US CHINA TRADE WAR–TRUMP TRADE AGENDA, INTERNAL TRADE BATTLES, LIGHTHIZER, BORDER ADJUSTMENT TAXES, AGRICULTURE, NAFTA, TRADE ADJUSTMENT ASSISTANCE, CFIUS, ZTE AND SECTION 337

TRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

US CHINA TRADE WAR UPDATE APRIL 21, 2017—MANY NEW TRADE CASES BEING FILED

The Trump trade war has escalated big time with new antidumping and countervailing duty cases against Mechanical Tubing, Tool Chests and a new Section 232 National Security case against all Steel imports.  Many importers simply do not realize how fast these trade cases move and how fast they can find themselves liable for antidumping and countervailing duties and other trade sanctions. With a sympathetic Trump Administration and a very sympathetic Wilbur Ross as the new Secretary of Commerce, more cases are going to be filed against China and numerous other countries.

In addition to the new trade cases, two section 337 patent cases has been filed against China on sockets for mobile electronic devices and robotic vacuum cleaning devices.

COLD-DRAWN MECHANICAL TUBING FROM CHINA, GERMANY, INDIA, ITALY, KOREA AND SWITZERLAND

On April 19, 2017, ArcelorMittal Tubular Products, Michigan Seamless Tube, LLC, PTC Alliance Corp., Webco Industries, Inc., and Zekelman Industries, Inc. filed major Antidumping and Countervailing Duty cases against hundreds of millions of dollars of cold-drawn mechanical tubing from the six countries in 2016.  The petition alleges antidumping duties ranging as follows:

China: 88.2% – 188.88%

India: 25.48%

Italy: 37.23% – 69.13%

Germany: 70.53% – 148.32%

Republic of Korea: 12.14% – 48.61%

Switzerland: 40.53% – 115.21%

The cold-drawn mechanical tubing covered by the complaint is used to produce numerous different products in the United States, including auto parts and machinery.

As stated above, these trade cases move very quickly and many importers are blindsided because of the speed of the investigations.  In the Mechanical Tubing case, as indicated in the attached notice, ITC PRELIM MECHANICAL TUBING NOTICE, the ITC will conduct its preliminary injury hearing on May 10, 2017.  US importers’ liability for countervailing duties on imports from China and India will start on September 16, 2017, 150 days after the petition was filed, and for Antidumping Duties will start on November 15, 2017, 210 days after the petition was filed.

The entire investigation will take one year and antidumping and countervailing duty orders can last for 5 to 30 years.

If Importers want to fight the case, they must move quickly.  The first ITC hearing in the case will be on May 10, 2017, which is the part of the proceeding where importers can have a real impact.

Atttached is a copy of the relevant parts of the AD and CVD complaints along with a list of the targeted Indian, Chinese, Korean, German, Swiss and Italian exporters/producers and US importers, please feel free to contact me.  INJURY EXCERPT SCOPE IMPORTERS EXERPT MECHANICAL TUBING FOREIGN PRODUCERS EXCERPT MECHANICAL TUBING

TOOL CHESTS FROM CHINA AND VIETNAM

On April 11, 2017, Waterloo Industries Inc. filed major Antidumping and Countervailing Duty cases against hundreds of millions of dollars of imports of certain tool chests and cabinets from China and Vietnam.

As indicated in the attached notice, ITC PRELIM MECHANICAL TUBING NOTICE, in the Tool Chests case, the ITC will conduct its preliminary injury hearing on May 2, 2017.  US importers’ liability for countervailing duties on imports from China will start on September 8, 2017, 150 days after the petition was filed, and for Antidumping Duties from China and Vietnam will start on November 7, 2017, 210 days after the petition was filed.

The entire investigation will take one year and antidumping and countervailing duty orders can last for 5 to 30 years.

If Importers want to fight the case, they must move quickly.  The first ITC hearing in the case will be on May 2, 2017, which is the part of the proceeding where importers can have a real impact.

Attached is a copy of the relevant parts of the AD and CVD complaints along with a list of the targeted Chinese and Vietnamese exporters/producers and US importers, Tool chests CHN VNM petition vol 1 narrative.  If anyone has any questions, please feel free to contact me.

With a sympathetic Trump Administration in power, there will be a sharp rise in AD and CVD cases against China and other countries.

NEW NATIONAL SECURITY SECTION 232 CASE AGAINST STEEL IMPORTS FROM NUMEROUS COUNTRIES, INCLUDING CHINA

On April 20, 2017, as indicated in the attached documents, Presidential Memorandum Prioritizes Commerce Steel Investigation _ Department of Commerce Section 232 Investigation on the Effect of Imports of Steel on U.S, President Trump announced a new trade investigation of steel imports under section 232 to determine if the tariffs should be imposed because the increased steel imports pose a threat to national security.  The trade action will be conducted under Section 232 of the Trade Expansion Act since 2001.

If the Commerce Department determines that the steel imports are a threat to national security, President Trump will be empowered to levy high tariffs and quotas on imports of steel products from various countries.

Under Section 232, the Commerce Department will conduct an investigation into the potential national security threat posed by the entry of foreign steel into the U.S. market. Commerce must issue its findings to the White House within 270 days, along with recommendations on what steps to take.

Commerce Secretary Wilbur Ross has stated, however, that the investigation may move along a faster track.  Once Commerce’s review is completed, the President has 90 days to decide whether to accept or reject its recommendations and to impose trade restraints, including tariffs or quotas on steel imports.

This may be the first attack, not just against China, but all steel imports from every country.  The problems with Commerce self-initiating antidumping and countervailing duty cases is the International Trade Commission.  The Administration does not control the ITC, but it does control Commerce.  By bringing a section 232 case, the Administration skips the injury test by the ITC and assuming the Commerce Department reaches an affirmative determination, the President is empowered to impose import relief in the form of tariffs and quotas.  From the Administration’s point of view, there is more than one way to solve the import problem.

NEW SECTION 337 CASES AGAINST CHINA AND OTHER COUNTRIES

COLLAPSIBLE SOCKETS FROM MOBILE ELECTRONIC DEVICES

On April 10, 2017, in the attached ITC notice, SOCKETS MARINE, PopSockets LLC filed a section 337 patent case against imports of Collapsible Sockets for Mobile Electronic Devices from the following Chinese companies:

Agomax Group Ltd., Hong Kong; Guangzhou Xi Xun Electronics Co., Ltd., China; Shenzhen Chuanghui Industry Co., Ltd., China; Shenzhen VVI Electronic Limited, China; Shenzhen Yright Technology Co., Ltd., China; Hangzhou Hangkai Technology Co., Ltd., China; Shenzhen Kinsen Technology Co., Limited, China; Shenzhen Enruize Technology Co., Ltd., China; Shenzhen Showerstar Industrial Co., Ltd., China; Shenzhen Lamye Technology Co., Ltd., China; Jiangmen Besnovo Electronics Co., Ltd., China; Shenzhen Belking Electronic Co., Ltd., China; Yiwu Wentou Import & Export Co., Ltd., China; and Shenzhen CEX Electronic Co., Limited, China.

ROBOTIC VACUUM CLEANING DEVICES

On April 18, 2017, in the attached ITC notice, ROBOTIC VACUM CLEANERS, iRobot Corporation filed a section 337 patent case against imports of Robotic Vacuum Cleaning Devices from the following US and Chinese companies:

Bissell Homecare, Inc., Grand Rapids, Michigan; Hoover Inc., Glenwillow, Ohio; Royal Appliance Manufacturing Co., Inc. d/b/a TTI Floor Care North America, Inc., Glenwillow, Ohio; Bobsweep, Inc., Canada; Bobsweep USA, Henderson, Nevada; The Black & Decker Corporation, Towson, Maryland; Black & Decker (U.S) Inc., Towson, Maryland; Shenzhen ZhiYi Technology Co., Ltd., d/b/a iLife, China; Matsutek Enterprises Co., Ltd., Taiwan; Suzhou Real Power Electric Appliance Co., Ltd., China; and Shenzhen Silver Star Intelligent Technology Co., Ltd., China.

If you have any questions about these cases or about the antidumping and countervailing duty cases, Section 232 Steel case, Trump and Trade, US trade policy, or 337 IP/patent law, please feel free to contact me.

Best regards,

Bill Perry

US CHINA TRADE WAR MARCH 26, 2017

Dear Friends,

Although politicians in Washington DC have been focused on Obamacare and Russian involvement in the election, trade issues lurk beneath the surface.  Trade was stirred up with the release of Trump’s Trade Agenda, Lighthizer Confirmation Hearings, rumors of internal fights in the Trump trade team and meetings with foreign leaders, including Angela Merkel of Germany.  In fact, the amount of material on trade is mountainous.

One of the pillars for Trump’s objective of hitting a 3 percent annual growth rate (Obama never got over 2%,), is increased US exports, but as indicated above, trade is a two-way street.  As Democratic Congressman Rick Larson of Washington stated recently at the Washington Council on International Trade Meeting on March 13, the Trump Administration has to choose between a trade policy of Trade Agreements or Border Adjustment Taxes.  If the Trump Administration intends to hit imports with increased Border Adjustment Taxes, it will be very difficult to negotiate trade agreements with the many countries on Trump’s list.

On March 21st, in pushing the Republicans in the House of Representatives to push for the Obamacare repeal bill, President Trump stated that without the Obamacare repeal, the Republicans cannot take up the Tax Bill.  But with the collapse of the Obamacare repeal on March 24th, Congress is pivoting to Tax Reform.  That means tax reform, including the Border Adjustment Taxes, will be front and center.  The target of Trump and the Republican Congress is to pass a tax reform bill by August.

Thus the Trump Administration will be soon at a crossroads—increased taxes/tariffs on imports or trade agreements.  It will be very difficult, if not impossible, to have both.

Meanwhile, the decision of Senate Democrats to stall on the Confirmation of Robert Lighthizer has hurt the trade debate in the Administration.  Lighthizer knows trade law.  Many of the officials, such as Steve Bannon and Peter Navarro, in the Administration, do not know trade law and the Democratic decision to stall the confirmation truly has hurt the United States.

In addition to Border Adjustment taxes, this newsletter contains several articles about Trump and Trade or the Trump Trade Report.  There are growing arguments between Administration officials and by Republican Senators and Representatives outside the Administration on the Trump Trade Policy as officials and Senators and Congressmen understand the ramifications of a protectionist trade policy on the constituents in their States and Districts.

Agriculture is waking up. During the recent March 14 Confirmation Hearing of Robert Lighthizer, one could see the concerns of Senators from Agricultural States as they realize that agricultural exports, their ox will be the one gored by the new Trump trade policy.

Meanwhile, NAFTA will be renegotiated; CFIUS may include reciprocity: China is taking a divide and conquer strategy on the Non-Market Economy Issue in Antidumping Cases; and new trade cases have been filed on Aluminum Foil and Silicon Metal.

ZTE has agreed to pay record fines because of its export control violations; and a recent section 337 patent case stated that the US production of the patent lessee can be used to meet the domestic industry requirement.

In addition, hopefully Trade Adjustment Assistance for Companies, which is the only effective US trade remedy that saves companies and the jobs that go with them without curtailing imports, will expand.

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 TRADE REPORT

TRUMP ADMINISTRATION ISSUES ITS 2017 TRADE POLICY AGENDA AND IT CREATES CONCERNS

On March 1, 2017, the Trump Administration issued its attached National Trade Policy Agenda for 2017 pursuant to 19 U.S.C. § 2213(a)(l)(B), 2017 TRUMP Trade Agenda.  In the short summary, which was released on March 1st, Trump stated in part:

“The overarching purpose of our trade policy – the guiding principle behind all of our actions in this key area – will be to expand trade in a way that is freer and fairer for all Americans. Every action we take with respect to trade will be designed to increase our economic growth, promote job creation in the United States, promote reciprocity with our trading partners, strengthen our manufacturing base and our ability to defend ourselves, and expand our agricultural and other exports.

As a general matter, we believe that these goals can be best accomplished by focusing on bilateral negotiations rather than multilateral negotiations – and by renegotiating and revising trade deals when our goals are not being met. Finally, we reject the notion that the United States can strengthen its geopolitical position by adopting trade measures that make American workers, farmers, ranchers, and businesses less competitive in global markets.”

In other words, the Trump Administration will take a much stronger position on trade agreements and trade policy.

The most controversial part of the Trade Policy Agenda is the strict approach to the WTO.  Thus, one of the key objectives of the Agenda is”

“Resisting efforts by other countries – or international bodies like the World Trade Organization (“WTO”) – to weaken the rights and benefits of, or increase the obligations under, the various trade agreements to which the United States is a party.”

The Agenda then states under the section “Defending Our National Sovereignty Over Trade Policy”:

“it has been a basic principle of our country that American citizens are subject only to laws and regulations made by the U.S. government – not rulings made by foreign governments or international bodies. This principle remains true today.  Accordingly, the Trump Administration will aggressively defend American sovereignty over matters of trade policy.”

One of the key objectives, just like other Administrations, will be to reduce and eliminate foreign barriers to US exports, but the Agenda then goes on to state:

“It is time for a more aggressive approach. The Trump Administration will use all possible leverage – including, if necessary, applying the principle of reciprocity to countries that refuse to open their markets – to encourage other countries to give U.S. producers fair access to their markets. The purpose of this effort is to ensure that more markets are truly open to American goods and services and to enhance, rather than restrict, global trade and competition.”

One key principle the administration said it plans to apply is a form of trade quid pro quo called “reciprocity” to countries that refuse to open up their markets.  Lawmakers and the Trump administration are considering toughening up national-security reviews of foreign investments into the U.S. to leverage better trade terms with China. If Beijing does not open up its markets to U.S. investors or exports, for example, the administration could use its powers to block Chinese deals to buy U.S. assets, or threaten higher tariffs on  Chinese imports.

The Agenda also expresses an interest in using Section 301 of the Trade Act of 1974 to open up restraints in foreign countries to US exports.  But 301 has not been used since the WTO’s 1995 inception.  The Agenda states

“Properly used, Section 301 can be a powerful lever to encourage foreign countries to adopt more market-friendly policies.  The Trump administration believes that it is essential to both the United States and the world trading system that all U.S. trade laws be strictly and effectively enforced.”

The Agenda also singles out trade deficits with China, Mexico, Canada and Korea and calls for a renegotiation of trade agreements and a more aggressive approach to trade enforcement.  Although these policies are very aggressive on paper, the question is how will the new Trump Administration apply these policies.

In conclusion, the Agenda states:

“For more than 20 years, the United States government has been committed to trade policies that emphasized multilateral agreements and international dispute settlement mechanisms. The hope was that by giving up some of our willingness to act independently, we could obtain better treatment for U.S. workers, farmers, ranchers, and businesses, Instead, we find that in too many instances, Americans have been put at an unfair disadvantage in global markets. Under these circumstances, it is time for a new trade policy that defends American sovereignty, enforces U.S. trade laws, uses American leverage to open markets abroad, and negotiates new trade agreements that are fairer and more effective both for the United States and for the world trading system, particularly those countries committed to a market-based economy.”

The Trump Administration also stated that it intends to update the document when Congress confirms Robert Lighthizer as the next US Trade Representative.

Parts of the policy document contain arguments similar to those in a widely attached circulated memorandum Mr. Lighthizer wrote in 2010 to the US China Commission, LIGHTHIZER 2010 STATEMENT US CHINA ECONOMIC SECURITY COMMISSION. At the time, Mr. Lighthizer told a congressionally mandated China commission that the U.S. could put its WTO commitments on hold, restricting imports from China until the country changes its behavior in key areas.

When the Trump Trade Agenda came out, the Press reported that the Trump Administration will ignore adverse decisions from the WTO.  During the Obama Administration, however, although WTO decisions were not ignored, they were slow walked, especially in the antidumping and countervailing duty area, with only small changes made in response to the WTO decision.

The Trump Administration will probably follow the same procedures.  The rubber will only meet the road when in response to adverse WTO decisions, foreign countries work up retaliation lists.  Then the Administration will have to decide whether to ignore the WTO decision or not.

In fact, after the Agenda was released, Presidential spokesman Sean Spicer stated that noncompliance with the WTO was not the formal policy of the administration.

In addition, many trade experts believe that the Trade Agenda was just rhetoric and we will need to see whether in the future there truly will be a fundamental shift in actual trade policy.  As one trade expert told me, it will take years for this policy to actually work out.

Moreover, as indicated below, Agriculture is waking up.  Now that Agricultural Senators and Congressmen realize that if there is a trade war, their ox is the one that will get gored, agriculture exports will be seriously hurt, the Trump Administration will probably slow up its aggressive trade policy as the hot protectionist rhetoric meets the realities of the international trade system where trade is a two way street.

If the United States truly signals it will not comply with WTO decisions, and other countries impose retaliatory penalties against U.S. imports, it could usher in an era of economic protectionism worldwide, which could trigger a global trade war that could disrupt international business and growth.  But that also would mean that the Trump Administration will not meet its 3% GDP growth target for the entire economy.

The real issue that the Trump Administration simply does not understand is that even though there may be trade deficits, free trade rises all boats.  The US now has over $1 trillion in exports, but the Trump Administration is focused on trade deficits with countries, such as China, Mexico and Germany.  The Trump Administration ignores the trade surpluses with other countries.  More importantly, free trade agreements have caused all boats to rise, increasing economic activity in the United States and creating jobs.  Because of NAFTA, US exports have quintupled creating millions of new jobs, but the Trump Administration appears to focus only on the trade deficit, which is relatively small in comparison to the surge in US exports.

At the same time that the White House issued its trade agenda on March 1, John Brinkley of Forbes, in an article entitled,Trump’s Trade Ideas As Bad As Ever,” responded to on President Trump’s first “State of the Union” address to the Congress where Trump stated:

“I believe strongly in free trade, but it also has to be fair trade.

Fine, but how do you achieve fair trade? Is it to punish other countries whose trade policies aren’t advantageous to the United States? Or is it to work with them collegially to get them to change those policies?
The latter course is the one that all presidents since World War II have chosen. They have negotiated 14 free trade agreements with 20 countries – agreements that require parties to eliminate tariffs and give fair and equitable treatment to one another.

Previous presidents helped set up the GATT and then the World Trade Organization as a forum for ensuring that countries play by the rules of global trade. Since the WTO was created in 1994, the United States has quietly resolved hundreds of trade disputes in its favor through WTO-sponsored consultations.

When consultations don’t solve the problem, the government can file a formal complaint in the WTO’s Dispute Resolution Body. If it rules in our favor, we can impose temporary, retaliatory tariffs or demand compensation.

That is fair trade. Accusing other countries of taking advantage of us, threatening them with exorbitant tariffs, and declaring that the United States is not beholden to WTO rules, as the Trump administration did today, is not fair trade. It’s more like anarchy.

On March 8, 2017 after the Trade Policy Agenda was issued, John Brinkley of Forbes published another article entitled, “Trump’s Disdain For WTO Portends Only Trouble” stating:

After the World Trade Organization was established in 1995, the Clinton, Bush and Obama administrations made good use of its dispute settlement system. The United States is batting about .500 in cases that proceeded to a final ruling; most of them don’t. Barack Obama had a perfect record in the WTO when he left office, but some of the complaints his administration filed are still pending.

None of the three presidents said the system was unfair or tried to make an end run around it.

Then came Donald Trump. He has nothing but disdain for the WTO and for the very idea of an international organization making and enforcing rules that the United States has to obey. So, in keeping with Trump’s “America First” ideology, the White House declared last week that America doesn’t have to follow those rules.

When one country accuses another of a trade rule violation, such as dumping a product in the host country at below-market value or unfairly subsidizing a domestic industry, the first step toward resolving it is a WTO-sponsored consultation between the two governments. If that fails, the accuser can request a hearing by a dispute settlement panel. The loser of that proceeding can take its case to the WTO’s Appellate Body.

Between 1995 and 2015, the United States filed 109 complaints to the WTO’s Dispute Settlement Body and had 124 filed against it. The U.S. government has settled about two-thirds of them through consultations, thus making recourse to a hearing unnecessary. Like most diplomatic initiatives, these results are achieved out of the public eye and without fanfare.

It’s hard to know what the Trump administration finds objectionable about this system, or why he considers the WTO “a disaster.” None of the WTO’s 163 other members seem to have a problem with it.

But Trump and his merry band of protectionists think they know a better way: to ignore the WTO if it issues a ruling they don’t like.

The President’s Trade Policy Agenda for 2017 says legislation enacted in 1994 lets the administration decide arbitrarily whether to comply with a WTO dispute settlement ruling that goes against the United States.

“If a WTO dispute settlement report is adverse to the United States, [the U.S. Trade Representative shall] consult with the appropriate Congressional committees concerning whether to implement the report’s recommendation, and, if so, the manner of such implementation and the period of time needed for such implementation,” the Trade Policy Agenda says.

In other words, the United States will comply with WTO decisions – decisions based on rules that the United States helped write – if it feels like it. Incredibly, Trump, et al, seem to think this approach would have no negative consequences.

If the U.S. government refuses to comply with a dispute settlement ruling against it, the WTO can authorize retaliation by the aggrieved party. That is likely to be a tariff increase targeted at the industry whose trade practices led to the adverse ruling. If a targeted tariff increase isn’t feasible, the aggrieved country can raise tariffs against some other industry.

Presumably, Trump would then retaliate against the retaliator and off we’d go into a destructive trade war.

It’s important to understand that the United States was intimately involved in the creation of the WTO and the drafting of its rules. During previous administrations, the U.S. ambassador to the WTO was in Geneva almost every day protecting the interests of the American industries and workers. Contrary to what Trump says, the WTO is not a foreign body accountable to no one. It’s a democratic institution, accountable to its members.

As former U.S. Trade Representative Michael Froman said in the President’s Trade Agenda for 2014:

“A robust international trading system offers the greatest economic benefits when all trading partners abide by their commitments and play by the same rules.”

LIGHTHIZER CONFIRMATION HEARING

On March 14, 2017, the Senate Finance Committee held its confirmation hearing on Robert Lighthizer as United States Trade Representative.  One can see the confirmation hearing in its entirety at https://www.c-span.org/video/?425333-1/us-trade-representative-nominee-testifies-confirmation-hearing

But as of March 23, 2017, Lighthizer’s confirmation vote is being held up in the Committee and on the Senate floor because his status as an advocate more than 30 years ago for the Brazilian government in a 1985 trade case, prior to the time when I was an associate at Skadden, Arps, appears to require a waiver in order for him to assume his role at USTR.  Unfortunately, this decision has left Lighthizer, the best trade lawyer on Trump’s team, out of the internal discussions on trade policy.

The White House has itself pushed to make the waiver vote unnecessary. White House counsel Donald F. McGahn wrote to Hatch and Senate Majority Leader Mitch McConnell, R-Ky., on March 3 citing a Clinton-era Office of Legal Counsel opinion as a challenge to the waiver rule.

A week after the March 21st confirmation hearing, Senator Pat Roberts of Kansas stated:

“I think we made it clear, I think [Finance Chairman] Orrin Hatch made it very clear that it’s not needed. But I don’t know what mood our friends across the aisle are in, and I have no idea what they’re going to do.”

Senator Ron Wyden ranking Democrat on the Senate Finance Committee, however, stated:

“We’ve made it clear we’re going to insist on the waiver. There’s this quaint idea that the law should actually matter, and the law says a person in his position has got to get a waiver.”

Thus Lighthizer’s nomination has been held up “for what feels like eons” according to Wyden, but at this point in time it is still not moving.

Meanwhile on March 22, 2017, the U.S. Chamber of Commerce in the attached letter, chamber_letter, pushed for a quick vote Lighthizer for USTR stating:

“Mr. Lighthizer has led a distinguished career as a trade policy practitioner and has a reputation as a staunch advocate for American industry. The Chamber believes he will represent the nation’s interests well as he works with international partners and addresses trade challenges at the negotiating table and before the World Trade Organization. The Chamber encourages a swift vote on his nomination and looks forward to working with him as the next U.S. Trade Representative.”

During the Confirmation hearing, Lighthizer had bipartisan support with many Democratic and Republican Senators vouching support for his candidacy.  One of the two issues of primary importance was the decision to break mega deals, such as the TPP, into bilateral deals with individual countries.

