US CHINA TRADE WAR – SECTION 301 TARIFFS, TRANSSHIPMENT FALSE CLAIMS ACT, ANTIDUMPING AND 337 CASES

White House Fence Summer Red Flowers Fountain Pennsylvania Ave Washington DC

TRADE IS A TWO-WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 20, 1986

US CHINA TRADE WAR – AUGUST 7, 2019

Dear Friends,

This blog post signals a change.  Recently I brought in Fred Rocafort, a young attorney, to help me with the trade practice and this newsletter.  Fred worked for the State Department in China and speaks fluent Chinese and Spanish.  He then worked for years in China and Hong Kong as an Intellectual Property lawyer.

In this blog post, we will discuss briefly the Section 301 case and the ongoing negotiations, the transshipment problem, the False Claims Act and impact on importers and competitors, the impact of the Fabricated Structural Steel from China case on the US construction industry, the highest antidumping rate in history, and new Section 337 cases.

Finally, this has been a very difficult newsletter to write because of this very difficult period in US China relations.  Because of constant criticism of China in Trump’s campaign to be President, one knew that Trump would be very tough on China.  Meanwhile, on the China side, as described in more detail below, President Xi Jinping has made dramatic changes in Chinese society to create a more statist economy in order to preserve the power of the Communist Party.  These two very different approaches have led to the trade conflict.

The objective of this blog is not to take one side or the other in the dispute but to focus on the reality as exists now in US China relations and spot and explain the issues so that readers can better understand the situation.  Since I am a US trade lawyer, it is easier for me to find US sources and understand better where the US is coming from.

But the rhetoric has become so heated on both the US and China sides that readers may think I am trying to favor one side over the other.  That is not my intent.  My intent is to focus on the real issues so that both sides can better understand each other.

Although the US China situation does not look good now, Dan Harris, my partner, has recently written an article entitled “Why NOW Is A Very Good Time to Double Down on Doing Business in China”.

No situation is every truly black and white.  It is grey.

Best regards,

Bill Perry

DEVELOPMENTS SINCE LAST BLOG POST

TRADE NEGOTIATIONS STOP IN MAY AS TARIFFS ON THE $200 BILLION GO FROM 10% TO 25%, POTENTIAL TARIFFS ON THE REMAINING $300 BILLION FROM CHINA GO 10% SEPTEMBER 1ST BECAUSE TRADE NEGOTIATIONS AFTER G-20 MEETING SHOW NO MOVEMENT CHINA RETALIATES ON AUGUST 5TH

Although the US and China were close to a trade deal with reportedly a 120 to 150 page agreement, in May 2019 China backtracked and redlined out much of the proposed trade deal.  In particular, apparently the Chinese government backtracked on commitments to deal with Intellectual Property Theft and Forced Technology Transfer.

As stated in the last blog post:

it is very clear that the key issues discussed in the trade talks are: Forced Technology Transfer, IP Theft and Enforcement of any trade agreement.  Trump and USTR Robert Lighthizer are not going to settle for an agreement with broad meaningless promises from the Chinese government, which are not kept.  The US wants tangible results and promises that can be enforced.

In response to the Chinese government’s retreat, on May 9, 2019 in the attached Federal Register notice,MAY 9 FED REG 25% 200 BILLION, the US government raised tariffs on the third $200 billion in imports from 10 to 25%.

On May 17, 2019, in the attached Federal Register notice, MAY 17 USTR REQUEST FOR COMMENTS ON TARIFFS $300 BILLION, the USTR started the process of imposing a 25% tariff on the remaining $300 billion from China.

On June 24th, in the attached Federal Register notice, June 24.2019.Procedures_for_Requests_to_Exclude_Particular_Products_from_the_September_2018_Action, the United States Trade Representative (“USTR”) set up an exclusion process for the 25% tariffs on the $200 billion.

As a result of the meeting between Presidents Xi and Trump at the G-20 in Japan on June 28th, President Trump agreed to postpone the 25% tariffs on the remaining $300 billion with the promise that trade negotiations would start up again.

Trade negotiations started up on July 30 and 31st, but there has been very little progress.  The Chinese government’s apparent new strategy is to wait for the US Presidential Election in November 2020 and hope for a better deal.  But all indications are that the Chinese economy is hurting so we will have to wait and see.

In response to the Chinese strategy, on August 1, 2019, President Trump announced 10% tariffs on the remaining $300 billion in imports from China effective September 1, 2019.  At that point in time, all of China’s exports to the US will be covered by tariffs.

On August 5, 2019, the Chinese government retaliated letting the Chinese currency drop in value to 7 yuan to the dollar, cheapening the Chinese currency so that Chinese exports will be cheaper to offset the US tariffs.  Also the Chinese government stopped all purchases of US agricultural products.

See Donald Trump Accuses China of Currency Manipulation as Yuan PlungesSee also China to suspend purchases of US farm products in retaliation for ‘serious violation’ of trade deal between Xi Jinping and Donald Trump.

FRED’S TAKE—FRED ROCAFORT ARTICLE ON SECTION 301 AND TRADE NEGOTIATIONS

USTR Lighthizer and SecTreas Mnuchin are heading to Shanghai next week for trade talks. The choice of Shanghai is interesting. One analyst suggested that China was sending a message that “trade should be trade, and politics should be politics”. Even SecTreas Mnuchin invoked the spirit of the 1972 Shanghai Communiqué, which paved the way from rapprochement between the U.S. and China—and ironically the current mess in which the two countries find themselves. Perhaps the hosts are thinking of a different kind of optics. There is arguably no image that is more associated worldwide with China’s economic miracle than the Lujiazui skyline—look up “china economic miracle” on Google Images for confirmation. It is hard to reconcile the portrait of China as an economic villain with the Pearl of the Orient’s vibrancy.

Before delving into the prospects for the upcoming talks, it is worth taking a step back and remembering how we got to this point. As mentioned above, the Shanghai Communiqué that Mnuchin celebrated set in motion a process that would over time entangle the Chinese economy with those of the United States and other nations in an unprecedented way. Though Cold War realities were initially foremost in America’s thinking, soon China policy became undergirded by the idea that increased engagement with the U.S. and its democratic, free-market allies would inexorably take China down their same path.

There was certainly much change, but only to the extent that it allowed China to become an export powerhouse. One can imagine the thrill felt by foreign executives as they saw the first cases of Coke cross the Shenzhen River into Mainland China in 1979, representing a symbolic first step towards the final realization of the long-standing Western dream of opening up China. Yet 30 years later, in some fundamental ways little has changed for foreign business. Sure, it has been a relatively smooth ride for the KFCs, Colgates and Nikes of the world, who contribute mightily to the state coffers. But for most foreign businesses, the China experience has been a negative one. As a longtime China expat, I heard so many tales of woe that I became jaded. Business partners colluding with local authorities to edge out foreign investors. Rampant counterfeiting and infringement of foreign brands. Continued restrictions on market access. Capricious immigration policies. China nightmares remain unabated despite repeated government assurances of coming improvements. Mr. China remains as much of a cautionary tale today.

Ultimately, the Chinese leadership viewed and continues to view Reform and Opening as a transactional mechanism. Reform and Opening themselves were never the objectives; continuity of Party rule has always been. This is why China continues to pick and choose when it comes to reform, in a way that has led to a collision with the United States.  By the time the 2016 U.S. presidential campaign got underway, it was clear to most China-watchers that the country would not follow the path of South Korea and Taiwan towards democracy, negating the one hope that secured for China so much patience over the years. In this environment, a certain Donald Trump decided that it was time to bring this issue to the forefront.

The current trade war’s first salvo was fired in March 2018, when President Trump directed the USTR to propose a list of products to be subjected to tariffs, in response to the findings of the USTR Section 301 investigation launched in August 2017. Ultimately 1,300 types of products were listed.

China retaliated with tariffs on 128 U.S. products and asking the WTO for consultations on the U.S. tariffs. After a visit to Washington by Vice Premier Liu He, China’s point man on trade, the two countries announced that there “was a consensus on taking effective measures to substantially reduce the United States trade deficit in goods with China”. This led SecTreas Mnuchin to declare that the trade war was “on hold”. However, and perhaps reflecting disagreements within the Trump team, shortly thereafter 25% tariffs on $50 billion worth of imports were announced. These tariffs went into effect on June 6 ($34 billion) and August 8 ($16 billion).  China retaliated in kind.

In September 2018, the U.S. announced 10% tariffs on $200 billion worth of Chinese products, which were raised to 25% on May 5, 2019. China’s expected retaliation came on June 1, in the form on tariffs on $60 billion worth of U.S. imports.

Presidents Trump and Xi met during the G-20 summit in Osaka, Japan and announced a truce. The upcoming talks in Shanghai are the first high-level encounter since then.

The smart money is on keeping expectations low. As an analyst quoted by the SCMP noted, the “talks will only result in a small step”. Still, even a small step would be a welcome respite from the spiral of escalation we have seen over the past year. The key question is, what exactly would that small step be?

A rollback in tariffs is one option. The Chinese have previously demanded that all tariffs be eliminated before a deal can be reached. This is surely a no-starter for the Trump team, which in fact would like to keep some tariffs in place even after a deal is made. However, having slapped tariffs on $250 billion worth of Chinese imports, the U.S. side has plenty of room for maneuver, allowing it to simultaneously eliminate the tariff burden considerably, while still leaving meaningful tariffs in place.

On the issue of Huawei, the introduction of a bipartisan bill in Congress that would lock the Shenzhen-based telco into the Commerce Department’s blacklist complicates matters. Paradoxically, however, the Democrats jump onto the Huawei bandwagon could help the Trump negotiators in two ways. First, it moves the goalposts in a way that allows the administration to do a lot without accomplishing anything when it comes to Huawei. Second, Lighthizer and Mnuchin can now point to concrete evidence that a Democratic victory in 2020 might not deliver the Chinese from American wrath. Better the devil you know…

As for China’s side of the bargain, hopes of placating the U.S. with purchases of agricultural goods seems to have faded, as the Chinese come to realize that no amount of sorghum is going to get the U.S. to ease up on its core demands. It is critical to remember that the Section 301 investigation that provided the legal basis for the tariffs concerned Chinese government practices “related to technology transfer, intellectual property, and innovation”. In the absence of meaningful Chinese concessions on these areas, it is hard to see the U.S. budging at all on tariffs or Huawei.

The Section 301 investigation report provides a clear picture of what the U.S. would like to see happen with regard to these critical areas. Last month, China announced it will open up new sectors to foreign investment, and it may offer further liberalization. On the other hand, it is hard to envision the Chinese undertaking to amend laws such as JV Regulations at American behest.

As difficult as it may be for some Dragon Slayers to accept, not every single line of Chinese jurisprudence has been drafted with a nefarious, China-first agenda in mind. For instance, when Article 43(1) of the JV Regs call for “fair and reasonable” fees for the use of technology, it is reflecting the basic principle that, “In civil activities, the principles of voluntariness, fairness, making compensation for equal value, honesty and credibility shall be observed” (Art. 4, General Principles of Civil Law). Meanwhile, “Vaguely worded provisions and uncertainty about the applicable rules” are a hallmark of Chinese legislation, and serve as powerful levers with implications that go far beyond FDI.

One intriguing, if unlikely, possibility would be the introduction of more specific investment terms into a bilateral treaty (such as the income tax treaty or the consular convention). This could include language that places Chinese investment into the U.S. under additional scrutiny. It could also provide for special procedures that allow companies such as Huawei to obtain technology while providing certain safeguards. This approach would allow the Chinese to save face as far as its own legislation is concerned, while pleasing the Americans (who, given the current tenor in Washington, are unlikely to care too much about any protestations from Brussels or Ottawa regarding this side deal).

Speaking of unconventional wisdom, the possibility of non-trade elements playing a role in a deal cannot be discarded. In the leadup to the talks, Secretary Pompeo called China’s treatment of Uighurs in Xinjiang “the stain of the century”, while Vice President Pence tweeted a condemnation of China’s record on religious freedom. This simultaneous push on trade and human rights is consistent with the “whole of government” approach against China called for in the—ironically-named—John S. McCain National Defense Authorization Act for Fiscal Year 2019.

Admittedly, it is hard to see where China can budge, especially in the kind of public way that the Trump team needs to be able to claim some kind of victory. That said, if it gives him some oxygen on tariffs and Huawei, President Xi might be willing to pull something out of his hat on North Korea or even the South China Sea.

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

The section 301 case started in the spring of 2018.  The core of the complaint is China’s aggressive campaign to steal intellectual property (“IP”)  from US and other foreign companies.  See the attached Full Section 301 Report and Interim Report

If the Chinese government can compromise on IP Theft and Forced Technology Transfer in an enforceable agreement, I suspect that a deal can be reached.

If not, however, US has imposed 25% tariffs on $250 billion in imports from China with potentially another 25% tariff on the remaining $300 billion, which means by September 1st all imports from China will be hit with a 10 to 25% tariff.   See the Federal Register notices above.

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

President Trump’s and USTR Lighthizer’s firm belief is that because of a US trade deficit and a Chinese trade surplus of $350 billion and total Chinese exports of $550 billion plus, the US could weather a trade war much better than China.

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

China’s failure to follow through on past trade agreements is not just a Trump issue.  Recently, former USTR Charlene Barshefsky, a good Democrat, who negotiated the US China WTO Agreement under President Clinton, has stated that the Chinese government broke all the WTO Agreements it signed.

SECTION 301 PROCEDURES AND THE JUNE 24, 2019 EXCLUSION PROCESS FOR THE $200 BILLION

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

The deadlines to file an exclusion request for the first $50 billion have past.  The exclusion process for the third $200 billion list just started up on June 24th and the deadline is September 30, 2019.

Also the process has started to impose 25% tariffs on the remaining $300 billion from China.

Theoretically, if the negotiations go well, all or some of the 301 tariffs could be lifted so there will be no need for exclusion requests.  If the duties remain in place, then the USTR will have an exclusion process.

FRED ROCAFORT ARTICLE ON THE JUNE 24TH EXCLUSION PROCESS FOR THE TARIFFS ON THE $200 BILLION

Back in June, Adams Lee (one of my fellow international trade lawyers) urged those who manufacture products in China for the U.S. to Get Going on Your China Tariff Exclusion Requests Now. 

Adams’ advice has clearly not gone unheeded. These days, client calls to discuss exclusion requests are as much a part of my morning routine as my first cup of joe. The deadline for filing List 3 exclusion requests is September 30, 2019, though one wonders why the United States Trade Representative (USTR) is even bothering with a deadline. According to Roll Call, the process for reviewing exclusion requests has “slowed to a painful crawl” and “USTR in July up to the 19th had completed work on just 60 of the total 2,900 requests for tariff waivers on [List 2] tranche requests”.  Not a promising sign when trying to determine how long it will take to sort out the 60,000 List 3 requests for which USTR is bracing — never mind the looming List 4 requests, when essentially all China imports will be subject to tariffs.

