S. trade laws and with proper planning and disciplined execution, companies can sometimes make even minor adjustments to reduce or eliminate their AD/CVD duty liability.

Bottom Line: You are not without defenses when the AD/CVD bogeyman appears to be heading for you. There are things you can do both to stop it from attacking your business and things you can do to restore your business once attacked.

Editor’s Note: This post focuses on products exported from China to the United States, but its advice applies with equal force to products exported from any other country to the United States and with nearly equal force to products exported from any other country to any other country that also has AD/CVD sanctions.

CAFC MAGNESIUM METAL DECISION

On October 6, 2016, in the attached decision, cafc-magnesium, the Court of Appeals for the Federal Circuit affirmed the Commerce Department’s decision that replacement of stainless steel retorts used to produce magnesium metal was an overhead expense and not a direct cost in the Magnesium Metal from China antidumping case.

STEEL TRADE CASES

CARBON AND ALLOY STEEL CUT-TO-LENGTH PLATE FROM CHINA AND KOREA

On September 7, 2016, in the attached fact sheet, clt-plate-cvd-prelim-fs-090716, Commerce issued an affirmative preliminary CVD determination in the initial investigation of certain carbon and alloy steel cut-to-length plate from China and a negative preliminary determination in the CVD investigation of imports from Korea.

China CVD rate best on all facts available is 210.50% and Korea’s CVD rate is 0.

CARBON AND ALLOY STEEL CUT-TO-LENGTH PLATE FROM BRAZIL, SOUTH AFRICA AND TURKEY

On September 16, 2016, in the attached fact sheet, factsheet-multiple-ctl-plate-ad-prelim-091616, Commerce announced its affirmative preliminary determinations in the AD investigations of imports of certain carbon and alloy steel cut-to-length plate from Brazil, South Africa, and Turkey.

Brazil’s antidumping rate is 74.52%.  South Africa’s antidumping rates range from 87.72% to 94.14%.  Turkey’s antidumping rates range from 42.02% to 50%.

STAINLESS STEEL SHEET AND STRIP FROM CHINA

On September 12, 2016, in the attached fact sheet, factsheet-prc-stainless-steel-sheet-strip-ad-prelim-091216, Commerce announced its affirmative preliminary determination in the AD investigation of imports of stainless steel sheet and strip from China.  The antidumping rates range from 63.86% to 76.64%.

TRADE CASES AGAINST EUROPE

EUROPEAN TARGETS IN ANTIDUMPING AND COUNTERVAILING DUTY CASES AND WHAT CAN BE DONE TO GET BACK IN THE US MARKET AGAIN

Recently, there have been several articles about the sharp rise in AD and CVD/trade remedy cases in the last year.  By the second half of 2016, the US Government has reported that twice as many AD and CVD cases have been initiated in 2015-2016 as in 2009.

China is not the only target.  AD cases have been recently filed against a number of European countries, including Carbon and Alloy Steel Plate from Austria, Belgium, Germany, and Italy; Steel Flanges from Italy and Spain; and Rubber from Poland.

In addition, there are outstanding AD and CVD orders against Germany on brass sheet and strip, seamless pipe, sodium nitrite and non-oriented electrical steel.  In addition to Germany, other EU Countries have been hit on various steel products, including a number of stainless steel products, from Spain, Belgium and Italy; brass sheet and strip from France and Italy, isocyanurates from Spain, pasta from Italy, paper from Portugal and Uranium from France. The oldest US AD order in place today is pressure sensitive plastic tape from Italy, which was issued in 1977.

Under US law Commerce determines whether dumping is taking place.  Dumping is defined as selling imported goods at less than fair value or less than normal value, which in general terms means lower than prices in the home/foreign market or below the fully allocated cost of production.  Antidumping duties are levied to remedy the unfair act by raising the US price so that the products are fairly traded.

Commerce also imposes Countervailing Duties to offset any foreign subsidies provided by foreign governments so as to raise the price of the subsidized imports.

AD and CVD duties can only be imposed if there is injury to the US industry, which is determined by the ITC.  But in determining injury, the law directs the ITC to cumulate, that is add together all the imports of the same product from the various foreign countries.

The real question many companies may have is how can AD and CVD rates be reduced so that the European company can start exporting to the US again.  US AD and CVD laws are considered remedial, not punitive statutes.  Thus, every year in the month in which the AD or CVD order was issued, Commerce gives the parties, including the domestic producers, foreign producers and US importers, the right to request a review investigation based on sales of imports that entered the US in the preceding year.

Thus, the AD order on electrical steel from Germany was issued in December 2014.   In December 2016, the German producer can request a review investigation of the electrical steel that entered, was actually imported into, the US during the period December 1, 2015 to November 31, 2016.

EU companies may ask that it is too difficult to export a 17 metric ton container of covered product to the US, requesting a nonaffiliated importer to put up an AD of 50 to over 100%, which can require a payment of $1 million USD or more.  In contrast to European law, however, the US AD and CVD law is retrospective.  Thus the importer posts a cash deposit when it imports products under an AD or CVD order, and the importer will get back the difference plus interest at the end of the review investigation.

More importantly, through a series of cases, Commerce has let foreign producers export smaller quantities of the product to use as a test sale in a review investigation if all other aspects of the sale are normal.  Thus in a chemical case, we had the exporter put a metric ton of the chemical in question in a container with other products and that metric ton served as the test sale to establish the new AD rate.

EU Companies may also ask how we can make sure that we are not dumping.  The answer is dump proofing and computer programs.  In contrast to China, EU companies are considered market economy companies and, therefore, Commerce must use actual prices and costs in the European country to determine whether it is dumping or not.  Computer programs can be used to reduce the dumping margin significantly by modeling US prices and EU home market prices to eliminate or significantly reduce antidumping rates.

How successful can companies be in reviews?  In one EU Steel case, we dropped the dumping rate from over 17% in the initial investigation to 0% in the review investigation.  In a chemical from China case, we dropped a dumping rate of over 200% to 0%, allowing the Chinese company to become the exclusive exporter of the product for decades per order of the US government.

Playing the AD and CVD game in review investigations can significantly reduce AD and CVD rates and get the EU company back in the US market again

TRADE ADJUSTMENT ASSISTANCE FOR FIRMS/COMPANIES

David Holbert, who heads the Northwest Trade Adjustment Assistance Center (“NWTAAC”), is writing a series of posts on the NWTAAC website on how Trade Adjustment Assistance for Firms/Companies helps injured companies injured by imports.  This is the first post.

Imports are Like a Thousand Flash Floods Injuring US Companies That Are Not Competitive

The issue of trade competition and lost jobs is well discussed in the media.  I work with small and medium-sized enterprises (SMEs) who are negatively affected by trade competition, what is often called “trade impact” in policy lingo. It’s a big issue. According to the U.S Trade Representative, the United States’ 30 million SMEs account for nearly two-thirds of net new private sector jobs in recent decades.

For large companies or from a macro-economic perspective, import competition may seem like a rising tide – one that can be anticipated, prepared for or proactively mitigated. For small and medium-sized businesses, not equipped with diverse product lines, resources or change acumen, import competition feels more like a flash flood.

What is it like for those companies?  When trade impact hits, sales drop off, often suddenly.

  • Contract manufacturers build to specification for customers, often larger companies. For this group, trade impact could mean the loss of a major customer moving operations to a foreign country (and finding parts suppliers there), or simply an importer arriving on the scene with lower cost products.
  • For a consumer products company, trade impact will probably first arrive with falling sales to the big retail chains since they are the most sensitive to supplier prices.
  • For a commodity producer things are a little more predictable. There may be a change in currency valuation or the rise of a new industry in a foreign country. Regardless, these highly price sensitive markets will suddenly have a lower price option.
  • Commercial products producers will usually have more time. When imports arrive they will sell to generally more informed customers who usually value factors other than price. But the fall will come, just more slowly.

Sales could fall off for many reasons. How do you know its trade related? You ask or you ask around. It shouldn’t take long to find out.

Imports arrive product by product. Companies move offshore factory by factory.  A domestic company makes that product, is part of the supply chain needed to make the product or is part of that commodity industry. When the imports arrive (or the factory moves), that one company or set of suppliers or community of producers is directly in the way. All of this happens in what can seem to be a relatively normal looking manufacturing neighborhood. Across the street there might be a company making another product that is experiencing no trade competition. Next door a third company might have gone through trade impact years ago and has adjusted. For small and medium sized companies, trade impact can be surprisingly direct and specific.

Here are some examples of what I’m talking about.

  • A commercial products company makes a specialized tool. A couple of other U.S. and European companies make similar products with some parity between price and features. One year they are at the big industry trade show and see a product, similar to theirs (and the others), but priced about 40% lower. Three months later sales started slipping.
  • A contract manufacturer that machines metal parts had gravitated away from stainless steel to titanium and built for several competitors in the same industry. Foreign producers had mastered stainless steel over the last decade. But as of a recent year, those producers finally mastered titanium as well. One by one, the manufacturer’s customers started buying imports. Once one did, it had a cost advantage, so the others had to go along also.
  • A nut grower was maintaining a slim profit. Then, a certain country decided to incentivize its nut growers to achieve more efficiency and export capability. It took a while, but when the imported nuts started arriving, they were at a price point below break-even for the domestic producer.
  • A safety products producer sold through a variety of retailers. One year, seemingly out of the blue, the big box stores stopped ordering. It didn’t take long to figure out why. A similar imported product was on the shelves at about half the price.

In future posts I’ll cover the steps to recovery. They are many effective tools in the economic recovery toolbox.  In many cases, companies that employed these resources are now unrecognizable through increased scale and product changes. Interestingly, a surprising number become significant exporters.

My role at the Northwest Trade Adjustment Assistance Center is to help small and medium-sized companies that are negatively impacted by trade competition through grants of up to $75,000.  Our non-profit organization administers a federal program serving companies in Washington, Oregon, Idaho and Alaska. You can learn more about us at NWTAAC.org.

CUSTOMS LAW

IMPORTING GOODS FROM CHINA: THE RISKS ARE RISING

By Adams Lee, Harris Moure International Trade Group

Last month I wrote about how importers from China need to be on their guard since U.S. Customs and Border Protection (CBP) has implemented new regulations to investigate allegations of antidumping (AD) and countervailing duty (CVD) evasion. See Importing From China: One More (New) Thing You Need To Know.

It didn’t take long, as U.S. Customs has already begun its first wave of investigations: Wheatland Tube, a US steel pipe producer, on September 14, 2016 announced it had filed with CBP an allegation of duty evasion on imports of Chinese circular welded steel pipe.

CBP has published a timeline for conducting its investigations and a process diagram (EAPA Investigation Timeline) and this newly filed allegation will be a test case to see how CBP will conduct its new duty evasion investigations. Hopefully, CBP will soon address many of the questions raised by the new regulations. How will parties be allowed to participate? What information from the investigation will be made public? How will CBP define “reasonable suspicion” of duty evasion?

This steel pipe investigation is likely to be the first of many CBP duty evasion investigations that are to come, many (probably most) of which will target Chinese products subject to AD/CVD duties. For how to figure out the risk quotient for the products you import from China, check out China Imports: Know Your Risks.

The new antidumping and countervailing duty regulations will unquestionably require an increased number of importers and foreign manufacturers to formally respond to CBP’s questions in response to allegations. Given the strong political pressure by domestic U.S. industries calling for tougher enforcement of US trade laws (not to mention the rising opposition to free trade among the American populace), Chinese producers and exporters and US importers should be prepared for increased CBP activity. CBP is likely looking to punish someone hard to set an example of their improved enforcement.