The problem, however, is that trade deals take a lot of time to negotiate.  The TPP took almost 10 years to negotiate with the 12 countries involved.  But by abandoning the TPP, with an objective of creating individual trade deals with the TPP member companies, the US Government has probably quintupled its work load, if not increased it twelve fold.

Although Lighthizer indicated that USTR would use the TPP draft agreement as a basis to negotiate a number of bilateral agreements, negotiating that many trade deals will take an enormous amount of work by a very small agency – USTR—with only just over 200 employees at offices in Brussels Belgium, Geneva Switzerland and Washington DC.  Trump’s budget is not clear whether USTR will get an increase in budget or whether its budget will be cut.

The second point is the importance of Trade Deals to US Agriculture exports.  In the Lighthizer confirmation hearing, all of a sudden Senators from agriculture states started to wake up.  If the TPP had passed, the biggest winner would have been US agriculture exports with tariffs dropping on more than 18,000 different products, many being agricultural products.  Now the TPP is gone and countries are racing into those overseas markets to replace US agricultural products.

Agriculture Senators and Congressmen want trade deals now because the United States is exporting billions of dollars in agricultural products to the rest of the World.  Mexican government officials recently declared that since Trump wants to be tough on trade with Mexico, they will cut $2.4 billion in imports of corn from the United States and replace the US corn with corn from Brazil and Argentina.  Congressman Newhouse at a recent Washington Council on International Trade stated that after the Korea FTA, exports of Washington State cherries doubled and Washington State French fries increased by 52%.  Increased exports means more jobs.

With a decision not to do the TPP, Senators and Congressmen from agricultural states fear that other countries will replace the United States and get those benefits.  As indicated below, that is a real and justified fear.

TRUMP TRADE AGENDA—OPPOSITION TO THE TRUMP TRADE POLICY IN THE ADMINISTRATION AND IN CONGRESS

Part of the Trump trade problem is the perception by Trump and many on his internal trade staff, such as Peter Navarro, that trade is a one-way street.  The Administration apparently believes it can simply issue an executive order raising tariffs, taxes or barriers to imports with no reaction by foreign countries.

But the Trump Administration is now in the international arena.  Although Trump won the Presidency, he has no political power over foreign countries.  Trade is a two-way street and as stated in several past newsletters, Mexico, Canada, China, and Germany have all threatened retaliation if the US imposes trade restraints, including Border Adjustment Taxes.  Deals have to be negotiated, but most countries, including the US, will not negotiate a deal when a gun is pointed at their head.

INTERNAL ADMINISTRATION TRADE FIGHTS—NAVARRO CREATES AN INTERNAL TRADE WAR

On March 10th the Financial Times reported that a trade war had broken out in White House in what was called “a fiery meeting” in the Oval Office pitting economic nationalists close to Donald Trump against pro­trade moderates in Treasury and the Economic Council from Wall Street.

Navarro is the ultra-nationalist economist who has angered Berlin and other European allies by accusing Germany of currency manipulation and exploiting a “grossly undervalued” euro and calling for bilateral discussions with Angela Merkel’s government over ways to reduce the US trade deficit with Germany.

The fight was between trade hardliners, such as Steve Bannon and Peter Narvarro, against the free trade economic faction led by Gary Cohn, the executive from Goldman Sachs, who heads the National Economic Council.  Note that since Lighthizer has not been confirmed, he could not be part of the discussion.  Bannon and Navarro support the Border Adjustment Tax while Cohn and Treasury Secretary Mnuchin oppose it.

During the last several weeks, Navarro appeared to be losing influence. But during the recent Oval Office fight, Mr Trump appeared to side with the economic nationalists.

Mr Navarro’s case has angered Republicans in Congress because he was criticized for being ill­prepared and vague at a closed­door briefing he held with Senators in February.

Reports have been made that Mr Navarro is becoming increasingly isolated in the administration. He has been operating with a very small staff out of an office in the Old Executive Office Building adjacent to the White House, while Mr Cohn has been adding staff to his NEC base inside the West Wing of the White House.

On March 5th, Navarro published an op-ed in the Wall Street Journal on why trade deficits matter:

Do  trade  deficits matter? The question is important because America’s trade deficit in goods is large and persistent, about $2 billion every day. . . .

Reducing a trade deficit through tough, smart negotiations is a way to increase net exports—and boost the rate of economic growth. . . .

Similarly, if the U.S. uses its leverage as the world’s largest market to persuade India to reduce its notoriously high tariffs and Japan to lower its formidable nontariff barriers, America will surely sell more Washington apples, Florida oranges, California wine, Wisconsin cheese and Harley-Davidson motorcycles. Just as surely, the U.S. trade deficit would fall, economic growth would increase, and real wages would rise from Seattle and Orlando to Sonoma and Milwaukee. . . .

But running large and persistent trade deficits also facilitates a pattern of wealth transfers offshore. . .

Might we lose a broader hot war because America has sent its defense-industrial base abroad on the wings of a persistent trade deficit?

Today, after decades of trade deficits and a mass migration of factories offshore, there is only one American company that can repair Navy submarine propellers—and not a single company that can make flat-panel displays for military aircraft or night-vision goggles. Meanwhile, America’s steel industry is on the ropes, its aluminum industry is flat on its back, and its shipbuilding industry is gathering barnacles. The U.S. has begun to lose control of its food-supply chain, and foreign firms are eager to purchase large swaths of Silicon Valley’s treasures.

Much of Wall Street and most economists simply don’t care. But to paraphrase Mike Pence on the 2016 campaign trail, the people of Fort Wayne know better. The analysts at the Pentagon know better, too. That’s why, for both economic and national-security reasons, it is important to bring America’s trade back into balance—through free, fair and reciprocal trade.

As indicated below, however, do trade deficits justify increased US barriers to imports?  Wouldn’t a policy of making companies more competitive with imports, such as Trade Adjustment Assistance for Companies, explained below be a better option.  TAA does not risk retaliation from other countries.

Moreover, as stated above, focusing on trade deficits ignores the enormous increase in US exports to those countries.  Navarro focuses on a trade deficit and ignores the fact that US exports are over $1 trillion and support millions of jobs.  A trade war will cut those exports and jobs in half.  That will not make America great again.

Recently Navarro attempted to intervene in an antidumping duty case at the Commerce Department on Oil Country Tubular Goods from Korea sparking outrage from the trade lawyers representing the Korean steel mills.  Navarro should keep in mind that the Commerce Department in antidumping cases makes its decision based on the facts on the administrative record and the Commerce Department’s determinations are subject to Court review by the Court of International Trade and the Court of Appeals for the Federal Circuit.  In the past, Courts have made clear that when a Government agency, such as the Commerce Department, makes a decision based on politics, that is a reason for depositions of the government official.  Navarro might be deposed in any appeal of the OCTG case to the Court.

On March 13, John Brinkley of Forbes in an article entitled, “Commerce Secretary Ross Thinks U.S. Is In A Trade War”, which also addressed Navarro’s thinking, stated:

Commerce Secretary Wilbur Ross, responding to concerns that the Trump administration is pushing the United States toward a trade war, said we were already in one.

“We’ve been in a trade war for decades,” he said last week in an interview with Bloomberg News. “That’s why we have the (trade) deficits.”

But not to worry, Ross said. “It’s not going to be a shooting war. If people know you have the big bazooka, you probably don’t have to use it.”

That’s the Luca Brasi negotiating method: bend to our will or we’ll blow you to smithereens. Peter Navarro, the head of the White House National Trade Council, recently suggested that future trade agreements include a rule stating that they can be renegotiated any time the U.S. runs a trade deficit with the partner country. That is, to put it mildly, a non-starter.

Ross’s and Navarro’s remarks are symptomatic of the Trump administration’s singular obsession with trade deficits. However, the fact that the United States has a global trade deficit does not mean we’re in a trade war. It doesn’t mean our trading partners are cheating us any more than that we’re cheating Canada and the United Kingdom by running trade surpluses with them. It means we import more than we export. One of the reasons for that is the strength of the dollar in foreign exchange markets. A strong dollar makes imports less expensive and exports more expensive. That, in turn, leads to more choices and lower prices for American consumers.

Navarro said in a recent speech that trade surpluses were synonymous with economic growth. History suggests otherwise. The U.S. economy added 235,000 jobs in February and the unemployment rate fell to 4.7%. The trade deficit in January (February not available yet) was $48.5 billion, the highest it’s been since March  2012.

The trade deficit decreased during the recession of 2008-09. The United States ran a trade surplus through most of the Great Depression.

Ross didn’t say who the enemy was in this supposed trade war, but President Trump has made it clear that he has it in for China and Mexico, our second and third largest trading partners, respectively. Our largest bilateral trade deficits are with those countries.

So, Trump intends to renegotiate NAFTA. And, he has threatened China with punitive tariffs. He has said doing these things would erase the U.S. trade deficit, cause a renaissance of American manufacturing jobs and bring the 3% GDP growth he promised.

They would do none of those things.

“Withdrawal from the Trans-Pacific Partnership, renegotiation of the North American Free Trade Agreement, and launching trade actions against China ensure political headlines, but they will not make much difference to the global U.S. trade deficit. Nor will they bring more jobs and higher wages to U.S. workers,” said Gary Clyde Hufbauer and Euijin Jung of the Peterson Institute of International Economics in an article published in February.

They also noted that the trade deficit is financed in part by foreign direct investment, which is unquestionably beneficial to the U.S. economy. Foreign-owned companies operating in the United States directly employ 6.1 million Americans, according to the U.S. Commerce Department. FDI stock in the U.S. stands at almost $3 trillion.

One way to reduce the trade deficit would be to devalue the dollar against the Chinese yuan and other currencies.  That would be politically difficult because it’s what Trump (wrongly) accuses China of doing on a regular basis. It would also raise the prices of imported food and manufactured goods and, possibly, cause inflation. That would hurt low-income Americans the most.

A better idea would be for the Trump trade triumvirate to calculate America’s balance of trade with its 20 free trade agreement partners. They would find that we have an aggregate trade surplus with them. Maybe then they’d reconsider their plans to renegotiate or withdraw from those agreements.

If Ross thinks we’re in a trade war now, let him propose raising tariffs against Mexico and China over and above the World Trade Organization’s Most Favored Nation rates. Then, we’d be in a trade war for real.

NAVARRO’S STANDING WITH CONGRESS DROPS

On March 16th, senior trade officials from the administration, minus Robert Lighthizer, headed up to Capitol Hill to talk with members of the House Ways and Means Committee about NAFTA, among other trade topics – marking the latest step in what one administration official described as a series of ongoing consultations between the administration and Congress before the White House formally moves to reopen the agreement.

The next step will be for the administration to formally notify Congress that its NAFTA  plans to begin talks, triggering a congressionally mandated 90-day consultation period before the renegotiation can start.

Commerce Secretary Wilbur Ross stated that the White House hopes to send that notification letter “sometime in the next couple of weeks,” meaning formal talks are likely to begin around early summer. Ross is expected attended the March 16th meeting, as did senior members of the Office of the U.S. Trade Representative including general counsel and acting USTR Stephen Vaughn, and deputy general counsel Maria Pagan.

Peter Navarro, however, did not go to the Capital Hill meeting. After a meeting with the Senate Finance Committee in February – which was described as “a disaster” – Navarro made such a poor impression that Senators viewed it as a reason for why they need to get USTR nominee Robert Lighthizer confirmed as soon as possible.  That meeting also spurred additional questions about who is really in charge on trade and led to strong reminders that USTR holds the statutory authority.

G-20 BECOMES MORE PROTECTIONIST

On March 18th, the trade protectionist rhetoric increased as it was reported that the G-20 member states dropped the no-protectionism pledge, which indicates more trade storms to come.  The G­20 is an informal forum on economic cooperation made up of 19 countries plus the European Union.  Finance ministers from the Group of 20 countries met in the southern German town of Baden­Baden and issued a statement saying only that countries “are working to strengthen the contribution of trade” to their economies.  In last yearʹs meeting under the Obama Administration, called on countries to resist “all forms” of protectionism, which can include border tariffs and rules that keep out imports to shield domestic companies from competition.

During the press conference, I was told that U.S. Treasury Secretary Steven Mnuchin, was peppered with questions about the border adjustment tax.  Munchin did state that trade deals need to offer a win-win scenario and went on to state:

“We believe in free trade: we are one of the largest markets in the world, we are one of the largest trading partners in the world.  Having said that, we want to re­examine certain agreements… And to the extent that agreements are old agreements and need to be renegotiated weʹll consider that as well.”

AGRICULTURE WAKES UP BECAUSE IT REALIZES HOW MUCH IT WILL LOSE WITH A PROTECTIONIST ANTI TRADE POLICY

In the past, many reporters have asked me what could China or other countries retaliate against.  The United States does not export much.  US exports are simply too small.  In the face of large trade deficits with China, Mexico and other countries in the manufacturing area, what is the US exporting that can be a retaliation target?

US trade data indicate that US exports for 2016 were over $1 trillion.  In the Robert Lighthizer confirmation hearings, you could hear the real concern of many Senators, especially from the agriculture states, that products from their states could be retaliation targets.  Their worry is certainly justified.

As Senator Pat Roberts stated at the Lighthizer Confirmation hearings:

“I’m going to try and demonstrate that we are going through a pretty rough patch in agriculture.  If Trump makes good on his promises to turn U.S. trade policy into a war against imports, “we are going to get into a very difficult situation.”

During the Confirmation Hearing, Roberts, Grassley and other Agriculture Senators extracted a pledge from Lighthizer that in negotiating trade agreements he would push agriculture interests to the top of the list. Senators and Congressmen from Agriculture states fear that if no new trade agreements are negotiated, US agriculture will lose market share and will become the retaliation target of other countries.

Mexico, in fact, is one of the largest buyers of US corn, much of which comes from Kansas and Iowa.  US exports about $2.4 billion in corn to Mexico.  Now Mexico is talking about retaliation and buying its corn from Brazil and Argentina.  What goes around comes around.

U.S. Senators and Congressmen noticed when a Mexican lawmaker introduced legislation favoring Latin American products over American- exported corn, a key winner in Nafta. That move followed warnings from Mr. Trump that Nafta would be renegotiated and Mexico would have to pay for a new border wall.  In response, Republican Senator Joni Ernst of Iowa stated:

“I have been worried because other countries have pushed back: ‘You want us to build a wall, well we’re not going to take your corn.’  If we’re talking about renegotiating Nafta, we actually stand to lose ground in agriculture—so we would really have to work that very, very carefully.”

On March 6th, leaders of the US Dairy industry were in Mexico to attempt and protect their exports from uncertainty over the future of NAFTA. After NAFTA was signed in 1994, American dairy exports to Mexico more than quadrupled to $1.2 billion, accounting for nearly one-fourth of all U.S. dairy exports last year. Because of Trump’s attacks on Mexico, it has encouraged Mexican importers to find other suppliers in the European Union and New Zealand, which are eager to get into the market, and in New Zealand’s case are part of the TPP.

In response to the criticism that Trump is putting his trade focus on the plight of the U.S. manufacturing sector at the expense of the export-dependent agriculture sector, on March 21st Trump pivoted to agriculture.  Sean Spicer, the President’s press secretary stated:

“While our farmers are the most efficient in the world, margins have been tightening, regulations have been multiplying, and exports, which has historically counted for over one- fifth of the U.S. farm production, have been declining due to unwise trade policies.  The President promised the many people in the agriculture industry and throughout rural America that he would not allow this to continue and he will continue to pursue policy changes that will reverse this disturbing trend.”

John Bode, president and CEO of the Corn Refiners Association praised the statement saying that Trump’s proclamation recognizes that “improved trade balances and a successful agriculture sector are inextricably linked.”  He further stated:

“Our industry’s exports not only deliver jobs at home, they are among America’s fundamental strengths abroad.  We are heartened to know that this White House agrees and that they will seek to increase agricultural exports as they examine existing and future trade agreements.”

Ray Starling, special assistant to the president for agriculture on the National Economic Council, recently stated at a National Ag Day event in Washington:

“The President has talked a lot about our manufacturing imbalance on trade, but that is not meant to neglect ag. That is essentially to say we know ag is doing a good job, we are making strides there, we need to do more.”

Now we have to wait and see if Trump truly means what he says or whether he wants a trade war, which will hurt US exports, especially in the agriculture area.

SENATORS AND CONGRESSMEN WANT MORE TRADE DEALS–BILATERAL VERSUS MULTILATERAL DEALS

Back on January 26, 2017 in an interview with Sean Hannity on Fox News, Trump explained that he did not like multilateral trade deals, such as the TPP, because they are a mosh pit and fall to the lowest common denominator.

During his confirmation hearing, Commerce Secretary Wilbur Ross stated that it easy to negotiate bilateral deals than multilateral deals.  But the question is, will it be easier to negotiate 12 bilateral deals with 12 different countries when one deal, the TPP, would have done it.  More importantly, although the US will renegotiate NAFTA and start trade deals with Japan and eventually Britain, is it truly realistic for the very small USTR to have continual negotiations with dozens of countries at the same time.  The TPP took 10 years to negotiate.  Maybe Ross is just playing a game and does not want more trade deals.

At a recent trade conference on March 13th here in Seattle held by the Washington Council on International Trade, however, it was very apparent that Washington State Congressmen, both Democrats and Republicans, want more trade deals.

At the Conference Congressman Dave Reichert, WA Republican, and Chairman of the Subcommittee on Trade, House Ways and Means, stated that the Trump Administration intends to do more bilateral deals.  He also stated that since NAFTA is a trilateral agreement, all three countries, Mexico, Canada and the US need to be at the table.

Reichert also stated that we cannot give up trade agreements because the cost would be too high.  China will benefit.  He also stated that the United States needs to set the international trade standards through trade agreements or China will do so and 95% of the World’s population and markets are outside US.

Reichert stated that the longer we wait to do trade deals, the more market shares we lose.  He pointed to the FTA with Korea, which dramatically reduced the 24% Korean tariff on cherries, and Washington State cheery exports doubled and Washington French Fries went up 53%.

When NAFTA took place US exports to Mexico doubled reaching $180 billion.  There is now over $500 billion in trade between US and Mexico

Following Reichert, Republican Congressman Dan Newhouse, who represents large Agricultural interests in the Center of Washington stated, “We cannot afford to waste any time as we create opportunities for local producers and exporters to gain access to new markets.”

Congressman Rick Larsen stated that the Administration has to decide whether it will do Border Adjustment taxes or trade deals.  Larsen went on to state that trade is much bigger than just agreements. It is soft power.  Asian countries see the US leading with military power, but the US relationship with the other Asian countries is less secure if the only relationship is military and not trade.

Democratic Congressman Denny Heck stated that TPP went too far too fast and was not politically possible.  Echoing Donald Trump, Heck stated that the white working man has seen no increase in income in 40 years.

But Newhouse stated that after the Korea FTA, Washington State potato growers saw an increase in exports of 670,000 tons of French Fries to Korea.  That is jobs.

On March 22nd, John Brinkley in an article entitled, Trump’s “Trade Policies Would Take From the Many and Give To a Few” points out the problem of relying only on bilateral agreements as compared to multilateral agreements:

“Politics can be defined as taking something from someone and giving it to someone else. Done right, the winners outnumber the losers and the sacrifice will have been worthwhile.

This seems lost on the Trump administration, whose trade proposals are likely to create a lot more losers than winners.

Let’s start with his plan to eschew multilateral trade agreements and negotiate only bilateral ones. With a multilateral agreement, like the Trans-Pacific Partnership, all parties play by the same rules. That means exporters don’t have to figure out what the rules of origin are country-by- country. They’re all the same.

Deciphering and complying with rules of origin under a free trade agreement are among the most difficult and time-consuming chores that exporting companies have to perform. If the rule says 70 percent of a truck’s parts have to have been made in the United States, the company has to go to its suppliers and say, where did the door handles come from? Where did the tires come from?

A lot of smaller companies find it isn’t worth the time and expense, so they ship the product and pay the tariff. Or they don’t export at  all.

Having a series of bilateral agreements makes it even harder, because each agreement would have its own rules of origin. American manufacturers were looking forward to ratification of the TPP, because it was to be a 12-country trading bloc with one set of rules. But Trump withdrew the United States from it.

Renegotiating NAFTA is another idea that would take from the many for the benefit of a few.

Breaking up NAFTA and negotiating separate bilateral agreements with Mexico and Canada would be even worse. U.S. Trade Representative nominee Robert Lighthizer said during his Senate confirmation hearing that the administration might take that course.

NAFTA has been in effect for 23 years. Whatever impacts it had on American employment and economic growth are well in the past. If you look under NAFTA’s hood, you see a complex network of supply chains crossing the three countries’ borders. They make it easy and cost-effective for American manufacturers to buy parts from Mexico or Canada and have them delivered quickly and duty-free.

About half of Mexico’s exports to the United States are parts for products that are built here – car parts, electronic components and so  on.

Making those parts more expensive would make the products they go into more expensive and would reduce the importing companies’ revenues, leading to lay-offs or worse. That is basic economics.

Trump said yesterday that renegotiating NAFTA was “going to be an easy one.” Everyone who has ever been a trade negotiator probably got a chuckle out of that. . .. .

“The United States has been treated very, very unfairly by many countries over the years, and that’s going to stop,” he said last week during a joint press conference with German Chancellor Angela Merkel.

Poor little us. We’re being pushed around by those mean bullies from South Korea and Mexico.

Nonetheless, the U.S. and global economies have been growing at a healthy pace. The U.S. unemployment rate is 4.7 percent, about as low as it can go, and median wages have finally started to increase for the first time since the recession of 2008.

This seems to call for an economic policy of caution and restraint to keep the recovery going rather than taking a machete to our trade agreements and punishing our trading partners for transgressions they have not committed.

That would harm vastly more Americans than it would help.

On February 28th, however, it was reported that the EU expects the Trump Administration to negotiate with the entire block as EU countries pushed back on Trump’s bilateral dreams.  European countries in the EU bloc have been unified against the Trump administration’s reported attempts to bring individual EU countries into direct, bilateral trade deals with the U.S. The EU ambassador at a recent National Press Club meeting stated that bilateral deals are “nonsense”.  David O’ Sullivan stated:

“It’s nonsense to talk about bilateral deals with countries that are part of a single market.  Would American companies really want 28 separate FTAs?”

In Germany, Martin Schäfer, spokesperson for the German foreign ministry, stated:

“The [European] Commission carries out trade negotiations and concludes trade agreements for Europe and for us. This is the legal status, about which we have nothing critical to say.  The new political constellation in the U.S. and elsewhere should not tempt anybody to take up a different position.”

European Trade Commissioner Cecilia Malmstrom also stated recently:

“The U.S. administration seems to favor bilateral relations over multilateralism. And some of the proposals we have seen floated, such as a border adjustment tax, could be at odds with WTO rules. Countries should be able to protect themselves from distortions and unfair trade practices. But that has to be done within the framework of the WTO. Global rules mean everyone playing fair, by a consistent, predictable and transparent rulebook.

In an age when some want to rebuild walls, re-impose barriers, restrict people’s freedom to move … we stand open to progressive trade with the world.”

On March 6th, a top European official stated that U.S. President Donald Trump’s protectionist stance may propel Asian, Middle Eastern and Latin American economic powers into market-opening alliances with the European Union.  Jyrki Katainen, a vice president of the European Commission, the EU’s executive arm, said Trump’s rejection of multilateral commercial deals and border-tax threat are giving impetus to the 28-nation bloc’s push for free- trade or investment pacts with countries including Japan, China, India, Saudi Arabia, the United Arab Emirates, Mexico, Brazil and Argentina.

Katainen stated that:

“When there has been some signals to raise protectionism, especially from the U.S. side, the rest of the world seems to be fighting back and saying that this is not our line, this is something which we don’t want. This is music to our ears.”

The comments signal that Trump’s “America First” approach that seeks to reduce the U.S.’s $502 billion trade deficit may be as much an opportunity as a threat to the EU.

Recently, the US equipment manufacturing industry, which supports more than 1.3 million jobs, expressed its concern about exports.  A report by the Association of Equipment Manufacturers stated that about 30 percent of the construction equipment and about 30 percent of the agricultural equipment manufactured in the United States is designated for export – and would therefore be hit hardest by any slowdown in global trade:

“Slow international growth combined with uncertainty about trading rules under the Trump administration could act as a drag on the equipment manufacturing industry’s overall performance.  Any steps the Trump administration might take to revisit or exit existing trade agreements could further complicate the challenging economic environment outside the United States.