Our clients are understandably interested in any patterns that are emerging regarding approvals. Thanks to the Mercatus Center, we know List 1 requests for capital goods have been approved at a higher rate than intermediate goods or consumer goods, but for List 2 requests, consumer goods were approved at a higher rate than either capital or intermediate goods. It is important, however, to keep in mind that consumer goods account for only a fraction of the List 1 and 2 requests. More on this later.

Turning to the substance of the requests, after reviewing many of the requests adjudicated by USTR, approved requests tended to clearly articulate why the product for which an exclusion was sought cannot be sourced from anywhere other than China. I emphasize cannot because what trips up many requestors is that they end up explaining why they do not want to source from elsewhere.

For instance, take this denied tariff exclusion request from List 1:

[Company X] respectfully requests that you grant its request for an exclusion.

While we cannot seek exclusions on every component that we source from China, we are pursuing exclusions for several higher value and/or larger volume components, including this product.

[Company X’s] sourcing decisions are guided by a number of factors including availability of the part; quality of the part; landed cost… desire to work with a particular supplier; capacity of a supplier to produce volume needed on deadline; supply chain risk management; and minimizing capital investment.

*    *    *    *

Failure to grant [Company X’s] exclusion request will increase the company’s production costs. As a result, the company will reduce its margins, pass the additional cost onto consumers… negatively affect… the 60,000+ American workers [Company X] employs… (emphasis added)

Readers from my generation may remember the The Far Side, a brilliant comic created by Seattle’s own Gary Larson. One of my favorite cartoons juxtaposed what an owner said to his dog (“You stay out of the garbage! Understand, Ginger?”) with what Ginger actually heard (“blah blah Ginger blah”). To USTR (Ginger) this request is screaming, “I don’t want to pay more, blah blah”.

To be sure, paying more for products manufactured in China is a completely legitimate concern and I am not trying to make light of the real struggles faced by Company X and others that have their products made in China. But we are right now in a large-scale trade war with China (with no end in sight) and in the same way our great-grandparents were expected to buy Liberty bonds during World War I, the USTR expects businesses that ship China-manufactured products to the United States (and  the buyers of those products) to bear economic burdens as the country “max[es] out [its] economic power.”

Company X’s tariff exclusion request (above) does passingly mention availability of its product outside China, but it fails to flesh out how that forces it to get that product from China. Is the product not available at all in a third country? Or is it available, but not at the sufficient volume or necessary quality?

It is worth keeping in mind that USTR largely avoided consumer goods in Tariff Lists 1 and 2, but consumer goods account for more than 30% of the List 3 products (compared to less than 1% in the first two lists). This shift could bring about a sea change in tariff exclusion rejection patterns. USTR has rejected just over 60% of the List 1 tariff exclusion requests and 45% of the List 2 requests it has received.

My suspicion is that the move towards consumer goods in List 3 will cause tariff exclusion rejection numbers to increase from Lists 1 and 2. One of the key issues for USTR when it considers exclusion requests is the following:

Whether the particular product [for which the tariff exclusion is being sought] is available only from China. In addressing this factor, requesters should address specifically whether the particular product and/or a comparable product is available from sources in the United States and/or in third countries.

A familiar theme in this blog is the shift of manufacturing activity out of China, primarily to Southeast Asia and to Mexico.  In How to Stop Manufacturing in China: Try Harder, we wrote how in many instances (but certainly not all), it is neither difficult nor expensive to move manufacturing outside China:

This probably sounds harsh, but many companies would benefit from moving their manufacturing out of China that have not yet done so for reasons more related to inertia than to economics or anything else. I realize change is hard but if you are in a situation where you are essentially paying 25% more than your competitors and at huge risk of your products being slapped with retroactive duties ranging from 20% to 250%, inertia is not a good excuse.

Of course, there are companies that have almost no choice but to have their products made in China. China has been developing its export-oriented capabilities for decades and its manufacturers enjoy access to a massive internal market and to levels of government assistance that cannot be matched in other low-cost destinations. As per a Quartz article:

Then there are the products the US almost exclusively gets from China. Raising tariffs on these goods will likely cost American consumers, and leave importers in a bind to find substitutes in the short-term—in the long-run, manufacturers may look to produce these goods outside China. We identified 11 product categories that China supplied 95% of US imports worth at least $100 million in 2018 by analyzing data from the US Census Bureau. All 11 product categories were on the list of goods for which the US has threatened to raise tariff rates by 25%. The US has since agreed to delay these hikes as part of negotiations.

By contrast, China’s manufacturing competitors have been flooding the lower ends of the value chain. Simply put, it is easier to set up a sneaker factory than a chemical processing plant. Back to Quartz:

The US imports about $100 million dollars in soy sauce every year. China supplies 42%. But it also gets a lot of soy sauce from Japan (17%), Hong Kong (14%) and Thailand (7%). If the US raises tariffs on Chinese soy sauce, importers might shift their buying to these other countries to avoid cost increases.

This means that when it comes to consumer goods, we expect fewer U.S. importers will be able to answer “No” to the key question in the exclusion request form: “Is this product, or a comparable product, available from source[s] in third countries?”. As a result, it can be fully expected that USTR will deny a higher rate of List 3 and List 4 requests.

What all of this means is that if you really need to source your products from China, you need to ensure that your tariff exclusion requests are as strong as they can be. On the flip side, what is happening with the tariff exclusion process is another reminder that the conversation about getting out of China needs to happen now, especially because we do not see the United States eliminating its China tariffs soon, if ever:

If your company is thinking there will be a solution to the US-China trade war and that solution will obviate any need to move your manufacturing from China, you are very likely engaging in wishful thinking. The US-China trade war has been going on for more than a year now and, if anything, we are farther away from resolution than when it started.

What is happening with the tariff exclusion process underscores this point. By now, everyone should have disabused themselves of any notion that  tariff exclusions would be an effective workaround. They will not, unless you can truly show that your product cannot be sourced in a third country. This is the time to recognize the difference between needing to source your product from China and preferring to do so.

If you need to stick with China and you are looking down at the tariff barrel, make sure you look at some of the approved tariff exclusion requests for inspiration and be sure to clearly spell out why you do not have a China alternative, remembering that “I would have to pay more” is not going to cut it. On the other hand, if you can source your product from somewhere other than China at comparable cost and quality, it is probably time for you to move on.

I will in the meantime be working on completing and submitting more tariff exclusion requests.

BEING TOUGH ON CHINA IS A BIPARTISAN REPUBLICAN DEMOCRAT ISSUE

The Chinese government’s apparent strategy in the trade negotiations is to wait and see what happens in the next Presidential election in November 2020 and hope for a better deal with a new Administration.  But after the two recent debates by Democratic candidates, Democratic pundits complain that no Democratic Presidential candidate to date can beat Donald Trump. With that situation in mind, Chinese government officials might want to rethink that strategy.

Moreover, contrary to many commentators in China and elsewhere, the tough position against China in these trade negotiations is not just President Donald Trump.  After Trump’s announcement of a potential 10% tariff starting September 1 on the remaining $300 billion imported from China, New York Senator Chuck Schumer, who leads the Democrats in the Senate, came out in favor of the Trump tariffs telling President Trump to stand tough on China.

In light of these facts, the Chinese government should not expect a change in the tough US position on China trade policy if there is a change in US government. US China Trade Policy is not just a Republican issue.  It is bipartisan issue.  Traditionally, the Democratic party is much more protectionist than the Republican party, because the Democratic party is supported by the labor unions.

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

Although a President Biden, whose son Hunter Biden has a billion-dollar deal in China, might be easier on China, the rest of the Democratic field will be very tough on China.  Based on quotes from numerous sources, the Chinese government has succeeded in uniting both ends of the political spectrum, Democrats and Republicans, against China.  This trade situation is not going to change any time soon no matter what party is in power.

FORMER DEMOCRATIC CONGRESSMAN DON BONKER TRADE ARTICLE ON THE DEMOCRATIC RESPONSE TO TRUMP ON TRADE

On May 21, 2019, my friend Don Bonker, a former Democrat Congressman, published an article in the Wall Street Journal entitled “On Trade, Where Are My Fellow Democrats?” stated in part:

President Trump’s latest round of punishing tariffs on China, with threats of more to come, will have a devastating effect on the world’s two largest economies. His actions are contrary to the Republican Party’s usual doctrine of free trade, and they have alarmed business leaders, farmers and the American sectors and regions that will most acutely feel the pain of the tariff increases and China’s targeted retaliation.

So where are the Democrats? Until Mr. Trump arrived on the scene, the Democratic Party had itself been sojourning down the path of protectionism, driven by organized labor. Since then, the president has ripped up the Trans-Pacific Partnership, overhauled the North American Free Trade Agreement, and hit even U.S. allies with harsh tariffs-all while Democrats have been strangely silent. It seems as if they either tacitly support Mr. Trump’s reckless trade policies or simply lack an alternative.

Sidestepping the Constitution, which clearly assigns to Congress the power to “regulate commerce with foreign nations,” the Trump administration is using executive orders and national-security statutes to impose punishing tariffs. If a President Bernie Sanders were doing this, Senate Republicans would protest furiously. Yet Republicans and Democrats alike are letting the president do what he wants. . . .

The U.S. has tens of thousands of domestic companies that would be highly competitive in foreign markets if they could collaborate in marketing and shipping their products abroad. In 1982 I worked with Secretary of Commerce Malcolm Baldrige to resolve this problem by passing the Export Trading Company Act, enacted with bipartisan support, that included a waiver to allow these companies to team up without being in violation of the antitrust laws.

Unfortunately, the law has since been largely ignored by recent administrations, including Mr. Trump’s.The White House has tried plan after plan to restrict imports and punish trading partners. But focusing on the export side is a better way to ensure that American companies get a larger share of the world market. Over the years, Congress has established agencies and mandates to help U.S. companies go international, but they exist more like fiefdoms.  There is no global strategy and no coherence.

I’d also advise a presidential candidate to reorganize all the trade agencies-the Export-Import Bank, Overseas Private Investment Corporation, Trade and Development Agency, U.S. Commercial Service and others-under one umbrella with a new mandate to make America more competitive.

In the 2020 election, the Trump administration will continue to offer protectionist policies and ongoing threats that may provoke a repeat of the 1930 Smoot-Hawley Tariff Act, which precipitated the collapse of the world trading system. Democrats need to give voters a clear alternative: Elect a president who will take America back from the brink, make exports a much higher priority, and adopt policies to make U.S. companies far more competitive in the global economy.

Congressman Bonker has some very good points, but the Democratic party does not appear to be listening to his advice.  Many Democratic Senators and Congressmen agree with President Trump’s tough stance on trade, especially with regards to China.

LONG TERM IMPACT OF TRADE WAR ON US CHINA RELATIONS, THE XI JINPING BACKLASH AND THE DECOUPLING WITH CHINA

Recently, many books have been written by Chinese experts in the United States and elsewhere about the substantial political change in China and the decision by President Xi Jinping to move China back from a free market with private companies to a state-controlled economy.  Tax rates on Chinese entrepreneurs are reportedly as high as 65%.

See the January 2019 book by Nicholas Lardy, a US expert, entitled “The State Strikes Back The End of Economic Reform in China”, which states:

“The fundamental obstacle to implementing far-reaching economic reforms in China is the top leadership’s view that, while state-owned firms may be a drag on China’s economic growth, they are essential to maintaining the position and control of the Chinese Communist Party and achieving the party’s strategic objectives (Economy 2018, 15–16).”

State Strikes Back at p, 507-508 (2019).

A more influential book is the most recent book by Richard McGregor “Xi Jinping The Backlash”.  See https://www.cnn.com/2019/07/16/opinions/xi-jinping-backlash-opinion-intl-hnk/index.html.  McGregor in his book describes in detail the movement of President Xi Jinping to recentralize decision making authority in Beijing and move China back to a more authoritarian State run completely by the Chinese Communist Party.

This dramatic political change in China has now resulted in a major reassessment by many US politicians of relations with China.  See podcast by Newt Gingrich, one of the elder statemen in the Republican Party and an advisor to President Trump, “China How We Got It Wrong”.  https://podcasts.apple.com/us/podcast/newts-world/id1452065072?i=1000438763243.

Gingrich is a free trader, but recent developments in China have led him to completely change his outlook of China.  The movement by President Xi Jinping to a more authoritarian, State Run society, in China has caused many US and other Western politicians to believe that China is not moving in the right direction.  That is not a good sign for future US/Western Democracy relations with China.

Moreover, the long-term effect of the Trump trade war and the change in policy in China regarding the treatment of private companies and foreign companies is leading to a decoupling in supply chains between the US and China and also a decoupling of many foreign companies from China suppliers.  Although some foreign companies will continue to have operations in China, many others are moving.  See August 5, 2019 South China Morning Post article, Japan’s Sony, Ricoh and Asics join manufacturers’ mass exodus from China’s factories as US tariffs on made-in-China products bite,

Many US importers are moving or looking to move supply to a third country.  US companies that have operations in China are moving or looking to move all or almost all of their production from China.  The reports are that Apple and Fox Conn have succeeded in moving all of their Chinese production to Vietnam.

We are working with Chinese, foreign and US companies that want to move production or supply to a third country, including Vietnam, Malaysia and Thailand.  This major decoupling with China will have a major impact on the Chinese economy and on China’s foreign relations with other countries.  That is the simple reality of the situation.

But at the same time, as stated above, Dan Harris, my partner, has recently written an article entitled “Why NOW Is A Very Good Time to Double Down on Doing Business in China”.

THE RISE OF TRANSSHIPMENT AND HOW INDIVIDUALS AND COMPANIES CAN PROFIT FROM RIVALS TRANSSHIPMENT: IMPORTERS BEWARE

MOIETY  AND THE FALSE CLAIMS ACT

In response to these trade actions, many Chinese companies have attempted to transship products through third countries to the United States.  The Wall Street Journal recently published a piece on transshipment.  See https://www.wsj.com/articles/trump-to-impose-additional-10-tariff-on-chinese-goods-11564681310?mod=hp_lead_pos1.  In the video attached to the article, my partner Steve Dickinson, describes the transshipment problem in detail.

Many US importers, however, many not realize that importing goods through transshipment is a crime, which can land importers in prison.  In fact, two of my past clients went to prison for importing transshipped Chinese products through a third country.