Getting Your China Products Through U.S. Customs: The 101

By Emily Lawson, Harris Moure International Trade Group

If you are importing products from China you need to do your homework to make sure your incoming shipments into the United States comply with U.S. Customs laws and regulations. Compliance with U.S. Customs laws and regulations is critical in avoiding your shipments being detained or seized, and/or penalties assessed. Common issues importers of products from China typically face include the following:  

  Not determining proper classification and duty rate for products. If you plan to import and sell on a Delivered Duty Paid basis, you should consider customs duties in your costs and that means you should know all of your applicable duty rates before you import. Also certain products are subject to high antidumping or countervailing duties in addition to regular customs duties, which may be as high as 300%.

   Failing to mark the product with the country of origin of manufacture.  Generally goods of foreign origin for import into the U.S. or immediate containers of the goods must be marked legibly and in a conspicuous location with the country of origin in English. Failure to do so accurately  can result in civil and even possibly criminal penalties.

  Not properly marking wood packing material. All wood packing material for products imported into the U.S. must be properly  treated and marked prior to shipping. Failure to meet the treatment and marking requirements may cause shipments to be delayed and penalties issued. 

  Failing to provide complete commercial invoices. Customs regulations provide that specific data must be included on the commercial invoice for U.S. Customs purposes, including a detailed description of the merchandise, and correct value information. Omission of this information may result in improper declaration to U.S. Customs at the time of import and expose you to penalties.

  Failing to meet other U.S. Government agency requirements.  Goods imported for sale in the U.S. must satisfy the same legal requirements as those goods manufactured in the United States. U.S. Customs enforces the laws of other agencies in the U.S., including, the Food and Drug Administration, the Consumer Product Safety  Commission (CPSC), and the Environmental Protection Agency, in addition to others. Therefore, if toys, for example, are exported to the U.S., detailed CPSC requirements, including for testing, must be met prior to export.

   Distribution of many trademarked and copyrighted items. Items which are trademarked and copyrighted are restricted by contractual agreements that give exclusive rights to specific companies to distribute the product in the U.S. Imports of improperly  trademarked or copyrighted items can be seized at the U.S. border and can subject you as the importer to penalties.

 Taking the time to identify  the required U.S. Customs laws and regulations for the products to be shipped to the U.S. from China will help you maintain seamless delivery  of your merchandise to U.S. customers and avoid civil and criminal penalty  exposure.

FALSE CLAIMS HAMMER GETS BIGGER — THIRD CIRCUIT HOLDS FCA’S APPLICATION TO FALSE STATEMENTS MADE TO US CUSTOMS

On October 5, 2916, the Third Circuit Court of Appeals  in the attached decision in United States ex rel Customs Fraud Investigations, LLC. v. Vitaulic Company, us-vs-vitaulic, reversed the Federal District Court and held that a failure to label imported goods with the proper country of origin is actionable under the False Claim Act (“FCA”).  Vitaulic had imported millions of pounds of steel pipe with the wrong country of origin.

In holding that this is an actionable claim under the FCA, the Court stated:

These actions, according to CFI, give rise to the present qui tam action under the so-called “reverse false claims” provision in the False Claims Act (FCA).  Typically, a claim under the FCA alleges that a person or company submitted a bill to the government for work that was not performed or was performed improperly, resulting in an undeserved payment flowing to that person or company. The FCA was enacted as a reaction to rampant fraud and price gouging by merchants supplying the Union army during the Civil War. In this case, by contrast, the allegation is not that Victaulic is obtaining monies from the government to which it is not entitled, but rather that it is retaining money it should have paid the government in the form of marking duties. Wrongful retention cases such as these are known as “reverse false claims” actions.

The Court went on to state:

Of particular importance here, the Senate Report discussed “customs duties for mismarking country of origin,” and how such duties would be covered by the amended reverse false claims Provision. . . .

The plain text of the FCA’s reverse claims provision is clear: any individual who “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government” may be subject to liability. As alleged by CFI in the amended complaint, Victaulic declined to notify the Bureau of Customs and Border Protection of its pipe fittings’ non-conforming status. This failure to notify resulted in the pipe fittings being released into the stream of commerce in the United States and, consequently, marking duties being owed and not paid.

From a policy perspective, the possibility of reverse false claims liability in such circumstances makes sense in the context of the larger import/export regulatory scheme created by Congress. Because of the government’s inability to inspect every shipment entering the United States, an importer may have an incentive to decline to mention that its goods are mismarked on the assumption that the mismarking will not be discovered. In doing so, an importer avoids its obligation under 19 U.S.C. § 1484 to provide the government with such information as is necessary to enable the Bureau of Customs and Border Protection to determine whether the merchandise may be released from government custody or whether it must be properly marked, re-exported or destroyed.

HONEY AND FURNITURE

FURNITURE

On September 30, 2016, Ecologic Industries LLC and OMNI SCM LLC controlled by a Daniel Scott Goldman agreed to pay $1.525 million to settle a civil False Claims Act suit alleging it conspired to make false statements to avoid paying duties on wooden furniture imported from China to avoid the antidumping duties on Wooden Bedroom Furniture from China.  The companies sell furniture for student housing.

The case was filed by a whistleblower Matthew Bissanti, who is the former president and director of OMNI.  The Justice Department reported that Bissanti will receive $228,750 as his share of the settlement.

HONEY

On Aug 12, 2016, in the attached notice, to-bee-or-not-to-bee_-cbp-and-partners-seized-132-drums-of-hone, Customs and Border Protection announced seizure of 42 tons of illegally imported Chinese honey.  The honey was contained in 132 fifty-five gallon drums that were falsely declared as originating from Taiwan to evade antidumping duties applicable to Chinese honey. The evaded antidumping duties on this shipment of Chinese honey would be nearly $180,299.

ANTITRUST LAW

VITAMIN C ANTITRUST CASE—THE REAL ANTIDUMPING BACK STORY

On September 20, 2016, the Second Circuit Court of Appeals handed down its attached decision in the Vitamin C Antitrust case against the Chinese companies, In Re: Vitamin C Antitrust Litigation, vitamin-c-13-4791_opn-2d-cir-sept-20-2016.  In its decision, the Court of Appeals reversed the Federal District Court’s decision that the Chinese Vitamin C companies had fixed prices in violation of the US antitrust because Chinese government action, in effect, insulated the Chinese companies from US antitrust liability.

The Court of Appeals made the correct decision because as indicated below, I have personal knowledge as to the reason the Chinese government set the Vitamin C export price scheme in place to raise Chinese export prices—to deter US and other Antidumping cases.

As the Court of Appeals stated in its opinion:

the Chinese Government filed a formal statement in the district court asserting that Chinese law required Defendants to set prices and reduce quantities of vitamin C sold abroad, and because Defendants could not simultaneously comply with Chinese law and U.S. antitrust law . . .

The Court of Appeals then reversed the District Court “on international comity grounds” and ordered the District Court to dismiss the complaint with prejudice.

In effect, the Second Circuit held that based on comity grounds, that is, respect for Chinese law as evidenced by a formal statement and submission of the Chinese government that the Chinese government lawfully set up a scheme to raise Vitamin C prices, the Federal District Court should have dismissed the case.  The Court of Appeals held that the District Court should have deferred to the Chinese government and exempted the Chinese companies from the application of the US antitrust law based on the state action defense.  It should be noted that the Federal Government and State Governments through state action can insulate US domestic companies from the application of the US antitrust law.

The Court of Appeals specifically determined in the decision that:

The official statements of the Ministry should be credited and accorded deference. . . .The  2002  Notice,  inter  alia,  demonstrates  that  from  2002  to  2005,  the relevant time period alleged in the complaint, Chinese law required Defendants to participate in the PVC regime in order to export vitamin C. This regulatory regime allowed vitamin C manufacturers the export only vitamin C subject to contracts that complied with the “industry‐wide negotiated” price.

Although the 2002 Notice does not specify how the “industry‐wide negotiated” price was set, we defer to the Ministry’s reasonable interpretation that the term means what it suggests—that members of the regulated industry were required to negotiate and agree upon a price.  . . ..

In this context, we find it reasonable to view the entire PVC regime as a decentralized means by which the Ministry, through the Chamber, regulated the export of vitamin C by deferring to the manufacturers and adopting their agreed upon price as the minimum export price. In short, by directing vitamin C manufacturers to coordinate export prices and quantities and adopting those standards into the regulatory regime, the Chinese Government required Defendants to violate the Sherman Act. . . .

Because we hold that Defendants could not comply with both U.S. antitrust laws and Chinese law regulating the foreign export of vitamin C, a true conflict exists between the applicable laws of China and those of the United States.

The Court of Appeals went on to state:

Moreover, there is no evidence that Defendants acted with the express purpose or intent to affect U.S. commerce or harm U.S. businesses in particular. Rather, according to the Ministry, the regulations at issue governing Defendants’ conduct were intended to assist China in its transition from a state‐run command economy to a market‐driven economy, and the resulting price‐fixing was intended to ensure China remained a competitive participant in the global vitamin C market and to prevent harm to China’s trade relations. While it was reasonably foreseeable that China’s vitamin C policies would generally have a negative effect on Plaintiffs as participants in the international market for vitamin C, as noted above, there is no evidence that Defendants’ antitrust activities were specifically directed at Plaintiffs or other U.S. companies.

The purpose of the Chinese export scheme was not to damage US customers or businesses.  In fact, just the opposite was true.  The Chinese government wanted to keep exports flowing.

What was the concern of the Chinese government?  US and other antidumping cases, which could wipe Chinese exports out of the US market for decades.  This was the true number one anticompetitive threat that the Chinese government and companies were facing.  Was this a realistic threat?  Sure was.

The period that the export price scheme was set in place was 2002-2005.  On July 11, 2002, after losing an antidumping case in the mid-90s against Saccharin from China despite very high antidumping rates because of a no injury determination by the US International Trade Commission (“ITC”), PMC, the sole US producer of saccharin, filed a second antidumping case against saccharin from China.  The Chinese Chamber of Commerce in charge of the Saccharin case was the Chamber of Commerce for Medicines, the same Chamber in charge of the Vitamin C case.

On July 2, 2003, the Commerce Department issued an antidumping order against all imports of saccharin from China with rates ranging from an individual dumping rate of 249.39% to 329.29% for all other Chinese companies, effectively blocking all Chinese saccharin from China.  The Antidumping Order was in effect for 10 years.

Although one company that I represented was after three and a half years able to reduce its dumping rate down to 0%, all other Chinese saccharin was blocked out of the US market for 10 years.  Market prices for saccharin in the US soared from a low $1.50 per pound in the investigative period to a price well over $10 a pound.

And US plaintiff companies in the Vitamin C case were complaining about the price rise in Vitamin C exports to the US??!!  I am sure the increase was not 10 times.

Since I represented the Chinese saccharin industry in the Saccharin antidumping case, the Chamber of Commerce for Medicine and I were very aware of the devastating effect a US or other antidumping case could have on Chinese companies and exports.  After the antidumping order was issued, in the Summer of 2003 the Chamber called me to a meeting with the Chinese Vitamin C producers and the Chinese Ministry of Commerce (“MOFCOM”} to discuss how to deter US and other antidumping cases.  The Chamber and MOFCOM were very worried that intense Chinese price competition would lead to a wave of antidumping cases against the Vitamin C companies.