It is difficult to precisely forecast how the Trump administration might rewrite existing trading rules, but any steps that make it more difficult for manufacturers to export their products could hinder growth in the industry.”

TPP CONTINUES WITHOUT THE US

On March 14th Government officials from the 12 Trans-Pacific Partnership nations minus the United States held a two-day summit in Chile to discuss a path forward on trade following the US decision to withdraw from the TPP.

New Zealand Trade Minister Todd McClay stated:

“I have recently visited Australia, Japan, Singapore and Mexico, met with ministers from Brunei and Malaysia and talked directly with trade ministers from all other TPP countries.  It is clear our partners remain committed to the benefits high quality trade agreements provide.”

Even though the TPP requires that at least six countries composing at least 85 percent of the entire TPP’s collective economic production, with the US withdrawal, the other 11 countries have decided to move forward with the TPP.  As Wendy Cutler, a former trade negotiator at USTR, stated:

“A TPP agreement without the U.S. is still relevant and would have significant economic value.  You’d still have four of the world’s 20 largest economies — Japan, Canada, Australia, and Mexico — alongside significant emerging economies, like Vietnam and Malaysia.”

In other words, other countries will replace US exports in those markets because they will have the benefit of the TPP.

After the meeting in Chile, Australian Trade Minister Steven Ciobo stated:

“I was particularly pleased there was continuing movement on the TPP.  Countries remain committed to exploring all the avenues and opportunities in relation to the TPP. There was broad agreement on the high level of ambition in the TPP being a benchmark and something we shouldn’t just let slip away.”

Japanese State Minister Takao Ochi stated:

“As long as Japan is concerned we don’t want to exclude any possible ways and we would like to take initiative in discussing with each of the member countries.”

The 11 countries will now work to preserve the trade deal’s innovations, which included new rules on digital trade, disciplines for state-owned companies and what have been touted as the toughest labor and environment protections of any modern trade agreement. The innovations also include new market access that countries negotiated on everything from milk powder to insurance services.

BORDER ADJUSTMENT TAXES

As stated in my last newsletters, the big issue in the trade area right now is border adjustment taxes and tax reform.  New Treasury Secretary Mnuchin says tax reform will take place in August 2017 and it is a priority for the Trump Administration.  Part of that reform is Border Adjustment Taxes (“BAT”).  See http://www.foxbusiness.com/politics/2017/02/23/treasury-secretary-mnuchin-lays-out-aggressive-timeline-for-tax-reform.html.  As Mnuchin states, a US deficit of $20 trillion, which was doubled by President Obama, is a concern, but more important is economic growth, which will result in more tax revenue.  To get economic growth, taxes and regulations have to be cut.

But with the failure of Obamacare in the House, taxes, including border adjustment taxes, move to the front of the Congressional calendar.  Trump and Republicans in the Congress, especially the House, appear to be moving ahead with an alternative to tariffs to spur US manufacturing and that is taxes.  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.  As Kevin Brady, Chairman of House Ways and Means, argues, almost 80% of countries border adjust their taxes.  That includes Mexico, Canada, China, and the European countries, putting US exports at a substantial disadvantage.  For Brady’s argument, see videos at the following links, https://www.youtube.com/watch?v=1yYHGoFmNEk&feature=youtu.be and

https://waysandmeans.house.gov/icymi-chairman-brady-cnbc-makes-case-ending-made-america-export-tax/.

Under a border adjustment tax (“BAT”), a 20% tax would be applied against all domestic products and imported products.  But the domestic producer would be allowed to deduct all the domestic costs associated with producing that product.  Thus if a $100 product was produced in the US, the domestic producer could deduct $70 in costs, resulting in a 20% tax on $30 or a $6 tax.  But there would be no deduction of domestic costs for a $100 import resulting in a 20% tax on the full $100 or a $20 tax, giving the domestic product a 14% tax advantage.  The BAT would not apply to exports.

This proposal has welled up from the House of Representatives and is strongly supported by House Speaker Paul Ryan and the Chairman of House Ways and Means, Kevin Brady.  Their argument is that border adjustment tax is needed to offset value added taxes in other countries.  Brady argues that the BAT is the only way to end the “Made in America” tax.

One example given is that if an automobile is produced in the US and exported to Mexico, a 35% corporate tax is levied on the profits of the US automaker and then the US automobile is hit with a 16% value added tax when it comes into Mexico.  On the other hand, when an automobile is produced in Mexico for shipment to the US, there is no corporate tax on the export and no corresponding tax in the US on the Mexican export to the US.  In effect, Ryan and Brady argue that this is a tremendous incentive to move manufacturing out of the United States to countries with value added taxes, such as Mexico, China, Canada, EU and many other countries.

Border adjustments serve as a way to level the playing field and alter value-added consumption taxes many countries, including European countries, Mexico, Canada and China, impose on each stage of production, as products are sold internationally.  Proponents argue that the BAT is not trade policy and does not favor exports over imports.  To see the companies that have VAT taxes in place, see the Ways and Means website at https://waysandmeans.house.gov/ending-made-america-tax-three-major- wins-american-people/.

The Trade War in the Administration on border adjustment taxes has become clear as Bannon, Navarro and others are in favor, but Cohn and Treasury Secretary Mnuchin are opposed.  Wilbur Ross is on the fence.  Trump himself has not taken a position.

On March 25th During a morning interview, Mnuchin said he had been overseeing work on the administration’s tax bill over the past two months and it would be introduced soon. He said the goal was still to win Congressional approval of the tax measure by August. But if the timeline is delayed, he said he expected the proposal to pass by the fall.  Mnuchin did not reveal whether the administration will include the Border Adjustment tax.

On March 9th Bloomberg reported that the BAT is in deep trouble.  The BAT is important because it is expected to raise more than $1 trillion in revenue, which would offset the cut to corporate tax rates:

Companies that rely heavily on exports, such as Boeing Co. and Oracle Corp., love the plan—for obvious reasons. Beyond profits, they also say a BAT would make American manufacturers more competitive by putting them on equal footing with foreign competitors around the world.

Importers hate the BAT. Big retailers such as Walmart Stores Inc. and Best Buy Co. contend that border adjustments will dent profit margins and force them to raise prices on everything from avocados and furniture to Nike shoes and French cheese. In a Feb. 28 letter to congressional leaders, the Americans for Affordable Products coalition said the tax would raise consumer costs “by as much as $1,700” in the first year. . . .

Companies are taking their message to consumers. In late February the National Retail Federation, which opposes the BAT, started airing TV commercials that parody an OxiClean infomercial, telling shoppers that “the all-new BAT tax is specially designed to make your disposable income—disappear!” Proponents, through the American Made Coalition that includes Johnson & Johnson and Pfizer Inc., launched a Twitter feed to support the tax. Both sides have created Facebook pages and websites with auto-form letters that viewers can send to Congress. Both, too, routinely pepper media outlets with press releases citing prominent people in the private sector and academia who either love or hate it.

As Bloomberg further states in Congress the BAT is running into opposition from Republicans:

A core group of House Republicans has come out in recent weeks against the BAT, citing the higher prices they’d inflict on consumers. Republican Senate support is in doubt, too. Tom Cotton, a Republican from Walmart’s home state of Arkansas, told a Senate floor session on Feb. 15 that border adjustments are “a theory wrapped in speculation inside a guess.” The next day, Senate Majority Whip John Cornyn, a Texas Republican, said, “The hard reality is the border tax is on life support.”

But as Bloomberg further states:

“Ryan and Brady aren’t backing down. Without border adjustments, they say, their plan to rewrite the tax code can’t happen. That $1.1 trillion in revenue is crucial to the politics of the BAT, since it helps keep it deficit- neutral, a prerequisite for passing a tax bill through the Senate without Democratic votes. “What it boils down to is that it’s a way to pay for the rest of the tax plan,” says Veronique de Rugy, an economist at George Mason University. “Only revenue comes from this feature—economic growth doesn’t.” That $1 trillion is also crucial to how the BAT might affect the economy. Says Ross, “That is way too big a number to get wrong.”

EUROPE, THE WTO AND CHINA

Meanwhile, other countries are lining up to retaliate if the BAT is passed.  On February 28th, it was reported that the EU is preparing a legal challenge against Donald Trump’s US border tax plan in what could be biggest trade dispute in a century.  Jyrki Katainen, the European Commission’s Vice President, told the newspaper: “If someone is behaving against our interests or against international rules in trade then we have our own mechanisms to react.”  He said the EU was seeking to avoid a potential trade war with the US as it would be “disastrous” for the world economy.

“We have all the legal arrangements within the EU but we are also part of global arrangements like the WTO and we want to respect the global rule base when it comes to trade.”

One WTO trade dispute expert estimated that a defeat in such a case could see around $385bn a year in trade retaliation against the US.  Volker Kauder, parliamentary floor leader of Merkel’s conservatives, also recently stated:

“If Donald Trump imposes punitive tariffs on German and European products, then Europe should also impose punitive tariffs on U.S. products.”

Meanwhile, the Chinese government has been seeking advice from think tanks and policy advisers on how to retaliate against trade penalties imposed by the US.  China’s strongest responses would likely include finding alternative suppliers of agricultural products, machinery and manufactured goods, and reducing the number of consumer goods like cellphones and laptops that it exports to the United States. Other possibilities could include levying a tax or other penalty on major U.S. companies that do business in China or restricting access to the country’s services sector.

NAFTA RENEGOTIATION

The first trade agreement, which the Trump Administration will negotiate is NAFTA.  President Trump has already formally notified both Canada and Mexico that he intends to renegotiate NAFTA.  The negotiations will probably start sometime this summer.

On March 12, 2017, Commerce Secretary Wilbur Ross stated that the Trump administration has yet to determine what the trade agreement replacing NAFTA will look like.  As Ross stated:

“One size doesn’t fit all.  The issues of automotive are not the same as the issues of agriculture; they’re not the same as the issues of electronics, or steel. It’s a very, very complicated situation. So it’s very hard to paint just with one big broad brush.”

On March 16, 2017, Canadian Prime Minister Trudeau stated:

“NAFTA’s been … improved a dozen times over the past 20 years. There’s always opportunities to talk about how we can make it better. It has led to a lot of great jobs for a whole lot of people on both sides of the border and I very much take him [Trump] at his word when he talks about just making a few tweaks. Because that’s what we’re always happy to do.

“We’ve got auto parts crisscrossing the border six times before they end up in a finished product. You’ve got over $2 billion a day going back and forth. So, making sure that the border is … secure but also smooth in its flow of goods and people is essential to good jobs on both sides of the border.”

Meanwhile, there are a number of meetings between US, Canadian and Mexican officials preparing for the NAFTA negotiations.

On March 21st, the Trump administration created the attached list, KEY ELEMENTS, of more than 20 foreign trade practices it would like to address in a renegotiation of NAFTA and in any bilateral trade deal it might pursue.  The list includes relatively new areas like foreign currency manipulation, where achieving agreement could be difficult, but also a host of others like intellectual protection that have long been mainstays in U.S. trade agreements.  Payne Griffin, deputy chief of staff at the Office of U.S. Trade Representative, stated:

“These are market problems that the administration has identified either through vigorous consultations with Congress or their own internal research.  It is a non-exhaustive list of things that may be addressed in these bilateral trade agreements.”

CHINA NONMARKET ECONOMY

China has initiated a mandatory 60-day consultation period with both economies before deciding to request a dispute settlement panel to hear its complaint.  China has now decided to only target the EU, which is in the process of trying to change antidumping methodology. Brussels is trying to come up with a new way of treating China under its trade remedy law while still recognizing that Beijing intervenes heavily in its economy.

The United States has said it would only consider a change in response to a formal request from China to be treated as a market economy, something it has not done since 2006.

Apparently, China is trying a strategy of ‘divide and conquer’.  Take on the EU first, because it is already revising its law and they might get a good WTO decision, then face the tougher battle against the U.S.”

MORE TRADE CASES COMING

A law firm that specializes in bringing antidumping (“AD”) and countervailing duty (“CVD”) trade cases recently told me that they are in the process of preparing a number of new cases against China and other countries.  With a sympathetic Trump Administration and a very sympathetic Wilbur Ross as the new Secretary of Commerce, more cases are going to be filed.

ALUMINUM FOIL FROM CHINA

On March 9, 2017, the US Aluminum Foil Trade Enforcement Working Group, including Aleris Inc., Alpha Aluminum, Golden Aluminum, Granges Americas Inc., JW Aluminum Company, Novelis Corporation, Republic Foil Inc., Reynolds Consumer Products, and United Aluminum Corporation, filed major AD and CVD cases against more than $658 million of aluminum foil imports from China in 2016.

The petition alleges duties ranging from at a minimum of 38 percent to a high of 134 percent and targets 232 Chinese exporters and producers of aluminum foil.  The aluminum foil covered by the complaint covers household aluminum foil as well as aluminum foil used in cookware, product packaging and heat exchangers found in cars and HVAC systems.

US importers can be liable for CVD duties on aluminum foil imports from China as soon as August 6, 2017 and AD duties on October 5, 2017.

Attached are the relevant parts of the AD and CVD complaints along with a list of the targeted Chinese exporters/producers and US importers, 2017.03.08 CHN-ALUMINUM FOIL Petition Vol I 1Narrative IMPORTERNAMES.  If anyone has any questions, please feel free to contact me.

SILICON METAL FROM AUSTRALIA, BRAZIL, KAZAKHSTAN AND NORWAY

Although the US industry may believe AD and CVD petitions will move the Chinese imports share to the US industry, that is not necessarily the case.  Case in point, on March 8, 2016, Globe Specialty Metals Inc. filed major AD and CVD cases against imports of Silicon Metal from Australia, Brazil, Kazakhstan and Norway.  Chinese silicon metal has been under an AD order with shut out rates since 1991.

Attached are the relevant parts of the AD and CVD complaints along with a list of the targeted foreign exporters/producers and US importers, SMALL SILICON METAL PETITION.

The first hearing at the ITC is March 29th.  Commerce will issue questionnaires probably in the first week of April.  Commerce Department preliminary determinations in the Countervailing Duty cases, which is when liability for importers begins, can happen as soon as August.

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

With a sympathetic Trump Administration in power, there will be a sharp rise in AD and CVD cases against China and other countries.

TRADE ADJUSTMENT ASSISTANCE FOR FIRMS/COMPANIES – A BETTER ALTERNATIVE TRADE REMEDY WHICH ACTUALLY WORKS

Previous newsletters stated Wilbur Ross has made it very clear to reach the 3% plus growth rate, the US must increase exports.  Yet, at the same time, the Trump Administrations keeps concentrating on deficits and accusing foreign governments of treating US companies unfairly.  Trump and his Administration do not look internally and try to find ways to make the US companies more competitive, which will not create a trade war.

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 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.

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.

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.   Moreover, with the threats of a massive trade war in the air, which will injure all US companies and destroy US jobs, the US government needs to look at an alternative—TAA for Firms/Companies is that alternative.

FOREIGN ANTIDUMPING AND COUNTERVAILING DUTY LAW AND CASES

UNIVERSAL TRADE WAR CONTINUES

With the election of Donald Trump, as stated in my last blog post, 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.  It will also discuss potential US exports that can be retaliation targets.

MEXICO

On March 6, 2017, Alexandro N. Gomez-Stozzi, a Mexican trade lawyer, at the Gardere firm in Mexico City sent me the following summary of Antidumping and Countervailing Duty Investigations in Mexico:

Mexican Antidumping and Countervailing (AD/CVD) Investigation Procedures Factsheet

  • AD/CVD investigations in Mexico may take from 12 to 18 months as of the publication in the Diario Oficial regarding the initiation of investigation. Terms within the investigative process may be extended with cause, at the discretion of the authority. Investigations are generally conducted as follows (variation of a chart created by Mexican authorities):
  • There is a single investigating authority, the Ministry of Economy´s International Trade Practices Unit (known by its Spanish acronym UPCI, for Unidad de Prácticas Comerciales Internacionales). UPCI makes all relevant findings: (i) dumping or countervailing, (ii) material injury or threat thereof and (iii) causation. Final AD/CVD orders are signed by the Minister of Economy; although informally, trade policy considerations in other sectors come into play before deciding to issue an AD/CVD order. UPCI is also in charge of safeguard investigations.  
  • Investigations are usually requested by Mexican producers representing at least 25% of the total production, although UPCI may initiate investigations if it deems so appropriate.
  • Exporters and importers of affected goods are strongly encouraged to retain Mexican counsel, as all appearances have to be made in Spanish and a domestic service address has to be designated.
  • When issuing a preliminary determination, the authority may: (1) impose a preliminary AD/CVD duty and continue with investigation, (2) continue the investigation without an AD/CVD duty, or (3) terminate the investigation on insufficient evidence grounds.
  • In its final determination, the authority may (i) confirm or modify its preliminary determination to impose an AD/CVD duty, or (2) declare the investigation concluded without imposing an AD/CVD duty. Under stringent circumstances, final determinations may impose retroactive duties for up to three months from date of publication of the preliminary determination.
  • During the course of an investigation, Mexican law allows for interested parties to ask UPCI to convene conciliatory meetings, at which proposals may be presented to resolve the case and terminate the investigation. These proceedings coexist with Antidumping Agreement´s price undertakings.
  • AD/CVD orders remain in effect for 5 years. They may be renewed for similar periods when warranted after a sunset review which covers both dumping (or countervailing) and injury.  Circumvention, actual coverage of AD/CVD orders, and similar proceedings can also be initiated as long as orders are in effect.
  • World Trade Organization (WTO)´s Antidumping and Subsidies Agreements are applied as is in Mexican investigation proceedings. Mexican trade-remedy law and regulations may sometimes be contradictory with WTO agreements; in case of conflict, the WTO Agreements would prevail in court.

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.2017.09.

CFIUS—WILL INVESTMENT RECIPROCITY BE A NEW REQUIREMENT??

There is movement within the United States to establish investment reciprocity as a criteria in investigations by the Committee on Foreign Investment in the United States into its national security reviews of inbound transactions, a policy shift that would weigh the heaviest on Chinese buyers if enacted.

Investment reciprocity — the idea that the U.S. should block a foreign entity’s investment in a particular industry when a U.S. buyer would be similarly blocked in that entity’s country — has been on politicians’ radar since before Donald Trump took office.

Trump made no secret of his leanings on the campaign trail, criticizing in particular a Chinese investment group’s acquisition of the 130-year-old Chicago Stock Exchange, a deal that has since been cleared by CFIUS.

If the U.S. does decide to go this route, there are at least a couple ways the government could go about it. The President could direct CFIUS to focus more heavily on particular industries or use a broader definition of national security, as long as those directives don’t stray too far from the regulations dictated by the Foreign Investment and National Security Act of 2007, or FINSA. Congress can also amend FINSA to expand either the range of industries susceptible to national security review, or even expand the review itself from one focused solely on national security to a review that more broadly considers foreign investments in the U.S.

CHINESE MILITARY BUILDUP TO PROTECT ITS TRADE INTERESTS???

As mentioned in prior blog posts, there is a close relationship between defense/security and trade.  The Japanese attack on Pearl Harbor was created, in part, by the US naval embargo of Japan.

One of the strongest arguments for the Trans Pacific Partnership was the geo-political argument that the TPP would bring us closer to the Asian countries.  Former defense secretary Ash Carter stated at one point that the TPP was equivalent to another US aircraft carrier.

On March 15, 2017, Malia Zimmerman for Fox News in an article entitled “China next US threat? Beijing beefs up military to protect trade”, stated:

With a laser-like focus on protecting its lifeblood – trade – China is dramatically altering its military operations, creating specialized teams that can protect its maritime resources, routes and territorial expansion plans. . . .

Harry Kazianis, director of the Washington, D.C.-based Defense Studies for The Center for the National Interest, stated:

“The great Achilles heel of China is trade—especially natural resources that come via sea and into its ports—and a big reason it will inevitably become a globally deployed military power. Beijing’s armed forces are working to slowly but surely reinforce and protect its overseas hubs as well as trade routes that move from Europe, the Middle East and Africa and into China’s territorial waters.”

ZTE HIT WITH SANCTIONS FOR VIOLATING EXPORT CONTROLS ACT

On March 7, 2007, in a notice and judgement, which will be attached to my blog, judgment 3-22ZTE Corporation Agrees to Plead Guilty and Pay Over $430, the US Justice Department announced that ZTE Corp, has agreed to plead guilty and pay a combined a penalty of $1.1.9 billion for violating U.S. sanctions by sending U.S.-origin items to Iran.  As the Justice Department notice states:

ZTE Corporation has agreed to enter a guilty plea and to pay a $430,488,798 penalty to the U.S. for conspiring to violate the International Emergency Economic Powers Act (IEEPA) by illegally shipping U.S.-origin items to Iran, obstructing justice and making a material false statement. ZTE simultaneously reached settlement agreements with the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) and the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC). In total ZTE has agreed to pay the U.S. Government $892,360,064. The BIS has suspended an additional $300,000,000, which ZTE will pay if it violates its settlement agreement with the BIS. . . .

“ZTE Corporation not only violated export controls that keep sensitive American technology out of the hands of hostile regimes like Iran’s – they lied to federal investigators and even deceived their own counsel and internal investigators about their illegal acts,” said Attorney General Sessions. “This plea agreement holds them accountable, and makes clear that our government will use every tool we have to punish companies who would violate our laws, obstruct justice and jeopardize our national security.  . . .”

“ZTE engaged in an elaborate scheme to acquire U.S.-origin items, send the items to Iran and mask its involvement in those exports. The plea agreement alleges that the highest levels of management within the company approved the scheme. ZTE then repeatedly lied to and misled federal investigators, its own attorneys and internal investigators. Its actions were egregious and warranted a significant penalty,” said Acting Assistant Attorney General McCord. “The enforcement of U.S. export control and sanctions laws is a major component of the National Security Division’s commitment to protecting the national security of the United States. Companies that violate these laws – including foreign companies – will be investigated and held to answer for their actions.”

“ZTE Corporation not only violated our export control laws but, once caught, shockingly resumed illegal shipments to Iran during the course of our investigation,” said U.S. Attorney Parker. “ZTE Corporation then went to great lengths to devise elaborate, corporate-wide schemes to hide its illegal conduct, including lying to its own lawyers.”

“The plea agreement in this case shows ZTE repeatedly violated export controls and illegally shipped U.S. technology to Iran,” said Assistant Director Priestap. “The company also took extensive measures to hide what it was doing from U.S. authorities. This case is an excellent example of cooperation among multiple

U.S. agencies to uncover illegal technology transfers and make those responsible pay for their actions.”

The plea agreement, which is contingent on the court’s approval, also requires ZTE to submit to a three- year period of corporate probation, during which time an independent corporate compliance monitor will review and report on ZTE’s export compliance program. ZTE is also required to cooperate fully with the Department of Justice (DOJ) regarding any criminal investigation by U.S. law enforcement authorities.  . . .”

According to David Laufman, chief of the counterintelligence and export control section at the DOJ’s National Security Division, it was “extraordinarily difficult” to obtain key documents and witnesses located in China until on March 7, 2016, the Commerce decision to add ZTE to the so-called Entity List.  According to Laufman, “The game-changing event in this case, was the Commerce Department’s decision to pursue an entity listing of ZTE, demonstrating the efficacy of the whole-of- government approach” to national security.

Companies end up on the Entity List after Commerce determines they are tied to illicit weapons programs, terrorism or other national security threats, and thereafter can’t trade with U.S. companies without a special dispensation from the agency.

This may be the first case in which the Commerce Department has used an Entity List designation to force a foreign company to cooperate in a probe.  Commerce will probably start using this strategy in future investigations.

SECTION 337 AND IP CASES

DOMESTIC INDUSTRY FROM PATENT LICENSEE

On March 8, 2017, the US International Trade Commission (“ITC”) issued the attached interesting decision, 2 PAGE ONE PAGE DI, in the Section 337 case Certain Silicon-On-Insulator Wafers.  In that decision, the ITC Administrative Law Judge determined that it could find a domestic industry in a Section 337 if the US patent licensee’s activities show domestic activity.  Even though the patent holder was a non-practicing entity, the ALJ determined:

Silicon Genesis Corporation (“SiGen”), has established contingently a domestic industry in the United States through the activities of its licensee, SunEdison Semiconductor Limited (“SunEdison”) . . . through its licensee, SunEdison, SiGen has proven by a preponderance of evidence that it has made a significant domestic investment in plant and equipment, in capital and labor, and a substantial investment in research and development to produce certain silicon-on-insulator (“SOI”) products at issue in this Investigation.