When an importer imports products into the United States, he must submit a Section 7501 Customs form to the US Customs and Border Protection, which requires the importer to specifically declare the country of origin.  If a false 7501 Customs form is submitted to the US government and the importer knew the country of origin was false, that is Customs fraud, which can trigger significant civil and criminal penalties.

In fact, recently, a US importer contacted me because he had received an e-mail from a Chinese chemical producer/exporter, saying buy my chemical product, which is covered by a US antidumping (“AD”) order.  The Chinese producer told the US importer not to worry about the AD duties because the Chinese company would simply ship the product through Taiwan, call it Taiwan product and no problem.  The importer was very angry because he knew that transshipment is a crime, and he the US importer could find himself criminally liable for such a scheme.

Another importer recently stated that he intended to get around a US trade order by triangulation, simply shipping the Chinese product to a third country and then changing the country of origin from China to the third country.  I told the importer that this was Customs fraud and could lead to criminal and civil prosecution.

In another situation, several importers have contacted me because to get around trade orders, including antidumping and the Section 301 tariffs, Chinese companies are telling their US importers not to worry because they will just label the country of origin as Hong Kong or Singapore.  Import games, such as switching the country of origin, can lead to civil and criminal violations, which can lead to enormous penalties and even prison time.

Chinese companies and US importers have different interests.  The Chinese company wants to ship to the US.  The US importer wants to stay out of Customs trouble and avoid additional liability, be it civil or criminal.

But the question for many individuals and companies, be they Chinese or US, is how can we profit from this if we know competitors, including Chinese producers and US importers, are not playing by the rules?

Anyone, including companies in China or US importers, can profit if they discover Chinese exports or US imports that violate US Customs and Trade laws by using transshipment, shipping through a third country to change the country of origin.

Under 19 USC 1619, the Moiety statute, any person can receive compensation not to exceed 25% of the recovery, up to $250,000, for providing to any Customs officer or US attorney:

“original information concerning .. . any fraud upon the customs revenue, or any violation of the customs laws or the navigation laws which is being, or has been, perpetrated or contemplated by any other person and such information leads to a recovery of . . .any duties withheld, or … any fine, penalty, or forfeiture of property incurred . . . .”

Many US and foreign individuals and companies, including US importers and even Chinese producers/exporters, can profit even more from transshipment under the False Claims Act.   Under Title 31, United States Code, Section 3729 (G), et. seq., any person, including companies, currently face triple damages and a penalty of $11,000 per claim for any of the following acts:

“(G) knowingly makes, uses, or causes to be made or used, a false record or statement material to an obligation to pay or transmit money or property to the Government, or knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government.”

Section 3730 of the False Claims Act (“FCA”) provides a private right of action, that is a private person may sue for a violation of section 3729 on behalf of the US government, such as Customs fraud.  The private party called a relator can be a competitor, such as a US importer or foreign producer, or an insider, such as a secretary or a filing clerk.  The relator files a copy of the complaint and written disclosure of all material evidence and information possessed by the person under seal in the Federal District Court to show that certain US importers and foreign producers/exporters have committed fraud on the US government by transshipping products covered by antidumping and other trade orders to avoid the duties.

The complaint is brought on behalf of the United States and the Department of Justice.  The complaint and the evidence supporting the complaint are not served on the defendants, but on the US government, which has 60 days to determine whether or not to intervene in the case.

If the government decides to intervene and prosecute the action, the private party is entitled to 15 to 25 percent of any recovery.  If the government decides not to prosecute the case and the private party goes forward, the private parties are entitled to 25 to 30 percent of any recovery.

The remedy in a False Claims Act case is triple damages and in many AD and countervailing duty (“CVD”) cases, especially against China, the missing AD or CVD duties can be well over 100 to 300% on imports over the last 5 to 6 years.  In one recent preliminary antidumping determination against mattresses from China, the antidumping rate is 1,731%, the highest antidumping rate in history.

If total annual imports have come in from the transshipment country are over $15 million, for example, the total damages could be well over $100 million to $200 million with a potential payout to the relator of millions of dollars.

Relators, be they a competitor or an individual, can become very rich because of a False Claims Act case.  We presently have an ongoing False Claims Act case, where the total award is $62.4 million.  We are in the process of negotiating a multi-million dollar settlement for the relator in that case.  In a medical FCA case here in Seattle, a young clerk made several million dollars because of a False Claims Act case.

Although President Donald Trump and many in Congress scream about evasion of US AD and other trade orders because of transshipment, they often do not realize that there are already legal hammers to crush transshipment in the US legal arsenal and that is the Moiety Statute and the False Claims Act.

HUAWEI’S PROBLEMS CONTINUE

At the G-20 meeting between Presidents Xi and Trump, the Huawei issue was raised.  But to date, the Commerce Department has not done anything concrete to help Huawei and at the most has talked about making it easier for US companies to export products to Huawei that do not damage US national security.

But the major problem for Huawei is the criminal cases and to date nothing has been done from the US side to stop these cases.  More specifically, on January 28, 2019, the Justice Department issued two indictments against Huawei.  One indictment was filed in the Federal District Court in the Eastern District of New York and is entitled United States of America Vs Huawei Technologies Co., Ltd., Huawei Device USA, Skycom Tech Co., Ltd., Wanzhou Meng, also known as Cathy Meng and Sabrina Meng and a number of unknown defendants.

This indictment detailed allegations against Huawei, Huawei USA, Meng Wanzhou, the Huawei CFO and daughter of the owner, and several unnamed co-defendants alleging evasion of Iran sanctions, bank fraud, and obstruction of justice.

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

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

In fact, Christopher Wray, the head of the FBI, recently announced that it has 1,000 investigations into Chinese IP theft.  See https://www.scmp.com/news/china/article/3019829/fbi-has-1000-probes-chinese-intellectual-property-theft-director

THE PROBLEM FOR CHINESE FACING CRIMINAL PENALTIES IS THAT US ARREST WARRANTS AND EXTRADITION REQUESTS ARE ENFORCEABLE IN MANY DIFFERENT COUNTRIES

Recently, the Wall Street Journal published an article about a Chinese aluminum mogul, Liu Zhongtian, who was indicated in the US for evading $2 billion in tariffs in the Aluminum Extrusions from China Antidumping and Countervailing Duty case.  The indictment focuses on fraud and international money laundering, which carries a maximum prison sentence of 465 years.  See https://www.wsj.com/articles/chinese-billionaire-indicted-in-u-s-in-alleged-tariff-evasion-scheme-11564586470?mod=hp_lead_pos4.

The problem Mr. Liu faces, like Meng Wanzhou, is that although he cannot be arrested in China, as soon as he takes a step outside of China, he is vulnerable.

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

Chinese companies, however, are now international operations.  As soon as the Chinese individual takes a step out of China, he or she can be arrested.  US judgments are enforceable in many other countries, including Taiwan, Canada and until recently Hong Kong.

HIGHEST ANTIDUMPING RATE IN HISTORY AND THE CRITICAL CIRCUMSTANCES TRAP

As mentioned above, on July 10, 2019, in the Mattresses from China Antidumping case, Commerce issued the highest preliminary antidumping rate in history of $1,733%.  This can be a very difficult problem if there is a critical circumstances situation.  In the recent Quartz Surface Products from China Antidumping and Countervailing Duty case, we have been representing a substantial number of US importers.

In that case, the Commerce Department found antidumping rates ranging from 265 to 333% and countervailing duty rates ranging from 45 to 190%. More importantly, the Commerce Department made critical circumstances determinations exposing many importers to millions of dollars in retroactive liability for imports 90 days prior to the Preliminary Determinations.

For critical circumstances (“CC”) to stick, however, the US International Trade Commission (“ITC”) had to determine that the increased imports would “undermine seriously” the remedial effect of the antidumping and countervailing duty orders to be issued.  This is a very high statutory standard and, therefore, in over 90% of the cases, the ITC reaches a negative CC determination.  In the Quartz Surface Products case, luckily for many US importers, the ITC did reach a negative CC determination.

For almost 8 months before the ITC ruling, however, US importers were under immense pressure from US Customs and Border Protection to pay the millions in outstanding cash deposits during the CC period.  In fact, a number of US importers received notices of liquidated damages for failure to pay the cash deposits in the CC period, when the ITC ultimately reached a negative CC determination.

This CC situation created a number of sleepless nights for US importers.

FABRICATED STRUCTURAL STEEL FROM CHINA AND IMPACT ON US CONSTRUCTION INDUSTRY

Another problem has risen in the US Construction industry for the ongoing antidumping and countervailing duty case on Fabricated Structural Steel from China.  Many developers, who may not be importers but have set construction contracts, have called because of exposure to the CVD Preliminary Determination and rates of 36 to 179% and the potential AD rates of 222%.

If there are CC determinations by Commerce in the Fabricated Structural Steel case, this could put importers and downstream developers into a very difficult situation.

RECENT SECTION 337 PETITIONS

Two recent Section 337 petitions, which may be of interest are the following.

LIGHT EMITTING DIODES

On July 30, 2019, the Regents of the University of California filed a Section 337 case against imports of Filament Light-Emitting Diodes and Products.  The proposed respondents are:

Amazon.com, Inc., Seattle, WA; Amazon.com Services, Inc., Seattle, WA; Bed Bath & Beyond Inc., Union, NJ, IKEA of Sweden AB, Sweden; IKEA Supply AG, Switzerland; IKEA Distribution Services Inc., Conshohocken, PA; IKEA North America Services , LLC, Conshohocken, PA; Target Corporation, Minneapolis, MN; and Walmart Inc., Bentonville , AR.

CHILD RESISTANT CLOSURES

On July 22, 2019, Reynolds Presto Products Inc. filed a Section 337 case against imports of Child Resistant Closures with Slider Devices Having a User Actuated lnsertable Torpedo for Selectively Opening the Closures and Slider Devices.  The proposed respondents are:

Dalian Takebishi Packing Industry Co., Ltd., China; Dalian Altma Industry Co., Ltd., China; Japan Takebishi Co., Ltd., Japan; Takebishi Co., Ltd., Japan; Shanghai Takebishi Packing Material Co., Ltd., China; and Qingdao Takebishi Packing Industry Co., Ltd., China.

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

Best regards,

Bill Perry and Fred Rocafort

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

TRADE IS A TWO-WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 20, 1986

US CHINA TRADE WAR UPDATE – FEBRUARY 21, 2019

Dear Friends,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Best regards,

Bill Perry

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

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

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

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

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

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

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

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

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

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

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

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

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

SECTION 301 PROCEDURES

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

OTHER COUNTRIES AGREE WITH TRUMP ON US CHINA TRADE DISPUTE

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

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

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

.        Semiconductor technology was stolen from Australia and the US.

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

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

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

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

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

BEING TOUGH ON CHINA IS A BIPARTISAN REPUBLICAN DEMOCRAT ISSUE

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3.     China’s hardening authoritarianism

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

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

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

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

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

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

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

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

The indictment states:

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

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

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

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

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

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

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

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

LONG TERM PROBLEMS AND IMPACT ON CHINESE ECONOMY

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

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

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

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

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

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

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

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

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

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

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

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

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

NICHOLAS LARDY — US EXPERT ON THE CHINESE ECONOMY

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

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

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

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

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

XIANG SONGZUO-CHINESE EXPERT ON THE CHINESE ECONOMY

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

On to John’s thought-provoking talk:

Asian Strategic and Economic Seminar Series

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

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

Now I get to go unplugged.  . . .

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

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

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

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

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

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

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

So today I’m stepping into the food fight.

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

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

 A Dynastic Cosmology

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

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

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

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

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

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

China’s veneration of the written word

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

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

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

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

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

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

The “Great Genius” Comrade Stalin. 

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

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

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

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

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

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

The most important lines in the book:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The same logic applies outside the party as within.

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

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

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

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

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

Which brings us to the title of this seminar.

Engineers of the human soul

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It’s no different today. Xi:

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

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

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

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

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

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

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

But ideology won that contest.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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

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

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

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

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

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

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

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

END”

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

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

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

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

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

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

GOVERNMENT SHUTDOWN

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

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

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

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

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

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

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

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

Best regards,

Bill Perry

TRADE IS A TWO-WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 20, 1986

US CHINA TRADE WAR UPDATE – DECEMBER 21, 2018

Dear Friends,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Best regards,

Bill Perry

G-20 DIM HOPE BECOMES BRIGHTER HOPE BUT??

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SECTION 301 PROCEDURES

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

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

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

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

INTERNATIONAL EXTRADITION AND JUDGMENT AGREEMENTS ARE IMPORTANT

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

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

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

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

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

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

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

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

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

Emphasis added.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Technology Theft Campaign

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

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

*              *              *

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

QUARTZ SURFACE PRODUCTS ANTIDUMPING AND COUNTERVAILING DUTY CASES—ITC QUESTIONNAIRES

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

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

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

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

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

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

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

Best regards,

Bill Perry

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

US CHINA TRADE WAR–TRUMP SIMPLISTIC APPROACH TO TRADE INJURES US COMPANIES, US AGRICULTURE BADLY HURT, NAFTA NOT GOING WELL, SECTION 301 AND 232 CASES, TRADE ADJUSTMENT ASSISTANCE, SOLAR, FALSE CLAIMS ACT, MORE CASES

White House Washington DC

TRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

US CHINA TRADE WAR AUGUST 30, 2017

 

Dear Friends,

As stated in many past blog posts, it is easy for Candidate Trump to talk protectionism, but President Trump is now learning it is much more complicated.  Trump’s decision to push protectionism endangers his standing with a core constituency—farmers and rural America.  As stated below, Trump’s decision to tear up the Trans Pacific Partnership (“TPP”) has already had a major negative impact on farmers.

Trump’s call for an economic war with China and other countries is already having a ramification.  Trump’s threat to pull out of NAFTA is not helping the US position in the negotiations.  Trump simply does not understand the ramifications of the trade deal when he terminated the TPP or when he threatens to tear up NAFTA.

The Trump trade policy is based on one arrogant presumption—the US market is the largest in the World and the rest of the World must kowtow, come on bended knee, to get into the US and that fact gives the US leverage.  But that fact is no longer true.  The 11 countries in the TPP have a larger market than the US.  China has a larger market than the US so the Trump Administration has to be very careful when it plays this card.

In fact, Canada and Mexico already can fall back on trade agreements they have with other countries, such as Europe.  The United States does not have that luxury.  The US decision by both Trump and the Democrats to go protectionist is further isolating the US in the trade area and is and will have major negative economic ramifications on the US economy.  The chickens will come home to roost.

Trump simply did not understand the dynamics of the Trans Pacific Partnership (“TPP”) and the ramifications of simply terminating it.  During the campaign, Candidate Trump stated that the TPP was a bad deal and if only he led the negotiating the team, it would be a better deal.  Thus, Trump argued that the TPP deal should be terminated and the US should then negotiate bilateral deals with the eleven countries in the TPP.