The Vitamin C companies, the Chamber and MOFCOM asked what can we do if there is a threat of an antidumping case.  Since Commerce and all other countries treat China as a nonmarket economy country and refuse to use actual prices and costs in China to determine antidumping cases, the general practice of dump proofing where antidumping consultants use computer programs to eliminate the unfair act, dumping, is not an option for Chinese companies.

The only remedy I could think of was that the Chinese government impose an export price floor.  That approach worked in the 90s with another Chamber of Commerce when there was a threat of a US antidumping case against Silicon Carbide from China.  The US Silicon Carbide producer in the one company US industry never filed their threatened antidumping case against China because of the export price floor the Chamber with MOFCOM’s consent put in place.

After suggesting that the Chamber set up an export price floor with MOFCOM’s involvement, I went on to state that MOFCOM would have to issue a law, regulation or action to show that the Government mandated the establishment of the system to insulate the Chinese companies from attack under the US antitrust laws.

The Chamber did set up the export price system for Vitamin C exports to stop US and other antidumping cases from being filed against the Chinese companies.  No Vitamin C antidumping cases were filed because the export price system was put in place.

As indicated by the Second Circuit, MOFOM did take government action to set up the export price scheme, which, in turn, insulated the Chinese companies from US antitrust liability.

The lesson of the story is that although the purpose of US antitrust law is to protect consumers and competition in the US market, the real threat to US consumers and market competition is the US antidumping law.

CRIMINAL IP/TRADE SECRET CASE

On October 5, 2016, the Justice Department in the attached notice, chinese-national-sentenced-to-prison-for-conspiracy-to-steal-tr, announced the sentencing of Mo Hailong, a/k/a Robert Mo, a Chinese national to three years in Federal prison for a conspiracy to steal trade secrets.  Mr. Mo Hailong was the Director of International Business of the Beijing Dabeinong Technology Group Company, commonly referred to as DBN. DBN is a Chinese conglomerate with a corn seed subsidiary company, Kings Nower Seed.

According to the plea agreement, Mo Hailong admitted to participating in a long-term conspiracy to steal trade secrets from DuPont Pioneer and Monsanto. Mo Hailong participated in the theft of inbred corn seeds from fields in Iowa and elsewhere for the purpose of transporting the seeds to DBN in China. The stolen inbred, or parent, seeds were the valuable trade secrets of DuPont Pioneer and Monsanto.

U.S. Attorney Kevin E. VanderSchel stated:

“Mo Hailong stole valuable proprietary information in the form of seed corn from DuPont Pioneer and Monsanto in an effort to transport such trade secrets to China. Theft of trade secrets is a serious federal crime, as it harms victim companies that have invested millions of dollars and years of work toward the development of propriety technology. The theft of agricultural trade secrets, and other intellectual property, poses a grave threat to our national economic security. The Justice Department and federal law enforcement partners are committed to prosecuting those who in engage in conduct such as Mo Hailong.”

SECTION 337 AND IP CASES

NEW 337 CASES

On October 6, 2016, Nite Ize, Inc. filed a major 337 case against Device Holders, many of which come from China.  The relevant parts of the ITC notice along with the names of the Chinese respondent companies are below.

Commodity:

Device Holders

Filed by:

James B. Altman

Firm/Organization:

Foster, Murphy, Altman & Nickel, PC

Behalf of:

Nite Ize, Inc.

Description:

Letter to Lisa R. Barton, Secretary, USITC; requesting that the Commission conduct an investigation under section 337 of the Tariff Act of 1930, as amended, regarding Certain Device Holders, and Components Thereof. The proposed respondents are Shenzhen Youtai Trade Company Limited, d/b/a NoChoice, China; REXS LLC, Lewes, DE; Spinido, Inc., Brighton, CO; Luo, Qiden, d/b/a Lita International Shop, China; Guangzhou Kuaguoyi E-commerece co., ltd., d/b/a Kagu Culture, China; Shenzhen New Dream Technology Co., Ltd., d/b/a Newdreams, China; Shenzhen Gold South technology Co., Ltd. d/b/a Baidatong, China; Zhao Chunhui d/b/a Skyocean, China; Sunpauto Co., ltd., HK; Wang Zhi Gang d/b/a China; Dang Yuya d/b/a Sminiker, China; Shenzhen Topworld Technology Co.,    d/b/a IdeaPro, Hong Kong; Lin Zhen Mei d/b/a Anson, China; Wu Xuying d/b/a Novoland, China; Shenzhen New Dream Sailing Electronic Technology Co., Ltd., d/b/a MegaDream, China; Zhongshan Feiyu Hardware technology Co., Ltd d/b/a YouFo, China; Ninghuazian Wangfulong Chaojishichang Youxian Gongsi, Ltd., d/b/a EasybuyUS, China; Chang Lee d/b/a Frentaly, Duluth, GA; Trendbox USA LLC d/b/a Trendbox, Scottsdale, AZ; Timespa d/b/a Jia Bai Nian (Shenzhen) Electronic Commerce Trade CO., LTD., China; Tontex d/b/a Shenzhen Hetongtai Electronics Co., Ltd., China; Scotabc d/b/a ShenChuang Opto-electronics Technology Co., Ltd., China; Tenswall d/b/a Shenzhen Tenswall International Trading Co., Ltd., La Puente, CA; Luo Jieqiong d/b/a Wekin, China; Pecham d/b/a Baichen Technology Ltd., Hong Kong; Cyrift d/b/a Guangzhou Sunway E-Commerce LLC., China; Rymemo d/b/a Global Box, LLC., Dunbar, PA; Wang Guoxiang d/b/a Minse, China; Yuan I d/b/a Bestrix, China; Zhiping Zhou d/b/a Runshion, China; Funlavie, Riverside, CA; Huijukon d/b/a Shenzhen Hui Ju Kang technology Co., Ltd., China; Zhang Haujun d/b/a CeeOne, China; Easy Acc d/b/a Searay LLC., Newark, DE; Barsone d/b/a Shenzhen Senweite Electronic Commerce Ltd., China; Oumeiou d/b/a Shenzhen Oumeiou Technology Co., Ltd., China; Grando d/b/a Shenzhen Dashentai Network Technology Co., Ltd., China; Shenzhen Yingxue Technology Co., Ltd., China; Shenzhen Longwang Technology Co., Ltd., d/b/a LWANG, China; Hu Peng d/b/a AtomBud, China

CHINESE VERSION OF 337 ARTICLE

Set forth below is a Chinese version of the 337 English article published last month followed by the original English version.

阻止来自中国的侵权产品:337条款调查案

随着亚马逊和eBay加大力度引入中国卖家,以及越来越多的中国制造商另辟蹊径生产本身的产品,向我们在中国的律师咨询有关盗版产品和仿冒问题的公司数目也随之猛增。若该问题涉及到把侵权产品进口到美国,拥有美国知识产权的公司可以采取强大的补救措施进行反击。其中一个最强有力的补救措施就是337条款调查案,它可以用来阻止侵权产品进入美国,无论该产品生产自何处。

337条款调查案(该名称源自于19 U.S.C. 1337法令)可用来打击侵犯版权、商标、专利或商业秘密的进口品。但是由于注册商标和版权拥有人一般上可以采取其它的法律行动,337条款调查案对专利、未注册商标和商业秘密的拥有人尤其有效。虽然该调查案通常局限于知识产权,正在对钢铁产品进行的337调查案中,美国钢铁业试图将不公平行为的定义扩大以便将入侵计算机系统和违反反垄断行为包含在内。

首先,美国国际贸易委员会(“ITC”)会发起337条款的调查。如果ITC发现某进口货侵犯了特定的知识产权,可以发出排除令(exclusion order),美国海关就会扣留所有侵权的进口货。

大量种类各异的产品已经因337条款调查案而被禁止入口:从玩具(魔方拼图、椰菜娃娃)、鞋类(匡威运动鞋)、大型机器(造纸机)、消费类产品(首饰盒、汽车配件、电子香烟和烫发器)到高科技产品(电脑、手机和半导体芯片)等等。

337条款是知识产权和贸易的混合型法令,某个美国产业必须证明受到了伤害。伤害证明的要求很低,几乎所有的案例都符合此要求——只许一些销售损失就能证明伤害。对符合美国产业的要求可说是关键所在。美国产业通常是一家持有相关知识产权的公司。如果该知识产权是一项注册商标、版权或专利,美国产业的要求范围已扩大至凡在美国进行的工厂和设备、劳动力或资本的重大投资,以及专利权开发的实质性投资,包括工程、研发或授权许可,均可视为国内产业。然而,ITC最近提高了美国产业的要求,让专利“流氓”或非执业实体更难提出337调查案诉求。

337条款调查案由行政法官(ALJ)负责审理,诉讼过程迅速且激烈,一般上只需12至15个月来完成。ITC收到一份337调查的申请后,有30天的时间来决定是否立案。一旦确定立案,ITC会将诉状和调查通知答辩方。外国被诉方有30天的时间应诉,美国国内的被诉方则只有20天的时间应诉。如果进口商或外国被诉方没有做出回应,ITC会可认定公司放弃抗辩而发出排除令。

ITC在337调查案中所采取的是“对物”管辖权,也就是针对进口到美国的产品进行管辖。这很合理:ITC无权管制外国公司,但有权管制其进口产品。一般而言,337条款调查案和大多数的普通诉讼案不同,申诉方可以打赢一家1)不可能送达诉状、2)未能出庭聆讯,以及3)不可能被追讨款项的中国公司。

337条款调查案所采取的补救措施是颁布排除令,阻止答辩方的侵权产品进入美国。但是在某些特殊情况下,如果某个产品非常容易制造,ITC可以发布普遍排除令,不分来源地禁止所有同类侵权产品进入美国。以我处理过的魔方拼图案件为例,Ideal公司(申请人)把超过400家台湾公司列为侵犯其普通法商标的答辩人。ITC在1983年发布了普遍排除令(General Exclusion Order),阻止非Ideal公司制造的魔方产品进入美国市场,这一禁令沿用至今。除了排除令,ITC也可以发布制止令(cease and desist orders),禁止美国进口商继续售卖相关侵权产品。

337条款调查案的双方也可以选择庭外和解,但是和解协议必须经由ITC复审。我们经常协助客户尽早解决337条款调查案,以减少他们的诉讼费用。在20世纪90年代初期,RCA针对中国进口的电视提出了337条款调查。所有涉及的中国公司通过与RCA签署授权许可协议,迅速地解决了该调查案。

337条款调查案中的答辩人通常可以通过修改本身产品的设计来避开相关的侵权指责。约翰迪尔(John Deere)曾经指控把拖拉机漆成绿色和黄色的中国公司侵犯了约翰迪尔的商标,因而提出了一项著名的337条款调查案。大部分的中国答辩人与申诉人达成协议并改变拖拉机的颜色,例如蓝红色。

关键点:337条款调查案是ITC发起的强有力诉讼案,美国公司应该把它视为阻止侵权产品进入美国市场的手段。另一方面,涉及这些调查案的美国进口商和外国答辩人应该认真地对待它们,并且迅速做出回应,因为排除令发出后可延续多年有效。

 STOP IP INFRINGING PRODUCTS FROM CHINA AND OTHER COUNTRIES USING CUSTOMS AND SECTION 337 CASES

With Amazon and Ebay having increased their efforts at bringing in Chinese sellers and with more and more Chinese manufacturers branching out and making their own products, the number of companies contacting our China lawyers here at Harris Moure about problems with counterfeit products and knockoffs has soared. If the problem involves infringing products being imported into the United States, powerful remedies are available to companies with US IP rights if the infringing imports are products coming across the US border.