The decision did not break new ground, but it reminds nonpracticing entities, (“NPEs”) that one way to meet the domestic industry requirement under Section 337 is through the actions of patent licensee in the United States.

NEW 337 CASES AGAINST CHINA

On March 10, 2017, in the attached ITC notice, Intravascular Sets, Curlin Medical, Inc., Moog, Inc., and Zevex, Inc. filed a section 337 case against imports of Intravascular Administration Sets from Yangzhou WeiDeLi Trade 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–DEVELOPMENTS IN TRADE, TAX, CUSTOMS, PATENTS/337, ANTITRUST AND SECURITIES

Benjamin Franklin Statue Old Post Office Building Washington DC“TRADE IS A TWO WAY STREET”

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

US CHINA TRADE WAR BLOG UPDATE—SEPTEMBER 11, 2014

SEPTEMBER UPDATE

Dear Friends,

There have been major developments in early September in the Trade and Chinese antitrust areas of interest.

SPEECH IN VANCOUVER CANADA ON US SANCTIONS AGAINST RUSSIA—RUSSIAN TRADE LESSON

On September 3, 2014, I spoke on the US Sanctions against Russia, which are substantial, at an event sponsored by Deloitte Tax Law and the Canadian, Eurasian and Russian Business Association (“CERBA”). Attached are copies of the powerpoint for the speech US SANCTIONS RUSSIA and a description of our Russian/Ukrainian/Latvian Trade Practice for US importers and exporters. RUSSIAN TRADE PRACTICEThe sanctions will be described more in my September newsletter.

But my speech started with a quote from the last paragraph of the September 3, 2014 Wall Street Journal editorial about the Russian crisis, entitled “Deterring a European War”, which states:

“The temptation of democracies is to believe that autocrats treasure peace and stability as much as we do. Europeans in particular want to believe that their postwar institutions and economic integration have ended their violent history. But autocrats often prosper from disorder, and they need foreign enemies to feed domestic nationalism. This describes Russia under Mr. Putin, who is Europe’s new Bonaparte. His goal is to break NATO, and he’ll succeed unless the alliance’s leaders respond forcefully to the threat.”

This powerful paragraph reflects the very serious military situation between Russia and the EC and the US. But let’s probe a little more deeply.

What is the difference between Russia and China and our relationship with the two countries—Trade. When I was a young attorney at the ITC, a former Chairman Catherine Bedell, who was the first woman to be elected to the US Congress from Washington State, came to speak to the ITC staff. Former Chairman Bedell emphasized in her speech that our work at the ITC was not just simple trade work. It was the work of promoting peace.

President Reagan understood this. More trade means more peace and less chance of a shooting war.

The United States has 796,000 US jobs dependent upon exports to China, and China has millions of jobs dependent on exports to the US.

But what about Russia? The answer is much less trade coming from Russia. In 2013, the United States imported approximately $27 billion from Russia as compared to $464 billion from China. Of the Russian imports, $19 billion was for oil, and the rest for raw materials, including iron and steel products, chemicals, metals, fertilizer and fish. With China, electronics leads the way.

Much of what Russia exports is oil, raw materials and steel products. Many steel products and urea, fertilizer, are blocked by US Antidumping Orders or a Steel Agreement. There is less trade and with less trade it is much easier to have a shooting war.

In 1986 when I was working at the Commerce Department, one of Russia’s most important exports, Urea, fertilizer, was attacked with an antidumping case, which resulted in an antidumping order on July 14, 1987. The case was so long ago that it was not against Russia. It was against the entire Soviet Union.

When the Soviet Union broke up, the Commerce Department issued antidumping orders against Urea from all the member countries in the Soviet Union. Most of the orders against the other member states in the Soviet Union have been lifted, but not the orders against Russia or Ukraine. Urea from both countries are still covered by antidumping orders from the original 1986 case. In early November 2011, the US International Trade Commission (“ITC”) extended the antidumping orders for another five years. So we have had antidumping orders on Urea from Russia and Ukraine for almost 3o years.

One company, Eurochem, has been able to get through the antidumping order because in contrast to China Russia is considered a market economy country, but every other Russian company is blocked. Why is Russia considered a market economy country and not China? Because of 911, President Bush wanted Russian military bases to attack Afghanistan. President Putin of Russia, being a tough negotiator, said make Russia a market economy under the US antidumping and countervailing duty law. Secretary Evans of Commerce flew into Moscow and said it looks like a market economy to me. As CBS news stated about the announcement:

“The Russian leader has aggressively pursued closer ties with the West since the Sept. 11 terrorist attacks, and many analysts had predicted the United States would grant Russia market economy status and help in its WTO bid in exchange for Putin’s strong support for the U.S.-led campaign in Afghanistan.”

http://www.cbsnews.com/news/russia-joins-club-capitalism/

But even with the change in the US antidumping law, Russian imports remain relatively low, and the United States has less influence. Because of the importance of the present situation with Russia and the interest of US exporters and US importers, my blog and newsletter will include a new section on trade with Russia and the US sanctions in place against trade with Russia. More will come out in the next newsletter and blog post.

NEW ANTIDUMPING AND COUNTERVAILING DUTY CASE AGAINST BOLTLESS STEEL SHELVING FROM CHINA

On August 26, 2014, Edsall Manufacturing filed a new AD and CVD case against Boltless Steel Shelving from China. The alleged Antidumping rates are 33 to 267%.

The ITC will hold its preliminary conference on September 16, 2014. Attached are the ITC notice and the relevant pages of the petition.  ITC PRELIMINARY NOTICE STEEL SHELVING SHORT PETITION

SEPTEMBER ANTIDUMPING ADMINISTRATIVE REVIEWS

On September 2, 2014, Commerce published in the Federal Register the attached notice, SEPT REVIEWS ,regarding antidumping and countervailing duty cases for which reviews can be requested in the month of September. The specific antidumping cases against China are: Freshwater Crawfish Tailmeat, Foundry Coke, Kitchen Appliance Shelving and Racks, Lined Paper Products,   Magnesia Carbon Bricks, Narrow Woven Ribbons with Woven Selvedge, New Pneumatic Off-The-Road Tires, Raw Flexible Magnets, and Steel Concrete Reinforcing Bars.

The specific countervailing duty cases are:

Kitchen Appliance Shelving and Racks, Magnesia Carbon Bricks, Narrow Woven Ribbons with Woven Selvedge, New Pneumatic Off-The-Road Tires, and Raw Flexible Magnets.

For those US import companies that imported Freshwater Crawfish Tailmeat, Foundry Coke, Kitchen Appliance Shelving and Racks, Lined Paper Products,   Magnesia Carbon Bricks, Narrow Woven Ribbons with Woven Selvedge, New Pneumatic Off-The-Road Tires, Raw Flexible Magnets, and Steel Concrete Reinforcing Bars and the other products listed above from China during the antidumping period September 1, 2013-August 31, 2014 or during the countervailing duty review period of 2013 or if this is the First Review Investigation, for imports imported after the Commerce Department preliminary determinations in the initial investigation, 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 Antidumping and Countervailing Duty 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.

In my experience, many US importers do not realize the significance of the administrative review investigations. They think the antidumping and countervailing duty 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 the recent final determination in the Wood Flooring Case, for example, although the rates were very low for many Chinese exporters, only 5%, 20 Chinese exporters had their rates go to 58% because they did not participate in the review investigation and did not file a no shipment certification, separate rate application or separate rate certification at the Commerce Department.

NEW MAJOR 337 PATENT CASE AGAINST PERSONAL TRANSPORTERS FROM CHINA

On September 9, 2014, Segway filed a major 337 patent case against imports of personal transporters from a number of Chinese companies in Beijing and Shenzhen. The ITC notice is below and the relevant parts of the Petition are attached. SHORT PERSONAL TRANSPORTERS 337 Complaint Segway is requesting a general exclusion order to exclude all personal transporters from China and other countries and also cease and desist orders to stop importers from selling infringing personal transporters in their inventory.

Chinese companies must respond to the complaint in about 60 days, 30 days for Institution and 30 days from service of complaint. If the Chinese companies fail to respond, they can be found in default and exclusion orders against their products can be issued.

If anyone has questions about this compliant, please feel free to contact me.

Dorsey & Whitney has substantial expertise in the patent and 337 areas. Recently, we were able to win a major 337 case for a Japanese company in the Point-to Point Network Communication Devices 337 case.

Docket No: 3032

Document Type: 337 Complaint

Filed By: David F. Nickel

Firm/Org: Foster & Murphy

Behalf Of: Segway Inc. and DEKA Products Limited Partnership

Date Received: September 9, 2014

Commodity: Personal Transporters

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 Personal Transporters, Components Thereof, and Manuals Therefor . The proposed respondents are: PowerUnion (Beijing) Tech Co. Ltd., Beijing; UPTECH Robotics Technology Co., Ltd., Beijing; Beijing Universal Pioneering Robotics Co., Ltd., Beijing; Beijing Universal Pioneering Technology Co., Ltd., Beijing; Ninebot Inc.,(in China) Beijing; Ninebot Inc., Newark, DE; Shenzhen INMOTION Technologies Co., Ltd., Guangdong; Robstep Robot Co., Ltd., Guangdong; FreeGo High-Tech Corporation Limited, Shenzhen; Freego USA, LLC, Sibley, IA; Tech in the City, Honolulu, HI; and Roboscooters.com, Laurel Hill, NC.

Status: Pending Institution

RISE IN CHINESE ANTI-MONOPOLY CASES CREATES INTENSE CONCERN FROM US AND FOREIGN COMPANIES

In September 2014, the US China Business Council and the US Chamber of Commerce published the attached major reports/survey from US Companies about the impact of the Chinese anti-monopoly law on US business in China.  US CHINA BUSINESS COUNCIL REPORT CHINA AML The Executive Summary of the US China Business Council report states as follows:

Executive Summary

  • China’s increased level of competition enforcement activity and the high-profile reporting of its competition investigations have prompted growing attention and concern from US companies. Eighty-six percent of companies responding to the US-China Business Council’s (USCBC’s) 2014 member company survey indicated they are at least somewhat concerned about China’s evolving competition regime—although more so about the potential impact than actual experience so far.
  • China’s competition regime framework is relatively new. The Antimonopoly Law (AML) came into force in 2008 after Chinese authorities spent more than a decade drafting the law and consulting with foreign competition authorities from the United States, the European Union, and other jurisdictions. The AML draws from elements of both the US and EU competition laws, though it is more closely tied to the EU model and contains some elements unique to China.
  • The rise in competition-related investigations has corresponded to the buildup in personnel at regulatory agencies following the AML’s implementation.
  • USCBC monitoring of publicly announced cases indicates that both foreign and domestic companies have been targets of AML-related investigations, but that foreign companies appear to have faced increasing scrutiny in recent months.
  • The perception that foreign companies are being disproportionately targeted is also fueled by China’s domestic media reporting, which has played up foreign-related investigations versus those of domestic companies.
  • Targeted or not, foreign companies have well-founded concerns about how investigations are conducted and decided. Company concerns include:

o Fair treatment and nondiscrimination

o Lack of due process and regulatory transparency

o Lengthy time periods for merger reviews

o Role of non-competitive factors in competition enforcement

o Determination of remedies and fines

o Broad definition of monopoly agreements

  • Bigger questions remain unanswered about the objectives of China’s competition regime, such as: Will China use the AML to protect domestic industry rather than promote fair competition? Is the government using the AML to force lower prices, rather than let the “market play the decisive role” as enshrined in the new economic reform program? The answers are not fully determined yet, but in at least some cases so far there are reasons for concern.

The report by the US China Business Council was followed by the attached even stronger report by the US Chamber of Commerce in China entitled, Competing Interests in China’s Competition Law Enforcement: China’s Anti-Monopoly Law Application and the Role of Industrial Policy, AM CHAM ACTUAL REPORT ON AML. My September newsletter and blog post will have more about the rise of the Chinese anti-monopoly law. What goes around, does indeed come around.

AUGUST NEWSLETTER

Dear Friends,

There have been major developments in the trade, Solar Cells, Tax, Trade Agreements, 337/IP, US/Chinese antitrust, and securities areas in August 2014.

I have been late in sending out this blog post because the Trade War keeps expanding into many different areas, especially antitrust. The United States has brought a shotgun to the Trade War with its antidumping and countervailing duty laws against Chinese companies, and the Chinese government has brought a bazooka to the Trade War with the enforcement of its Antimonopoly Law/Antitrust laws against US and other foreign companies. What goes around, does indeed come around.

IMPORT ALLIANCE FOR AMERICA/IMPORTERS’ LOBBYING COALITION

BEIJING ORGANIZATIONAL MEETING

As mentioned in prior newsletters, we are working with APCO, a well-known lobbying/government relations firm in Washington DC, on establishing a US importers/end users lobbying coalition to lobby against the expansion of US China Trade War and the antidumping and countervailing duty laws against China for the benefit of US companies.

On September 18, 2013, ten US Importers agreed to form the Import Alliance for America. The objective of the Coalition will be to educate the US Congress and Administration on the damaging effects of the US China trade war, especially US antidumping and countervailing duty laws, on US importers and US downstream industries.

We will be targeting two major issues—Working for market economy treatment for China in 2016 as provided in the US China WTO Agreement and working against retroactive liability for US importers. The United States is the only country that has retroactive liability for its importers in antidumping and countervailing duty cases. The key point of our arguments is that these changes in the US antidumping and countervailing duty laws are to help US companies, especially US importers and downstream industries. We will also be advocating for a public interest test in antidumping and countervailing duty cases and standing for US end user companies.

Congressmen have agreed to meet importers to listen to their grievances regarding the US antidumping and countervailing duty laws. In addition to contacting US importers, we are now contacting many Chinese companies to ask them to contact their US import companies to see if they are interested in participating in the Alliance.

As indicated above, at the present time, Commerce takes the position that it will not make China a market economy country in 2016 as required by the WTO Accession Agreement because the 15 years is in a treaty and not in the US antidumping and countervailing duty law. Changes to the US antidumping and countervailing duty law against China can only happen because of a push by US importers and end user companies. In US politics, only squeaky wheels get the grease.

On August 7, 2014, we held an organizational meeting in Beijing, China at the headquarters of China Ocean Shipping Company (“COSCO”) with interested Chambers of Commerce and Chinese companies to explain the project in more detail and to seek help in contacting US importers about the Alliance.

We spoke to about 40 attendees, including attendees from the legal departments of the top 10 chambers of commerce, including Chemicals, Machinery and Electronics, Light Industrial Products, and Food, and the Steel, Wood Products and Hydraulics and Pneumatics & Seals Association.

In addition to describing the Import Alliance and the issues regarding 2016 in the US China Accession Agreement, we also discussed the US China Trade War in general. Introductory videos for Organizational Meeting from Cal Scott of Polder Inc., the President of the Import Alliance, can be found at the following link https://vimeo.com/103556227 and for former Congressmen Don Bonker and Cliff Stearns of APCO can be found at the following link https://vimeo.com/103556226 along with the powerpoint FINAL WEB BEIJING IMPORT ALLIANCE POWERPOINT we used to describe the Import Alliance, the specific provision in the US China WTO Agreement and the Trade War in general.

TRADE

TAX IMPLICATIONS OF US ANTIDUMPING AND COUNTERVAILING DUTY CASES

Recently, it has come to my attention that a major problem for importers that import under antidumping and countervailing duty orders is the US tax laws. As indicated in past blog posts, the US Congress is screaming because US importers are not paying all the antidumping and countervailing duties that are retroactively assessed.

As mentioned previously, the United States is the only country in the World that has retroactive liability for US importers in antidumping and countervailing duty cases. When an antidumping or countervailing duty order is issued, the rates in the orders are not the actual dumping or countervailing duties owed by US importers to the US government. The published rates are merely the cash deposit rates to be posted by US importers, when they import under an antidumping or countervailing duty order. The actual duties are determined during annual review investigations that often start up one year after the antidumping or countervailing duty order are issued.

Review investigations start up in the anniversary month in which the specific order is issued and will take a year and a half. So at a minimum, after the importer imports the product into the United States under an antidumping or countervailing duty order, it will take two and a half years, one year for the review investigation to start up and then a year and a half for Commerce to conduct the review investigation for the importer to learn how much it actually owes the US government. If the Commerce Department’s final determination is appealed to the Courts, it can take 5 to 10 years before the US importer knows how much it actually owes the US government.

If the antidumping or countervailing duty rate goes up in the annual review investigation, the US importer is retroactively liable for the difference plus interest. In numerous cases, such as Ironing Tables, Wooden Bedroom Furniture, Mushrooms and other China cases, rates can go from 0% or 16% to 157, 216 and 300%, creating millions of dollars in retroactive liability for US importers and often bankruptcy.

Congress then screams that US importers do not pay the duties that are due, but according to David Musser, a tax accountant, at Nicholas Cauley that I have been talking to, if a US importer sets up an internal fund to pay off any potential antidumping or countervailing duties, that fund is taxable because it is not considered a deductible expense. So the US government has set up a system where it is impossible for the importer to protect itself from increased antidumping or countervailing duties.

As David Musser states:

“ANTIDUMPING TARIFFS – ACCOUNTING TREATMENT vs. TAX DEDUCTION

Antidumping duties that attach to certain imports create accounting issues that may be in conflict with income tax deduction rules. The rule for deducting an expense for income tax purposes is that it must pass the all events test and economic performance occurs. This means that the liability for the antidumping fees must be fixed and determinable and paid (economic performance) for it to be tax deductible. This can create a large timing difference for deductibility since the Commerce Department may not determine the fees owed until a minimum of two and half years after the import was made. So if you accrue an amount for estimated antidumping fees, the amount is not fixed and determinable at that point and is not deductible. If you pay a deposit for the fees, you have satisfied economic performance, but the amount is still not fixed and determinable.

This appears to be in conflict with matching rules where specific expenses are matched in the same year to related income items, especially if you are passing the cost of the antidumping fees to your customers. Depending on how you invoice, there may be a potential to reduce the effect of the tax timing difference. This would require the antidumping fees/deposits to be separately stated on the sales invoice and accounted for as deferred antidumping fees on your balance sheet. This does not completely eliminate the timing difference associated with the fees, but it may be better than waiting two and a half years or more to get the deduction.”

In a May, 5, 1995 letter ruling 538001, the Internal Revenue Service (“IRS”) stated:

“In the present case, the deposits were determined on the basis of transactions that occurred in a prior year. The deposits are specifically characterized as such by the relevant provisions of the applicable statutes and regulations. There is no necessary correlation between the circumstances in the year that provided the basis for the deposits and the circumstances that exist in the year the deposits are required. . . .

An importer’s ability to influence the ultimate disposition of a deposit required by an antidumping duty order is consistent with the characterization of the amount as a deposit. If an importer sells merchandise that is subject to the deposit requirement at fair value, the importer can ensure the recovery of the deposit. Generally, an asserted liability is not affected by the subsequent actions (other than administrative or judicial review) of the obligor. . . .

CONCLUSION

In the circumstances described, the Taxpayer’s deduction for antidumping duties is not allowable for the taxable year in which the antidumping duty order was issued. Antidumping duties are determined on the basis of the weighted-average dumping margins on all U.S. sales during the period covered by an administrative review of an antidumping duty order or, in the absence of a request for administrative review, on the basis of deposits required by an antidumping duty order. In either case, occurrence of all events necessary to allow a reasonable basis for determination of the amount of a liability for antidumping duties had not taken place before the end of the taxable year for which the Taxpayer claimed a deduction for antidumping duties.”

The 1995 tax ruling, however, is completely wrong as it applies to antidumping cases against China.  The writer of the ruling assumed “an importer can sell merchandise that is subject to the deposit requirement at fair value”. As readers of this blog know, since antidumping duties in Chinese cases are not based on actual market prices and costs in China, it is impossible for the Chinese exporter to know whether it is dumping, never mind the US importer.  With regards to China, Commerce constructs a cost using consumption factors from Chinese producers multiplied by surrogate values from import statistics from 10 potential surrogate countries, ranging from Thailand, Indonesia, Philippines, to Columbia or Bulgaria and those countries can change in subsequent review investigations.

Because of the fact that actual price and costs in China are not used to determine Chinese antidumping rates, it is impossible for the Chinese company or the US importer to know whether it is dumping. Thus, the US importer that is trying to protect itself from bankruptcy is in a damned if you do, damned if you don’t situation.

SEPARATE ANTIDUMPING RATES—NO LONGER A PRO FORMA EXERCISE– MUCH TOUGHER FOR STATE OWNED COMPANIES

With December 11, 2016 and the requirement in the US China WTO Agreement that China is a market economy country coming up, one would expect Commerce to relax the requirements regarding separate rates for state owned companies. Instead, Commerce is making it more difficult for Chinese state owned companies that are under the supervision of the PRC’s State-owned Assets Supervision and Administration Commission of the State Council (“SASAC”) to get their own separate antidumping rate.

Based on recent attached decisions in the Court of International Trade in the Diamond Sawblades case, specifically two opinions in the Advanced Technology & Materials Co., Ltd. v. United States, ADVANCED TECHNOLOGY TWO CIT CIT ADVANCED TECHNOLOGY 11-12211-122, where the Court, in effect, forced Commerce to deny a separate rate to Advanced Technology because part of the ownership was by SASAC, Commerce has made it more difficult for Chinese companies under the control of or owned in part by the State-Owned Assets Commission to get separate dumping margins/separate rates.

Recently, in the preliminary determination in 1,1,1, 2 Tetrafluoroethane from China case, Commerce overturned decades of past decisions giving Sinochem a separate antidumping rate, and determined that many Chinese companies, including numerous Sinochem companies, were not entitled to a separate dumping rate. In the May 22, 2014 preliminary determination, in the Issues and Decision memo, AD Tetrafluoroethane Prelim Decision Memo-5-21-14, the Commerce Department stated:

The Department has not granted a separate rate to the following additional Separate Rate Applicants: SC Ningbo International Ltd (“SC Ningbo International”), Sinochem Environmental Protection Chemicals (Taichang) Co., Ltd. (“SC Taicang”), Sinochem Ningbo Ltd. (“SC Ningbo”), Zhejiang Quhua Fluor-Chemistry Co., Ltd. (“Quhua-Fluor”), Zhejiang Quzhou Lianzhou Refrigerants Co., Ltd. (“Lianzhou”) and Aerospace for the following reasons:

“The Department preliminary determines that SC Taicang, SC Ningbo Ltd. and SC Ningbo International have not demonstrated an absence of de facto government control.Specifically, each of these companies is under the control of Sinochem Group, a 100%-owned SASAC [State-owned Assets Supervision and Administration Commission of the State Council]entity.Evidence shows that members of Sinochem Group’s board of directors and management actively participate in the day-to-day operations of SC Taicang, SC Ningbo Ltd. and SC Ningbo International as members of the board of directors. Furthermore, while the boards of these companies claim they are not involved in the day-to-day activities, each board oversees every aspect of the company, including the hiring and firing of the managers and determining their remuneration.

Accordingly, based on this evidence, we find that these companies have not demonstrated an absence of de facto government control.

Similarly, the Department preliminarily determines that neither Quhua nor Lianzhou demonstrated an absence of de facto government control. Specifically, both of these companies are under the control of Juhua Group, a 100%-owned SASAC entity, and evidence shows that members of Juhua Group’s board of directors and management actively participate in the day-to-day operations of Quhua and Lianzhou as executive directors. Further, the Juhua Group holds monthly price discussions and sets price guidance for sales of the merchandise under consideration. Accordingly, based on this evidence, we find that these companies have not demonstrated an absence of de facto government control.