But two major problems with that strategy are becoming very clear.  First the United States Trade Representative (“USTR”) does not have the personnel to negotiate 11 separate trade deals with the individual countries.  It took more than five years to negotiate the TPP.  With Trump’s steep cuts to the Government bureaucracy, the government resources simply are not there.

Second, Trump did not understand the dynamics of the TPP deal.  During those negotiations, countries could give the US concessions because they would get offsets from other countries and the importance of gaining access to the markets of 11 other countries was worth the concession to the US.

But with no other countries in bilateral deals, the other countries are less willing to make the concessions the US is demanding.  In fact, as Robert Lighthizer, the USTR, has discovered, many of the countries in the TPP do not want to have a bilateral deal with the US.  They fear and rightly so that the US will demand too much.  Much easier to export and import from other countries.

The same problem is happening in the NAFTA negotiations.  Trump is threatening to leave NAFTA when he simply does not understand the dynamics of the deal and the devastating impact that such a withdrawal would have on US farmers and also US manufacturing industries, such as the US auto industry.  Trade is very complicated and running into the trade area like a bull in a China shop simply creates enormous damage.  That damage will be borne by the US agricultural industry and US manufacturers and that means the loss of 1000s if not 100s of thousands of jobs.

Labor unions and working men like the sound of being politically tough on trade and the foreigners, but when jobs are lost, those same people may not like the actual reality of a very protectionist policy.  Many American politicians, such as Donald Trump and Senators Chuck Schumer and Bernie Sanders, like to be tough on trade because foreigners do not vote.  But if the economy is hurt by Trump’s trade actions, his base will be hurt and he will not be the next President.  So there a lot riding on Trump’s trade policy and his Administration has run straight into the Wall of actual trade reality.

The only saving grace for Trump is that as evidenced by Senators Chuck Schumer and Bernie Sanders, the Democrats are even more protectionist than Trump.  But neither the Democrats nor Trump understand the true ramifications of simply walking away from trade deals that open up foreign markets.  The US agricultural industry is now learning those ramifications.

By kowtowing to the Steel industry with its 141,000 jobs, these trade actions could costs thousands, if not hundreds of thousands, of jobs in downstream industries and other industries, such as Agriculture. It is time for the United States to wake up to the benefits of trade.

It is also time for the United States to find a way to make its companies more competitive in the US and international markets as they exist now rather than erect protectionist barriers to international competition.  See the article on Trade Adjustment Assistance for Companies below and how companies, including steel companies, can be saved from import competition by making them competitive again.

USTR has also initiated a section 301 case against forced technology transfers in deals with China.  But in an August 30, 2017 article by Dan Harris, my partner, entitled “China US Trade Wars and the IP Elephant in the Room”, Dan states that in over one hundred deals with Chinese companies, he has not seen US companies forced to give over their Intellectual Property (“IP”) by the Chinese government.  Instead he has seen US companies make bad decisions leading them to give away their IP by their own volition.  If US companies do not protect their IP rights, they will lose them.  The US Government cannot protect against stupid mistakes.

Meanwhile, the Section 232 Steel and Aluminum cases remain on hold.  The Section 201 case against imports of Solar Cells continues with the ITC hearing being 11 hours long. The United States has intervened in a False Claims Act case against Furniture.  Commerce has also issued a circumvention determination in the Aluminum Extrusions case.

More Antidumping and Countervailing Duty and 337 cases have been filed against China and the trade beat goes on.

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

THE WEAKNESS IN DONALD TRUMP’S ECONOMIC POLICY—TRADE

Donald Trump’s political strategy is fight the cultural war, but win the next election because of his economic policy.  If jobs and wages are up, more companies move into the US, Trump’s firm belief is that he wins the next Presidential election.  Even Michael Moore, the Democratic gadfly, believes that Trump will win reelection by carrying the states that he already won.  See https://www.fastcompany.com/40459122/michael-moore-says-trump-is-on-track-to-win-again-in-2020.

There is only one fly in the ointment, flaw in this strategy—Trade.  If the Trump trade policy hurts farmers, Trump could lose the rural states: Iowa, Kansas, North Dakota, South Dakota, Montana, Wisconsin, Oklahoma, and Arkansas, to name a few and that could lead to Trump’s loss in the next Presidential election.

The economic nationalist Steve Bannon, who is credited with helping get Donald Trump elected by in part pushing the American First Trump policy, was recently forced out of the White House.  Before he left, however, Bannon made his trade position crystal clear.  in an article entitled “Steve Bannon Unrepetent”, in the American Prospect” magazine on August 16, 2017, Bannon stated with regards to trade policy:

“We’re at economic war with China,” he added. “It’s in all their literature. They’re not shy about saying what they’re doing. One of us is going to be a hegemon in 25 or 30 years and  it’s gonna be them if we go down this path.  . .

Bannon went on to describe his battle inside the administration to take a harder line on China trade, and not to fall into a trap of wishful thinking in which complaints against China’s trade practices now had to take a backseat to the hope that China, as honest broker, would help restrain Kim.

“To me,” Bannon said, “the economic war with China is everything. And we have to be maniacally focused on that. If we continue to lose it, we’re five years away, I think, ten years at the most, of hitting an inflection point from which we’ll never be able to recover.”

Bannon’s plan of attack includes: a complaint under Section 301 of the 1974 Trade Act against Chinese coercion of technology transfers from American corporations doing business there, and follow-up complaints against steel and aluminum dumping. “We’re going to run the tables on these guys. We’ve come to the conclusion that they’re in an economic war and they’re crushing us.”

From Bannon’s point of view, trade is economic war.

Although Bannon has since left the White House, President Trump and Commerce Secretary Ross apparently share Bannon’s thinking.  On August 22nd, without understanding the ramifications on his voter base, President Trump announced that he might simply cancel NAFTA.  Apparently, Trump believes that both Mexico and Canada are winning the economic war against the United States.

On August 28th, in an article entitled “Exclusive: Trump vents in Oval Office, “I want tariffs. Bring me some tariffs!”, Axios reported that in the first Oval Office meeting with Chief of Staff John Kelley and the last meeting with Steve Bannon, President Trump stated:

Trump, addressing Kelly, said, “John, you haven’t been in a trade discussion before, so I want to share with you my views. For the last six months, this same group of geniuses comes in here all the time and I tell them, ‘Tariffs. I want tariffs.’ And what do they do? They bring me IP. I can’t put a tariff on IP.”  . . .

“China is laughing at us,” Trump added. “Laughing.”

Kelly responded: “Yes sir, I understand, you want tariffs.” . . . .

Staff secretary Rob Porter, who is a key mediator in such meetings, said to the president: “Sir, do you not want to sign this?” He was referring to Trump’s memo prodding Lighthizer to investigate China — which may lead to tariffs against Beijing.

Trump replied: “No, I’ll sign it, but it’s not what I’ve asked for the last six months.” He turned to Kelly: “So, John, I want you to know, this is my view. I want tariffs. And I want someone to bring me some tariffs.”

Kelly replied: “Yes sir, understood sir, I have it.” . . .

Trump made sure the meeting ended with no confusion as to what he wanted.

“John, let me tell you why they didn’t bring me any tariffs,” he said. “I know there are some people in the room right now that are upset. I know there are some globalists in the room right now. And they don’t want them, John, they don’t want the tariffs. But I’m telling you, I want tariffs.” . . . .

Emphasis in the original.

Trump’s statements in this article ring true because during the Presidential campaign, Donald Trump made it very clear that he likes tariffs.

On August 28th, however, George Will in an Op-ed article entitled “Trump, The Novice  Protectionist” in Investors Business Daily responded to the Trump trade policy stating:

“Foreigners, however, have their uses. After the president trumpeted that the Dow surpassing the 22,000 mark was evidence of America’s resurgent greatness, The Wall Street Journal rather impertinently noted this: Boeing, whose shares have gained 50% this year and which accounted for 563 of the more than 2,000 points the Dow had gained this year en route to 22,000, makes about 60% of its sales overseas. Boeing has a backlog of orders for 5,705 planes, 75% going outside North America. For Apple, the second-biggest contributor (283 points) to this year’s Dow gain at that point, foreign sales are two-thirds of its total sales. Foreign sales are also two-thirds of the sales of McDonald’s, the third-biggest contributor (239 points).

Mark Perry of the American Enterprise Institute says that in the last 20 years the inflation-adjusted value of U.S. manufacturing output has increased 40% even though — actually, partly because — U.S. factory employment decreased 5.1 million jobs (29%).  . . . Increased productivity is the reason there can be quadrupled output from the same number of workers.  According to one study, 88% of manufacturing job losses are the result of improved productivity, not rapacious Chinese.

But those Democrats who think government should fine-tune everything are natural protectionists (Sen. Charles  Schumer: “They’re  rapacious, the  Chinese”)  and probably think Trump is too fainthearted because he is not protecting Americans from competition from Americans.  . . .”

TRUMP TRADE WAR—THE SIMPLISTIC APPROACH TO TRADE COULD WELL DAMAGE THE US ECONOMY AND DOOM THE TRUMP ECONOMIC PLAN

In the above articles about Bannon’s and Trump’s approach to trade along with the below op-ed article in the Wall Street Journal by Commerce Secretary Wilbur Ross, the Trump trade team reveal the protectionist bent of the Trump Administration, which is based, in part, on blind arrogance and a simplistic approach to trade policy.

The Bannon and Trump approach reveal fatal misunderstandings:  trade is a two-way street, and US exports are critical to the wellbeing of Donald Trump’s own constituents.  In international trade, what goes around comes around.  What the US does to other countries, they can do back to the US.

Moreover, Bannon, Ross and Trump are confusing economic warfare with economic competition.  The United States has always strongly believed that economic competition is good for the economy, the country and the US consumer.  The bedrock principle of the importance of economic competition to wellbeing of the US economy is the reason the US antitrust laws were enacted. As Deputy Assistant Attorney General Roger Alford of the US Justice Department’s Antitrust Division recently stated on August 30th at a Competition Policy Forum in Shanghai China:

Our continued engagement on this topic is significant for competition enforcement. We are the guardians of strong and vigorous competition for economic prosperity. Our lodestar is to promote competition, not to give preference to specific competitors, even when individual businesses jockey for advantage.  . . .

Emphasis added.

Bill Gates believed that Microsoft had to go to war with its competition, but frankly that is why Microsoft produced such good software.  CEOs of companies are driven by competition to produce better products at lower prices, which means stronger US companies and prosperity for the US economy and US consumers.  Stronger US companies means more jobs at higher wages.

Protecting US companies from international competition does not strengthen the US companies.  It weakens them and the poster child for such a point is the US Steel industry, which has had 40 years of protection from steel imports.

This is exactly why President Ronald Reagan was so opposed to protectionism.  As President Reagan stated above in June 1986: “Protectionism is destructionism. It costs jobs.”

Moreover, Steve Bannon and Donald Trump have not figured out one important point: Not only do companies compete against each other and States compete against each other, but the United States and other countries compete against each other.  The US decision to go the Protectionist route means it has given up competing, and, therefore, it will lose the economic war.  Trump’s and Bannon’s combined with the Democrat’s protectionist policies mean the US will lose the economic war because of its decision to look inward and no longer compete in the international economic marketplace.

US companies do not get stronger by protecting them from international competition, which simply promotes the mentality of international trade victimhood.  US companies get stronger by looking inward and working harder to become internationally competitive.  See the article about Trade Adjustment Assistance for Companies below.

The arrogance of the Steve Bannon and the Trump trade policy is based on the principle that the United States is the largest market in the World, and this gives the US leverage and, therefore, countries must kowtow and bend their head to get into the US market.  Although that principle may have been true twenty years ago, it is simply no longer true.

The Trans Pacific Partnership, for example, combines the markets of 12 countries, now 11 with the US exit, into one “huge” trading block.  Since Mexico, Canada, Japan, Australia and New Zealand are part of that block, the TPP market is a much larger market than the US alone.  Mexico and Canada are also in a stronger trade position than the US because they already have free trade agreements with a number of other countries, including the EC, and that gives them a substantial competitive advantage getting into those markets.  This fact gives Canada and Mexico leverage in the NAFTA negotiations even though Trump, Lighthizer and Ross simply do not understand the dynamics of the deal.

Maybe this is a major reason US companies move to Mexico and Canada to get better access to other foreign markets.  The United States is competing with other countries too.

Also in many ways, with 1.37 billion people China has a larger market than the US.  In 2006, at a speech in Beijing, the US Commercial Attaché stated that 75% of all Chinese, including rural Chinese, have a color television set.  Now that is close to 95% of 1.37 billion.  That is a larger market than the US with its 323 million.

Also the upper class and upper middle class in China, which numbers between 250 to more than 300 million, have an income closer to the US and that segment of the China market is the same size, if not larger, than the US.  That is why in the push for the Trans Pacific Partnership (“TPP”), House Speaker Paul Ryan used to state that 75% of the World’s consumers are outside the United States.

But China is also not this overwhelming behemoth with an economic juggernaut that is going to crush the US.  Yes, it may have a larger market, but on a per capita basis, it is much smaller.  Thus, the US per capita income on average is $57,000 where the Chinese per capita income is $8,000.  China has its own problems—keeping its people happy and fed.

Along with these problems, China has major weaknesses, which can be exploited by the US.  China has a very high personal tax rate, which can be as high at 45%.  This high tax rate is why many Chinese have emigrated to the US, looking for a lower tax rate and a better opportunity to keep the money they earn.  If Trump can drive taxes lower, that may result in more entrepreneurs and businesses moving to the US, e.g. Foxconn.

Another problem is the Chinese government’s strict control of information flowing into China by its very strong control of the internet.  Strict control of the internet stops knowledge flowing into China, which especially hurts the country’s high tech sector.  When information and knowledge stop, economies do not do as well.  The free flow of knowledge and ideas is critical for the most advanced economies and yet that is not true in China.

But arrogance is one of the great sins because it blinds you to all options.  To make a better deal in trade negotiations, the Administration has to do its homework and first understand the actual American interest.  If one is going to make America great again, one must first understand what is the nature of America’s interest in trade.  This requires understanding the dynamics of the trade deal in question, which President Trump prides himself in doing.  The Trump Administration must understand the actual trade deal closely, the US leverage points and the US weaknesses, what trade deals will help the US and the what trade deals will hurt the US interest.  Donald Trump’s failure in trade negotiations is to understand the dynamics of the deal and the leverage that the US has in trade negotiations.  In other words, with regards to trade, Trump simply does not understand “The Art of the Deal”.