If the IP holder has a registered trademark or copyright, the individual or company holding the trademark or copyright can go directly to Customs and record the trademark under 19 CFR 133.1 or the copyright under 19 CFR 133.31.  See https://iprr.cbp.gov/.

Many years ago a US floor tile company was having massive problems with imports infringing its copyrights on its tile designs.  Initially, we looked at a Section 337 case as described below, but the more we dug down into the facts, we discovered that the company simply failed to register its copyrights with US Customs.

Once the trademarks and copyrights are registered, however, it is very important for the company to continually police the situation and educate the various Customs ports in the United States about the registered trademarks and copyrights and the infringing imports coming into the US.  Such a campaign can help educate the Customs officers as to what they should be looking out for when it comes to identifying which imports infringe the trademarks and copyrights in question.  The US recording industry many years ago had a very successful campaign at US Customs to stop infringing imports.

For those companies with problems from Chinese infringing imports, another alternative is to go to Chinese Customs to stop the export of infringing products from China.  The owner of Beanie Babies did this very successfully having Chinese Customs stop the export of the infringing Beanie Babies out of China.

One of the most powerful remedies is a Section 337 case, which can block infringing products, regardless of their origin, from entering the U.S.  A Section 337 action (the name comes from the implementing statute, 19 U.S.C. 1337) is available against imported goods that infringe a copyright, trademark, patent, or trade secret. But because other actions are usually readily available to owners of registered trademarks and copyrights, Section 337 actions are particularly effective for owners of patents, unregistered trademarks, and trade secrets. Although generally limited to IP rights, in the ongoing Section 337 steel case, US Steel has been attempting to expand the definition of unfair acts to include hacking into computer systems and antitrust violations.

The starting point is a section 337 investigation at the US International Trade Commission (“ITC”).  If the ITC finds certain imports infringe a specific intellectual property right, it can issue an exclusion order and U.S. Customs will then keep out all the infringing imports at the border.

Section 337 cases have been brought and exclusion orders issued against a vast range of different products: from toys (Rubik’s Cube Puzzles, Cabbage Patch Dolls) to footwear (Converse sneakers) to large machinery (paper-making machines) to consumer products (caskets, auto parts, electronic cigarettes and hair irons) to high tech products (computers, cell phones, and semiconductor chips).

Section 337 is a hybrid IP and trade statute, which requires a showing of injury to a US industry. The injury requirement is very low and can nearly always be met–a few lost sales will suffice to show injury. The US industry requirement can be a sticking point. The US industry is usually the one company that holds the intellectual property right in question. If the IP right is a registered trademark, copyright or patent, the US industry requirement has been expanded to not only include significant US investment in plant and equipment, labor or capital to substantial investment in the exploitation of the IP right, including engineering, research and development or licensing.  Recently, however, the ITC has raised the US industry requirement to make it harder for patent “trolls” or Non Practicing Entities to bring 337 cases.

Section 337 cases, however, are directed at truly unfair acts.  Patents and Copyrights are protected by the US Constitution so in contrast to antidumping and countervailing duty cases, respondents in these cases get more due process protection.  The Administrative Procedures Act is applied to Section 337 cases with a full trial before an Administrative Law Judge (“ALJ”), extended full discovery, a long trial type hearing, but on a very expedited time frame.

Section 337 actions, in fact, are the bullet train of IP litigation, fast, intense litigation in front of an ALJ.  The typical section 337 case takes only 12-15 months. Once a 337 petition is filed, the ITC has 30 days to determine whether or not to institute the case. After institution, the ITC will serve the complaint and notice of investigation on the respondents. Foreign respondents have 30 days to respond to the complaint; US respondents have only 20 days. If the importers or foreign respondents do not respond to the complaint, the ITC can find the companies in default and issue an exclusion order.

The ITC’s jurisdiction in 337 cases is “in rem,” which means it is over the product being imported into the US. This makes sense: the ITC has no power over the foreign companies themselves, but it does have power over the imports. What this means in everyday terms is that unlike most regular litigation, a Section 337 case can be effectively won against a Chinese company that 1) is impossible to serve, 2) fails to show up at the hearing, and 3) is impossible to collect any money from.

The remedy in section 337 cases is an exclusion order excluding the respondent’s infringing products from entering the United States. In special situations, however, where it is very easy to manufacture a product, the ITC can issue a general exclusion order against the World.  In the Rubik’s Cube puzzle case, which was my case at the ITC, Ideal (the claimant) named over 400 Taiwan companies as respondents infringing its common law trademark. The ITC issued a General Exclusion Order in 1983 and it is still in force today, blocking Rubik’s Cube not made by Ideal from entering the United States. In addition to exclusion orders, the ITC can issue cease and desist orders prohibiting US importers from selling products in inventory that infringe the IP rights in question

Section 337 cases can also be privately settled, but the settlement agreement is subject to ITC review. We frequently work with our respondent clients to settle 337 cases early to minimize their legal fees. In the early 1990s, RCA filed a section 337 case against TVs from China. The Chinese companies all quickly settled the case by signing a license agreement with RCA.

Respondents caught in section 337 cases often can modify their designs to avoid the IP right in question. John Deere brought a famous 337 case aimed at Chinese companies that painted their tractors green and yellow infringing John Deere’s trademark. Most of the Chinese respondents settled the case and painted their tractors different colors, such as blue and red.

Bottom Line: Section 337 cases are intense litigation before the ITC, and should be considered by U.S. companies as a tool for fighting against infringing products entering the United States. On the flip side, US importers and foreign respondents named in these cases should take them very seriously and respond quickly because exclusion orders can stay in place for years.

If you have any questions about these cases or about US trade policy, TPP, the antidumping or countervailing duty law, trade adjustment assistance, customs, False Claims Act or 337 IP/patent law in general, please feel free to contact me.

Best regards,

Bill Perry

 

 

US CHINA TRADE WAR–TPP POLITICS, TAAF THE ANSWER, $2 BILLION MISSING DUMPING DUTIES AS CASES RISE, CUSTOMS LAW CHANGES, SOLAR CELLS, 337 CUSTOMS STOP INFRINGING IMPORTS

US Capitol North Side Construction Night Washington DC ReflectioFIRM UPDATE

In mid-August, Adams Lee, a well- known Trade and Customs lawyer from White & Case in Washington DC, has joined us here at Harris Moure in Seattle.  Adams has handled well over 100 antidumping and countervailing duty cases.  Attached is Adams’ bio, adams-lee-resume-aug-16, and his article is below on the new Customs Regulations against Evasion of US Antidumping and Countervailing Duty Orders.

Adams and I will both be in China from Sept 11th to October 1st in Beijing, Shanghai and Nanjing.  If anyone would like to talk to us about these issues, please feel free to contact me at my e-mail, bill@harrismoure.com.

TRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

US CHINA TRADE WAR SEPTEMBER 8, 2016

Dear Friends,

Trade continues to be at the center of the Presidential primary with a possible passage of the Trans Pacific Partnership during the Lame Duck Session.  This blog post contains the sixth, and maybe the most important, article on Trade Adjustment Assistance for Companies of a several part series on how weak free trade arguments have led to the sharp rise of protectionism of Donald Trump and Bernie Sanders and the now possible demise of the Trans Pacific Partner (“TPP”).

The first article outlined the problem and why this is such a sharp attack on the TPP and some of the visceral arguments against free trade.  The second article explored in depth the protectionist arguments and the reason for the rise of Donald Trump and Bernie Sanders.  The third article explored the weak and strong arguments against protectionism.  The fourth article discussed one of the most important arguments for the TPP—National Security.  The fifth article discussed why the Commerce Department’s and the US International Trade Commission’s (ITC) policy in antidumping (“AD”) and countervailing duty (“CVD”) cases has led to a substantial increase in protectionism and national malaise of international trade victimhood.

The sixth article provides an answer with the only trade program that works and saves the companies and the jobs that go with them—The Trade Adjustment Assistance for Firms/Companies program along with MEP, another US manufacturing program.  The Article will describe the attempts by both Congress and the Obama Administration to kill the program, which may, in fact, have resulted in the sharp rise in protectionism in the US.

To pass the TPP, Congress must also provide assistance to make US companies competitive in the new free trade market created by the TPP.  Congress must restore the trade safety net so that Congress can again vote for free trade agreements, and the United States can return to its leadership in the Free Trade area.  The Congress has to fix the trade situation now before the US and the World return to the Smoot Hawley protectionism of the 1930s and the rise of nationalism, which can lead to military conflict.

In addition, set forth below are articles on a possible new antidumping case on Aluminum Foil from China and the rise of AD and CVD cases, the $2 billion in missing AD and CVD duties, the new Customs regulations to stop Transshipment in AD and CVD cases, the upcoming deadlines in the Solar Cells case in both English and Chinese, recent decisions in Steel cases,  antidumping and countervailing duty reviews in September against Chinese companies, and finally an article about how to stop imports that infringe US intellectual property rights, either using US Customs law or Section 337 at the US International Trade Commission (“ITC”).

If anyone has any questions or wants additional information, please feel free to contact me at my new e-mail address bill@harrismoure.com.

Best regards,

Bill Perry

TRADE PROTECTIONISM IS STILL A VERY BIG TOPIC OF THE PRESIDENTIAL ELECTION; THE TPP PROBABLY IS NOT COMING UP IN THE LAME DUCK

As mentioned in my last newsletter, I believe that if Hilary Clinton is elected, President Obama will push for the Trans Pacific Partnership (“TPP”) to come up for a vote during the Lame Duck Session.  The Congress, however, has other ideas.

In early August, U.S. House Speaker Paul Ryan stated that he saw no reason to bring up the TPP in the Lame Duck because “we don’t have the votes.”  Ryan went on to state:

“As long as we don’t have the votes, I see no point in bringing up an agreement only to defeat it.  They have to fix this agreement and renegotiate some pieces of it if they have any hope or chance of passing it. I don’t see how they’ll ever get the votes for it.”

Democratic Senator Ron Wyden stated in late August that he will not take a position on the TPP until Senate Majority Leader Mitch McConnell brings the TPP up for a vote.  But on August 26th, Mitch McConnell stated that passage of the Trans-Pacific Partnership will be the next president’s problem, saying that the Senate will not vote on the treaty this year:

“The current agreement, the Trans-Pacific [Partnership], which has some serious flaws, will not be acted upon this year.  It will still be around. It can be massaged, changed, worked on during the next administration.”

With this statement, McConnell appears to have killed passage during the Obama Administration.

But businesses continue to push for the TPP.  On Sept 6th, the California Chamber of Commerce urged its Congressional delegation to pass the TPP.  In the attached Sept 7th letter, 9-7finaltppletter, the Washington State Council on International Trade also urged its Congressional delegation to pass TPP, stating:

“with 40 percent of Washington jobs dependent upon trade, it is paramount that we prioritize policies and investments that increase our state’s international competitiveness. That is why it is so important that you join us in calling for an immediate vote on the TPP; according to a newly released Washington Council on International Trade-Association of Washington Business study, Washington could have already increased our exports by up to $8.7 billion and directly created 26,000 new jobs had the TPP been implemented in 2015.

While the U.S. has some of the lowest import duties in the world on most goods, our local Washington exporters are faced with thousands of tariffs that artificially inflate the cost of American-made goods. TPP will help eliminate these barriers . . ..