Similarly, the Department preliminary determines that Aerospace did not demonstrate an absence of de facto government control. Specifically, Aerospace’s controlling Board members are also on the Board of its largest single owner China Aerospace Science & Industry Corp. (“CASIC”), a 100%-owned SASAC entity, and evidence shows that members of CASIC’s board of directors actively participate in the day-to-day operations of Aerospace.  Aerospace’s Board elects the company’s general manager and the Board will appoint or dismiss other senior managers based upon the general manager’s recommendation. Although the ownership from SASAC is less than a majority, record evidence leads us to conclude that the other shareholders have no formal authority to appoint board members or directors. Accordingly, based on this evidence, we find that Aerospace has not demonstrated an absence of de facto government control.”

SOLAR CASES—POSSIBLE SETTLEMENT??

On June 3, 2014, Commerce issued its preliminary countervailing duty determination against China in the Solar Products case. The fact sheet and preliminary Federal Register notice are posted on my blog in my last post. The Countervailing Duty Rates range from 18.56% for Trina to 35.21% for Wuxi Suntech and all other Chinese companies getting 26.89%.

As stated in the attached Commerce Department memo, ADCVD Solar Products Ex Parte Phone Call with Senator Patty Murray (WA)-7-23-14, on July 23rd, Senator Patty Murray spoke to Commerce expressing her concern of the impact of the Commerce Department determination on REC Silicon, a polysilicon producer in Washington.

On July 25th, the Commerce Department announced its preliminary antidumping determination in the Chinese solar products case establishing 47.27% combined rates (20.38% Antidumping, 26.89% Countervailing Duty) wiping out billions of dollars in imports of Chinese solar products into the United States. More specifically, on July 25, 2014, DOC announced preliminary AD duties ranging from 27.59 to 44.18 percent for Chinese companies, and 27.59 to 44.18 percent for Taiwanese companies. With the set off for countervailing duties, however, the antidumping rates are offset resulting in a lower overall cash deposit rate.

Attached are the Commerce Department’s Factsheet, Solar Products AD Prelim Fact Sheet 072514 (1), Federal Register notice, FR Notice AD Solar Products Affirmative Prelim Determination Postponement of Final Determination-7-31-14, Issues and Decision memo from the Antidumping Preliminary Determination, AD Solar Products Decision Memo for Prelim Determination-7-24-14, along with Commerce instructions to Customs in the Solar Products Antidumping and Countervailing Duty cases, COMMERCE INSTRUCTIONS TO CUSTOMS COMMERCE CVD INSTRUCTIONS CHINA CUSTOMS, which will help importers understand what products are covered by this case.

Attached also is the ITC scheduling notice for its final injury investigation in the Solar Products case. FR Notice ITC Solar Products Scheduling of Final Phase of CVD AD Inv -8-25-14 The ITC hearing is scheduled for December 8, 2014.

On August 15th, after an extension, the Chinese government filed a letter at Commerce expressing an interest in a suspension agreement, but no proposed formal agreement has been filed with the Department.

Once and if any agreement is negotiated, Commerce will disclose the terms of the Agreement and seek public comment. Pursuant to the Statute, the Petitioner must approve the Agreement, which will make it much more difficult to negotiate an Agreement acceptable to Solar World. But miracles can happen.

If the Chinese government were to submit a proposed settlement agreement to Commerce, that might start negotiations. But the underlying antidumping and countervailing duty cases on Solar Products are moving quickly with verifications of the Chinese companies already underway and a final Commerce Department determination due in December and an ITC final injury determination in January 2015. There is little time left for negotiations or posturing.

Meanwhile, it has been reported that Chinese solar companies are moving to set up production facilities in third countries, such as India. In addition, Solar companies in third countries, such as REC Group in Norway and a German company with production facilities in Singapore and Malaysia, are reporting increased sales.

Also there have been reports that REC Silicon, a US polysilicon producer, is now moving forward with a joint venture in China, rather than increasing its investment in Washington State.

TAIWAN SOLAR PRODUCTS

On August 21, 2014, in the attached Federal Register notice, FR Notice AD Solar Products from Taiwan- Notice of Amended Prelim Determination-8-22-14, because of a “ministerial” error in its calculation, the Commerce Department reduced significantly the preliminary antidumping rate of the Taiwan respondent, Motech Industries Inc., from 44.18 percent to 20.86 percent. Apparently Commerce made a mistake in its calculations by adding a warranty expense to the normal/foreign value of Motech’s products without first converting that expense from New Taiwan dollars to U.S. dollars. This decision has also caused the all other rate for other Taiwan companies to fall to 24.23%.

TRADE NEGOTIATIONS—TPA, TPP, TTIP/TA AND BALI/DOHA ROUND

As mentioned in past blog posts, in the trade world, the most important developments may be the Trans Pacific Partnership (TPP), Trans-Atlantic (TA)/ the Transatlantic Trade and Investment Partnership or TTIP negotiations and the WTO.  These trade negotiations could have a major impact on China trade, as trade issues becomes a focal point in Congress and many Senators and Congressmen become more and more protectionist.

This is particularly a problem because the protectionism is coming from the Democratic side of the aisle. Democratic Senators and Congressmen are supported by labor unions. To date, President Obama cannot get one Democratic Congressman in the House of Representatives to support Trade Promotion Authority (“TPA”) in Congress. Without bipartisan/Democratic support for these Trade Agreements, Republicans will not go out on a limb to support President Obama and risk being shot at by the Democrats during the mid-term elections as soft on trade.

As mentioned in prior blog posts, on January 29th, the day after President Obama pushed the TPA in the State of the Union, Senate Majority leader Harry Reid stated that the TPA bill would not be introduced on the Senate Floor.

To summarize, on January 9, 2014, the Bipartisan Congressional Trade Priorities Act of 2014, which is posted in my February post, was introduced into Congress. The TPA bill gives the Administration, USTR and the President, Trade Promotion Authority or Fast Track Authority so that if and when USTR negotiates a trade deal in the TPP or the Trans-Atlantic negotiations, the Agreement will get an up or down vote in the US Congress with no amendments.

Under the US Constitution, Congress, not the President has the power to regulate trade with foreign countries. Article 1, Section 8, Clause 3, of the Constitution empowers Congress “to regulate Commerce with foreign nations” Thus to negotiate a trade agreement, the Congress gives the Executive Branch, the Administration/The President and United States Trade Representative (“USTR”), the Power to negotiate trade deals.

Because trade deals are negotiated with the foreign countries, the only way to make the system work is that under the TPA law when the Trade Agreement is negotiated, the Congress will agree to have an up or down vote on the entire Agreement and no amendments to the Agreement that has already been negotiated will be allowed.

On April 9, 2014, the new Senate Finance Committee Chairman Senator Ron Wyden announced at a speech to the American Apparel & Footwear Association Conference that he was introducing a new TPA bill, what Senator Wyden calls Smart Track. But to date no details have been given about exactly what Smart Track will mean, other than more oversight by Congress and input by the Public in the trade negotiations.

On July 16, 2014, the American Iron and Steel Institute, which represents all the US steel manufacturers, stated that any future legislation that grants the president Trade Promotion Authority (TPA) or implements a free trade agreement must contain provisions on trade enforcement, including changes to the U.S. trade remedy law, the enactment of the ENFORCE Act, to put more pressure on US Customs to address transshipment and other issues, and language to address currency manipulation. The US Steel Industry and the United Steel Workers (“USW”) are also requesting Congress to lower the injury standards in antidumping and countervailing duty cases to make it easier for the ITC to go affirmative in antidumping and countervailing duty cases.

On July 17th, all Republican members of the House Ways and Means Committee sent a letter to USTR Froman, which is posted on my last July blog post, urging the Administration to build support for Trade Promotion Authority (TPA) and directing the Administration not to complete the Trans-Pacific Partnership (TPP) before TPA is enacted into law.

Now the story continues . . . .

On July 30th in the attached letter, JAPAN TPP HOUSE REPS tpp_market_access_letter.pdfHpR)_R)wR)_, close to 100 Congressmen/women wrote to the USTR to express their concern regarding the agricultural negotiations with regard to Japan and Canada. They stated:

We write to express our deep concern over Japan’s current market access ·offer within the ongoing Trans-Pacific Partnership (TPP) negotiations. When Japan joined these negotiations, it agreed that the elimination of tariffs is a key feature of the agreement, as announced by TPP leaders on November 12, 2011. Unfortunately, Japan’s current position falls far short of acceptability.

Specifically, Japan is seeking to exempt numerous tariff lines from complete elimination with the United States. If accepted, this unprecedented and objectionable offer would significantly limit access for U.S. farmers and ranchers to the Japanese market, and most likely, to other TPP countries as well.

Furthermore, caving to Japan’s demands would set a damaging precedent, compromising the U.S. negotiating position with future TPP members. This result runs the significant risk that the EU will be encouraged to make unacceptably weak offers in the Transatlantic Trade and Investment Partnership negotiations, undermining Congressional support. In that same vein, we are also troubled by Canada’s lack of ambition, which is threatening a robust outcome for U.S. farmers.

The Trans-Pacific Partnership was envisioned as a high-standard, 21st century trade agreement that would be a model for all future U.S. free trade agreements. To realize this goal, we urge you to hold Japan and Canada to the same high standards as other TPP partners. Otherwise, Congressional support for a final TPP agreement will be jeopardized.

Indeed, we urge you to pursue the TPP negotiations without any country, including Japan, Canada, or others, that proves unwilling to open its market in accordance with these high standards. We owe our farmers and ranchers the best deal possible.

On August 14, 2014 the North American steel, automotive and textile industries called on USTR to include currency manipulation in future trade deals, including the TPP.

USTR Froman in prior statements has acknowledged the importance of dealing with rampant currency manipulation in countries such as China but has stopped short of indicating whether or not the rules would make their way into the TPP. He has also been careful to note that Treasury takes the lead on all issues relating to currency.

On August 19, 2014, the Electronic Frontier called on Sen. Ron Wyden, head of the powerful Senate Finance Committee, to create more transparent rules overseeing the negotiation and passage of free trade agreements, warning against overly restrictive protections for copyrights. The Electronic Frontier launched a petition calling on Wyden to introduce and pass legislation that would grant unprecedented access to trade negotiating texts and meetings for lawmakers and other observers, along with negotiating objectives that would balance the rights of both users and private industry.

On August 27, 2014, it was reported that TPP negotiators will meet for 10 days in Hanoi, Vietnam to discuss various issues, including food safety, intellectual property, investment, technical barriers to trade, environmental rules and state-owned enterprises. But because of the political situation, experts doubt that a serious breakthrough will occur and that the decisions necessary to close the deal still need to be made at the highest levels of government. The hope, however, is that the Hanoi session will allow the negotiators to narrow the gaps on the way to an agreement.

But the differences with Japan and the lack of Trade Promotion Authority are two big issues that need to be addressed by the US Government. Without these two issues being resolved, the chance of any big breakthroughs in Hanoi are small. These two problems would appear to prevent a final deal at the November APEC meeting, which has been an objective of the Obama Administration.

INDIA WANTS TO JOIN THE TPP???

On August 12, 2014, Indian government officials stated that the TPP presents a substantial opportunity for India to bring its own trade regime up to global standards. Commerce Secretary Rajeev Kher told a Confederation of Indian Industry conference in New Delhi that while India is not a member of the TPP talks, the finalization of the 12-nation pact may serve as the catalyst for India to take a more active role in the global trading system and diversify its economy.

In summarizing the event the Confederation stated “Kher observed that there are several countries in the world that are not part of the TPP and India could enhance its trade relations with these countries. The TPP also gives India an opportunity to pay greater attention to strengthening its services sector so as to diversify it away from information technology as well as to bring about trade facilitation measures to boost trade.”

External Affairs Secretary Sujata Mehta also speaking at the event said that whatever rules become enshrined in the TPP agreement may well become the “gold standard” for global trade regulation moving forward and that developing countries will be affected by the pact even if they are not parties to it.

According to CII, “Mehta felt that India needed to work on a successful response, especially on non-tariff issues so as not to be shut out of the global markets. . . . She was of the view that India needs to achieve a balance between our economic goals and strategic interests.”

In light of India’s decision to kill the trade facilitation agreement negotiated in Bali at the World Trade Organization meeting, as described below, however, it is very doubtful that many countries in the TPP would welcome India into the Group. China would be a much better candidate because it is less ideological and more willing to make the necessary compromises to be included in the Agreement.

INDIA KILLS WTO TRADE FACILITATION AGREEMENT NEGOTIATED IN BALI

On July 31st, the WTO announced that the Trade Facilitation Agreement negotiated in Bali would not be implemented on schedule because of the substantial opposition from developing nations led by India, which wishes to limit the pact because of food security initiatives.

WTO Director-General Roberto Azevedo said on July 31st that a late-night informal session of the WTO’s Trade Negotiating Committee in Geneva failed in a last-ditch attempt to find common ground with the holdout countries. Azevedo stated that “I am very sorry to report that despite these efforts I do not have the necessary elements that would lead me to conclude that a breakthrough is possible. We got closer — significantly closer — but not quite there. At this late hour, with the deadline just a matter of moments away, I don’t have anything in my hands that makes me believe that we can successfully reach consensus.”

Because of outstanding differences that Azevedo termed “unbridgeable,” the WTO members will not be able to implement the deal, a move that required a consensus among members. The modest Trade Agreement was regarded as a sign that the WTO could be a forum to create new broad trade rules, in spite of the collapse of the Doha round of trade talks.

Azevedo went on to plead with the negotiators, “So please, take this time to reflect—and let’s be ready to discuss the way forward on these issues when you return. The future of the multilateral trading system is in your hands.”

But opposition from developing countries, chiefly India, has grown louder in recent weeks. While India’s specific demands have not been made public, the country has said that it will not agree to implement the facilitation deal without first securing a permanent solution on food security, a key priority for developing nations.

Top US trade officials criticized India for trying to alter the strict deadlines for each agreement laid out in Bali. India, however, has repeatedly refused to compromise, rejecting calls at the G-20 summit of trade ministers and the WTO’s General Council to follow through on the deal it made in Bali.

In response on August 1, 2014, House of Representatives Chairman Congressman Dave Camp of Ways and Means Committee along with Trade Subcommittee Chairman Devin Nunes made the following attached statement, HOUSE INDIA TRADE FACILITATION DEAL KILLED:

Rep. Camp: “India’s actions last night to bring down implementation of the Trade Facilitation Agreement are completely unacceptable and put into doubt its credibility as a responsible trading partner. As we determine next steps, I am committed to the WTO as an institution, and I hope that we can salvage the Trade Facilitation Agreement, either with or without India.”

Rep. Nunes: “It’s one thing for a country to be a tough negotiator. It is entirely another to agree to a deal with your trading partners, and then just simply walk away months later, insisting instead on one-sided changes. That’s what India has done here by going back on its word, running the risk of eliminating any sense of good will toward it.”

And India now wants to join the TPP??? As they say in New York, “Ferget about it.”

On August 6, 2014, EU trade commissioner Karel De Gucht stated that the European Union would have been willing to support “any solution” that would respect the substance of the deal.

The Bali package was the first unanimous trade agreement since the WTO’s inception and included a so-called cease-fire on challenges to India’s food subsidy programs while the countries worked to find a permanent solution by 2017. But India backed off on the deal insisting food security move to the front hoping to push more members to join them.

The ramifications from India’s decision could mean a near-fatal blow to the WTO’s already failing effort to craft comprehensive new global rules to govern international commerce. Experts said that the shrinking of the WTO as a negotiating platform would likely lead to a shift toward smaller, binational, talks among willing countries members and regional free trade agreements, such as the TPP.

WTO Director-General Roberto Azevedo made clear that the members’ inaction would have far-reaching implications for the multilateral negotiating system.

“My sense, in the light of the things I hear from you, is that this is not just another delay which can simply be ignored or accommodated into a new timetable — this will have consequences. And it seems to me, from what I hear in my conversations with you, that the consequences are likely to be significant.”

With the first of those trade agreements now facing an uncertain future after this week’s missed deadline, many trade experts are pessimistic that the multilateral system can ever be workable again. As one trade lawyer stated “If agreements agreed to by all governments of the world become subject to hostage-taking by a country who desires a change in the package, then you have no sense in negotiating because it’s not going to be worth anything.”

Meanwhile on August 19, 2014, Members of the Asia-Pacific Economic Cooperation, including China, vowed to do everything in their power to improve the flow of goods across their borders even as the WTO Agreement falls apart. The APEC Committee on Trade and Investment restated their commitment to trade facilitation, indicating that they will take matters into their own hands if no progress can be made on the multilateral stage.

CHAOTIC TRADE SITUATION WITH COLLAPSE OF WTO TALKS

The collapse in Trade Facilitation Agreement has led many experts to question the future of the WTO Multilateral system. In an article published on August 18th, Terry Stewart, a well-known trade lawyer in Washington DC, stated:

“The World Trade Organization has existed for almost 19 years, replacing the former General Agreement on Tariffs and Trade in 1995. . . . Last December, trade ministers from the WTO eeked out a last-minute compromise to permit an agreement on trade facilitation to be reached and to agree to commitments on a range of other topics at the 9th Ministerial in Bali, Indonesia. . . . The trade facilitation agreement (“TFA”) had long been viewed as a win win for all members. Some estimates of the benefits to the world economy were as high as $1 trillion and the creation of some 21 million jobs (most in the developing world). . . .

The WTO membership operates on momentum. When there is optimism based on success or progress, the membership appears capable of searching for solutions and the organization can achieve significant forward movement. . . .

Where there are missed deadlines or spoiled expectations, WTO members go into lockdown positions, where officials in Geneva are basically just going through the motions, and the organization’s negotiating function effectively shuts down for extended periods. . . .

But never before have WTO members (or GATT contracting parties before them) ever failed to move a new agreement approved by ministers through the steps of a legal scrub and adoption of appropriate documents to permit the agreement to be opened for ratification by members. Yet that is exactly what happened last month as India (with some support from a few other countries) refused to permit adoption of a simple protocol of amendment to add the trade facilitation agreement to the WTO agreements and to open the agreement for ratification by the membership.

The failure was not just another missed deadline. The failure sends the WTO once again to the precipice of irrelevance for trade negotiations. . . ..

The path out of the crisis India has created is not clear. While India has downplayed the importance of the missed date and the significance of changing the balance of the Bali package, the dilemma for others is more obvious. If a WTO member can hold the membership hostage on an agreed upon direction in the hopes of altering a previously agreed balance, negotiations at the WTO become meaningless and subject to repeated hostage-taking.”

As former US Trade Representative Susan Schwab recently stated, the stalling of multilateral efforts to craft cohesive global trade and investment rules has pushed nations both large and small to pursue more limited agreements that can squarely address their most immediate concerns in a given region, but the proliferation of these efforts has substantially complicated the operations of businesses across several sectors. Schwab stated, “Even the largest multinational firms, stepping back and looking at what is going on, their heads are spinning trying to figure out how this affects all of their business plans . . . You’ve got the progress in the trade system stalling and all of the regional [deals] in various states of suspended animation.”

Schwab echoed the near-unanimous sentiment of several experts in saying that India’s move poses a substantial threat to ever reviving a serious effort to rewrite international trade rules for the first time in two decades. According to Schwab, “What the Indians did is a travesty, and it’s a disaster for India’s economy, the rest of the world and the multilateral trading system . . . . The implications for the trading system and the global economy and businesses are really bad news. Not only do you have a stalling of these mega-regional negotiations, but now you’ve got a stalling of what had been a glimmer of hope in the multilateral system.”

OCTG

As stated in prior newsletters and above, US Steel Corp along with the Steel Union (USW) have brought follow up cases against Steel Oil Country Tubular Goods (“OCTG”), Steel Pipes used in oil wells from a number of different countries. US Steel and the Steel Union first attacked China and were able to drive them out of the US market with 47% dumping rate, not based on actual prices and costs in China. Instead, Commerce used values from Indian import statistics to throw the Chinese out of the US market.

But Chinese imports were replaced by imports from Korea, Taiwan, India and many other countries. So USW and US Steel filed antidumping and countervailing duty cases against those countries. In the preliminary antidumping determination, Commerce calculated very low antidumping rates, such as 0s for Korea, 0 to 2.65 for Taiwan, 0 for one producer in India, 2.92% for Saudi Arabia and 8.9% for Philippines.

The USW and US Steel through the Congress put immense political pressure on Commerce to change its preliminary determination, especially with regards to Korea. On July 11, 2014, Commerce issued its final determination, which is posted in my last post on this blog, pushing Korea’s AD rate to 9.89 to 15.75%, Taiwan 0 to2.52%, Saudi Arabia 2.69%, Philippines 9.88%, Ukraine 6.73% and an India CVD rate from 5 to 19%.   The point, however, is that these are not shut out rates and in contrast to China, all of these countries will continue to export OCTG steel products to the United States in substantial quantities.

As indicated in the factsheet that can be found at http://www.usitc.gov/press_room/news_release/2014/er0822mm1c.htm, on August 22, 2014, based on a threat of material injury determination, the U.S. International Trade Commission (“ITC”) made affirmative injury determinations with respect to OCTG imports from India, Korea, Taiwan, Turkey, Ukraine and Vietnam, but negative determinations with respect to imports from Philippines and Thailand.

ALUMINUM EXTRUSIONS

WHIRLPOOL SUES

In the attached complaint, WHIRLPOOL COMPLAINT, on August 26, 2014, Whirlpool Corporation filed suit in the US Court of International Trade against the Commerce Department to stop the Department from including door handles for kitchen appliances within the scope of the antidumping and countervailing duty order on aluminum extrusions from China.

Whirlpool is arguing that the handles are outside the scope of the orders because they are “finished goods.” Certain finished goods that don’t require additional assembly are excluded from the order.

In the Complaint, Whirlpool specifically states:

Appliance handles with end caps consist of alloy 6 series aluminum extrusions and nonaluminum components that are permanently assembled together, are fully complete and finished, and are ready for use as appliance door handles at the time of import. Thus, these appliance handles with end caps are ready to be attached to the kitchen appliance doors in their as-imported condition. No further processing or finishing of these handles is necessary prior to fulfilling their intended use….

Appliance handles with end caps consist of alloy 6 series aluminum extrusions and non-aluminum components that are permanently assembled together, are fully complete and finished, and are ready for use as appliance door handles at the time of import. Thus, these appliance handles with end caps are ready to be attached to the kitchen appliance doors in their as-imported condition. No further processing or finishing of these handles is necessary prior to fulfilling their intended use.

CIRCUMVENTION OF ALUMINUM EXTRUSIONS ORDER??

On May 8, 2014, Senator Mitch McConnell wrote the attached letter to Commerce, AD Aluminum Extrusions 5000 SERIES Controlled Correspondence Inbound-5-8-14, complaining about the circumvention of the antidumping order against aluminum extrusions from China. In the letter Senator McConnell stated:

“I write on behalf of constituents at Kentucky’s Cardinal Aluminum. Cardinal, an aluminum extruder, employs over 500 people in Louisville and plays a vital economic role in the community. My constituents have informed me that unfair trade practices from China are once again threatening Kentucky jobs. . . .

Unfortunately, my constituents have informed me that Chinese exporters are now circumventing existing U.S. import duties using 5000-series aluminum alloy not covered under previous DOC antidumping measures. . . .I ask that you give full and fair consideration of their request to include 5000-series aluminum alloy with similar products covered by existing DOC anti-dumping measures . . . .”

AUGUST ANTIDUMPING ADMINISTRATIVE REVIEWS

On August 1, 2014, Commerce published in the attached Federal Register notice, REVIEW REQUEST NOTICE AUGUST, regarding antidumping and countervailing duty cases for which reviews can be requested in the month of August. The specific antidumping cases against China are:

Floor-Standing, Metal-Top Ironing Tables and Parts Thereof, Laminated Woven Sacks, Light-Walled Rectangular Pipe and Tube, Petroleum Wax Candles, Polyethylene Retail Carrier Bags, Sodium Nitrite, Steel Nails, Sulfanilic Acid, Tetrahydrofurfuryl Alcohol, Tow-Behind Lawn Groomers and Parts Thereof, and Woven Electric Blankets.

The specific countervailing duty cases are:

Laminated Woven Sacks, Light-Walled Rectangular Pipe and Tube, Sodium Nitrite, and Tow-Behind Lawn Groomers and Parts Thereof.