In ripping up the TPP without even trying to renegotiate, Trump failed his own test because he did not understand the elements of the deal.  Trump’s philosophy was to do away with multilateral deals because they fall to the lowest common denominator and do only bilateral deals because that gives the US more control over the deal and if the country does not live up to its side of the bargain cancel the deal.

The problem with that approach is first the US government does not have the personnel at USTR, which is very lean and mean, to negotiate 11 separate trade deals with all the countries in the TPP.  It took more than 5 years to negotiate the TPP.

But secondly and more important, in recent bilateral negotiations, Canada, Mexico and Japan have all told the US do not assume that in bilateral deals or NAFTA, the United States will get the same deal it would have gotten in the TPP.  In fact, as indicated below, many countries in the TPP simply do not want to do a bilateral deal with the US—too much work.  Canada, Mexico and Japan were willing to give the US a better deal because they would gain access to a much greater market, the market of 11 additional countries.  That gave countries the political ability to play one national interest against another national interest.  Thus, Canada could give in to the US on dairy products because of the potential access to the much larger TPP market, including the Japanese and US markets.  Thus, countries in the TPP could use tradeoffs with other countries to open their markets further to US exports.  Those trades offs and the market access to the markets of 12 different countries does not exist with a bilateral deal with just the US.

On August 24, 2017, in an article entitled “Revived TPP may exclude trade concessions sought by US”, Nikkei, a Japanese newspaper, stated:

TOKYO — Japan is proposing suspending trade concessions made to the U.S. as part of the Trans-Pacific Partnership in order to resurrect the pact with the 11 remaining members.

Tokyo sounded out that proposal to other nations in the “TPP 11,” as those members became known after the U.S. withdrew from the deal. Senior negotiators will cite items they wish to see shelved during three days of talks starting Monday in Australia.

Washington had secured a number of major concessions from other nations in exchange for lower American tariffs on their exports. Though President Donald Trump pulled the U.S. out of the deal, those concessions remain on the TPP’s books — to the consternation of other members.

If all the 11 participants agree unanimously, any such concession would be put on hold, and national regulations governing that element of the pact would remain in place.
But the suspensions would be lifted if and when the U.S. decides to return to the partnership.

While the remaining members are leaning toward keeping the lower tariffs agreed on among the initial group, they are likely to revisit specific trade rules.

The U.S. sided with major domestic drug companies and settled on an effective eight-year window before competitors can have access to proprietary pharmaceutical data. That moratorium exceeds international standards, and other countries think it would impede development of cheap generics. All members of the TPP 11 are expected to agree on freezing that provision.

Other provisions that may be suspended involve copyright protection periods, fair-competition policies governing state-owned enterprises and the opening of government procurement to foreign capital.

American exports would face a competitive disadvantage if an 11-member TPP goes into force. Tokyo hopes that U.S. meat industry leaders will speak up in favor of rejoining the trade deal.

Trade is the one weak link in Trump’s economic plan.  As indicated below, the decision to kill the TPP has already had a major negative impact on US agriculture and part of Trump’s base, the rural states, where agriculture is king.

SIMPLICITY IS OFTEN A GOOD TRADE POLICY BUT NOT WHEN THE POLICY IS SIMPLE MINDED AND NARROWLY FOCUSED

Trump has slowed down the Section 232 Steel and Aluminum Investigations because its “complicated”, but when Bannon and Trump take a very simplistic, black and white view of trade, it is extremely dangerous to the US economy and Donald Trump’s own constituents.

This is not a fight between Globalism and America First.  The America First strategy requires the Administration to understand deeply the interest of the United States and the interest of all the significant US industries in trade negotiations, including agriculture, not just the narrow Steel and Aluminum Industries. The Trump and  Bannon statements indicate a deep failure to analyze why Trump won the election and what the interest of the entire United States is in trade negotiations and also the interest of Donald Trump’s own constituents, the voters that elected Donald Trump President.

Bannon thinks that if we create a trade war with China and are tough on them we will win the economic trade war with China. But Bannon truly has forgotten why voters elected Donald Trump.

First, it was not just the US Steel and Aluminum industries that put Trump in the White House, it was the working man in many manufacturing plants throughout the United States.  Because of their economic, black white view of the World, Trump and Bannon want to put up barriers to steel imports to protect the US Steel industry and its 141,000 jobs without realizing the damaging impact of such an action on the millions of jobs in the downstream steel consuming industries.  Truthfully, if Donald Trump is going to be reelected, Trump himself, his trade team and Steve Bannon cannot be so simple minded.

More importantly Donald Trump also won because of farmers.  Although Trump won the States in the Blue Wall, Michigan, Ohio, Pennsylvania and Wisconsin, he was also able to win the Presidency because he won the US heartland, including the states of Iowa, Kansas, Nebraska, Wyoming, Montana, North Dakota, South Dakota, Arizona, Oklahoma, Utah and Florida.  What do those states have in common and in common with Wisconsin—Agriculture.  And the Trump trade policy is and has seriously hurt US farmers because US farmers are dependent on exports.

As the US Wheat Federation stated in the Section 232 Steel case, half of US wheat is exported.  Putting up protectionist walls invites retaliation against US agricultural exports.

Finally, one other point in direct response to Steve Bannon’s and Trumps statement, substantial trade relations prevent real shooting wars.  As indicated below in the Section 301 article, China is becoming more amenable on North Korea because of its enormous trade relationship with the United States.  The total US China trade relationship is $578.6 billion with $115.8 billion in US exports and $462.8 billion in imports from China.

In direct contrast, the US trade relationship with Russia is much, much smaller.  The total US Russia trade relationship is $38.1 billion with $11.2 in US exports and $27 billion in imports from Russia.  Truly peanuts in the global trade market.  It is better to compete with countries in the economic arena as compared to a real war, where millions die.

DEMOCRATS MORE PROTECTIONIST THAN DONALD TRUMP

The only saving grace for Donald Trump on trade is that the Democrats are even more protectionist.  On August 13th, Senator Chuck Schumer, who heads the Democrats in the Senate, told John Catsimatidis on his New York AM 970 radio show “The Cats Roundtable” that he is closer now to President Donald Trump than he ever was with former President Barack Obama on trade.  Senator Schumer stated:

“Trade is the thing [China cares] most about, and they’ve been treating us very badly on trade for a long time, frankly,.  I was closer in trade views to Donald Trump than I was to either George Bush or Barack Obama, on China anyway. I think we were much too easy on them. But if we got tough on them now, maybe they would relent, but we have to be real tough. So far, the administration has not been as tough as they should be, as far as I’m concerned.”

The Trump Administration should be very tough with China on trade, but it should carefully analyze what its true interests are and the interests of US voters that elected Donald Trump.  The US government should do everything in its power to drop barriers to US exports in China and other countries.  But protectionism for protectionism’s sake will not cure the problems of US manufacturing and right the US China trade balance

TRUMP’S TRADE WAR HURTS US AGRICULTURE AND US FARMERS

As mentioned in prior newsletter, the ox that will be gored by Trump’s trade policy is agriculture and that is just what is happening.  On August 7, 2017, in the attached extensive article entitled “Trump’s Trade Pullout Roils Rural America”, Trump’s Trade Pullout Roils Rural America – POLITICO Magazine, Politico did its homework and described in detail the deep negative impact of the Trump trade policy on US agriculture:

EAGLE GROVE, Iowa—On a cloud-swept landscape dotted with grain elevators, a meat producer called Prestage Farms is building a 700,000-square-foot processing plant. The gleaming new factory is both the great hope of Wright County, which voted by a 2-1 margin for Donald Trump, and the victim of one of Trump’s first policy moves, his decision to pull out of the Trans-Pacific Partnership.

For much of industrial America, the TPP was a suspect deal, the successor to the North American Free Trade Agreement, which some argue led to a massive offshoring of U.S. jobs to Mexico. But for the already struggling agricultural sector, the sprawling 12- nation TPP, covering 40 percent of the world’s economy, was a lifeline. It was a chance to erase punishing tariffs that restricted the United States—the onetime “breadbasket of the world”—from selling its meats, grains and dairy products to massive importers of foodstuffs such as Japan and Vietnam.

The decision to pull out of the trade deal has become a double hit on places like Eagle Grove. The promised bump of $10 billion in agricultural output over 15 years, based on estimates by the U.S. International Trade Commission, won’t materialize. But Trump’s decision to withdraw from the pact also cleared the way for rival exporters such as Australia, New Zealand and the European Union to negotiate even lower tariffs with importing nations, creating potentially greater competitive advantages over U.S. exports.

A POLITICO analysis found that the 11 other TPP countries are now involved in a whopping 27 separate trade negotiations with each other, other major trading powers in the region like China and massive blocs like the EU. Those efforts range from exploratory conversations to deals already signed and awaiting ratification. Seven of the most significant deals for U.S. farmers were either launched or concluded in the five months since the United States withdrew from the TPP.

“I’m scared to death,” said Ron Prestage, whose North Carolina-based family pork and poultry business made its huge investment in the plant near Eagle Grove in part to reap expected gains from the TPP. “I don’t guess I’ve gone beyond the point of no return on the new plant, but we did already start digging our wells and started moving dirt.”

He and other agricultural business people and workers have reason for concern.

On July 6, the EU, which already exports as much pork to Japan as the United States does, announced political agreement on a new deal that would give European pork farmers an advantage of up to $2 per pound over U.S. exporters under certain circumstances—a move which, if unchecked, is all but certain to create a widening gap between EU exports and those from the United States.

European wine producers, who sold more than $1 billion to Japan between 2014 and 2016, would also see a 15 percent tariff on exports to Japan disappear while U.S. exporters would continue to face that duty at the border. For other products, the deal essentially mirrors the rates negotiated under the TPP, which the United States has surrendered, giving the EU a clear advantage over U.S. farmers.

The EU’s deal is all the more noteworthy because American farmers were relying on the TPP—to which the EU was not a member—to give them an advantage over European competitors. But in a further rebuke to the United States, Tokyo decided within a matter of weeks to offer the European nations virtually the same agricultural access to its market that United States trade officials had spent two excruciating years extracting through near-monthly meetings with their Japanese counterparts on the sidelines of the broader TPP negotiations; the United States is now left out.

The EU, which also recently inked a deal with Vietnam, is now moving forward with talks with Malaysia and is in the process of modernizing a pre-existing trade deal with Mexico.

Meanwhile, a bloc of four Latin-American countries—Mexico, Peru, Chile and Colombia, known as the Pacific Alliance—is quickly becoming the leading force for free trade in the region, announcing near the end of June it would commence its own negotiations with New Zealand, Australia and Singapore, heedless of its neighbor to the north.

On its own, Australia, which in 2015 cut a deal to undersell the United States in beef exports to Japan, announced another round of scheduled tariff cuts with Japan. Without the TPP, Australian ranchers eventually will enjoy a 19 percent tariff advantage over U.S. competitors. Australia is also prioritizing the conclusion of trade talks with Indonesia, the largest nation in Southeast Asia by gross domestic product.

The remaining 11 TPP countries have already met two times, with a third meeting planned, to move ahead with the revival of the deal without the United States. The so- called TPP-11 would be in direct response to Trump’s trade policy. Economic forecasts already show projected gains for countries involved. Canada, according to one estimate, could permanently gain an annual market share of $412 million in beef and $111 million in pork sales to Japan by 2035, because lower tariffs would enable it to eclipse America’s position in the market.

As China, which was never a part of the TPP, senses blood in the water, it is moving quickly to assert itself, rather than the United States, as the region’s trade arbiter. China is aiming to close talks by the end of this year on its behemoth Regional Comprehensive Economic Partnership—a trade agreement involving 15 other Asia-Pacific countries.

None of these deals are yet in effect. But already there are signs that competitors are gaining market share over U.S. producers in the post-TPP landscape, as Pacific nations take a closer look at alternatives to U.S. exporters.

Over the first five months of 2017, U.S. exports to Japan of chilled pork, which is preferable to frozen meat, are up 2 percent over the previous year. But exports of chilled pork from Canada, a prime competitor, are up 19 percent. Likewise, in frozen pork, U.S. exports are up 28 percent. But exports from the EU, the leading competitor, are up 44 percent.

Japan, which saw the TPP not only as a source of economic growth but a counterweight to China, is now taking the lead in salvaging the deal. Its goal is to have some sort of agreement between the 11 other countries in place for the annual summit of Asia-Pacific leaders in November. Trump is expected to attend, creating the awkward possibility that he will witness all the handshakes and back slaps as his fellow leaders congratulate themselves on a deal.

For his part, Trump once promised a slew of “beautiful” deals to replace the TPP, but his administration has yet to lay out a detailed strategy. U.S. Trade Representative Robert Lighthizer told lawmakers that an analysis is underway to determine where it makes most sense to pursue negotiations.

In the meantime, Lighthizer, a trade attorney who pressured Japan to voluntarily restrain its steel exports when he was a trade official in the 1980s, said Tokyo should just go ahead and lower their tariffs without expecting anything in return.

“I think in the areas like beef and the others, they ought to be making some unilateral concessions, at least temporary concessions,” he told lawmakers in June. “And I don’t quite understand why that doesn’t happen.”

Lighthizer said the administration still hopes to strike bilateral trade deals—that is, separate agreements with individual countries—but he conceded that “some of the TPP countries don’t want to do bilaterals.” The value of the TPP for many countries was that they could justify giving up protective tariffs in exchange for their own access to the markets of a wide pool of countries; many are unwilling to make such concessions for the smaller gains of a bilateral deal.

Lighthizer acknowledged that even Japan, at least for the time being, may not be interested in one-on-one negotiations with the U.S. . . .

That leaves workers in 13,000-person Wright County, whose survival depends largely on agriculture, with relatively few signs of optimism. Trump’s decision to walk away from the TPP has stoked uncertainty about U.S. trade policy and, more notably, the president’s commitment to rural America.

“He fooled a lot of people,” said Sandy McGrath, mayor of Eagle Grove, who is not affiliated with any party and did not support Trump. . . .

But the plant’s success will depend largely on export opportunities. More than 26 percent of the pork produced in the U.S. in 2016 was exported to foreign markets. And more than $1.5 billion of the nearly $6 billion in U.S. pork exports in 2016 headed for Japan.

“At the time those investment decisions were made, the U.S. had never turned down a free trade opportunity,” said Dermot Hayes, an agricultural economist at Iowa State University, referring to the Prestage plant and other pork-industry investments.

Hayes said the livestock industry had in its sights a future of expansion amid soaring export growth. After Trump’s withdrawal from the TPP, “that has pretty much disappeared,” he said. . . .