TPP aligns with Washington’s high standards, setting 21st century standards for digital trade, environmental protections, and labor rules .  . . .  If we want to increase our competitiveness and set American standards for global trade, we must act now with the TPP.

This election season’s rhetoric has been hostile toward trade, but the TPP’s benefits for our state are undeniable. It is imperative that our state steps up to advocate for the family wage jobs and economic opportunities created by trade, and the time to do so is now.”

Despite the Congressional opposition, ever the optimist, President Obama keeps pushing for passage during the Lame Duck.  On August 30th, the White House Press Office stated:

“The president is going to make a strong case that we have made progress and there is a path for us to get this done before the president leaves office.”

On September 1, 2016, at a Press Conference in Hangzhou, China for the G20 meeting, President Obama said he is still optimistic about passage of the Trans-Pacific Partnership trade agreement. Obama argued that the economic benefits of the pact would win out once the “noise” of the election season subsides.

The President said he plans to assure the leaders of the other countries that signed the TPP that the U.S. will eventually approve the deal despite the very vocal opposition from Democratic and Republican lawmakers and Presidential candidates.

President Obama went to state:

“And it’s my intention to get this one done, because, on the merits, it is smart for America to do it. And I have yet to hear a persuasive argument from the left or the right as to why we wouldn’t want to create a trade framework that raises labor standards, raising environmental standards, protects intellectual property, levels the playing field for U.S. businesses, brings down tariffs.”

Obama stated that although other countries, such as Japan, have troubles passing the TPP, the other countries:

“are ready to go.  And what I’ll be telling them is that the United States has never had a smooth, uncontroversial path to ratifying trade deals, but they eventually get done”

“And so I intend to be making that argument. I will have to be less persuasive here because most people already understand that. Back home, we’ll have to cut through the noise once election season is over.  It’s always a little noisy there.”

As mentioned in the last blog post, one of the strongest arguments for the TPP is National Security.  Trade agreements help stop trade wars and military conflict.  But despite that very strong point, the impact of free trade on the average manufacturing worker has not been beneficial.

In a recent e-mail blast, the Steel Workers make the point:

“Because of unfair trade, 1,500 of my colleagues at U.S. Steel Granite City Works in Granite City, Illinois are still laid-off. It’s been more than six months since our mill shut down.

Worker unemployment benefits are running out. Food banks are emptying out. People are losing their homes. City services might even shut down.

But there’s finally reason for hope. The Commerce Department recently took action to enforce our trade laws by placing duties on unfairly traded imports from countries like China. That will help ensure steel imports are priced fairly — and allow us to compete . . . .

All told, nearly 19,000 Americans have faced layoffs across the country because of the steel imports crisis.

China is making far more steel than it needs. China knows this is a problem, and repeatedly has pledged to cut down on steel production. But nothing has changed . . . .

China’s steel industry is heavily subsidized by its government, and it also doesn’t need to follow serious labor or environmental rules. But China has to do something with all that steel, so it dumps it into the United States far below market value.”

In a recent Business Week article, Four Myths about Trade, Robert Atkinson, the president of the Information Technology and Innovation Foundation, made the same point stating:

The Washington trade establishment’s second core belief is that trade is an unalloyed good, even if other nations engage in mercantilism. . . . it doesn’t matter if other nations massively subsidize their exporters, require U.S. companies to hand over the keys to their technology in exchange for market access, or engage in other forms of mercantilist behavior.  . . .

But China and others are proving that this is folly. In industry after industry, including the advanced innovation-based industries that are America’s future, they are gaming the rules of global trade to hold others back while they leap forward. . ..

It’s a reflection of having lost competitive advantage to other nations in many higher-value-added industries, in part because of foreign mercantilist policies and domestic economic-policy failures.

The Author then goes on to state the US must be tough in fighting mercantilism and “vigilantly enforce trade rules, such as by bringing many more trade-enforcement cases to the WTO, pressuring global aid organizations to cut funding to mercantilist nations, limiting the ability of companies in mercantilist nations to buy U.S. firms, and more.”

But this argument then runs into reality.  As indicated below, Commerce finds dumping in about 95% of the cases.  Thus, there are more than 130 AD and CVD orders against China blocking about $30 billion in imports.  Presently more than 80 AD and CVD orders are against raw materials from China, chemicals, metals and various steel products, used in downstream US production.  In the Steel area, there are AD and CVD orders against the following Chinese steel products:

carbon steel plate, hot rolled carbon steel flat products, circular welded and seamless carbon quality steel pipe, rectangular pipe and tube, circular welded austenitic stainless pressure pipe, steel threaded rod, oil country tubular goods, steel wire strand and wire, high pressure steel cylinders, non-oriented electrical steel, and carbon and certain alloy steel wire rod.

There are ongoing investigations against cold-rolled steel and corrosion resistant/galvanized steel so many Chinese steel products from China are already blocked by US AD and CVD orders with very high rates well over 100%.

AD and CVD orders stay in place for 5 to 30 years and yet the companies, such as the Steel Industry, still decline.  After 40 years of protection from Steel imports by AD and CVD orders, where is Bethlehem Steel today?  The Argument seems to be that if industries simply bring more cases, the Commerce Department is even tougher and the orders are enforced, all US companies will be saved, wages will go up and jobs will be everywhere.

The reality, however, is quite different.  In fact, many of these orders have led to the destruction of US downstream industries so does hitting the Chinese with more trade cases really solve the trade problem?

More importantly, although Commerce does not use real numbers in antidumping cases against China, it does use actual prices and costs in antidumping steel cases against Korea, India, Taiwan, and many other countries.  In a recent antidumping case against Off the Road Tires from India, where China faces dumping rates of between 11 and 105%, the only two Indian exporters, which were both mandatory respondents, received 0% dumping rates and the Commerce Department in a highly unusual preliminary determination reached a negative no dumping determination on the entire case.

Market economy countries, such as Korea and India, can run computer programs to make sure that they are not dumping.  This is not gaming the system.  This is doing exactly what the antidumping law is trying to remedy—elimination of the unfair act, dumping.

Antidumping and countervailing duty laws are not penal statutes, they are remedial statutes and that is why US importers, who pay the duties, and the foreign producers/exporters are not entitled to full due process rights in AD and CVD cases, including application of the Administrative Procedures Act, decision by a neutral Administrative Law Judge and a full trial type hearing before Commerce and the ITC, such as Section 337 Intellectual Property cases, described below.

In fact, when industries, such as the steel industry, companies and workers along with Government officials see dumping and subsidization in every import into the United States, this mindset creates a disease—Globalization/International Trade victimhood.  We American workers and companies simply cannot compete because all imports are dumped and subsidized.

That simply is not true and to win the trade battles and war a change in mindset is required.

In his Article, Mr. Atkinson’s second argument may point to the real answer.  The US government needs to make US manufacturing companies competitive again:

It must begin with reducing the effective tax rate on corporations. To believe that America can thrive in the global economy with the world’s highest statutory corporate-tax rates and among the highest effective corporate-tax rates, especially for manufacturers, is to ignore the intense global competitive realities of the 21st century. Tax reform then needs to be complemented with two other key items: a regulatory-reform strategy particularly aimed at reducing burdens on industries that compete globally, and increased funding for programs that help exporters, such as the Export-Import Bank, the new National Network for Manufacturing Innovation, and a robust apprenticeship program for manufacturing workers. . . .

if Congress and the next administration develop a credible new globalization doctrine for the 21st century — melding tough trade enforcement with a robust national competitiveness agenda — then necessary trade-opening steps like the Trans-Pacific Partnership will once again be on the table and the U.S. economy will begin to thrive once again.

When it comes to Trade Adjustment Assistance, however, as Congressman Jim McDermott recently stated in an article, workers do not want handouts and training.  They want jobs.  The only trade remedy that actually provides jobs is the Trade Adjustment Assistance for Firms/Companies program and MEP, another manufacturing program.

FREE TRADE REQUIRES COMPETITIVE US COMPANIES— TAA FOR FIRMS/COMPANIES AND THE MEP MANUFACTURING PROGRAM ARE THE ANSWER

On August 17th, in a letter to the Wall Street Journal, the author referred to “the longstanding Republican promotion of trade as an engine of growth.” The author then goes on to state:

But what Donald Trump sees and the Republican elites have long missed is that for trade to be a winner for Americans, our government must provide policies for our industries to be the most competitive in the world. Mr. Zoellick and others promoted trade without promoting American competitiveness.  . . .

Mr. Zoellick should take a lesson from the American gymnasts in Rio and see how competitiveness leads to winning.

Although Donald Trump might agree with that point, there are Government programs already in effect that increase the competitiveness of US companies injured by imports, but they have been cut to the bone.

This is despite the fact that some of the highest paying American jobs have routinely been in the nation’s manufacturing sector. And some of the highest prices paid for the nation’s free trade deals have been paid by the folks who work in it. What’s shocking is the fact that that isn’t shocking anymore. And what’s really shocking is that we seem to have accepted it as the “new normal.” Now where did that ever come from?

How did we get here? How did we fall from the summit? Was it inexorable? Did we get soft? Did we get lazy? Did we stop caring? Well perhaps to some extent. But my sense of it is that too many of us have bought into the idea of globalization victimhood and a sort of paralysis has been allowed to set in.

Now in my opinion that’s simply not in America’s DNA. It’s about time that this nation decided not to participate in that mind set any longer. Economists and policy makers of all persuasions are now beginning to recognize the requirement for a robust response by this nation to foreign imports – irrespective of party affiliation or the particular free trade agreement under consideration at any given moment.  Companies, workers and Government officials need to stop blaming the foreigner and figure out what they can do to compete with the foreign imports.

There is no doubt in my mind that open and free trade benefits the overall U.S. economy in the long run. However, companies and the families that depend on the employment therein, indeed whole communities, are adversely affected in the short run (some for extended periods) resulting in significant expenditures in public welfare and health programs, deteriorated communities and the overall lowering of America’s industrial output.

But here’s the kicker: programs that can respond effectively already exist. Three of them are domiciled in our Department of Commerce and one in our Department of Labor:

  • Trade Adjustment Assistance for Firms (Commerce)
  • The Hollings Manufacturing Extension Partnership (Commerce)
  • Economic Adjustment for Communities (Commerce)
  • Trade Adjustment Assistance for Displaced Workers (Labor)

This Article, however, is focused on making US companies competitive again and the first two programs do just that, especially for smaller companies.  Specific federal support for trade adjustment programs, however, has been legislatively restrictive, bureaucratically hampered, organizationally disjointed, and substantially under-funded.

The lessons of history are clear. In the 1990’s, after the end of the Cold War and the fall of the Soviet Union, the federal government reduced defense industry procurements and closed military facilities. In response, a multi-agency, multi-year effort to assist adversely affected defense industries, their workers, and communities facing base closures were activated. Although successes usually required years of effort and follow on funding from agencies of proven approaches (for example the reinvention of the Philadelphia Naval Shipyard into a center for innovation and vibrant commercial activities), there was a general sense that the federal government was actively responding to a felt need at the local level.

A similar multi-agency response has been developed in the event of natural disasters, i.e., floods, hurricanes, tornadoes and earthquakes. Dimensions of the problem are identified, an appropriate expenditure level for a fixed period of time is authorized and the funds are deployed as needed through FEMA, SBA and other relevant agencies such as EDA.