For those US import companies that imported Ironing Tables, Laminated Woven Sacks, Retail Carrier Bags, Steel Nails, Sulfanilic Acid, Lawn Groomers, and Electric Blankets and the other products listed above from China during the antidumping period August 1, 2013-July 31, 2014 or during the countervailing duty review period of 2013 or if this is the First Review Investigation, for imports imported after the Commerce Department preliminary determinations in the initial investigation, 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 Antidumping and Countervailing Duty 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.

In my experience, many US importers do not realize the significance of the administrative review investigations. They think the antidumping and countervailing duty 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 the recent final determination in the Wood Flooring Case, for example, although the rates were very low for many Chinese exporters, only 5%, 20 Chinese exporters had their rates go to 58% because they did not participate in the review investigation and did not file a no shipment certification, separate rate application or separate rate certification at the Commerce Department.

CHINA WTO CASE

As mentioned in the prior post,on July 14, 2014, in a decision and summary, which is posted in my last blog post, the WTO upheld China’s claims that certain US countervailing duty cases against China were inconsistent with the WTO Agreement. On August 22nd, China filed the attached notice of appeal at the WTO with regards to the remaining cases, CHINA APPEALS WTO DETERMINATION.

CUSTOMS

SENATE HEARING ON COLLECTIONS OF UNPAID ANTIDUMPING DUTIES IN HONEY, MUSHROOMS, GARLIC AND CRAWFISH FROM IMPORTERS AND INSURANCE CUSTOMS BOND COMPANIES

On July 16, 2014, at a Senate Appropriations subcommittee hearing in Washington DC, US Customs and Commerce Department officials discussed enforcement proceedings against evasion of US Antidumping and Countervailing Duty laws and several U.S. food producers and their Congressional supporters discussed a longstanding fight to push Customs and Border Protection (CBP) to bring lawsuits against insurance companies to collect hundreds of millions of dollars in unpaid antidumping duties on imports of honey, mushrooms, garlic and crawfish from China.

In the attached testimony, Testimony – ICE Trade Enforcement, Lev Kubiak, Assistant Director of US Immigration and Customs Enforcement (“ICE”) testified about the ongoing Customs enforcement investigations by Homeland Security:

“Currently, HSI is involved in more than 80 investigations relating to open Commerce AD/CVD orders covering commodities such as honey, saccharin, citric acid, tow-behind lawn groomers, shrimp, steel, and wooden bedroom furniture.”

According to a January 2nd letter from Senators Wyden and Thune to Homeland Security, there are an estimated $107 million in uncollected duties on honey, $132 million on garlic, $309 million on crawfish and $102 million on mushrooms — a total of roughly $650 million from 2000 to 2007.  Apparently, these dumping duties are from large unpaid bills by importers, who have gone out of business, and bond companies that are contesting the payments.

In the attached statement, APPROPRIATIONS HONEY, the President of the Louisiana Beekeepers Association testified about the problems US honey producers are facing because of inability of Customs to recover bonds issued in new shipper review investigations:

“Customs estimates it is holding over 600 million dollars in thousands of New Shipper Bonds as security against unpaid dumping duties on imports of honey, fresh garlic, crawfish tail meat, and preserved mushrooms from China – 150 million dollars of which secure honey imports.

Shockingly, the major insurance companies that issued these bonds all failed to determine whether the sham companies that acted as the U.S. importers were creditworthy, or to require that they deposit any collateral to cover the insurers in case they had to pay under the bonds. When Customs eventually assessed substantial duties on these imports, the importers had disappeared. And the insurance companies – which had collected tens of millions of dollars in premiums for issuing the bonds – uniformly refused Customs’ demands that they pay as promised.

This duty-evasion scheme devastated the domestic producers of these four agricultural products in two ways. First, the scheme allowed the importers to enter and sell in this country huge volumes of these goods over an eight-year period at steeply dumped prices – as if the government orders imposing substantial dumping duties on these products did not exist. As a result, the domestic producers continued to suffer the very economic injury the dumping duties were supposed to prevent.

Second, all of these imports are subject to a provision of US trade law, which requires Customs to distribute dumping duties collected on imports that arrived through 2007 to the injured domestic producers. Thus, some of the injury inflicted by these imports on the honey, garlic, crawfish and mushroom producers could have been partly offset by Customs’ distribution of duties collected under the New Shipper Bonds. But the insurance companies’ refusal to pay as promised under these bonds has prevented this.

Unfortunately, Customs must bear substantial responsibility for this debacle. Although the insurance companies first started refusing to pay under these bonds in 2001, Customs by 2009 had failed to file a single collections lawsuit against them. In fact, the agency filed its first New Shipper Bond collections lawsuit only after being sued to do so by the four domestic industries.

Customs currently is attempting to recover $80 million from the insurance companies through 30 collections lawsuits. Rather than pay Customs as promised, the insurance companies are dragging out those lawsuits by raising many frivolous defenses.

One insurance company – Hartford Fire – has raised many of the same frivolous defenses in 350 lawsuits it has filed against Customs in its effort to avoid paying an estimated two to three hundred million dollars under its New Shipper Bonds. Indeed, Hartford Fire’s lawsuits now account for 20 percent of all cases before the Court of International Trade.

Despite Customs’ recent actions to recover under the bonds, the agency’s extended delay in suing the issuing insurance companies will likely block it from recovering under many bonds. This is because a bond collections lawsuit must be started within six years of the date the issuing insurance company becomes liable for the duties. Indeed, in the first collection lawsuit, the court ruled that Customs was time-barred from recovering three million dollars in duties secured by three of the nine bonds at issue.”

In the attached statement, CRAWFISH, the representative of the US Crawfish industry testified along the same lines:

“The problem is that a huge proportion of antidumping duties that should have been collected on imports from China that entered the United States prior to October 1, 2007, have not been collected, despite the fact that they are secured by bonds issued by large, U.S.-based insurance companies. That date is important because U.S. law requires a portion of the duties collected prior to October 1, 2007, to be paid to domestic producers who have been injured in their business by the dumping.

People who are unfamiliar with this area of the law are often surprised that there would still be unpaid duties on goods that came into U.S. ports in 2007 or earlier. They don’t realize that part of this is just because antidumping duties are assessed retrospectively – so delays of a couple or three years are not shocking. However, we’re still trying, right now in 2014, to get Customs to collect duties on entries from 2000, 2001, and so on. . . .

People might say they’d rather have Louisiana crawfish than Chinese crawfish, and they might actually mean it. But everyone has a price. With such a huge price difference, if you’re a U.S. processor, you’re going to be hard pressed to replace that old truck or upgrade your freezer or pay down your debt. You’re just trying to survive another day. The CDSOA was set up to use the antidumping duties to correct that problem, but it only works when Customs actually collects what’s owed. Even worse, the people importing the Chinese product – which, oftentimes, were just shell corporations with no real assets in the United States – started noticing that they didn’t really have to pay the duties, so they weren’t afraid of dumping. Massive volumes of imports kept pouring in, at very low prices. The hole just got deeper and deeper.

The responsible Congressional committees have been trying to fix this problem since at least July 15, 2002, the date of H.R. Report 107-575, in which the Appropriations Committee said: “The Committee is very concerned with the status of tariffs and duties assessed on crawfish . . . The U.S. Customs Service is therefore directed to begin, using funds currently available, vigorous and active enforcement of the tariff. Additionally, the U.S. Customs Service shall, not later than April 30, 2003, issue to the Committee and make publicly available a comprehensive report detailing their efforts to enforce and collect this duty.” That was in 2002 – twelve years ago. . . .

We’re also hoping to learn something about what happened with duty collections last year (FY2013) and what is happening this year (FY2014). More specifically:

• Last summer, Customs released its report on “Preliminary Amounts Available to Disburse” under the CDSOA for FY2013, reflecting collections made from October 1, 2012, through April 30, 2013. For crawfish, this “preliminary amount” turned out also to be the final amount, to the penny. In other words, during the last five months of FY2013, Customs did not collect a single penny of additional duties out of the vast backlog owed on entries made prior to October 1, 2007.

• This year, the “preliminary amount” for crawfish is only $2,687,300.70, reflecting collections through April 30, 2014. Yet we know for certain that Customs collected $6.1 million from Great American Insurance and Washington International Insurance, in February of this year, in crawfish antidumping duties on imports entered during 2000-01. We have copies of the checks from the sureties. Customs is on record, at the court, as saying that the checks had been received and were being processed in late February. It is unclear why this $6.1 million has apparently not been included in the “preliminary amount” for FY2014.

• Customs has also stated, in a letter to Congressman Boustany dated April 11, 2014, that it had fully collected “more than $14 million” in crawfish antidumping duties on April 7, 2014, one day before the six-year statute of limitations would have expired. From other information in the letter, we know that the money was owed by Hartford, a surety, on entries that came into the United States well before 2007. Although this money was allegedly collected prior to the April 30, 2014, cut-off date for the report on “preliminary amounts,” it has obviously been left out. We do not know why. . . .

Much remains to be done. Our best information right now is that there is still more than $600 million in bond money to be collected on imports of crawfish tail meat, honey, garlic, and mushrooms from China that entered the United States between May 1998 and August 2006. This debt is secured by over 8,000 bonds. Yet, so far, Customs has filed lawsuits to collect on only about one-tenth of those bonds, representing roughly 12 percent of their face value.”

PATENT/IP AND 337 CASES

337 CASES

There has been major developments at the US International Trade Commission (“ITC”) in 337 cases.

SUPREMA—EN BANC CAFC PROCEEDING ON 337 AND INDUCED INFRINGEMENT

As mentioned in prior posts, in the Suprema v. ITC case, on February 21, 2014, in the attached petition, Suprema – ITC Petition for Rehearing, the ITC asked for a rehearing en banc of the original panel decision, and on June 11, 2014 the Court of Appeals for the Federal Circuit (“CAFC”) granted a request for an en banc hearing, that means an en banc hearing before all the CAFC judges, to review the original 2-1 decision in the Suprema case.

In prior blog posts, I mentioned that Suprema was a major decision on induced infringement holding that if a product did not infringe when it crossed the border, the ITC did not have jurisdiction to find that the product violated section 337 because of induced infringement. The decision also has a major impact on general patent cases regarding induced infringement.

The ITC’s brief is due on September 15th at the CAFC, but the Commission has asked for an extension until October 15. Experts have predicted an oral argument in the case, possibly in January.

In its February 21st petition to the CAFC, the ITC set out the issues as follows:

“(1) Did the panel contradict Supreme Court precedent in Grokster and precedents of this Court when it held that infringement under 35 U.S.C. § 271(b) “is untied to an article” (Maj. Op. at 19)?

(2) Did the panel contradict Supreme Court precedent in Grokster and this Court’s precedent in Standard Oil when it held that there can be no liability for induced infringement under 35 U.S.C. § 271(b) at the time a product is imported because direct infringement does not occur until a later time (Maj. Op. at 19-21)?

(3) When the panel determined the phrase “articles that . . . infringe” in 19 U.S.C. § 1337(a)(1)(B)(i) does not extend to articles that infringe under 35 U.S.C. § 271(b), did the panel err by contradicting decades of precedent and by failing to give required deference to the U.S. International Trade Commission (“the Commission”) in its interpretation of its own statute (Maj. Op. at 20-21, 26 n.5)?

(4) Did the panel misinterpret the Commission’s order as a “ban [on the] importation of articles which may or may not later give rise to direct infringement” (Maj. Op. at 25) when the order was issued to remedy inducement of infringement and when the order permits U.S. Customs and Border Protection to allow importation upon certification that the articles are not covered by the order?

In its petition for en banc rehearing, the ITC argued that “the panel not only overturned decades of Commission practice affirmed by the courts, but also upended the law of induced infringement.” The ITC based the section 337 violation on the imported products’ combination with software produced by Texas-based Mentalix Inc., which imports Suprema scanners. More specifically, as the ITC states in its petition:

“Appellant Suprema, Inc. (“Suprema”), a Korean company, manufactures fingerprint scanners overseas and imports those scanners into the United States. Before the scanners may perform their intended purpose, they must be connected to a computer running specialized software. Suprema does not make or sell this software, but provides a Software Development Kit (“SDK”) that allows its customers to create their own customized software to operate the scanners. Suprema imports scanners and SDKs and supplies them to appellant Mentalix, Inc. (“Mentalix”), a company located in Plano, Texas. Suprema assisted Mentalix in developing Mentalix software for use with Suprema’s imported scanners. Mentalix then used the software with Suprema’s scanners in a manner that directly infringed method claim 19 of U.S. Patent 7,203,344.”

On August 13th, Suprema filed a brief arguing that the full CAFC should affirm the original panel decision that the ITC does not have authority to hear inducement patent infringement cases where a product is found to infringe after importation.  Suprema argues that the ITC’s Section 337 does not reach conduct where a product may be found to infringe only after it was imported and used together with something else — in this case, software. Suprema argues that “[Section 337] empowers the Commission to bar only the importation, and sale for or after importation, of infringing articles, not the importation of non-infringing staple articles based on the respondent’s purported state of mind,”

Google, Microsoft and other high tech companies have jumped on Suprema’s bandwagon to argue in Amicus Briefs that the full CAFC should uphold the original panel decision barring the ITC from hearing induced patent infringement cases when a product only infringes after importation.  In attached amicus brief, Microsoft Suprema, filed on August 18, Microsoft argues that the law is clear that products that do not infringe at the time they are imported are not within the ITC’s jurisdiction. In the attached separate brief, Google BRIEF, filed on August 19th, Google, Dell Inc., Samsung Electronics Co. Ltd., LG Electronics Inc. and others state that they have an interest in the case because they are “often targets of expensive litigation at the ITC.” “Allowing exclusion orders against articles that do not infringe when imported — on the ground that they may be combined with other products after importation to infringe — threatens substantial disruption to their businesses.”

According to Google’s brief, “The panel’s conclusion is correct: the statute as a whole makes more sense when infringement is judged at the time an article is imported. . .” If a product infringes after it enters the U.S., that infringement can be addressed with a suit in federal court. “The ITC need not expand its jurisdiction to reach every infringement claim that could be brought in district court because the role of the ITC is not to serve as an alternative forum for patent litigation . . . It is a trade court that may hear only the specified types of cases that Congress has designated.”

Both briefs also urged the en banc court to further hold that the ITC cannot hear cases based on alleged infringement of method patents, because such patents are infringed only when the claimed steps are actually performed. According to Microsoft, “A method is an action, not a product or good. Thus, the phrase ‘articles that infringe’ in Section 337 cannot refer to infringement of method claims.”

On August 18, the American Intellectual Property Law Association told an en banc Federal Circuit panel in an amicus brief that the ITC has the authority to find a violation of Section 337 of the Tariff Act of 1930 and issue exclusion orders on certain imports in induced infringement cases regardless of whether direct infringement occurred before or after the articles were imported. The AIPLA argues that the ITC has authority over induced infringement, saying the panel’s initial decision “overlooks the long, uninterrupted history of U.S. protection against unfair trade practices provided by Section 337.” “AIPLA respectfully submits that the Commission has such authority, and that its exercise of such authority in appropriate investigations is consistent with, indeed compelled by, Congressional intent and public policy.” The AIPLA said that Section 337 is an important tool for the effective enforcement of intellectual property rights and is not limited in regards to the time or location that an alleged act of infringement took place. If allowed to stand, however, the Federal Circuit’s initial decision may enable some foreign companies “to circumvent Section 337 and evade effective IP enforcement” by allowing them to eliminate any software-based features in their products found to directly infringe a patent while inviting end-users to download the features after importation.

DISK DRIVES—DOMESTIC INDUSTRY ISSUES

On July 17th, in the Optical Disk Drives case, an ITC administrative law judge held that there was no domestic industry in a 337 case if the Petitioner was non-practicing entity, which is purely revenue driven, and there is no proof that the NPE exploits the asserted patents under § 1337(a)(3)(C).  This ruling would require purely revenue-driven NPEs to make some showing that they exploit the asserted intellectual property under 19 U.S.C. § 1337(a)(3)(C) in every case. They could no longer rely solely on the investments of their licensees.

Although the ALJ’s decision is reviewable by the Commission itself, if the decision becomes final, it will be even more difficult for non-practicing entities (NPEs) to bring 337 cases.

TIRES FROM CHINA

On July 24, 2014, In Re: Certain Tires and Products Containing Same, Inv. No. 337-TA-894, the ITC banned the import of certain kinds of automotive tires from China and Thailand, because they violate design patents held by Toyo Tire Holdings of America Inc. The Asian companies did not respond to the 337 complaint and were found in default.

On July 24th, the ITC issued a limited exclusion order forbidding the import and sale of tires that violate Toyo’s patents by the defaulting respondents.

The American companies held in default include importers, Kentucky’s WestKy Customs LLC; California’s Tire & Wheel Master, WTD Inc., Lexani Tires Worldwide Inc. and Wholesale Tires Inc.; North Carolina’s Vittore Wheel & Tire and RTM Wheel & Tire; and Tennessee’s Simple Tire. The patents cover the unique tread and side wall patterns on Toyo- and Nitto-brand tires.

The foreign infringers include Hong Kong Tri-Ace Tire Co. Ltd., Weifang Shunfuchang Rubber & Plastic Co. Ltd., Doublestar Dong Feng Tyre Co. Ltd., Shandong Yongtai Chemical Group Co. Ltd., Shandong Linglong Tyre Co. Ltd., Svizz-One Corp. Ltd., South China Tire and Rubber Co. Ltd., Guangzhou South China Tire & Rubber Co. Ltd., Turbo Wholesale Tires Inc. and related importers and U.S. distributors.

SECTION 337 COMPLAINTS

On July 25, 2014, Bose Corp. filed a patent based section 337 case at the ITC against a Chinese company on Noise Cancelling Headphones. The respondents are: Beats Electronics LLC, Culver City, California; Beats Electronics International Ltd., Ireland; Fugang Electronic (Dong Guan) Co., Ltd., China; and PCH International Ltd., Ireland.

On August 4, 2014, Adrian Rivera and ARM Enterprises, Inc. filed a section 337 patent case against imports Beverage Brewing Capsules from a number of Chinese and Hong Kong companies. The specific respondents are: Solofill LLC, Houston, Texas; DonGuan Hai Rui Precision Mould Co., Ltd., China; Eko Brands, LLC, Woodinville, WA; Evermuch Technology Co., Ltd., Hong Kong; Ever Much Company Ltd., China; Melitta USA, Inc., North Clearwater, FL; LBP Mfg. Inc., Cicero, IL; LBP Packaging (Shenzhen) Co. Ltd., China; Spark Innovators, Corp., Fairfield, New Jersey; B. Marlboros International Ltd. (HK), Hong Kong; Amazon.com, Inc., Seattle, WA.

PATENT AND IP CASES IN GENERAL

DUPONT SUES SUN EDISON FOR INFRINGEMENT OF US SOLAR PASTE PATENTS

On August 18, 2014, Dupont filed the patent infringement suit against Sun Edison for infringing its thick-film paste patent by importing and selling certain solar modules. DUPONT SOLAR COMPLAINT

DuPont alleges that Sun Edison imports solar modules from Malaysia, which are constructed by Flextronics International Ltd. and use photovoltaic cells provided by Neo Solar Power Corp., which include a paste that uses tellurium-oxide solids.

EX DUPONT ENGINEER SENTENCED TO PRISON FOR STEALING TRADE SECRETS FOR CHINA TITANIUM DIOXIDE INDUSTRY

On August 26, 2014, a California federal judge sentenced a former DuPont Co. engineer to two and a half years in prison and ordered him to pay nearly $750,000 in restitution and forfeitures for conspiring to sell to Chinese companies trade secrets on the technology to safely produce massive amounts of titanium dioxide.

According to the Judge, although Robert Maegerle’s involvement in a conspiracy to sell DuPont’s secret method of producing titanium dioxide to Chinese companies was his first crime, it was a serious one. In March, a jury convicted Maegerle, 79, of participating in the trade-secrets scheme and also of obstructing prosecutors’ investigation into the crimes.

NEW PATENT AND TRADEMARK CASES AGAINST CHINESE COMPANIES, INCLUDING ZTE

On July 28, 2014, JST Performance, Inc. d/b/a Rigid Industries and Illumination Management Solutions, Inc. filed a case for patent infringement against imports of various LED lighting products for off road vehicles against Sun Auto Electronics, LLC and Foshan Sunway Auto Electrical Company, Ltd., a Chinese company.  LED LIGHTING COMPANY SUED

On August 6, 2014, Shenzhen Liown Electronics Co., Ltd., a Chinese company, filed a patent infringement case against a US company, Luminara Worldwide, LLC, Michael L. O’Shaughnessy, and John W. Jacobson. COUNTERSUIT SHENZHEN LIOWN

On August 6, 2014, Multiplayer Network Innovations, LLC filed a patent infringement case against ZTE Corp. and ZTE (USA), Inc. ZTE

On August 7, 2014, a Taiwan company sued a Taiwan company for theft of trade secrets and patent infringement. Via Technology companies in California and Taiwan filed the patent infringement suit against Asus Computer International, a California corporation, Asutek Cmputer Inc., a Taiwan corporation, and Asmedia Technlogy Inc., a Taiwan corporation. VIA TECHNOLOGY TAIWAN

On August 13, 2014, Pacific Lock Company filed a patent infringement case against the Eastern Company d/b/a/ Security Products, World Lock Co., Ltd., and Dongguan Reeworld Security Products LtdDONGGUAN COMPANY

On August 25, 2014, Folkmanis, Inc. filed a copyright infringement case against Delivery Agent, Inc., S.F. Global Sourcing LLC, CBS Broadcasting, Inc. and Shanghai Oriland Toys Co., LtdSHANGHAI COPYRIGHT

PRODUCTS LIABILITY

On July 21, 2014, Loren Vieths filed a products liability case against Shanxi Regent Works, Inc., a Chinese company, and The Sports Authority, Inc. EXERCISE EQUIPMENT

On July 29, 2014, Eduardo and Carmen Amorin filed a products liability case for defective drywall against The State-Owned Assets Supervision and Administration Commission of the State Council; Taishan Gypsum Co., Ltd. f/k/a Shandong Taihe Dongxin Co., Ltd.; Tai’an Taishan Plasterboard Co., Ltd.; Beijing New Building Materials Public Limited Co.; China National Building Material Co., Ltd.; Beijing New Building Materials (Group) Co., Ltd.; China National Building Materials Group Corporation. TAISHAN CLASS ACTION

CFIUS—CHINESE INVESTMENT IN THE US

RALLS CORP CASE

On July 15, 2014, the Federal DC Circuit Court of Appeals in Ralls Corp. v. Committee on Foreign Investments (“CFIUS”), which is attached to my last post on this blog, issued a very surprising decision reversing the Presidential/CFIUS decision to invalidate Ralls and a Chinese company’s attempt to acquire four Oregon wind firms that were close to a US military base on national security grounds.

The DC Circuit overturned the CFIUS decision on due process procedural grounds requiring the President and CFIUS at a minimum to explain why the decision was made and grant Ralls Corp’s access to the unclassified evidence used to come to that decision and give company an opportunity to rebut the evidence. Appeal is likely, either through a petition for en banc review or a petition to the U.S. Supreme Court.

The CFIUS review process, however, has been described as a black box into which foreign investors feed information, only to get out a yes or no answer with no way of appealing the decision.

Many experts, however, have been issuing comments to the effect that the Ralls decision will not have a meaningful impact on the outcome of the case and is likely do little to boost the transparency of the CFIUS review process. Experts doubt that any of the unclassified information given to Ralls or any other company in a similar situation in the future would not have a substantial impact on the case. A former head of CFIUS stated that because these cases involve national security, “There isn’t a lot of non-deliberative information that’s not classified or not derived from classified material that can be shared.” Another attorney that specializes in this area stated, “What are they going to do with unclassified information based on a partial record?”

Although the legal victory has little practical impact, it helps to dispel the idea that the U.S. judicial system is biased against Chinese investment and avoids the chilling of the current Chinese investment boom. The U.S. has a process and if that process is not followed, there is relief within the U.S. judicial system.

CHINESE INVESTMENT IN US SEMICONDUCTOR COMPANY

In spite of or maybe because of the Ralls decision, on August 14th a group of Chinese investors made an unsolicited $1.6 billion offer for California chipmaker OmniVision Technologies Inc. The deal would send a chip maker for smartphones, including Apple Inc.’s iPhone, and tablets, to an investor group led by Hua Capital Management Ltd. The potential buyers pitching the $29-per-share bid also include state-owned Shanghai Pudong Science and Technology Investment Co. Ltd. If OmniVision accepts the offer, a comprehensive government review is likely.