In April, when Trump was on the verge of withdrawing from NAFTA, Maier said he watched corn prices plummet in anticipation of the president’s decision. Trump relented, at the request of Perdue, the agriculture secretary, who appealed to the president with colorful maps showing the president’s base was largely concentrated in states that heavily rely on agriculture.

Ultimately, Trump agreed to renegotiations with Canada and Mexico instead. But Maier remains wary that, despite pledges by the administration to “do no harm” for agriculture, the mere act of reopening the deal with Canada and Mexico, the two largest destinations for U.S. agricultural exporters, could mess up what has been a very good thing for American farmers in the Midwest.

“Farmers are willing to open up NAFTA, but if we open up NAFTA, there’s the risk of going backwards,” he said. . . .

The Obama administration, backed by a large cadre of free-trade Republicans, used that reality to grow support for the TPP among businesses and agricultural interests eager to grab a better foothold in a fast-growing area of the world where the U.S. has few formal trade deals.

But through the slow churn of negotiations, the dazzlingly complex deal among 12 countries soon fell victim to time and circumstance. After more than five years of talks, bleary-eyed trade negotiators were finally able to close the deal at an Atlanta hotel on October 5, 2015. But the agreement quickly became mired in election politics. Labor unions and blue-collar voters declared it to be a successor to NAFTA, which was blamed for the loss of factories. And while the U.S. trade commission predicted the deal would be broadly beneficial to the overall economy, some areas including food and agriculture were predicted to score more gains than others.

Even as supporters of the deal insisted it would put U.S. manufacturers on a stronger footing versus overseas competitors by enforcing higher labor and environmental standards, Trump and Bernie Sanders used anti-TPP fervor as a key plank of their campaign platforms, declaring that it would cost America jobs. Even Hillary Clinton, normally a supporter of freer trade, turned on the deal, saying she wanted to negotiate better terms.

Trump escalated his rhetoric on trade after the primaries and Congress, which has final say on trade deals, shied away from bringing TPP up for a vote. After Trump’s victory, the fate of the deal in the GOP-controlled Congress was all but sealed as Republican lawmakers put it aside to concentrate on tax reform and a bid to roll back Obamacare.

On his first full day in office, Trump signed an executive order withdrawing from the TPP, calling the action a “great thing for the American worker.”

“The Trans-Pacific Partnership is another disaster done and pushed by special interests who want to rape our country, just a continuing rape of our country,” Trump said during a campaign stop in Ohio. “That’s what it is, too. It’s a harsh word: It’s a rape of our country.” . . .

But even as Iowa was voting for Trump by 51 percent-42 percent, its farmers were looking to Asia as their savior. . . .

But despite Trump’s intense personal interest in trade, the White House has been slow to build the dream team of negotiators the president promised on the campaign trail. Lighthizer, who once served as a deputy U.S. trade representative under President Ronald Reagan, was confirmed on May 11. The people tapped to serve in the agency’s three deputy positions await confirmation, as does the administration’s pick for chief agriculture negotiator.

Iowa’s Republican Sen. Chuck Grassley says he thinks a trade deal with Japan would make up for much that was lost for agriculture by dropping TPP, but it will take “a lot more personnel, a lot more time to get it done, a lot more separate actions by Congress.”

As far as the administration’s strategy to get there, Grassley, who still owns his farm in Butler County, Iowa, said he hasn’t gotten much direction.

“I asked Lighthizer maybe a month ago in a meeting, and I didn’t get an answer,” Grassley said in a recent interview. “In a sense he answered, but not very definitively because their policy isn’t established.” . . .

Maybe the lesson of TPP demise for the protectionist firebreathers is be careful what you wish for.  The negative ramifications of not doing the TPP appear to be infinitely higher than doing the trade deal.

NAFTA NEGOTIATIONS

On August 16th, United States, Canada and Mexico sat down together for the first round of talks to formally reopen NAFTA.  On July 17th, the USTR released its attached “Summary of Objectives for the NAFTA Renegotiation”, USTR NAFTA RENGOTIATION OBJECTIVES.

But Trump keeps stirring the pot with his anti-NAFTA rhetoric. On August 22nd, during a speech in Phoenix President Trump announced that he might simply cancel NAFTA.

As Politico stated on August 23rd, “Trump’s  threat  of  NAFTA  withdrawal lose its edge”:

“Canada and Mexico appear to have reached a conclusion that when President Donald Trump threatens to withdraw from NAFTA, it is a negotiating ploy that is all bark and no bite. . . .

Instead, concerns were raised from within the United States government, where officials and lawmakers who support the deal see little value in the president repeatedly going to the well of harsh rhetoric in a way that makes the United States’ negotiating position more difficult.

“I don’t know a single person with a working brain cell that thinks that’s a good idea,” said one U.S. government source close to the talks, referring to renewing the threat of terminating the deal. “It’s a stupid message to send during the  negotiations.”

Part of the reason Mexico and Canada might be less intimidated by Trump’s bluster is that they have plenty of other trading partners to fall back on if the relationship with the U.S. sours. Both countries have separate deals in place with the European Union — Mexico is currently ramping up talks to update theirs — and both are part of the effort to reboot the Trans-Pacific Partnership, which the remaining 11 members are pushing toward completion even without the U.S.

But after Trump cast aside the TPP almost immediately upon taking office, the U.S. has fewer such options to fall back on — so pro-NAFTA lawmakers and those from export- dependent states have repeatedly urged him to focus on modernizing and updating NAFTA, rather than terminating it.

House Ways and Means Chairman Kevin Brady — whose home state of Texas counts Mexico as the No. 1 market for its exports, followed by Canada — cautioned Trump on Wednesday to be more aware of the effects his words have on the country’s trade relationships.

“The president’s rhetoric is red-hot, and it creates real impact,” Brady said during a town hall discussion at AT&T headquarters in Dallas. “I think the rhetoric, the words from the president matter, so I’d like to see that take a different approach in tone.”

Brady, whose powerful committee oversees trade on Capitol Hill, is one of a core group of Republicans whose support will be crucial if the administration succeeds in renegotiating a new deal with Canada and Mexico, since it will likely have to go through Congress for approval . . ..

The political question is whether Trump would discard NAFTA in the face of what certainly would be fierce resistance from Congress and industries like agriculture, which would take a significant hit in that event amid a sustained downturn in the farm economy.

Back in April, intense lobbying from the Hill and on the farm helped talk Trump down from inking a prepared executive order to withdraw from the deal. News of the planned order sparked such a public outcry and flurry of reaction in support of the deal that business and trade insiders sometimes refer to it as “Black Wednesday.” . . .”

Meanwhile, a chorus of industries are telling the Administration not to be so tough in the NAFTA negotiations because tweaks are fine, but the failure of the NAFTA deal would be disastrous to US industry and US agriculture.  On August 10th Automobile and Auto Parts makers urged the Administration to cool down the rhetoric on rules of origin for automobiles and auto parts because major changes to automobile rules of origin through NAFTA modernization could have the unintended consequence of making North America’s auto industry less competitive.  As Charles Uthus, vice president of international policy at the American Automotive Policy Council, the main lobbying arm of U.S. auto companies in Washington, stated:

“It’s the highest automotive rule of origin anywhere that you can find. It’s already extremely rigorous, very difficult to meet as it is. To actually strengthen it, there is a huge risk of unintended consequences.”

Ann Wilson, senior vice president of government affairs for MEMA, stated:

“Our members really struggle with finding a connection between changing the rules of origin and the reshoring of jobs. They do not see that connection.”

On August 17th Politico reported that Trump’s tough rhetoric has created intense hatred in Mexico, which will make it politically very difficult for Mexico to make concessions or agree to a deal that would clearly benefit the US.  Thus, Mexican President Enrique Peña Nieto is not afraid to walk away from the table if needed, potentially overturning the entire U.S.-Mexico bilateral trade relationship in the process.

Again, Trump does not understand the dynamics of the deal and the fact that since Mexico has more trade agreements than the US, it has leverage and is not afraid to walk away from the table.

Thus, both Mexico and Canada are resisting US pressure for a new “national content” provision in NAFTA’s auto trade rules to encourage more parts to be made in the United States.  As Mexican Economy Minister Ildefonso Guajardo stated:

“It will not be best practice to introduce that kind of rigidities into the industrial process.  It’s not good for American companies. It’s not good for Mexican companies.”

Canadian Foreign Minister Chrystia Freeland also stated: “Canada is not in favor of specific national content in rules of origin”.

Meanwhile, the Canadian Dairy Producers stated that they will fight any U.S. effort to duplicate in NAFTA the dairy concessions secured through TPP negotiations. As Yves Leduc, director of policy and international trade for the Dairy Farmers of Canada, stated, “Not a possibility – as far as we are concerned, we would never agree to that.”

The small amount of dairy access that Canada granted the U.S. during the TPP talks – equal to 3.25 percent of Canada’s domestic milk production – was balanced out by concessions Canada secured in negotiations involving all of the 11 other countries. Those circumstances don’t apply to NAFTA, which involves only three countries. As Leduc stated, “To ask us to open up our market to allow more subsidized goods from the U.S. to enter the Canadian market, the answer is simple: It’s no.”

Meanwhile, US famers joined with Canadian and Mexican farmers to urge US negotiators to not let specific demands undermine the market access US farmers and ranchers enjoy under the existing agreement.  Although all three groups want to lower trade barriers to exports and imports, it was their unified position to defend existing market access that was most notable, given the fear on the farm that Trump could use agriculture as a bargaining chip to satisfy his obsession with reducing America’s trade deficit in manufactured goods.

THE PHRASE “FREE BUT FAIR TRADE” IS A FRAUD BECAUSE COMMERCE HAS SO DEFINED DUMPING AS TO FIND ALMOST EVERY IMPORT DUMPED

In an article along the same lines as the Bannon article and the Trump quote, on August 1, 2017, Commerce Secretary Wibur Ross penned an article in the Wall Street Journal entitled, “Free Trade Is a Two Way Street”.  In the article, Commerce Secretary Ross argued that many countries erect barriers to US exports, but then went on to state:

“Both China and Europe also bankroll their exports through grants, low-cost loans, energy subsidies, special value-added tax refunds, and below-market real-estate sales and leases, among other means. Comparable levels of government support do not exist in the U.S. If these countries really are free traders, why do they have such formidable tariff and nontariff barriers?

Until we make better deals with our trading partners, we will never know precisely how much of our deficit in goods is due to such trickery. But there can be no question that these barriers are responsible for a significant portion of our current trade imbalance.

China is not a market economy. The Chinese government creates national champions and takes other actions that significantly distort markets. Responding to such actions with trade remedies is not protectionist. In fact, the World Trade Organization specifically permits its members to take action when other countries are subsidizing, dumping and engaging in other unfair trade practices.

Consistent with WTO rules, the U.S. has since Jan. 20 brought 54 trade-remedy actions— antidumping and countervailing duty investigations—compared with 40 brought during the same period last year. The U.S. currently has 403 outstanding orders against 42 countries.

But unfortunately, in its annual reports, the WTO consistently casts the increase of trade enforcement cases as evidence of protectionism by the countries lodging the complaints. Apparently, the possibility never occurs to the WTO that there are more trade cases because there are more trade abuses.

The WTO should protect free and fair trade among nations, not attack those trade remedies necessary to ensure a level playing field. Defending U.S. workers and businesses against this onslaught should not be mislabeled as protectionism. Insisting on fair trade is the best way to ensure the long-term strength of the international trading system.

The Trump administration believes in free and fair trade and will use every available tool to counter the protectionism of those who pledge allegiance to free trade while violating its core principles. The U.S. is working to restore a level playing field, and under President Trump’s leadership, we will do so.

This is a true free-trade agenda.”

Let me begin by saying no one has a problem with US government actions challenging foreign, including Chinese, barriers to US exports.  Every Administration be it Republican or Democrat has taken a tough stance to drop foreign barriers to US exports.  In fact, many Senators and Congressmen are pressuring the Trump Administration for more free trade agreements because they remove barriers to US exports.  The TPP, Trans Pacific Partnership, would have dropped tariffs down to 0 on more than 18,000 products exported by US companies, many agricultural products.

Although no one doubts that the Chinese market is significantly distorted, many foreign markets and in some cases US markets are significantly distorted.  The US steel market with the many outstanding trade orders blocking steel imports is a good example of a significantly distorted market in which the US price for steel is much higher than the World market price.

Also no one doubts that many countries subsidize their exports or dump in the US market.  For many years, the Commerce Department was able to find very high dumping rates on Japanese imports in antidumping cases by using price to price comparisons, which found that Japanese prices were significantly higher, sometimes four times higher, than US prices for the same Japanese product.  That is classic dumping using higher prices in the home market to fuel lower prices to the United States.

The Japanese companies were able to use dumping because the Japanese Government erected non-tariff trade barriers to block imports from the US and other countries creating very high domestic Japanese prices.  To protect its mikan /tangerine industry, for example, for many years Japan blocked all imports of citrus fruit.  But it is also interesting to note that there are no outstanding countervailing duty/anti-subsidy orders against Japanese products.

The Chinese governments, especially the local governments, also subsidize their exports and provide low interest loans to their companies, but so does the US government, through its subsidies in the Agriculture area, and the State Governments, which will waive state income taxes or help with low interest loans, to encourage production of companies, such as Foxconn, to move to their states.

But the US Countervailing Duty law applies to China now and the Commerce Department has not been shy in finding Chinese imports into the United States to be subsidized.  It should be noted, that the WTO has overturned 28 US Countervailing Duty cases against China, in part, because the WTO has ruled that Chinese state-owned companies are not necessarily the Chinese government itself, as the Commerce Department has ruled.

The US too has state-owned companies, such as the Tennessee Valley Authority, which provides electricity to certain parts of the US.  Should foreign governments assume that all electricity from the TVA is subsidized because it is owned by the US government?

The major problem, however, is the Commerce Department’s application of the antidumping law.

In the 1980s, James Bovard authored a book called the “Fair Trade Fraud”, which outlined many of these same problems in the US antidumping law.  But nothing has changed.  Instead Commerce has just developed new methodologies to increase antidumping rates even higher.

Moreover, the same economic warfare arguments were made about Japan in the 1980s.  Although China does not have clean hands, that does not mean that every single import from China is unfairly traded.  In fact, I would argue that a significant percentage, if not the majority, of imports from China are fairly traded.  The Chinese government simply does not care about the Chinese Mushroom, Honey, Crawfish or Shrimp industries and does not set the prices for those products or any of the inputs.  Does the Chinese government really care about the price of cow manure in China, a major input for mushrooms?

Remember Commerce over decades has so distorted the US antidumping law that it finds dumping in 100% of the cases from China because it refuses to look at actual prices and costs in China.  If you have a hanging judge, does that mean every single import from China is dumped/unfairly traded?