The analogy to trade policy is powerful.  When the US Government enters into Trade Agreements, such as the TPP, Government action changes the market place.  All of a sudden US companies can be faced, not with a Tidal Wave, but a series of flash floods of foreign competition and imports that can simply wipe out US companies.

A starting point for a trade adjustment strategy would be for a combined Commerce-Labor approach building upon existing authorities and proven programs, that can be upgraded and executed forthwith.

Commerce’s Trade Adjustment Assistance for Firms (TAAF) has 11 regional (multi-state) TAAF Centers but the program has been cut to only $12.5 million annually. The amount of matching funds for US companies has not changed since the 1980s. The system has the band-width to increase to a run rate of $50 million.  Projecting a four-year ramp up of $90 million (FY18-FY21), the TAA program could serve an additional 2,150 companies.

Foreign competitors may argue that TAA for Firms/Companies is a subsidy, but the money does not go directly to the companies themselves, but to consultants to work with the companies through a series of knowledge-based projects to make the companies competitive again.  Moreover, the program does not affect the US market or block imports in any way.

Does the program work?  In the Northwest, where I am located, the Northwest Trade Adjustment Assistance Center has been able to save 80% of the companies that entered the program since 1984.  The MidAtlantic Trade Adjustment Assistance Center in this video at http://mataac.org/howitworks/ describes in detail how the program works and why it is so successful—Its flexibility in working with companies on an individual basis to come up with specific adjustment plans for each company to make the companies competitive again in the US market as it exists today.

Increasing funding will allow the TAA for Firms/Companies program to expand its bandwidth and provide relief to larger US companies, including possibly even steel producers.  If companies that use steel can be saved by the program, why can’t the steel producers themselves?

But it will take a tough love approach to trade problems.  Working with the companies to forget about Globalization victimhood and start trying to actually solve the Company’s problems that hinder its competitiveness in the market as it exists today.

In addition to TAA for Firms/Companies, another important remedy needed to increase competitiveness is Commerce’s Manufacturing Extension Partnership (MEP), which has a Center in each State and Puerto Rico.  MEP provides high quality management and technical assistance to the country’s small manufacturers with an annual budget of $130 million. MEP, in fact, is one the remedies suggested by the TAA Centers along with other projects to make the companies competitive again.

As a consequence of a nation-wide re-invention of the system, MEP is positioned to serve even more companies. A commitment of $100 million over four years would serve an additional 8,400 firms. These funds could be targeted to the small manufacturing firms that are the base of our supply chain threatened by foreign imports.

Each of these programs requires significant non-federal match or cost share from the companies themselves, to assure that the local participants have significant skin in the game and to amplify taxpayer investment.  A $250 million commitment from the U.S. government would be a tangible although modest first step in visibly addressing the local consequences of our trade policies. The Department of Commerce would operate these programs in a coordinated fashion, working in collaboration with the Department of Labor’s existing Trade Adjustment Assistance for Displaced Workers program.

TAA for Workers is funded at the $711 million level, but retraining workers should be the last remedy in the US government’s bag.  If all else fails, retrain workers, but before that retrain the company so that the jobs and the companies are saved.  That is what TAA for Firms/Companies and the MEP program do.  Teach companies how to swim in the new market currents created by trade agreements and the US government

In short – this serious and multi-pronged approach will begin the process of stopping globalization victimhood in its tracks.

Attached is White Paper, taaf-2-0-white-paper, prepares to show to expand TAA for Firms/Companies and take it to the next level above $50 million, which can be used to help larger companies adjust to import competition.  The White Paper also rebuts the common arguments against TAA for Firms/Companies.

ALUMINUM FOIL FROM CHINA, RISE IN ANTIDUMPING CASES PUSHED BY COMMERCE AND ITC

On August 22, 2016, the Wall Street Journal published an article on how the sharp rise of aluminum foil imports, mostly from China, has led to the shutdown of US U.S. aluminum foil producers.  Articles, such as this one, often signal that an antidumping case is coming in the near future.

Recently, there have been several articles about the sharp rise in antidumping and countervailing duty/trade remedy cases in the last year.  By the second half of 2016, the US Government has reported that twice as many antidumping (“AD”) and countervailing duty (“CVD”) case have been initiated in 2015-2016 as in 2009.

China is not the only target.  AD cases have been recently filed against steel imports from Austria, Belgium, Brazil, China, France, Germany, Italy, Japan, South Korea, South Africa, Taiwan, and Turkey; Steel Flanges from India, Italy and Spain; Chemicals from Korea and China, and Rubber from Brazil, Korea, Mexico and Poland.

The potential Aluminum Foil case may not be filed only against China.  In addition to China, the case could also be filed against a number of foreign exporters of aluminum foil to the United States.

Under US law Commerce determines whether dumping is taking place.  Dumping is defined as selling imported goods at less than fair value or less than normal value, which in general terms means lower than prices in the home/foreign market or below the fully allocated cost of production.  Antidumping duties are levied to remedy the unfair act by raising the US price so that the products are fairly traded.

Commerce also imposes Countervailing Duties to offset any foreign subsidies provided by foreign governments so as to raise the price of the subsidized imports.

AD and CVD duties can only be imposed if there is injury to the US industry, which is determined by the US International Trade Commission (“ITC”).  But in determining injury, the law directs the ITC to cumulate, that is add together all the imports of the same product from the various foreign exporters.  Thus if a number of countries are exporting aluminum foil in addition to China, there is a real incentive for the US aluminum foil industry to file a case against all the other countries too.

There are several reasons for the sharp rise in AD and CVD cases.  One is the state of the economy and the sharp rise in imports.  In bad economic times, the two lawyers that do the best are bankruptcy and international trade lawyers.  Chinese overcapacity can also result in numerous AD and CVD cases being filed not only in the United States but around the World.

Although the recent passage of the Trade Preferences Extension Act of 2015 has made it marginally better to bring an injury case at the ITC, a major reason for the continued rise in AD and CVD cases is the Commerce and ITC determinations in these cases.  Bringing an AD case, especially against China, is like the old country saying, shooting fish in a barrel.

By its own regulation, Commerce finds dumping and subsidization in almost every case, and the ITC in Sunset Review Investigations leaves antidumping and countervailing duty orders in place for as long as 20 to 30 years, often to protect single company US industries, resulting in permanent barriers to imports and the creation of monopolies.

Many readers may ask why should people care if prices go up a few dollars at WalMart for US consumers?  Jobs remain.  Out of the 130 plus AD and CVD orders against China, more than 80 of the orders are against raw materials, chemicals, metals and steel, that go directly into downstream US production.  AD orders have led to the closure of downstream US factories.

Commerce has defined dumping so that 95% of the products imported into the United States are dumped.  Pursuant to the US Antidumping Law, Commerce chooses mandatory respondent companies to individually respond to the AD questionnaire.  Commerce generally picks only two or three companies out of tens, if not hundreds, of respondent companies.

Only mandatory companies in an AD case have the right to get zero, no dumping margins.  Only those mandatory respondent companies have the right to show that they are not dumping.  If a company gets a 0 percent, no dumping determination, in the initial investigation, the antidumping order does not apply to that company.

Pursuant to the AD law, for the non-mandatory companies, the Commerce Department may use any other reasonable method to calculate antidumping rates, which means weight averaging the rates individually calculated for the mandatory respondents, not including 0 rates.  If all mandatory companies receive a 0% rate, Commerce will use any other reasonable method to determine a positive AD rate, not including 0% rates.

So if there are more than two or three respondent companies in an AD case, which is the reality in most cases, by its own law and practice, Commerce will reach an affirmative dumping determination.  All three mandatory companies may get 0% dumping rates, but all other companies get a positive dumping rate.  Thus almost all imports are by the Commerce Department’s definition dumped.

Under the Commerce Department’s methodology all foreign companies are guilty of dumping and subsidization until they prove their innocence, and almost all foreign companies never have the chance to prove their innocence.

Commerce also has a number of other methodologies to increase antidumping rates.  In AD cases against China, Commerce treats China as a nonmarket economy country and, therefore, refuses to use actual prices and costs in China to determine dumping, which makes it very easy for Commerce to find very high dumping rates.

In market economy cases, such as cases against EU and South American countries, Commerce has used zeroing or targeted dumping to create antidumping rates, even though the WTO has found such practices to be contrary to the AD Agreement.

The impact of the Commerce Department’s artificial methodology is further exaggerated by the ITC.  Although in the initial investigation, the ITC will go negative, no injury, in 30 to 40% of the cases, once the antidumping order is in place it is almost impossible to persuade the ITC to lift the antidumping order in Sunset Review investigations.

So antidumping orders, such as Pressure Sensitive Tape from Italy (1977), Prestressed Concrete Steel Wire Strand from Japan (1978), Potassium Permanganate from China (1984), Cholopicrin from China (1984), and Porcelain on Steel Cookware from China (1986), have been in place for more than 30 years.  In 1987 when I was at the Commerce Department, an antidumping case was filed against Urea from the entire Soviet Union.  Antidumping orders from that case against Russia and Ukraine are still in place today.

In addition, many of these antidumping orders, such as Potassium Permanganate, Magnesium, Porcelain on Steel Cookware, and Sulfanilic Acid, are in place to protect one company US industries, creating little monopolies in the United States.

Under the Sunset Review methodology, the ITC never sunsets AD and CVD orders unless the US industry no longer exists.

By defining dumping the way it does, both Commerce and the ITC perpetuate the myth of Globalization victimhood.  We US companies and workers simply cannot compete against imports because all imports are dumped or subsidized.  But is strangling downstream industries to protect one company US industries truly good trade policy?  Does keeping AD orders in place for 20 to 30 years really save the US industry and make the US companies more competitive?  The answer simply is no.

Protectionism does not work but it does destroy downstream industries and jobs.  Protectionism is destructionism. It costs jobs.

US MISSING $2 BILLION IN ANTIDUMPING DUTIES, MANY ON CHINESE PRODUCTS

According to the attached recent report by the General Accounting Office, gao-report-ad-cvd-missing-duties, the US government is missing about $2.3 billion in unpaid anti-dumping and countervailing duties, two-thirds of which will probably never be paid.

The United States is the only country in the World that has retroactive liability for US importers.  When rates go up, US importers are liable for the difference plus interest.  But the actual determination of the amount owed by the US imports can take place many years after the import was actually made into the US.

The GAO found that billing errors and delays in final duty assessments were major factors in the unpaid bills, with many of the importers with the largest debts leaving the import business before they received their bill.

“U.S. Customs and Border Protection reported that it does not expect to collect most of that debt”.  Customs and Border Protection (“CBP”) anticipates that about $1.6 billion of the total will never be paid.

As the GAO report states:

elements of the U.S. system for determining and collecting AD/CV duties create an inherent risk that some importers will not pay the full amount they owe in AD/CV duties. . . . three related factors create a heightened risk of AD/CV duty nonpayment: (1) The U.S. system for determining such duties involves the setting of an initial estimated duty rate upon the entry of goods, followed by the retrospective assessment of a final duty rate; (2) the amount of AD/CV duties for which an importer may be ultimately billed can significantly exceed what the importer pays when the goods enter the country; and (3) the assessment of final AD/CV duties can occur up to several years after an importer enters goods into the United States, during which time the importer may cease operations or become unable to pay additional duties.

The vast majority of the missing duties, 89%, were clustered around the following products from China: Fresh Garlic ($577 million), Wooden Bedroom Furniture ($505 million), Preserved Mushrooms ($459 million), crawfish tail meat ($210 million), Pure Magnesium ($170 million), and Honey ($158 million).