CHINESE INVESTMENT OPPORTUNITIES

US FOUNDRY

A US investment company has approached me because an undisclosed US Foundry that produces metal castings has put itself on the auction block. The public information available to me is as follows:

The US Company provides complex metal casting services and products from 50 to 200,000 pounds for industry-critical applications. The Company operates through its two wholly-owned facilities (“Facility A” and “Facility B”) that aggregate in excess of 650,000 square feet, both of which have been in operation for more than 100 years.

The Company differentiates itself by offering highly-complex and highly-engineered products, compared to the simpler commoditized products of other facilities. In addition, the Company emphasizes quality over price —administering price increases without customer attrition.

The Company is focused on energy, infrastructure, and industrial equipment end markets, with approximately 53%, 33% and 13% of production in each of these markets, respectively. Products used in energy and power generation applications include the following sectors: air compression, fossil fuels, gas compression and wind. The Company also manufactures products for other industries including: construction equipment, machine tools, agriculture and refrigeration.

If anyone is interested in the opportunity, please feel free to contact me.

US INVESTMENT IN CHINA

HOSPITALS

It has been reported that on August 27, Ministry of Commerce and National Health and Family Planning Commission issued the “Notice on Establishing Wholly Foreign-owned Hospital Pilots”. The notice lays out the requirements, standards, and approval processes for foreign investors applying to qualify for establishing wholly foreign-owned hospitals in China.     The seven provinces included in the notice’s pilot zones are Beijing, Tianjin, Shanghai, Jiangsu, Fujian, Guangdong, and Hainan. Investors have the option of establishing their own new hospital, or investing through M&A. The notice regulates that only investors from Hong Kong, Macau, and Taiwan may establish hospitals featuring traditional Chinese medicine.

If anyone is interested in the opportunity, please feel free to contact me.

ANTITRUST– VITAMIN C, MAGNESITE AND AU OPTRONICS

There have been major developments in the antitrust area both in the United States and more importantly in China.

VITAMIN C

On August 11, 2014, the parties in the Vitamin C case filed their attached final briefs in the Second Circuit.  In its attached brief, HEBEI REPLY BRIEF, Defendants HeBei Welcome Pharmaceuticals Co. Ltd. et al reiterated its arguments that it followed Chinese law when it coordinated on pricing, and that co-defendant North China Pharmaceuticals Group Corp. was not involved in the coordination.

Hebei argued:

“Appellees’ brief confirms that the judgment below cannot be affirmed unless this Court rejects a sovereign government’s view of its own laws, establishes federal courts as arbiters of the validity of foreign nations’ regulatory decisions, disregards the massive foreign policy concerns raised by that approach, creates multiple circuit splits, and rejects binding precedent. This Court should therefore decline Appellees’ invitation to sit in judgment over China’s economic development policies.

The dispositive issue is now undisputed: Appellees concede that Chinese law required active coordination by vitamin C manufacturers on vitamin C prices and output. This amounts to a concession that the Chinese government compelled violation of the Sherman Act and that the district court’s determination of Chinese law cannot survive de novo

That should end the case. But Appellees argue that this Court should find that Chinese manufacturers and their corporate affiliates could still face nine-figure penalties because they complied with their own government’s legal, regulatory, and policy decisions. Their arguments that U.S. law can prohibit the same conduct a sovereign nation ordered and directed, if accepted, would go far in eradicating the foreign sovereign compulsion, international comity, act of state, and political question doctrines altogether, contrary to decades of established law.”

In the attached brief, ANIMAL SCIENCE REPLY BRIEF, the Plaintiffs, Animal Science Products Inc. and The Ranis Co. Inc., asserted that the district court’s verdict was proper and that the companies’ actions were not covered by the Chinese government, stating:

“Appellants and the Ministry of Commerce of China (“Ministry”) ask this Court to adopt an unprecedented “whatever the Ministry says, goes” approach to overturn a jury verdict, even though the Ministry’s assertions are not supported by the evidence or even Chinese law.

In the nine years since this case was filed, two district court judges appropriately considered the evidence of Appellants’ conspiracy to fix prices and limit the supply of vitamin C imported into the U.S. and determined the nature of Chinese law in light of the evidence submitted by the parties and statements by the Ministry (appearing as Amicus). The district court then presided over a trial at which the jury—using an unobjected-to set of instructions and verdict form—concluded that the Chinese government did not compel Appellants’ cartel as a factual matter.

Appellants’ and the Ministry’s assertion that the district court’s judgment represents a groundbreaking application of the Sherman Act is overblown because foreign corporations are routinely subject to liability under U.S. antitrust law over foreign governments’ objections. No Chinese law required Appellants and their co-conspirators to set supra-competitive prices for vitamin C imported to the United States.

Appellants argue that they were required by Chinese law to accept coordination by a vitamin C Subcommittee of a China Chamber of Commerce that was acting to implement the Chinese government’s regulatory objectives. Regardless of the proper interpretation of Chinese law, the facts as determined by the jury under unobjected-to instructions showed that the Subcommittee and Chamber did not as a factual matter act to compel the conduct at issue here; rather, the jury found Appellants liable for their own voluntary conduct.

With respect to its correct rulings on Chinese law, the district court gave the Ministry’s statements appropriate respect and regard, but in multiple rulings disagreed with the Ministry, concluding that the plain language of Chinese law and the overwhelming evidence contradicted the Ministry’s position. Having made its Federal Rule of Civil Procedure 44.1 (“Rule 44.1”) ruling on issues of foreign law, the district court properly excluded copies of Chinese laws and regulations from the evidence submitted to the jury. As it should be in every trial, the jury reached its verdict based on instructions of law from the Court and not from Appellants’ counsel reading and arguing law to the jury.

The district court correctly exercised personal jurisdiction over North China Pharmaceutical Group Corporation (“NCPG”) and denied its motion for judgment as a matter of law based on the evidence of NCPG’s direct participation in a cartel selling products into the United States.”

MAGNESITE

On July 24, 2014, in Animal Science Products Inc. and Resco Products Inc. v. China Minmetals Corp., et al, in he attached decision and order, MAGNESITE DISMISSAL STANDING MAGNESITE ORDER DISMISSAL, the US Federal Court dismissed the US companies antitrust action for a price fixing cartel on Chinese exports to the US of Magnesite and Magnesite products because plaintiffs lacked standing to represent the class of direct purchasers of Magnesite from China. The Court states:

“Plaintiffs seek to represent a putative class of U.S. purchasers of magnesite. They allege that sixteen Chinese corporations have conspired to fix prices and control the supply of magnesite and magnesite products exported to the United States. As a result, they say, magnesite prices have remained above market levels since at least April 2000. . ..

There is, however, one critical fact that distinguishes Cordes & Co. from the case now before me. There, the class action was initiated by two putative class representatives who were “indisputably members of the class they sought to represent.” . . . That is, the class representatives had themselves suffered the same injury that gave rise to the assigned antitrust claims they asserted. Here, the facts are not so clear, or at least, have yet to be established, as discussed below.

Suffice it to say that, at this stage, Resco must establish its own standing, either through its own direct purchases or through the direct purchases of some entity that validly assigned its claims to Resco. . . .

Plaintiff Resco has pleaded very few facts regarding its own “direct purchases” of magnesite from Defendants. The original complaint . . . contains no statements regarding Resco’s direct purchases of magnesite, or Animal Science’s indirect purchases of magnesite. . . .

In short, Plaintiffs allege no direct purchases by Resco from any named defendants.

Nothing in the Amended Complaint constitutes a plausible factual allegation in support of the most direct and obvious form of standing: plaintiff’s direct purchases from one or more of the defendant . . .Plaintiff Resco’s status as a direct purchaser, whether obtained through its own direct purchases or by means of an assignment, is a critical and yet unresolved question in this case. That uncertainty permeates not only the Amended Complaint but the Motion to Compel Arbitration.

For the reasons discussed above, the Minmetals and Sinosteel Defendants’ Motions to Dismiss Plaintiffs’ Amended Complaint are GRANTED on standing grounds only. The Amended Complaint is DISMISSED WITHOUT PREJUDICE to the filing of a Second Amended Complaint.”

Unfortunately, the Court and the Parties may have missed the forest through the trees. Many forms of magnesium from China, including many magnesium products, are covered by US antidumping orders, which have blocked many importers from importing Chinese magnesium into the United States for decades. The Court and the Parties may ignore this reality, but the point is that the effect of antidumping orders is to raise prices. That may be the cause of the increased prices on these products.

TAIWAN LCDS CASE

On August 25, 2014, AU Optronics Corp, along with several Taiwan individuals filed the attached petition, auo petition, with the 9th Circuit Court of Appeals asking it to rehear or hold an en banc hearing in its appeal of a $500 million price-fixing fine the government won against the liquid crystal display maker. The Petition argues that the panel misinterpreted the evidence in the case.

As reported in my July post on this blog, in July a three-judge panel affirmed the Justice Department’s victory before the Federal District Court in the case against AUO, its U.S. subsidiary and former top executives Hsuan Bin Chen and Hui Hsiung concerning a global plot to fix the price of liquid crystal display panels.

CHINA ANTITRUST CASES

As US antitrust cases have been on the rise in the United States, they are sharply rising against Chinese and foreign companies, including US companies, in China. The recent surge in antitrust cases reaches US and foreign companies like Qualcomm, Interdigital, Microsoft, Chrysler and Mercedes-Benz.

On July 24, 2014, it was reported that the National Development and Reform Commission (“NDRC”), one of China’s three National Antitrust Agencies, announced that it had determined that US chipmaker Qualcomm is a monopoly and was suspected of overcharging and abusing its market position in wireless communication standards.  The allegations could lead to record fines of more than $1 billion.

As the Chinese consumer market surges upward, Western companies are seeing their profits fall downward after this wave of antitrust cases. The China media has reported that the prices of many foreign items, including a Starbucks latte to a Jaguar sedan, are higher in China than in many other places in the world.

Chinese consumers, who now travel the World, are complaining. According to the media, although some of the price differences are explainable by factors, such transportation, real-estate costs, higher Chinese import taxes and fragmented supply chains in which multiple distributors each add a markup, at least some multinationals allegedly have adopted sales practices in China that would not be tolerated by antitrust regulators in Europe or the US. Automobile companies do not always give their Chinese customers a choice in their purchase of spare parts, causing high prices.

What concerns the US government, however, is procedures, the heavy-handed way that investigations are being pursued, and the highly charged media coverage that makes for heated nationalistic rhetoric against Western and US companies.

Foreign companies have learned two early lessons from the antitrust probes. First, the Chinese law provides little protection. The message that the National Development and Reform Commission, the Chinese agency that sets pricing rules, delivers in private to multinationals at the outset of a price-fixing investigation is not to bring in their foreign lawyers. The second lesson, apparently, is resistance is futile.

In almost every antitrust case launched so far, foreign companies have settled without a fight. Voluntary price cuts of up to 20% are the norm, accompanied by board-level expressions of remorse and promises to do better. Chrysler described its abrupt decision to slash car-part prices as a “proactive response” to the price fixing probe as it got under way.

These price-fixing investigations have been accompanied by heated nationalistic rhetoric in the state media with anti-foreign overtones. Pushing down multinationals goes over well with large sections of the Chinese public that view the foreign companies as arrogant. The China Youth Daily recently stated that multinationals “pollute the environment, lie to consumers, act arrogantly when facing their wrongdoings, and ignore China’s law and protests from Chinese consumers.”

For many years that China’s Anti-Monopoly Law has been in place, enforcement has been lax, but the National Development and Reform Commission (“NDRC”) and the State Administration for Industry and Commerce (“SAIC”), the two agencies charged with enforcing the AML’s antitrust provisions, have rapidly increased enforcement over the last year, with probes into Qualcomm Inc., Microsoft, and now international automakers. The action has come at the same time as the government has voiced a broader intention to promote the creation of Chinese players in many key industries, contributing to the impression that the latest antitrust probes may have a protectionist purpose.

While technically, agency decisions can be appealed to China’s administrative courts, the courts tend to defer to the agencies in all but the most blatant violations of the law. That means that as a practical matter, companies don’t have the same ability to force the agencies to defend themselves in court the way companies do in the U.S. and Europe.

MICROSOFT

As mentioned in my last post, on July 29, China time, the Chinese government conducted a dawn raid of Microsoft offices in China, apparently because of antitrust concerns. According to reports out of China, Microsoft Corp‘s internet browser and media player are being targeted in a Chinese antitrust probe, raising the prospect of China revisiting the software bundling issue at the heart of past antitrust complaints against the firm.

On August 6, 2014, it was reported that more raids were conducted on the Microsoft offices. Mr. Zhang Mao, the head of the State Administration for Industry and Commerce (SAIC), told reporters that Microsoft has not been fully transparent with information about its Windows and Office sales, but that Microsoft has expressed willingness to cooperate with ongoing investigations.

In 2004, the European Union ordered Microsoft to pay a 497 million euro ($656 million) fine and produce a version of Windows without the Windows Media Player bundled. The fine was later increased to nearly 1.4 billion euros.

The SAIC said earlier this month that Microsoft had been suspected of violating China’s anti-monopoly law since June last year in relation to problems with compatibility, bundling and document authentication for its Windows operating system and Microsoft Office software.

On August 4, 2014, Microsoft Deputy General Counsel Mary Snapp met with the SAIC in Beijing where the regulator warned Microsoft to not obstruct the probe.

But industry experts have questioned how exactly Microsoft is violating anti-trust regulations in China, where the size of its business is negligible.

AUTOMOBILE AND AUTO PARTS PRODUCERS—CHRYSLER, MERCEDES-BENZ AND VOLKSWAGEN

On August 6, 2014, it was reported that the National Development and Reform Commission (“NDRC”) had announced that it would punish Audi and Chrysler for monopoly practices, potentially paving the way for the automakers to be fined up to 10 percent of their domestic annual sales revenue in the world’s biggest car market.

NDRC spokesman Li Pumin stated that an ongoing investigation into the two companies showed they had “conducted anti-competitive behaviors” and that “They will be punished accordingly in the near future.” The NDRC has recently finished a probe of a dozen Japanese auto parts manufacturers on similar anti-trust charges.

According to Li Pumin, “The purpose is to maintain a sound competitive order in the auto market and protect consumer interest.” The NDRC did not specify the punishment for Chrysler or Audi. Under the six-year-old antimonopoly law, the NDRC can impose fines of between 1 and 10 percent of a company’s revenues for the previous year.

In the  attached Article from Singapore’s Strait Times on the Auto Parts antitrust investigation, QUOTE STRAIT TIMES, which features my quote, Esther Teo for the Strait Times states:

Industry experts say automakers have too much leverage over car dealers and auto part suppliers, enabling them to control prices, considered as a violation of China’s anti-trust laws.  “Monopolistic practices are quite rampant in the auto industry. NDRC is first targeting imported luxury brands because the problem is most severe in this area,” said Yale Zhang, managing director of consultancy Automotive Foresight (Shanghai) Co. Ltd. “It’s also a warning signal to the industry. If top brands like Audi gets punishment, others would know what to do.”

Zhang said imported luxury cars in China cost, on average, 2-1/2 to three times their price in the United States. The price difference is due to higher import duties and other taxes, foreign carmakers have argued. . . .

NDRC spokesman Li Pumin reiterated at a briefing in Beijing yesterday that China will punish any violators of the law regardless of nationality. . . .

While Beijing has denied these allegations, experts say the high-profile probes are likely to have a chilling effect on the business climate unless there is more transparency about how the anti-monopoly law is being enforced. . . .

experts said more needs to be done to convince international firms that they are not being unfairly targeted. For instance, whether it is a foreign or domestic firm being investigated, the authorities should provide more detailed and public information on the reasons for the decision reached and how the fine was determined. Without such transparency, multinational firms might be less willing to invest in China, they added.

Mr William Perry, an international trade partner at Seattle-based law firm Dorsey & Whitney, told The Straits Times that the business climate for foreign firms is becoming increasingly “uncertain”. “This is likely to affect trade relations down the line, especially between the United States and China.”

DORSEY ARTICLE ON CHINA ANTITRUST

On August 25, 2014, Peter Corne, who heads Dorsey’s China practice, published the following article about the situation in China:

A Fine Season for Antitrust Enforcement in China

The World Cup has ended and visiting fans have returned home from Brazil’s hot and humid climate. Now, some companies are feeling a different kind of heat, as Chinese antitrust regulators step up their enforcement activities. The regulatory actions include an investigation into the sale of World Cup tickets to Chinese football fans. The practice at issue was the bundling of high-end tickets with hotel, transportation, and tour services. Beijing Shankai Sports Development Company Limited (“Shankai”), the exclusive dealer for World Cup tickets within Greater China, failed to clarify whether customers were free to buy the high-end tickets separately. Some employees of Shankai told customers that they could not buy high-end tickets separately. The State Administration of Industry and Commerce (“SAIC”) started its investigation soon after Shankai’s practice was exposed by State central television. Backed into a corner, Shankai had no option but to admit its guilt in the sordid tale and promised to rectify its misdemeanors, leading to the SAIC approving the target’s application for a suspension to the investigation.

In other enforcement news, China’s second antitrust enforcement agency, the National Development and Reform Commission (“NDRC”), has escalated its own enforcement efforts. NDRC branches in each of China’s northern (Beijing), central (Shanghai), and southern (Guangdong) coastal regions all had a part in what has turned into a ‘fine’ season for the optical industry in China. The practice in question involved ‘disguised’ recommended retail prices that, in reality, apparently amounted to resale price maintenance. Manufacturers of glasses and contact lenses adopted a carrot and stick approach: their distributors were punished for failing to sell the products at “recommended retail prices”, and rewarded if they did. Hoya and Weicon reportedly turned on the rest of the culprits in the industry by reporting the monopolistic activities to the NDRC and providing important evidence; in return, Hoya and Weicon were provided an amnesty from prosecution. The targeted companies (Essilor, Nikon, Carl Zeiss, Bausch & Lomb, and Johnson & Johnson) were fined RMB 8.79 million, RMB 1.68 million, RMB 1.77 million, RMB 3.69 million, and RMB 3.64 million, respectively (for a total of about $3.2 million /€2.38 million).

Not to be left out of the action, China’s third and remaining antitrust enforcement organ, the Ministry of Commerce (“MOFCOM”), for only the second time in history, rejected a transaction: the attempted global joint alliance among Maersk, Mediterranean Shipping Company, and CMA CGM. MOFCOM determined that the tie-up would restrict or eliminate competition in the Asia-European shipping route, despite the deal’s having previously been approved by the US and European antitrust authorities.

In a MOFCOM-led multiple-ministry initiative to crack down on interregional trade barriers and industrial monopolies launched by 12 ministries at the end of 2013, MOFCOM sent questionnaires to companies in no fewer than 80 different industries to ascertain their level of compliance with antitrust legislation. This suggests that the enforcement net will soon be cast even wider. The automobile industry has already been snared, but that particular enforcement action may have resulted from a Ferrari distributor’s complaint to the industry association (when Ferrari suddenly terminated the distribution relationship) this past April.

Just before this briefing went to press, Microsoft China also started feeling the summer heat. On July 28, nearly 100 regulators from nine provincial branches of the SAIC converged on Microsoft in four different locations around the country.

This seems to have arisen out of a preliminary investigation that commenced about a year ago, in response to complaints by other companies concerning alleged bundling and other issues related to Windows and Office. At the preliminary investigation stage, Microsoft personnel were interviewed and Microsoft submitted answers to a series of questions. The SAIC still could not rule out antitrust infringement, so it proceeded to file a case and initiate its dawn raid. During the raid, Microsoft staff attempted to head off the interviews by begging lack of availability of the relevant people. The regulators apparently have managed to interview already, or have required attendance to interview, a Vice President, other senior management, and marketing and financial staff. During the raid, they copied contracts and financial statements and acquired internal correspondence including emails, and seized two computers.

In short, it may be summertime, but antitrust enforcement in China has not taken a vacation.

ARTICLES BY CHINESE ANTITRUST LAWYERS

AUTO PARTS ARTICLE

In the article, Analysis of NDRC Penalty Decision on 12 Auto Parts and Bearing Companies_AnJie_Michael Gu_Eng_20140830, Note of Caution: Record Fines on 12 Japanese Auto Parts and Bearing Manufactures – Analysis of the NDRC’s Penalty Decision and Countermeasures of Companies,Michael Gu, an antitrust partner in the AnJie Law Firm, in Beijing states:

Introduction

Within six years of implementation of China’s Anti-Monopoly Law, the China’s law enforcement agency responsible for supervising price monopoly, the National Development and Reform Commission (“NDRC”), continues to strengthen its law enforcement efforts with rounds of “antitrust storm” that swept across a number of industries and companies along with record fines.

This is especially true since 2013, the NDRC has probed into number of high-profile penalty cases, including the LCD Panel case, Moutai and Wuliangye case, Baby Formula case, Shanghai Gold Jewelers case and Spectacle Lenses case. Meanwhile, the NDRC has also launched investigation into the US high-tech giants, InterDigital and Qualcomm. For InterDigital case, the investigation has been suspended. As for Qualcomm case, Qualcomm has manifested their willingness to cooperate with the NDRC in its investigation and has submitted relevant commitment.

The “antitrust round up” of the automobile and auto parts industries is undoubtedly the most prominent case recently. Under such high pressure of antitrust law enforcement, a number of major foreign invested automobile manufacturers, including BMW, Benz, Audi, Toyota and Chrysler etc., have recently announced their price cut for auto parts. On August 20, the NDRC has announced its punishment of 12 Japanese auto parts and bearing companies who engaged in price related monopolistic behavior. Eight auto parts manufacturers are imposed fines totaling RMB 831.96 million (approximately USD 135.50 million), although Hitachi is exempted of the penalty. Four bearing manufacturers are imposed fines totaling RMB 403.44 million (approximately USD 65.70 million), although Nachi-Fujikoshi is exempted of the penalty. The combined amount of the fines reaches RMB 1.24 billion (approximately USD 200 million), setting up another record in China’s Anti-Monopoly Law’s enforcement.

This article will analyze the train of thought and trends of the NDRC’s anti-monopoly law enforcement, application of leniency program, impact of actions of the companies (including responses to investigations and illegal conducts) on the amount of the fines, and suggestions for relevant companies in dealing with antitrust investigation. . . .

Conclusion and Suggestions for the Companies

This record penalty decision demonstrates NDRC’s determination to intensify its antitrust law enforcement. Six years since the implementation of AML, the NDRC has taken more active and aggressive approach targeting a wider range in industries. This case will not be the finishing line, but merely a starting line that directs enforcement to areas closely related to the people’s livelihood, which have always been under its antitrust radar, such as petroleum, health care, telecommunication, pharmaceuticals, automotive, banks and consumer goods.

It is worth mentioning that the NDRC has indicated in its announcement that it will conduct further investigation following the leads uncovered in this case. Thus, the relevant companies should pay special attention to their possible monopolistic conduct related to this case or other auto parts and take necessary actions in a timely manner. They are strongly encouraged to report to the NDRC as early as possible in order to obtain exemption and reduction of fines.

The NDRC has adopted more stringent and definitive approach in application of leniency program. The NDRC has placed the leniency applicants in order and granted them exemption and reduction of fines accordingly. Companies need to seek professional advice in making leniency applications as to set up appropriate strategies in securing its first place by submitting the most important evidence to the NDRC within a short period of time and cooperating with the NDRC in its investigation.

The current heated antitrust law enforcement has posed unprecedented compliance challenges to all types of companies including foreign, domestic and even state-owned companies. Companies are suggested to take the following proactive measures to control and minimize risks associated with antitrust compliance:

1. Companies should conduct internal antitrust audit to inspect and evaluate potential antitrust risk with the assistance of external counsel. It’s also advisable to provide up-to-date and tailored antitrust trainings for senior management and employees, promote awareness of antitrust compliance.

2. For companies that are already found to be in potential violation of AML, it is recommended to voluntarily report to antitrust law enforcement agencies as soon as possible and to take rectification after seeking professional advice. Rectification measures may cover rectified sales policy and sales agreement that involves price-fixing and correction of conducts of price-fixing and collusive bidding, etc. Such measures shall be sufficient to maintain competition in the market and benefit the consumers.