Instead, Commerce should start easing the restrictions on the market economy status of China so as to determine which Chinese companies are truly dumping in the US market and nail them to the wall.  Commerce should make its antidumping cases against China mirror actual reality in China, not for the Chinese companies, but for US importers and downstream customers.

Right now, because of its refusal to use actual prices and costs in China, neither Donald Trump, nor Wilbur Ross nor the Commerce Department know which Chinese companies are truly dumping and which Chinese companies are not.  Until Commerce starts uses actual prices and costs in China, no one will know which Chinese company is truly dumping,

Finally, the Commerce Department decision to tilt the playing ground and find dumping in every antidumping and countervailing duty case against China and also against almost all every other foreign county has created a situation so that the public perception is that almost every import into the US is dumped.  These hanging judge decisions fuel the protectionist/isolationist political rhetoric in the United States badly damaging US industry and agriculture.  It has also led to a mentality by many US companies of international trade victimhood.  We poor US companies simply cannot compete in the international or US market because all foreign exports and US imports are subsidized or dumped.

Instead, US companies want to rely on US government issued protectionist walls to protect themselves from competition rather than finding a way to make the US companies competitive again.  See the article on Trade Adjustment Assistance for Companies below.

SECTION 232 STEEL AND ALUMINUM CASES STALLED

The Section 232 Steel and Aluminum cases continue to be stalled.  On August 21ST,  Politico reported:

“WHITHER THE NATIONAL SECURITY STEEL INVESTIGATION? White House chief strategist Steve Bannon’s departure from the White House . . tipped the balance of Trump’s economic advisers firmly toward the more centrist “globalist” wing – and that could mean that two reports examining whether to limit imports of steel and aluminum for national security reasons could be indefinitely delayed. The Commerce Department has prepared a report on its findings that is circulating among agencies, but the administration has decided to dial down the investigations as it turns its attention to tax reform . . . .

Part of the reason is the departure of Bannon, who had been a major proponent of the move. But the decision to put off the investigations was also made in part because of opposition from business groups and Republican lawmakers who were worried it would hurt steel users and the broader economy, the news report said. .

Although President Donald Trump and Commerce Secretary Wilbur Ross thought they had found a panacea, cure all, for US trade problems, using Section 232 National Security cases to put large tariffs and/or quotas on Steel, Aluminum and other raw material products, something happened on the way to the Trump trade heaven—reality.  The major problem is that the steel industry has only 141,000 jobs at stake while downstream steel users have millions of jobs at stake.

As background, on April 20, 2017, President Trump and the Commerce Department in a press announcement and fact sheet along with a Federal Register notice, Presidential Memorandum Prioritizes Commerce Steel Investigation _ Department of Commerce Section 232 Investigation on the Effect of Imports of Steel on U.S COMMERCE FED REG SECTION 232 NOTICE, announced the self-initiation of a Section 232 National Security case against imports of steel from every country.  See video of Trump signing the Executive Order with Secretary Ross and Steel Producers at https://www.youtube.com/watch?v=EiVfNOl-_Ho.

Commerce held a hearing on May 24th in this case.  The video of the hearing can be found at https://www.commerce.gov/file/public-hearing-section-232-investigation-steel-imports-national-security.

In the past Secretary Ross has stated that the Section 232 case is meant to fill the gaps created by the patchwork of antidumping and countervailing duties on foreign steel, which he said have provided only limited relief to the U.S. industry.

Under the terms of the executive order, an interagency group will present a report to the White House within 270 days that identifies goods that are essential for national security and analyzes the ability of the defense industrial base to produce those goods.

If the Secretary reports affirmatively, the President has 90 days to determine whether it concurs with the Secretary’s determination and “determine the nature and duration of the action that, in the judgment of the President, must be taken to adjust the imports of the article and its derivatives so that such imports will not threaten to impair the national security.”

Although Commerce Secretary Wilbur Ross pledged to get the Section 232 Steel and Aluminum reports to President Trump’s desk by the end of June, that did not happen as the Administration began to realize the impact a broad tariff on steel or aluminum raw material inputs would have on downstream steel and aluminum users, which are dependent on high quality, competitively priced steel products to produce competitive downstream products made from steel and aluminum.

In response to the delay in the Section 232 Steel case, American steel industry executives appealed directly to President Donald Trump for immediate import restrictions because steel imports have surged back to 2015 levels.  As the letter states:

“The need for action is urgent. Since the 232 investigation was announced in April, imports have continued to surge.  Immediate action must meaningfully adjust imports to restore healthy levels of capacity utilization and profitability to the domestic industry over a sustained period.”

The American Iron and Steel Institute (AISI), an industry trade group, reported on Wednesday that total steel imports through July this year were up 22 percent from the same period a year ago, with imports taking 28 percent of the U.S.  market.

In the letter, Steel company executives from Nucor Corp., U.S.  Steel, ArcelorMittal and Commercial Metals Co. said the sustained surge of steel imports into the United States had “hollowed out” much of the domestic steel industry and was threatening its ability to meet national security needs.

“Your leadership in finding a solution to the crisis facing the steel industry is badly needed now. Only you can authorize actions that can solve this crisis and we are asking for your immediate assistance.”

The collateral damage to the many US producers that produce downstream steel products created by any across the board tariffs on steel imports makes it very difficult for the Administration to use a broad brush to fix the steel problem.  That is the problem with purely protectionist decisions.  They distort the US market and simply transfer the problems of the steel industry to other downstream industries.

But does that mean the US government should simply let the US Steel industry and other manufacturing industries die?  The election of Donald Trump indicates  politically that simply is not a viable option.

Although Joseph Schumpeter in his book Capitalism, Socialism and Demcracy coined the term “creative destructionism”, which conservatives and libertarians love to quote, they do not acknowledge the real premise of Schumpeter’s book that capitalism by itself could not long survive.  Schumpeter himself observed the collateral damage created by pure capitalism.

So what can be done for the steel and other manufacturing industries?  Answer work with the companies on an individual basis to help them adjust to import competition and compete in the markets as they exist today.  Moreover, there is already a government program, which can serve as a model to provide such a service—the Trade Adjustment Assistance for Companies Program.

What is the TAA for Companies secret sauce?  Making US companies competitive again.  Only by making US manufacturing companies competitive again will the trade problems really be solved.  US industry needs to stop wallowing in international trade victimhood and cure its own ills first before always blaming the foreigners.  That is exactly what TAA for Companies does—helps US companies cure their own ills first by making them competitive again.

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

As stated above, there is another more productive way to solve the Steel crisis and fix the trade problem and help US companies, including Steel and other companies, adjust to import competition.  This program has a true track record of saving US companies injured by imports.

The Trade Adjustment Assistance for Firms/Companies program does not put up barriers to imports.  Instead the TAA for Companies program works with US companies injured by imports on an individual basis to make them more competitive.  The objective of TAA for Companies is to save the company and by saving the company it saves the jobs that go with that company.

But as stated in the video below, for companies to succeed they must first give up the mentality of international trade victimhood.

In contrast to TAA for workers, TAAF or TAA for Companies is provided by the Economic Development Administration at the Commerce Department to help companies adjust to import competition before there is a massive lay-off or closure.  Yet the program does not interfere in the market or restrict imports in any way.

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.  To retrain the worker for a new job, the average cost per job is $5,000.  To save the company and the jobs that go with it in the TAA for Companies program, the average cost per job is $1,000.

Moreover, TAA for Firms/Companies works.  In the Northwest, where I am located, the Northwest Trade Adjustment Assistance Center, http://www.nwtaac.org/, has been able to save 80% of the companies that entered the program since 1984. The Mid-Atlantic Trade Adjustment Assistance Center, http://www.mataac.org, uses a video, http://mataac.org/howitworks/, to show in detail how the program resulted in significant turnarounds for four companies. The reason the TAA for Firms/Companies is so successful—Its flexibility in working with companies on an individual basis to come up with a specific adjustment plan to make them competitive once again in the US market as it exists today.  For a sample recovery plan, see http://mataac.org/documents/2014/06/sample-adjustment-plan.pdf, which has been developed specific to the strengths, weaknesses and threats each company faces.

But TAA for Companies has been cut to the bone.  On August 22, 2017, in the attached press release, US Commerce Department Announces $13.3 Million to Boost Competitiveness of US Ma, the U.S. Commerce Department announced $13.3 Million to Boost Competitiveness of U.S. Manufacturers.  The press release specifically stated:

“WASHINGTON – U.S. Secretary of Commerce Wilbur Ross today announced $13.3 million in U.S. Economic Development Administration (EDA) grants to support 11 Trade Adjustment Assistance Centers (TAACs) in California, Colorado, Georgia, Illinois, Massachusetts, Michigan, Missouri, New York, Pennsylvania, Texas, and Washington that help manufacturers affected by imports adjust to increasing global competition and create jobs.

“The Trump administration is working every day to help America’s manufacturers, their workers, and their communities,” said Secretary Ross. “This funding is one element of a government-wide effort to restore American jobs and strengthen U.S. manufacturing.”

The 11 grants include:

$1.7 million to the University of Michigan, Ann Arbor, for the Great Lakes Trade Adjustment Assistance Center

$1.2 million to the Mid-Atlantic Employers’ Association, King of Prussia, Pennsylvania, for the Mid-Atlantic Trade Adjustment Assistance  Center

$978,000 to the New England Trade Adjustment Assistance Center, Inc., North Billerica, Massachusetts

$1.1 million to the Research Foundation, State University of New York Binghamton, for the New York, New Jersey and Puerto Rico Trade Adjustment Assistance Center

$1.2 million to the University of Colorado at Boulder for the Rocky Mountain Trade Adjustment Assistance Center . . .

$1 million to the University of Missouri–Columbia for the Mid-America Trade Adjustment Assistance Center …

$1.2 million to the Trade Task Group, Seattle, Washington, for the Northwest Trade Adjustment Assistance Center…

EDA’s Trade Adjustment Assistance for Firms program funds 11 Trade Adjustment Assistance Centers across the nation. The centers support a wide range of technical, planning, and business recovery projects that help companies and the communities that depend on them adapt to international competition and diversify their economies.  . . .

The mission of the U.S. Economic Development Administration (EDA) is to lead the federal economic development agenda by promoting competitiveness and preparing the nation’s regions for growth and success in the worldwide economy.”  . . .

Are such paltry sums really going to help solve the manufacturing crisis in the Steel and other industries?  Of course not!!

But when the program was originally set up, the budget was much larger at $50 to $100 million.  If the program was funded to its full potential, yes steel companies and other companies could be saved.

To those libertarian conservatives that reject such a program as interference in the market, my response is that this program was personally approved by your icon, President Ronald Reagan.  He understood that there was a price for free trade and avoiding protectionism and that is helping those companies injured by import competition.  But teaching companies how to be competitive is a much bigger bang for the buck than simply retraining workers.  And yes companies can learn and be competitive again in the US and other markets.

In the attached article entitled “Steel Competitiveness Seriously?”, Steel Competitiveness, William J. Bujalos, the head of the Mid-Atlantic Trade Adjustment Assistance Center,  makes the proposal to expand the program to help large manufacturing companies, including steel producers.  Mr. Bujalos states:

“Current reports suggest that the nation’s steel industry is experiencing a rebound – a rebound driven by a growing collective confidence about America’s economic future.

That’s all good but irrelevant because confidence is not a strategy for growing the nation’s global competitiveness. What is relevant is the extent to which our companies are able to grow other much more important things, like metrics critical to their competitive success. Do that and the power of any confidence index won’t matter.

Let me explain. Since 1998 I have been leading the nation’s Trade Adjustment Assistance for Firms (TAAF) program in the Mid-Atlantic region. My business experience during the last 50 years has yielded insight into the kinds of things that have the highest probability for success at reversing an enterprise’s negative fortunes irrespective of the competitive battlespace that they’ve chosen to play in. Prior lives involved corporate management in both private and public sectors (large and small companies) in a wide variety of markets that included: management consulting, chemicals, plastics, medical devices, pharmaceuticals, automotive systems, battery tech and steel – and I’ve learned that there are some things that are universal …

For example, I’m a believer that, for businesses of all stripes, there is only one true asset to be quantified and listed on the Balance Sheet – knowledge. Nothing else really matters at the end of the day. And the overarching value of TAAF is that it is this nation’s singularly effective business model that injects it directly into a company’s bloodstream over an extended period of time, i.e. half a decade. That sort of holistic, long-term approach yields the biggest chance for success because it has a high probability of permanently upgrading a company’s core DNA.

In my view steel companies don’t operate in markets that are fundamentally any different from markets in general. No markets are forgiving. No customer base is loyal. Some players don’t play fair. No amount of investment is worth it if indigenous leadership is of poor quality. So as a direct consequence, all companies that are serious about permanently enhancing their global competitiveness must achieve mastery over stuff like: competitive intelligence, customer intelligence, market dynamics intelligence, costs/managerial finance, talent/leadership development, product development, planning effectiveness, etc., etc., etc.

In other words: it’s the knowledge stuff that’s critical and little else. And in my humble opinion, focusing the attributes that TAAF brings to the table on that industry on a larger scale would yield stunning results.

The TAAF business model places its nationwide network of Trade Adjustment Centers (i.e. TAACs) in the unique position of being the right catalyst at the right place at the right time. Does it always work? Certainly not. What does? But it works better than just about anything else in America’s tool kit. It is unique. And here’s the kicker, we don’t ask for equity. On behalf of the American taxpayer we simply insist on pure, unadulterated, robust, and relentless commitment from the Chief Executive Officer down to the shop floor. Absent that? Well, it’s unfortunate but some companies probably should fail.

This approach really works, without costing a great deal of money or causing economic disruption while at the same time providing our political establishment the cover it needs to smooth passage of critical treaties – and, because a company must match our injection dollar-for-dollar throughout the process, the American taxpayer is assured of management’s total and focused commitment for one simple reason … they share in the risk!

Bottom line? The long-term holistic approach is effective. The business model, stipulating unique strategies addressing each company’s unique circumstances, is effective. The program’s neutral economic impact is effective. It’s ability to support passage of trade agreements while not impeding the benefits of free trade is effective. It’s ability to lessen the costs associated with the engagement of outside expertise to reengineer critical business processes is effective.

And I firmly believe that it’s application is not limited to America’s smallest makers – only its funding is. For several decades that’s been little more than an afterthought.