The GAO Report concludes at page 56-47:

We estimate the amount of uncollected duties on entries from fiscal year 2001 through 2014 to be $2.3 billion. While CBP collects on most AD/CV duty bills it issues, it only collects, on average, about 31 percent of the dollar amount owed. The large amount of uncollected duties is due in part to the long lag time between entry and billing in the U.S. retrospective AD/CV duty collection system, with an average of about 2-and-a-half years between the time goods enter the United States and the date a bill may be issued. Large differences between the initial estimated duty rate and the final duty rate assessed also contribute to unpaid bills, as importers receiving a large bill long after an entry is made may be unwilling or unable to pay. In 2015, CBP estimated that about $1.6 billion in duties owed was uncollectible. By not fully collecting unpaid AD/CV duty bills, the U.S. government loses a substantial amount of revenue and compromises its efforts to deter and remedy unfair and injurious trade practices.

But with all these missing duties, why doesn’t the US simply move to a prospective methodology, where the importer pays the dumping rate calculated by Commerce and the rate only goes up for future imports after the new rate is published.

Simple answer—the In Terrorem, trade chilling, effect of the antidumping and countervailing duty orders—the legal threat that the US importers will owe millions in the future, which could jeopardize the entire import company.  As a result, over time imports from China and other countries covered by AD and CVD order often decline to 0 because established importers are simply too scared to take the risk of importing under an AD and CVD order.

CUTSOMS NEW LAW AGAINST TRANSSHIPMENT AROUND AD AND CVD ORDERS; ONE MORE LEGAL PROCEDURE FOR US IMPORTERS AND FOREIGN EXPORTERS TO BE WARY OF

By Adams Lee, Trade and Customs Partner, Harris Moure.

U.S. Customs and Border Protection (CBP) issued new attached regulations, customs-regs-antidumping, that establish a new administrative procedure for CBP to investigate AD and CVD duty evasion.  81 FR 56477 (Aug. 22, 2016). Importers of any product that could remotely be considered merchandise subject to an AD/CVD order now face an increased likelihood of being investigated for AD/CVD duty evasion. The new CBP AD/CVD duty evasion investigations are the latest legal procedure, together with CBP Section 1592 penalty actions (19 USC 1592), CBP criminal prosecutions (18 USC 542, 545), and “qui tam” actions under the False Claims Act, aimed at ensnaring US importers and their foreign suppliers in burdensome and time-consuming proceedings that can result in significant financial expense or even criminal charges.

The following are key points from these new regulations:

  • CBP now has a new option to pursue and shut down AD/CVD duty evasion schemes.
  • CBP will have broad discretion to issue questions and conduct on-site verifications.
  • CBP investigations may result in interim measures that could significantly affect importers.
  • CBP’s interim measures may effectively establish a presumption of the importer’s guilt until proven innocent.
  • Other interested parties, including competing importers, can chime in to support CBP investigations against accused importers.
  • Both petitioners and respondents will have the opportunity to submit information and arguments.
  • Failure to cooperate and comply with CBP requests may result in CBP applying an adverse inference against the accused party.
  • Failing to respond adequately may result in CBP determining AD/CVD evasion has occurred.

The new CBP regulations (19 CFR Part 165) establish a formal process for how it will consider allegations of AD/CVD evasion. These new regulations are intended to address complaints from US manufacturers that CBP was not doing enough to address AD/CVD evasion schemes and that their investigations were neither transparent nor effective.

AD/CVD duty evasion schemes typically involve falsely declaring the country of origin or misclassifying the product (e.g., “widget from China” could be misreported as “widget from Malaysia” or “wadget from China”).

Petitions filed by domestic manufacturers trigger concurrent investigations by the U.S. Department of Commerce (DOC) and the U.S. International Trade Commission (ITC) to determine whether AD/CVD orders should be issued to impose duties on covered imports. The DOC determines if imports have been dumped or subsidized and sets the initial AD/CVD rates.  CBP then has the responsibility to collect AD/CVD duty deposits and to assess the final amount of AD/CVD duties owed at the rates determined by DOC.

US petitioners have decried U.S. Customs and Border Protection (CBP) as the weak link in enforcing US trade laws, not just because of it often being unable to collect the full amount of AD/CVD duties owed, but also because how CBP responds to allegations of AD/CVD evasion. Parties that provided CBP with information regarding evasion schemes were not allowed to participate in CBP’s investigations and were not notified of whether CBP had initiated an investigation or the results of any investigation.

CBP’s new regulations address many complaints regarding CBP’s lack of transparency in handling AD/CVD evasion allegations. The new regulations provide more details on how CBP procedures are to be conducted, the types of information that will be considered and made available to the public, and the specific timelines and deadlines in CBP investigations:

  • “Interested parties” for CBP investigations now includes not just the accused importers, but also competing importers that submit the allegations.
  • Interested parties now have access to public versions of information submitted in CBP’s investigation of AD/CVD evasion allegations.
  • After submission and receipt of a properly filed allegation, CBP has 15 business day to determine whether to initiate an investigation and 95 days to notify all interested parties of its decision. If CBP does not proceed with an investigation, CBP has five business days to notify the alleging party of that determination.
  • Within 90 days of initiating an investigation, CBP can impose interim measures if it has a “reasonable suspicion” that the importer used evasion to get products into the U.S.

Many questions remain as to how CBP will apply these regulations to actual investigations.  How exactly will parties participate in CBP investigations and what kind of comments will be accepted?  How much of the information in the investigations will be made public? How is “reasonable suspicion” defined and what kind of evidence will be considered? Is it really the case that accused Importers may be subject to interim measures (within 90 days of initiation) even before they receive notice of an investigation (within 95 days of initiation)?

These new AD/CVD duty evasion regulations further evidence the government’s plans to step up its efforts to enforce US trade laws more effectively and importers must – in turn – step up their vigilance to avoid being caught in one of these new traps.

UPCOMING DEADLINES IN SOLAR CELLS FROM CHINA ANTIDUMPING CASE—CHANCE TO GET BACK INTO THE US MARKET AGAIN

There are looming deadlines in the Solar Cells from China Antidumping (“AD”) and Countervailing Duty (“CVD”) case.  In December 2016, US producers, Chinese companies and US importers can request a review investigation in the Solar Cells case of the sales and imports that entered the United States during the review period, December 1, 2015 to November 31, 2016.

December 2016 will be a very important month for US importers because administrative reviews determine how much US importers actually owe in AD and CVD cases. Generally, the US industry will request a review of all Chinese companies. If a Chinese company does not respond in the Commerce Department’s Administrative Review, its AD and CVD rate could well go to the highest level and for certain imports the US importer will be retroactively liable for the difference plus interest.

In my experience, many US importers do not realize the significance of the administrative review investigations. They think the AD and CVD case is over because the initial investigation is over.  Many importers are blindsided because their Chinese supplier did not respond in the administrative review, and the US importers find themselves liable for millions of dollars in retroactive liability.

In February 2016, while in China I found many examples of Chinese solar companies or US importers, which did not file requests for a review investigation in December 2015.  In one instance, although the Chinese company obtained a separate rate during the Solar Cells initial investigation, the Petitioner appealed to the Court.  The Chinese company did not know the case was appealed, and the importer now owe millions in antidumping duties because they failed to file a review request in December 2015.

In another instance, in the Solar Products case, the Chinese company requested a review investigation in the CVD case but then did not respond to the Commerce quantity and value questionnaire.   That could well result in a determination of All Facts Available giving the Chinese company the highest CVD China rate of more than 50%.

The worst catastrophe in CVD cases was Aluminum Extrusions from China where the failure of mandatory companies to respond led to a CVD rate of 374%.  In the first review investigation, a Chinese company came to us because Customs had just ruled their auto part to be covered by the Aluminum Extrusions order.  To make matters worse, an importer requested a CVD review of the Chinese company, but did not tell the company and they did not realize that a quantity and value questionnaire had been sent to them.  We immediately filed a QV response just the day before Commerce’s preliminary determination.

Too late and Commerce gave the Chinese company an AFA rate of 121% by literally assigning the Chinese company every single subsidy in every single province and city in China, even though the Chinese company was located in Guangzhou.  Through a Court appeal, we reduced the rate to 79%, but it was still a high rate, so it is very important for companies to keep close watch on review investigations.

The real question many Chinese solar companies may have is how can AD and CVD rates be reduced so that we can start exporting to the US again.  In the Solar Cells case, the CVD China wide rate is only 15%.  The real barrier to entry is the China wide AD rate of 249%

US AD and CVD laws, however, are considered remedial, not punitive statutes.  Thus, every year in the month in which the AD or CVD order was issued, Commerce gives the parties, including the domestic producers, foreign producers and US importers, the right to request a review investigation based on sales of imports that entered the US in the preceding year.

Thus, the AD order on Solar Cells from China was issued in December 2012.   In December 2016, a Chinese producer and/or US importer can request a review investigation of the Chinese solar cells that were entered, actually imported into, the US during the period December 1, 2015 to November 31, 2016.

Chinese companies may ask that it is too difficult and too expensive to export may solar cells to the US, requesting a nonaffiliated importer to put up an AD of 298%, which can require a payment of well over $1 million USD.  The US AD and CVD law is retrospective.  Thus the importer posts a cash deposit when it imports products under an AD or CVD order, and the importer will get back the difference plus interest at the end of the review investigation.

More importantly, through a series of cases, Commerce has let foreign producers export smaller quantities of the product to use as a test sale in a review investigation if all other aspects of the sale are normal.  Thus in a Solar Cells review investigation, we had the exporter make a small sale of several panels along with other products and that small sale served as the test sale to establish the new AD rate.

How successful can companies be in reviews?  In a recent Solar Cells review investigation, we dropped a dumping rate of 249% to 8.52%, allowing the Chinese Solar Cell companies to begin to export to the US again.