3. Companies that have been dawn-raided by the antitrust law enforcement agencies should cope with the investigation appropriately, defend its legitimate interest and be proactive depending on the situation (e.g. propose defense regarding the gravity of the conduct and calculation of fines). In this case, Sumitomo has submitted written defense within one week of its receipt of the Prior-Notice of Administrative Penalty issued by NDRC. The defense addresses the miscalculation of turnover of joint venture that is involved. The NDRC has accepted its defense and granted a reduction of RMB 52.32 million in its fine. It can be seen that proactive approach and proposal of defense could help the companies avoid or mitigate penalties.

MICROSOFT ARTICLE

In the report on Chinese antitrust law by the Chinese T&D Law Firm, T&D Monthly Antitrust Report of July 2014, which will be attached to my blog, Chinese antitrust lawyer John Ren had this to say about the Microsoft case:

SAIC Initiates Anti-Monopoly Investigation on Microsoft

29 July, 2014 According to the information issued on the SAIC’s official website , on July 28, around 100 enforcement officials from the SAIC conducted dawn raids on Microsoft China and its branch companies in Shanghai, Guangzhou, and Chengdu. In June 2013, SAIC verified whether Microsoft violated the AML because of the allegation of the compatibility issue due to the non-full disclosure of information about the Windows operational system and office software, tying, and file validation, reported by other enterprises. During the verification, SAIC successively interviewed Microsoft and relevant enterprises, and Microsoft submitted the responding reports focusing on issues SAIC paid attentions to. In the period, relevant enterprises also continued to provide relevant information to SAIC. SAIC concluded that the preliminary verification cannot remove the suspicion of anti-competitive practices as mentioned above. Therefore, SAIC has initiated the investigation on Microsoft for its suspected anti-monopoly conducts pursuant to the relevant laws and regulations.

On July 28, 2014, according to the AML, SAIC conducted dawn raids on four of Microsoft’s business locations, i.e. Microsoft China and its branch companies in Shanghai, Guangzhou, and Chengdu. The personnel who were investigated included the Vice Presidents, senior management and the relevant staffs in the marketing, financial and other departments of Microsoft. The enforcement officials of SAIC copied some contracts and financial statements of Microsoft, extracted large amounts of electronic data including internal communication documents and emails, and sealed and removed two working computers. During the dawn raids, the investigation contents had not been fully completed, since according to Microsoft, some of the major staffs who need to be investigated were not in China at this stage. SAIC has instructed Microsoft to arrange relevant staffs to visit SAIC for being inspected as soon as possible.

Microsoft’s Chinese councils witnessed the entire enforcement practice conducted the by SAIC. Currently, the case is still under investigation.

NOW INDIA

Now India has followed China’s lead and its antitrust agency have hit 14 carmakers, including General Motors and Ford, with fines totaling 2,545 crore ($420.3 million) for violating India’s competition laws by allegedly restricting the ability of independent repair shops to enter the market.

The Competition Commission of India alleged the companies abused their dominant position by denying access to branded spare parts and diagnostic tools to independent repairers, hampering competition while allowing authorized dealers to charge higher prices.

SECURITIES

LIHUA

On August 15, 2014, William Peck filed the attached shareholder derivative suit, LIHUA COMPLAINT, in New York Federal District Court against Lihua International, Inc, Jianhua Zhu, Daphne Yan Huang, Yaying Wang, Robert C. Bruce, Jonathan P. Serbin, Siu Ki “Kelvin” Lau, Tian Bao Wang and Ming Zhang. Lihua is a China-based copper products company, and the attached complaint alleges materially false and misleading public filings that failed to disclose a substantial asset transfer out of the company by its former CEO. The shareholders say that eight executives and board members “knew nothing” about the former CEO’s alleged diversion of assets to another company, Power Apex Holdings Ltd., which the plaintiffs say is ultimately owned by the People’s Republic of China. The new derivative suit says the company is already being sued by two putative classes of shareholders who lost money in the stock drop.

CHINA MEDIA EXPRESS

On August 15, 2014, in the attached decision, CHINA MEDIA OPINION, a New York Federal Judge certified a class of investors in a class action securities case against China MediaExpress Holdings Inc. The Plaintiff allege the Chinese company concealed material information and made various misstatement and omissions that eventually led to a stock drop. The complaint was filed in February 2011.

FOREIGN CORRUPT PRACTICES ACT (“FCPA”)

VOLKSWAGEN

On August 25, 2014, there were reports out of China that the Chinese government has launched an anticorruption probe into a former and a current executive at one of Volkswagen AG ‘s China joint ventures. The Communist Party’s Central Commission for Discipline Inspection accused Li Wu, a former deputy general manager at FAW-Volkswagen Automobile Co., and Zhou Chun, a deputy general manager of the joint venture’s Audi sales division, of “suspected serious violations of discipline and law.” The phrase is typically used in Chinese corruption cases.

DORSEY FCPA DIGEST

In the attached August edition of the FCPA Digest, DORSEY Anti_Corruption_Digest_Aug2014, Dorsey lawyers report on a corruption investigation involving China stating:

“China

It has been reported that China commenced an investigation into former domestic security chief, Zhou Yongkang, on suspicion of corruption. The Communist Party decided to question Zhou Yongkang for suspected “serious disciplinary violations”, according to the official Xinhua news agency. The investigation will be conducted by the Party’s watchdog, the Central Commission for Discipline Inspection.

During Zhou Yongkang’s five-year appointment as security chief, he oversaw the police force, civilian intelligence apparatus, paramilitary police, judges and prosecutors.”

SECURITIES COMPLAINTS

On August 6, 2014, Andrew Dennison filed the attached class action securities case against China Commercial Credit, Inc., Huichun Qin, Long Yi, Jianmin Yin, Jingeng Ling, Xiangdong Xiao and John F. Levy. CHINA COMMERCIAL

If you have any questions about these cases or about the US trade, customs, 337, patent, US/China antitrust or securities law in general, please feel free to contact me.

Best regards,

Bill Perry

POLITICS OF CHINA TRADE/COALITIONS, TRADE, 337/IP, PATENTS, CFIUS

Commerce Department After the Snow Pennsylvania Avenue WashingtoPOLITICS OF CHINA TRADE, DEVELOPMENTS–TRADE, 337/IP, PATENTS AND CFIUS

Dear Friends,

There have been many recent important developments in the trade and intellectual property areas, but before getting to the developments, set forth below is the second article in our series on the US Politics of China Trade—the Importance of Coalitions.

If you have any questions about the politics article or the developments listed below, please feel free to contact me.

Best regards,

Bill Perry

THE POLITICS OF CHINA TRADE—IMPORTANCE OF COALITIONS

As previously mentioned, the serious political situation regarding China Trade in Washington DC warrants greater attention so I have asked former Congressmen Don Bonker to author a series of articles on the political situation in Washington DC and what can be done to change the discussion.  Our next article is on the importance of Coalitions of Chinese companies with interested US companies.

The Chinese emperor had a famous saying, “Use a foreigner to deal with a foreigner”  When Americans go to China to do business, they often need a Chinese face, an interface, who can help bridge the gap between Chinese and US language and culture.

Many foreigners believe they do not need the US counterpart because they see the United States as an easy country to understand and do business in, because many foreigners speak English.  But this is a mistake because there are vast differences in the US, especially in its political system.

Under the US Constitution, there are three co-equal branches—the Executive Branch/President and the Administration, Legislative Branch/the Congress and the Judicial Branch/the Courts.  In contrast to China, therefore, political power is more diffuse and not concentrated in any one group.

In China, Governors of Provinces are appointed by the Central Government.  Political power in the United States, however, is even more diffuse because of Federalism.  Under the US Constitution, power not specifically given to the Federal Government, is reserved to the States.  Because of the multiple power bases in the United States, Coalitions with US companies become essential to making the political argument.

A key reason for the US China Trade problems, I believe, is the failure of Chinese companies and even the Chinese government to understand the importance of working with the US importers and end user companies in Coalitions that have common interest in trade and investment disputes.  For many Chinese companies the “go it alone” approach is simply not working.  It does not take into account the political realities that exist in many trade cases.

Simply responding to US Antidumping, Countervailing Duty and other Trade cases is often not sufficient to obtain a favorable result.  Trade cases are not an application process.  This is litigation, fighting with the US industry, and the objective of the US producers in a trade case is to throw the Chinese companies out of the US market.

The same can be said on the investment side of the case.  When Chinese companies attempt to acquire sensitive companies in the US, they are competing, fighting, with US companies for that business, and the US companies will use the investment laws under CFIUS and the political process in the US to change the nature of the debate.

In Trade Cases, although the major target of US trade disputes may appear to be Chinese companies, in reality it is the importer, the first US company that purchases the products, that  is legally liable for antidumping and countervailing duties. In fact, they can be  retroactively liable if the rates go higher in antidumping and countervailing duty review investigations.

This punitive aspect of antidumping and countervailing cases, which are supposed to be remedial statutes, is unfair and needs to be addressed.  Many US importers do not realize that when they import a product from China under an antidumping and/or countervailing duty order, they do not post the antidumping or countervailing duty, but the cash deposit.  If duties go up in subsequent review investigations, the US importers are retroactively liable for the difference plus interest.

In one case that I am involved in, Ironing Tables from China, the antidumping rates went from 0 to 157% because Commerce determined in a review investigation that the Chinese company had played with its documents and committed fraud.  This decision exposed the US importers to $25 to $50 million in retroactive liability.  In the Wooden Bedroom Furniture, US importers have been exposed to an estimated $1 billion in retroactive liability.  I have met with a good old boy company in High Point, North Carolina, that had its entire $60 million furniture importing company go up in flames because it imported from China under an antidumping order.

When Chinese companies go it alone, because of potential retroactive liability, US importers vote with their feet and go to third countries.  Thus the US importers are now importing ironing tables from India, and Vietnam has become the largest exporter of wooden bedroom furniture.

When US importers and Chinese companies work together in antidumping and countervailing duty cases, however, the US importer keeps importing because he knows what is going on behind the scenes at the Chinese company.  In my Sebacic Acid case, for example, I had a coalition of Chinese exporters, a US importer and US distributor go on for more than 10 years importing sebacic acid into the United States under an antidumping order because the importer felt it was safe to import.

The point here is that Chinese companies and even the Chinese government need to work with US companies in Coalitions to win trade argument.  Part of these cases is the political argument.

THE POLITICS OF CHINA TRADE—IMPORTANCE OF COALITIONS

By Hon. Don Bonker

The U. S. – China economic relationship, particularly its growing dependence on investment and trade, is being tested as never before.  Both countries have legal mechanisms for dealing with unfair trade practices, to be sure, but there is no guarantee they will be fairly applied.

On the American side, our laws were crafted to protect American companies from foreign competitors who benefited from government subsidies, engaged in dumping activity or otherwise were doing injury to their U. S. counterparts.  No one can take issue with the purpose of such laws.

But they can question the application of the government’s trade laws (whether they are fairly applied) and if the public interest is truly being served.

A Commerce Department and an International Trade Commission (ITC) ruling in an antidumping and countervailing duty case has the appearance of targeting a foreign entity, but its punitive effects are felt by the importing U. S. companies who are liable for the higher tariffs, which can even be applied retroactively plus interest.  The costs, often totally unexpected, can run into the tens of millions, even causing bankruptcies of US companies.

In such cases, the public interest is not being properly served.  Congress needs to address this problem to insure more fairness and balance in the application of U. S. trade laws.  For Chinese companies, they will loose large market shares given that U. S. importers may opt to purchase similar products from Vietnam, India, Brazil and other developing countries.

Meanwhile, Chinese companies and American importers must cooperate to offset the “imbalance” that exists today.  To offset the imbalance, Chinese companies and US importers/end users have to collaborate to counter their American competitors’ political activity that is affecting their businesses and harming our trade relationship.  For Chinese companies it is difficult to engage in lobbying activity because US laws, such as Foreign Agents Registration Act, strictly regulate such a situation.  US companies, however, can and do lobby their Senators and Congressmen recognizing that it is their fundamental right as U. S. citizens.

Despite the ongoing trade cases against Solar Cells and Wind Towers from China, the Obama Administration has made renewable energy a top priority, providing tax credits and other incentives that are contributing to making this a growth industry.

To many American producers they see Chinese imports as a threat given the quality and price of imported products, which they attempt to counter  by establishing coalitions.  The Coalitions share the cost and boost their effectiveness by  retaining lobbying, public relations and law firms so as to give them an advantage before the respective government agencies.

The different firms work together.  The law firm gives legal advice on the various trade and investment cases, and the lobbying/public relations firm gives political advice on how to change the debate in Washington DC.  This collaborative approach is what’s gaining the other side distinct advantages in cases before government agencies.

Here are a few notable examples:

1.         Coalition for American Solar Manufacturing (CASM).  A consortium of U. S. domestic producers of conventional solar panels whose central purpose is “to hold China accountable by filing cases before government agencies.”  The Coalition consists of seven domestic producers, led by Solar World, a global company based in Bonn, Germany.  There is also the Solar Energy Industries Association that spent nearly $400,000 to retain lobbying and law firms in support of higher tariffs on Chinese products.

2.         The Wind Tower Trade Coalition (members consist of US Wind Tower Producers).  This Coalition’s mission is to obtain prohibitive tariffs on wind turbines and other products, which is widely reported in the news.  Also the American Wind Industry Association reportedly spent over $600,000 retaining lobbying and law firms.

This is what goes on in the nation’s capitol.  It is about law, economics and politics and how they all come together to influence policy and agency decisions.

As it relates to current trade cases on renewable energy imports, it has been regrettably one-sided. The U. S. producers are politically active and apparently quite effective.  The other side, which includes the US importers and end users, is paying a heavy price for remaining passive and conceding the argument.

There is a common refrain on Capitol Hill that says it best:  “The only thing that keeps decision-makers upright is equal pressure on all sides.”

China’s exporters and their American importers, distributors and end users must be more politically engaged if they expect to keep the US political leaders, Commerce Department officials and even ITC Commissioners and other U. S. officials “upright” to insure more favorable outcomes on cases they are considering. .

Such coalitions, not uncommon in America’s political system, are often necessary to develop greater public awareness and political support when trade cases and other actions are brought before these agencies.  The US importers, distributors and end-users of Chinese-made products with the help of their Chinese suppliers would do well to put together their own coalitions and adopt strategies that will leverage their respective positions, as follows:

•           The Coalition will consist of the affected U. S. companies, including US importers and the affected US down user producers, and adopt a strategy and plan that will demonstrate to the Administration, including the interested government agencies, Congress, and the Media, the public support and economic benefits the imports from China bring to the local economy.

•           Provide information on the economic benefits (and the loss of those benefits) should the imposition of prohibitive tariffs affect the operations of the US companies involved by shutting the Chinese products out of the US market.

•           In the local regions involved, including States and local city and county governments, mobilize public and political support that can be conveyed to Members of Congress and the particular government agencies.

•           In Washington, D. C., engage the Congressmen (representing the regions and serving on important committees) to enlist their support of the Coalition member cases when they appear before the agencies.

•          Develop a media package for distribution on Capitol/ government agencies, and media outlets (local, national, including trade publications); also be proactive on social media to insure the positive matches the negatives on Google and other internet venues.

The purpose is to insure the Coalition members’ cases by educating the public and the Politicians as to the other side of the argument so as to demonstrate strong public and Congressional support when the Department of Commerce and ITC are considering the trade cases.  Taking a collective approach helps to share the cost and be more effective in Washington, D. C.

 

 

DEVELOPMENTS TRADE, 337, PATENT/IP, AND CFIUS

TRADE LAW–GPX CASE

On January 7, 2013, Judge Restani of the Court of International Trade issued her new decision in GPX Tires case, which is attached. 2013 CIT DECISION GPX  In her decision, Judge Restani found the new law passed by Congress making the US Countervailing Duty law retrospectively applicable to China effective November 20, 2006 is Constitutional and did not violate the Ex Post Facto Clause of the Constitution.  Judge Restani stated:

“Article I Section 9 of the Constitution provides that “No Bill of Attainder or ex post facto Law shall be passed.” This clause, however, does not prohibit the imposition of all retrospective laws.  Instead, the clause only prohibits the imposition of retrospective penal legislation, which often, though not always, takes the form of criminal law. . . .By contrast, retroactive remedial laws are not prohibited by the clause.”

Judge Restani then determined that since the countervailing duty law is a remedial statute, retrospective laws, such as this provision, are constitutional.  Judge Restani then threw out the other Constitutional arguments against the law.

Judge Restani did raise questions with some of the issues in the Commerce Department’s initial determination and remanded the case back for further clarification from Commerce.

CHINESE TRADE CASES—PULP CASE AGAINST THE UNITED STATES, CANADA AND BRAZIL

There are strong rumors in China that the Chinese government will soon initiate an antidumping case against cellulose pulp from the United States, Canada and Brazil.  If anyone wants more information about the situation, please feel free to contact me.

With the strong rumors of a pulp case against the United States and an ongoing Chinese case against Paperboard, we are starting to see another trade war in the Wood Products, Pulp and Paper Sector.  This war started with the US cases on Coated Paper, Wooden Bedroom Furniture and Wood Flooring and now the Chinese government has reacted with cases on Pulp and Paperboard.  The trade war continues.

SECTION 337 PATENT CASES—DOJ AND USPTO OBJECTIONS TO EXCULSION ORDERS ON STANDARD-ESSENTIAL PATENTS

In contrast to the US antidumping and countervailing duty law, section 337, which deals with violations of intellectual property, in particular, patents, does have a public interest provision.  If the US International Trade Commission (“ITC”) determines that imported products infringe a US patent, the ITC can issue an exclusion order to exclude the infringing products at the border.  In deciding whether to issue an exclusion order, the ITC is to take public interest into account, and based on public interest grounds can refuse to issue the exclusion order.

On January 8, 2013, the Department of Justice Antitrust Division and the US Patent and Trademark Office (“USPTO”), filed a report at the ITC questioning whether the ITC should issue exclusion orders in section 337 cases where the banned imports are found to infringe standard-essential patents (“SEP”).  The DOJ and the USPTO argued that where SEP owners have agreed to license their patents on fair, reasonable and nondiscriminatory terms and the respondents have agreed to those terms, the ITC should not allow the threat of an import ban to result in the extraction of unfairly high royalty rates for these patents.

Recently, antitrust authorities have become focused on how companies whose patent have been incorporated into industry standards should be allowed to enforce their IP and Patents.  Much of the debate has centered on the so-called “FRAND or RAND licensing commitments.”  In the proposal, the DOJ and the USPTO defined these licensing agreements as follows:

“ a patent is RAND- or FRAND-encumbered where a patent holder has voluntarily agreed to license the patent on reasonable and non-discriminatory (RAND) terms or fair, reasonable, and non-discriminatory (FRAND) terms while participating in standards-setting activities at a standards-developing organization (SDO).  In the United States, SDO members may commit to license all of their patents that are essential to the SDO standard on RAND terms.  In other jurisdictions, SDO members may commit to license such patents on FRAND terms.  For the purposes of this letter, F/RAND refers to both types of licensing commitments. Commentators frequently use the terms interchangeably to denote the same substantive type of commitment.”

The report goes on to state:

“Voluntary consensus standards serve the public interest in a variety of ways, from helping protect public health and safety to promoting efficient resource allocation and production by facilitating interoperability among complementary products.  Interoperability standards have paved the way for moving many important innovations into the marketplace, including the complex communications networks and sophisticated mobile computing devices that are hallmarks of the modern age. Indeed, voluntary consensus standards, whether mechanical, electrical, computer-related, or communications-related, have incorporated important technical advances that are fundamental to the interoperability of many of the products on which consumers have come to rely.”

The report then goes on to state:

“A patent owner’s voluntary F/RAND commitments may also affect the appropriate choice of remedy for infringement of a valid and enforceable standards-essential patent.  In some circumstances, the remedy of an injunction or exclusion order may be inconsistent with the public interest. This concern is particularly acute in cases where an exclusion order based on a F/RAND-encumbered patent appears to be incompatible with the terms of a patent holder’s existing F/RAND licensing commitment to an SDO.  A decision maker could conclude that the holder of a F/RAND-encumbered, standards-essential patent had attempted to use an exclusion order to pressure an implementer of a standard to accept more onerous licensing terms than the patent holder would be entitled to receive consistent with the F/RAND commitment—in essence concluding that the patent holder had sought to reclaim some of its enhanced market power over firms that relied on the assurance that F/RAND-encumbered patents included in the standard would be available on reasonable licensing terms under the SDO’s policy.  Such an order may harm competition and consumers by degrading one of the tools SDOs employ to mitigate the threat of such opportunistic actions by the holders of F/RAND-encumbered patents that are essential to their standards.”

“This is not to say that consideration of the public interest factors set out in the statute would always counsel against the issuance of an exclusion order to address infringement of a F/RAND-encumbered, standards-essential patent.  An exclusion order may still be an appropriate remedy in some circumstances, such as where the putative licensee is unable or refuses to take a F/RAND license and is acting outside the scope of the patent holder’s commitment to license on F/RAND terms.”

For further details, read the attached letter and report.  DOJ PROPOSAL ITC PUBLIC STANDARD DOJ PTO LTR

337 ROBOTIC TOY TRADE SECRETS CASE

On January 4, 2013, a 337 complaint was filed on robotic toys at the ITC alleging theft of trade secrets by a Chinese company.

According to the complaint filed by Innovation First International Inc., CVS Pharmacy Inc. is importing a robotic toy fish incorporating trade secrets stolen by a former IFI employee and taken to a Chinese company, Zuru Inc.  See the notice below.

Pending Institution

Docket No: 2930

Document Type: 337 Complaint

Filed By: Lauren A. Degnan

Firm/Org: Fish & Richardson

Behalf Of: Innovation First, International, Inc., Innovation First, Inc., and Innovation First Labs, Inc.

Date Received: January 4, 2012

Commodity: Robotic Toys

Description: Letter to Lisa R. Barton, Acting Secretary, USITC; requesting that the Commission conduct an investigation under section 337 of the Tariff Act of 1930, as amended regarding Certain Robotic Toys and Components Thereof . The proposed respondent is CVS Pharmacy Inc., Woonsocket, Rhode Island.

PATENT CASE AGAINST HANGZHOU COMPANY

On January 4, 2013, TP Orthodontics Inc. sued Hangzhou Shinye Orthodontic Products Co. Ltd. and Global Orthodontics LLC in the Federal Court in Illinois for patent infringement for imports of orthodontic brackets, which allegedly infringe TP’s US patent.

CRIMINAL COPYRIGHT CASE AGAINST CHINESE CITIZEN

On January 7, 2013, it was revealed that a Chinese citizen has pled guilty in Delaware federal court to criminal conspiracy charges for operating websites in China through which he sold more than $100 million worth of pirated computer software to buyers around the world.  Attached are copies of the Indictment and the Plea Agreement.  INDICTMENT PLEA AGREEMENT

In June of 2011, a Xiang Li of Sichuan was arrested in Saipan for criminal violations of US copyright laws.  The pirated programs that Xiang Li was selling were sensitive technology.  Mr. Li now faces a possible sentence of 25 years in Federal prison.  Li was lured to a US territory, the Pacific island of Saipan, by undercover agents, where he was arrested.

ANNUAL CFIUS REPORT TO CONGRESS

In the attached December 20, 2012 annual report to Congress, CFIUS REPORT TO CONGRESS the Committee on Foreign Investment in the United States (CFIUS) states:

“Based on its assessment of transactions identified by CFIUS for purposes of this report, the U.S. Intelligence Community (“USIC”) judges with moderate confidence that there is likely a coordinated strategy among one or more foreign governments or companies to acquire U.S. companies involved in research, development, or production of critical technologies for which the United States is a leading producer. Information supporting this assessment is provided in the classified version of this report. Indications of other coordinated strategies may go unobserved due to limitations on intelligence collection, or may be hidden or misconstrued because of foreign denial and deception activities.”

This finding could affect future transactions from identified companies or governments, which could include China.

If you have any questions about these developments or wish copy of the 337 complaint or other documents, please feel free to contact me.

Best regards,

Bill Perry

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