Playing the AD and CVD game in review investigations can significantly reduce AD and CVD rates and get the Chinese company back in the US market again

SOLAR CELLS FROM CHINA CHINESE VERSION OF THE ARTICLE

中国进口太阳能电池反倾销案即将到来的最后期限重返美国市场的机会

针对原产自中国的太阳能电池反倾销(“AD”)和反补贴税(“CVD”)案的期限迫在眉睫。2016年12月,美国制造商、中国公司和美国进口商可以要求当局复审调查于2015年12月1日至2016年11月31日的审查期间进口并在美国销售的太阳能电池案例。

2016年12月将会是美国进口商的一个重要月份,因为行政复审将决定美国进口商在AD和CVD案中的实际欠款。一般上,美国业者会要求当局对所有中国公司进行复审。如果一家中国公司没有对商务部的行政复审做出回应,它很可能被征收最高的AD和CVD税率,美国进口商也将被追溯征收特定进口产品的差额及利息。

就我的经验而言,许多美国进口商并没有意识到行政复审调查的重要性。他们认为初步调查结束后,AD和CVD案也就此结束。许多进口商因为其中国供应商没有对行政复审做出回应,导致他们本身背负数百万美元的追溯性责任而因此措手不及。

2016年2月,我在中国期间发现很多中国太阳能公司或美国进口商没有在2015年12月提出复审调查请求。在其中一个例子中,某中国公司虽然在太阳能电池初步调查期间获得了单独税率,但是申请人向法庭提出了上诉。该中国公司并不知道有关的上诉案,结果进口商由于无法在2015年12月提出复审要求,现在欠下了数百万美元的反倾销税。

在另一个与太阳能产品有关的案例中,某中国公司针对CVD案提出了复审调查的要求,却没有对商务部的数量和价值问卷做出回应。这很可能导致当局根据“所有可得的事实”(All Facts Available)来向该中国公司征收超过50%的最高对华CVD税率。

在众多的CVD案例中,中国进口的铝合金型材所面对的局面最糟糕,受强制调查的公司若无法做出相关回应可被征收374%的CVD税率。一家中国公司在首个复审调查时联系上我们,因为海关刚裁定他们的汽车零部件属于铝合金型材生产项目。更糟的是,一家进口商在没有通知该中国公司的情况下,要求当局对其进行CVD审查,而他们也不晓得当局已经向他们发出一份数量和价值问卷。我们立即在初审的前一天提交了QV做出了回应。

可是这一切都已经太迟了,虽然该中国公司位于广州,商务部却逐一地根据中国的每一个省份和城市的补贴,向该中国公司征收了121%的AFA税率。我们通过向法庭提出上诉,将税率减少到了79%,可是这一税率还是很高,因此所有公司都有必要仔细地关注复审调查。

很多中国太阳能产品企业最想知道的,是如何降低AD和CVD税率,好让我们能再次将产品进口到美国。以太阳能电池的案例来看,当局向中国征收的统一性CVD税率仅为15%。当局向中国征收的统一性AD税率高达249%,这才是真正的入市门槛。

不过,美国的AD和CVD法律被认为是补救性而不是惩罚性法规,所以商务部每年在颁布AD或CVD令后,会在该月份允许包括美国国内生厂商、外国生厂商和美国进口商在内的各方,对上一年在美国销售的进口产品提出复审调查的要求。

因此,针对中国进口的太阳能电池的AD令是在2012年12月颁布的。一家中国生厂商和/或美国进口商可以在2016年12月,要求当局对从2015年12月1日至2016年11月31日期间进口到美国的中国太阳能电池进行复审调查。

中国公司或许会问,要求一家无关联的进口商承担298%的AD税,也就是支付超过1百万美元的费用,以便进口大批的太阳能电池到美国,是否太困难也太贵了。美国的AD和CVD法律是有追溯力的。因此,在AD或CVD令下,进口商在进口产品时会支付现款押金,并在复审调查结束后取回差额加上利息。

更重要的是,在一系列的案例中,商务部已经允许外国生厂商在其它销售方面都正常的情况下,出口少量产品作为试销用途。所以在一宗太阳能电池的复审调查案中,我们让出口商在销售其它产品的同时,出售少量的电池板作为试销用途以建立新的AD税率。

公司在复审案中的成功率有多大?在最近的一宗太阳能电池复审调查案中,我们将倾销率从249%下降到8.52%,协助中国太阳能电池公司重新进口产品到美国。

在复审调查期间了解如何应对并采取正确的策略,可以大幅度降低AD和CVD税率,并让中国公司重返美国市场。

STEEL TRADE CASES

HOT ROLLED STEEL FLAT PRODUCTS

On August 5, 2016, in the attached fact sheet, factsheet-multiple-hot-rolled-steel-flat-products-ad-cvd-final-080816, Commerce issued final dumping determinations in Hot-Rolled Steel Flat Products from Australia, Brazil, Japan, Korea, the Netherlands, Turkey, and the United Kingdom cases, and a final countervailing duty determination of Hot-Rolled Steel Flat Products from Brazil, Korea, and Turkey.

Other than Brazil, Australia and the United Kingdom, most antidumping rates were in the single digits.

In the Countervailing duty case, most companies got rates in single digits, except for POSCO in Korea, which received a CVD rate of 57%.

SEPTEMBER ANTIDUMPING ADMINISTRATIVE REVIEWS

On September 8, 2016, Commerce published the attached Federal Register notice, pdf-published-fed-reg-notice-oppty, regarding antidumping and countervailing duty cases for which reviews can be requested in the month of September. The specific antidumping cases against China are: Crawfish Tailmeat, Foundry Coke, Kitchen Appliance Shelving and Racks, Lined Paper Products, Magnesia Carbon Bricks, Narrow Woven Ribbons, Off the Road Tires, Flexible Magnets, and Steel Concrete Reinforcing Bars.   The specific countervailing duty cases are: Kitchen Appliance Shelving and Racks, Narrow Woven Ribbons, Off the Road Tires, Flexible Magnets, and Magnesia Carbon Bricks.

For those US import companies that imported : Crawfish Tailmeat, Foundry Coke, Kitchen Appliance Shelving and Racks, Lined Paper Products, Magnesia Carbon Bricks, Narrow Woven Ribbons, Off the Road Tires, Flexible Magnets, and Steel Concrete Reinforcing Bars during the antidumping period September 1, 2015-August 31, 2016 or the countervailing duty period of review, calendar year 2015, the end of this month is a very important deadline. Requests have to be filed at the Commerce Department by the Chinese suppliers, the US importers and US industry by the end of this month to participate in the administrative review.

This is a very important month for US importers because administrative reviews determine how much US importers actually owe in AD and CVD cases. Generally, the US industry will request a review of all Chinese companies. If a Chinese company does not respond in the Commerce Department’s Administrative Review, its antidumping and countervailing duty rate could well go to the highest level and for certain imports the US importer will be retroactively liable for the difference plus interest.

STOP IP INFRINGING PRODUCTS FROM CHINA AND OTHER COUNTRIES USING CUSTOMS AND SECTION 337 CASES

With Amazon and Ebay having increased their efforts at bringing in Chinese sellers and with more and more Chinese manufacturers branching out and making their own products, the number of companies contacting our China lawyers here at Harris Moure about problems with counterfeit products and knockoffs has soared. If the problem involves infringing products being imported into the United States, powerful remedies are available to companies with US IP rights if the infringing imports are products coming across the US border.

If the IP holder has a registered trademark or copyright, the individual or company holding the trademark or copyright can go directly to Customs and record the trademark under 19 CFR 133.1 or the copyright under 19 CFR 133.31.  See https://iprr.cbp.gov/.

Many years ago a US floor tile company was having massive problems with imports infringing its copyrights on its tile designs.  Initially, we looked at a Section 337 case as described below, but the more we dug down into the facts, we discovered that the company simply failed to register its copyrights with US Customs.

Once the trademarks and copyrights are registered, however, it is very important for the company to continually police the situation and educate the various Customs ports in the United States about the registered trademarks and copyrights and the infringing imports coming into the US.  Such a campaign can help educate the Customs officers as to what they should be looking out for when it comes to identifying which imports infringe the trademarks and copyrights in question.  The US recording industry many years ago had a very successful campaign at US Customs to stop infringing imports.

For those companies with problems from Chinese infringing imports, another alternative is to go to Chinese Customs to stop the export of infringing products from China.  The owner of Beanie Babies did this very successfully having Chinese Customs stop the export of the infringing Beanie Babies out of China.

One of the most powerful remedies is a Section 337 case, which can block infringing products, regardless of their origin, from entering the U.S.  A Section 337 action (the name comes from the implementing statute, 19 U.S.C. 1337) is available against imported goods that infringe a copyright, trademark, patent, or trade secret. But because other actions are usually readily available to owners of registered trademarks and copyrights, Section 337 actions are particularly effective for owners of patents, unregistered trademarks, and trade secrets. Although generally limited to IP rights, in the ongoing Section 337 steel case, US Steel has been attempting to expand the definition of unfair acts to include hacking into computer systems and antitrust violations.

The starting point is a section 337 investigation at the US International Trade Commission (“ITC”).  If the ITC finds certain imports infringe a specific intellectual property right, it can issue an exclusion order and U.S. Customs will then keep out all the infringing imports at the border.

Section 337 cases have been brought and exclusion orders issued against a vast range of different products: from toys (Rubik’s Cube Puzzles, Cabbage Patch Dolls) to footwear (Converse sneakers) to large machinery (paper-making machines) to consumer products (caskets, auto parts, electronic cigarettes and hair irons) to high tech products (computers, cell phones, and semiconductor chips).

Section 337 is a hybrid IP and trade statute, which requires a showing of injury to a US industry. The injury requirement is very low and can nearly always be met–a few lost sales will suffice to show injury. The US industry requirement can be a sticking point. The US industry is usually the one company that holds the intellectual property right in question. If the IP right is a registered trademark, copyright or patent, the US industry requirement has been expanded to not only include significant US investment in plant and equipment, labor or capital to substantial investment in the exploitation of the IP right, including engineering, research and development or licensing.  Recently, however, the ITC has raised the US industry requirement to make it harder for patent “trolls” or Non Practicing Entities to bring 337 cases.

Section 337 cases, however, are directed at truly unfair acts.  Patents and Copyrights are protected by the US Constitution so in contrast to antidumping and countervailing duty cases, respondents in these cases get more due process protection.  The Administrative Procedures Act is applied to Section 337 cases with a full trial before an Administrative Law Judge (“ALJ”), extended full discovery, a long trial type hearing, but on a very expedited time frame.

Section 337 actions, in fact, are the bullet train of IP litigation, fast, intense litigation in front of an ALJ.  The typical section 337 case takes only 12-15 months. Once a 337 petition is filed, the ITC has 30 days to determine whether or not to institute the case. After institution, the ITC will serve the complaint and notice of investigation on the respondents. Foreign respondents have 30 days to respond to the complaint; US respondents have only 20 days. If the importers or foreign respondents do not respond to the complaint, the ITC can find the companies in default and issue an exclusion order.

The ITC’s jurisdiction in 337 cases is “in rem,” which means it is over the product being imported into the US. This makes sense: the ITC has no power over the foreign companies themselves, but it does have power over the imports. What this means in everyday terms is that unlike most regular litigation, a Section 337 case can be effectively won against a Chinese company that 1) is impossible to serve, 2) fails to show up at the hearing, and 3) is impossible to collect any money from.

The remedy in section 337 cases is an exclusion order excluding the respondent’s infringing products from entering the United States. In special situations, however, where it is very easy to manufacture a product, the ITC can issue a general exclusion order against the World.  In the Rubik’s Cube puzzle case, which was my case at the ITC, Ideal (the claimant) named over 400 Taiwan companies as respondents infringing its common law trademark. The ITC issued a General Exclusion Order in 1983 and it is still in force today, blocking Rubik’s Cube not made by Ideal from entering the United States. In addition to exclusion orders, the ITC can issue cease and desist orders prohibiting US importers from selling products in inventory that infringe the IP rights in question

Section 337 cases can also be privately settled, but the settlement agreement is subject to ITC review. We frequently work with our respondent clients to settle 337 cases early to minimize their legal fees. In the early 1990s, RCA filed a section 337 case against TVs from China. The Chinese companies all quickly settled the case by signing a license agreement with RCA.

Respondents caught in section 337 cases often can modify their designs to avoid the IP right in question. John Deere brought a famous 337 case aimed at Chinese companies that painted their tractors green and yellow infringing John Deere’s trademark. Most of the Chinese respondents settled the case and painted their tractors different colors, such as blue and red.

Bottom Line: Section 337 cases are intense litigation before the ITC, and should be considered by U.S. companies as a tool for fighting against infringing products entering the United States. On the flip side, US importers and foreign respondents named in these cases should take them very seriously and respond quickly because exclusion orders can stay in place for years.

 

If you have any questions about these cases or about the antidumping or countervailing duty law, US trade policy, trade adjustment assistance, customs, or 337 IP/patent law in general, please feel free to contact me.

Best regards,

Bill Perry