Consider …

  • All manufacturing companies were at one time small ones.
  • All manufacturing companies are impacted by globalization.
  • Small ones need outside expertise to teach them basic stuff.
  • Larger ones need outside expertise to teach them sophisticated stuff.
  • Small makers, because they’re learning the basics and have little resources to tap, take a longer time to turn the corner.
  • Larger makers, because the basics are already inculcated and they have the requisite resources at hand, can turn the corner at much higher speed.
  • And if you were the Chief Executive of a tier-one domestic manufacturer, would you doubt for a minute –
    • That your supply chain probably has several thousand companies in it?
    • That extensive improvement in their performance would have a significantly positive impact on your performance?
  • Improvement in the performance of the small cohort will increase the probability that fewer will fail because a greater proportion will grow into larger ones – driving concomitant growth in good-paying manufacturing jobs and the creation of wealth. Go ahead. Beat that with a stick!”

For those who would simply dismiss the idea as impossible and too simplistic, watch the video.  The program works.  See http://mataac.org/howitworks/.

TRUMP AND CHINA

SECTION 301 CASE AGAINST CHINA ON FORCED TECHNOLOGY TRANSFERS MOVES FORWARD

In an attached August 18th Federal Register notice based on an August 14th Presidential Memorandum, 301 INITIATION NOTICE Presidential Memorandum for the United States Trade Representative whitehouseg, President Trump pulled the trigger on the Section 301 Intellection property case against China.  The Section 301 investigation could take a year and probably will lead to negotiations with the Chinese government on technology transfer.  If the negotiations fail, the US could take unilateral action, such as increasing tariffs, or pursue a case through the World Trade Organization.  Unilateral actions under Section 301, however, also risk a WTO case against the United States in Geneva.

The notice states that the USTR will specifically investigate the following specific types of conduct:

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

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

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

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

The United States Trade Representative (“USTR”) will hold a hearing on October 10th at the International Trade Commission and public comments are to be submitted by September 28th.

In an August 30, 2017 article by Dan Harris, who heads my law firm, on his China law blog at http://www.chinalawblog.com/2017/08/china-us-trade-wars-and-the-ip-elephant-in-the-room.html, entitled “China-US Trade Wars and the IP Elephant in the Room”, Dan states that in over one hundred negotiations with Chinese companies, he has not seem the Chinese government demand IP rights.  What he has seen is bad negotiating:

“I have been called by reporters at least a half dozen times in the last couple of weeks regarding the Trump Administration’s planned investigation of China’s IP practices. But what I tell these reporters fits so badly with THE narrative that my name is not showing up in print. Sorry, but I can’t help it.

Here’s the situation. The Trump Administration is claiming that China’s government forces American companies to relinquish its IP to China and my problem is that despite my firm having worked on literally hundreds of China transactions that involve IP, I have very little proof of this. So no real story there.

Here though is the story as seen from my eyes and from the eyes of the China attorneys at my firm, readily conceding that we have not seen even close to everything.

We have never been involved in a China transaction where it has been clear to us that the Chinese government has forced our client to relinquish its IP to China. We have though been involved in a million transactions where the Chinese party on the other side — sometimes a State Owned Entity, but way more often not — has vigorously and aggressively sought to get our client to part with its IP for a very low price. Is the Chinese government behind this sort of pressure? Don’t know? Probably sometimes, but probably most of the time not. If the transaction involves rubber duckies, we can assume not. If it involves next generation computer chips, well that is probably a very different story.

Anyway, as we write on here so often, there are many terrible technology transfer and other sorts of IP deals to be had with Chinese companies and we have too often — even against our China attorneys’ clear counsel to our clients not to do it — seen our clients make bad deals that will involve them turning over their IP with little to no chance of receiving full value for it. But these companies have not been forced, not in the sense that any government was forcing them to do anything. These companies were simply willing to take huge risks either because they could not grasp the risks or because they felt they had no other choice for financial reasons.

In Three Myths of China Technology Transfers, we wrote about how our clients all too often forge ahead with bad deals and why, and we nowhere mention government compulsion:

A Chinese company that intends to violate a licensing agreement and run off with the foreign company’s IP will usually have a very clear plan. What the China lawyers in my office call the Standard Plan works as follows. First, the Chinese company will negotiate in a way that guarantees a weak license that cannot be enforced against them by the foreign party. The tricks used to do this are quite standardized. Second, the Chinese company will ensure that it does not make any (or else it makes very few) payments until after it has already received the technology. If the Chinese company makes any payment at all, it will make a minimal number of payments, usually late and in violation of the agreement and then once it has received enough of the technology it seeks, it will cease making any payments entirely.

When our China attorneys encounter a Chinese company clearly working on the Standard Plan, we warn our clients. However, it is also typical for our clients to nonetheless want to forge on ahead. The client will usually explain how their situation is unique and that means the Chinese could not possibly be planning to breach.

We discuss again in China Technology Transfers: The Relationship and Deal Structure Myths how it is that American companies lose their IP to Chinese companies and we again leave out government force:

Due to a partnership relationship, the foreign side often wrongly believes it is somehow better protected against IP theft. The foreign side then lets down its guard, only to learn that its China partner has appropriated its core technology. This sense of partnership is most common with SMEs and technology startups, especially those companies whose owner is directly involved in the relationship with the Chinese entity.

In China and The Internet of Things and How to Destroy Your Own Company I rant about technology companies that literally destroy themselves by failing to do enough to protect their IP from China:

Well for what it is worth, I will no longer describe technology companies as a whole as our dumbest clients when it comes to China. No, that honor now clearly belongs to a subset of technology companies: Internet of Things companies. And mind you, we love, love, love Internet of Things companies. For proof of this, just go to our recent post, China and the Internet of Things: A Love Story. Internet of Things (a/k/a IoT) companies are sprouting all over the place and they are booming. Most importantly for us, they need a ton of legal work because just about all IoT products are being made in China, more particularly, in Shenzhen. And just about all IoT products need a ton of complicated IP assistance.

So then why am I saying they are so dumb about China? Because they are relinquishing their intellectual property to Chinese companies more often, more wantonly, and more destructively than companies in any other industry I (or any of my firm’s other Chinese lawyers) have ever seen. Ever. And by a stunningly wide margin.

I then list out the following as “my prime example, taken from at least a half dozen real life examples in just the last few months”:

IoT Company: We just completed our Kickstarter (sometimes Indiegogo) campaign and we totally killed it and so now we are ready to get serious about protecting our IP in China.

One of our China Lawyers: Great. Where are you right now with China?

IoT Company: We have been working with a great company in Shenzhen. Together we are working on wrapping up the product and it should be ready in a few months.

China Lawyer: Okay. Do you have any sort of agreement with this Chinese company regarding your IP or production costs or anything else?

IoT Company: We have an MOU (Memorandum of Understanding) that talks about how we will cooperate. They’ve really been great. They have told us that they would enter into a contract with us whenever we are ready.

China Lawyer: Can you please send us the MOU? Have you talked about what that contract will say?

IoT Company: Sure, we can send the MOU. It’s one page. No, we haven’t really talked much beyond just what we need to do to get the product completed.

China Lawyer: Okay, we will look at your MOU and then get back to you with our thoughts.

Then, a day or two later we a conversation like the following ensues:

China Lawyer: We looked at your “MOU” and we have bad news for you. We think there is a very good chance a Chinese court would view that MOU as a contract. (For why we say this, check out Beware Of Being Burned By The China MOU/LOI) And the Chinese language portion of the MOU — which is all that a Chinese court will be considering — is very different from the English language portion. The Chinese language portion says that any IP the two of you develop (the IoT company and the Chinese manufacturer) belongs to the Chinese company. So what we see is that as things now stand, there is a very good chance the Chinese company owns your IP. This being the case, there is no point in our writing a Product Development Agreement because your Chinese manufacturer is not going to sign that.

IoT Company: (And I swear we get this sort of response at least 90 percent of the time) I’m not worried. I think you have it wrong. I’m sure that they will sign such an agreement because we orally agreed on this before we even started the project.

China Lawyer: That’s fine, but I still think it makes sense for you to at least make sure that the Chinese company will sign a new contract making clear that the IP associated with your product belongs to you, because if they won’t sign something that says that, there is no point in our drafting such a contract and, most importantly, there is no point in your paying us to do so.

So far not a single such IoT company has been able to come back to us with an agreement from their Chinese manufacturer to sign.

Again, no government force, just an overzealous and insufficiently careful foreign company.

Now before anyone excoriates me for ignoring reality, let me say that I have read about instances where the Chinese government has “forced” foreign companies to turn over their IP to China; high speed rail is an often cited example of that. And I do not doubt that it happens in critical industries (nuclear power would be another example). And I am also not unaware of how China is increasingly forcing foreign companies to store their data in China, which absolutely puts technology at risk. But even in these instances the foreign company has some choice. Not good choices, I know. And arguably it is no choice at all when the decision is between doing business in China or not. The last thing I want to do is get all philosophical on anyone regarding what constitutes choice so I will leave it to our individual readers to determine for themselves where on the continuum of force and choice they want to put any and all of the above.

There is plenty to complain about how China protects IP and there is plenty to complain about how China protects foreign companies that do business in China or with China, but I am just not sure complaining about forced IP transfers goes at the top of that list for most American companies. When I talk with American and European and Australian companies about China their biggest legal complaint is invariably how expensive it is for them to comply with China laws and how they resent that their Chinese competitors generally are not held to the same legal standards.

A couple of years ago, I gave the following testimony before The US-China Economic and Security Review Commission of the United States Congress:

I was introduced as an expert, and I’d like to qualify that by saying do not think of myself as an expert. I am just a private practice lawyer who represents American and Australian companies and some European and Canadian companies as well in China.

I’m going to tell you a little bit about what we do so you can get a little bit better perspective of where I’m coming from on this. The bulk of my firms’ clients are small and medium-size businesses, mostly American businesses, but some European and Australian and Canadian businesses as well. Most of them have revenues between 100 million and a billion a year. Our clients are mostly tech companies, manufacturing companies and service businesses.

About 20 percent of our work is for companies in the movie and entertainment industry. We have some clients in highly-regulated industries, like health care, senior care, banking, insurance, finance, telecom and mining, but those companies make up less than ten percent of our client base.

Most of the China work we do for our clients is relatively routine. We help them register as companies in China. We register their trademarks and copyrights in China. We draft their contracts with Chinese companies. We help them with their employment, tax and customs matters. We oversee their litigation in China, and we represent them in arbitrations in China. We help them buy Chinese companies.

For our clients, the big anti-foreign issue is whether they will be allowed to conduct business at all in China as that is certainly not always a given. Certain industries in China are shut off or limited to foreign businesses acting alone. For our clients, publishing and movies are most prominent.

Essentially anything that might allow for nongovernmental communication to or between Chinese citizens is problematic, but it is not clear to me that these limitations are intended to be anti-foreign, as China does not really want any private entities, foreign or Chinese, engaging in these activities without strict governmental oversight.

So do these limits against foreign companies arise from anti-foreign bias or just the Chinese government’s belief that it can better control Chinese companies? To our clients, that distinction doesn’t matter.

On day-to-day legal matters, our clients are almost invariably treated pursuant to law, and so long as they abide by the law, they seldom have any problems. The problem for our clients isn’t so much how the Chinese government treats them; it’s how they are treated as compared to their Chinese competitors who are less likely to abide by the laws and more likely to get away with it.

I have no statistics on this. I doubt there are any statistics on this, but I see it and I hear it all the time.

I see it when one of our clients buys a Chinese business that has half of its employees off the grid and has facilities that are not even close to being in compliance with use laws, and I know foreign companies cannot get away with that.

And I hear it from Chinese employees of our clients who insist that there is no need for our clients to follow various laws. They insist there is no need to follow various laws and to do so is stupid. Is this disparity due to anti-foreign bias or is it due to corruption? Again, for our clients, the answer is irrelevant.

Is the Trump administration’s IP investigation a negotiating ploy done as much to get at disparate treatment as it is to get at forced technology transfers? I do not think it is, but some who know more about such things tell me it may be.

CNN was the only one of the media companies that both interviewed me on the above issues and ended up quoting me and I like how it handled the issue in its article, President Trump is set to crank up the pressure on China over trade:

Beijing has other ways of getting its hands on valuable commercial information. Officials often insist on taking a close look at technology that foreign companies want to sell in China.

“Chinese government authorities jeopardize the value of trade secrets by demanding unnecessary disclosure of confidential information for product approvals,” the American Chamber of Commerce in China said in a report published in April.

Some experts say that handing over technology has effectively become a cost of doing business in China — a market too big for most companies to ignore.

“Many Chinese companies go after technology hard and the tactics they use show up again and again, leading us to believe there is some force (the government?) teaching them how to do these things,” said Dan Harris, a Seattle-based attorney who advises international companies on doing business in China.

“The thing is that the foreign companies that give up their technology usually do so at least somewhat of their own volition,” he told CNNMoney. “Yes, maybe they need to do so to get into China, but they also have the choice not to go into China, right?”

Closing the stable door?

Other analysts say that the U.S. administration is coming to the problem too late.

“Intellectual property (IP) theft is yesterday’s issue,” wrote Lewis of the Center for Strategic and International Studies.

“In part because of past technology transfer and in part because of heavy, sustained government investment in science and research, China has developed its own innovative capabilities,” he wrote.

“Creating new IP in the United States is more important than keeping IP from China.”

These are really complicated issues and I realize the above is more of a stream of consciousness “thoughts dump” than a coherent position paper. So more than ever, I’d love to hear your thoughts in the comments below.”

Dan’s point is that it is often bad negotiating tactics by the US side that leads to companies giving away their technology, not Chinese government pressure.

On August 15th, Investors Business Daily speculated that “Trump’s Trade War With China Is War On North Korea By Other Means” stating:

“But they [the Chinese government] may have underestimated Trump: He has the will, and likely the political support, for an even-more damaging war with China over trade. With the U.S. China’s largest market — in 2016, U.S. imports from China totaled nearly half a trillion dollars — a trade war is a serious threat to China, which is already showing signs of economic slowing.

That’s what’s behind Trump’s sudden decision to investigate China’s rampant theft of U.S. intellectual property. And on trade grounds only, Trump is right to investigate this, since it’s enshrined in both U.S. law and international trade treaties that egregious trade violations warrant retaliatory actions if the violations aren’t fixed.

The U.S. has been jawboning China on this for years, to no effect. China for years has seen the U.S. as a paper tiger, too feckless to act on its own behalf. Now, Trump is showing it otherwise. . .

Once again, Trump the savvy business negotiator seems to know his foe’s weak points.

Perhaps hoping to stall Trump’s trade action, China announced that it would cease North Korean imports of coal, iron and lead, and seafood, starting Sept. 5, in keeping with U.N. sanctions imposed on Kim Jong Un’s regime.

In a joint statement Monday, Secretary of State Rex Tillerson and National Security Advisor Gen. James Mattis made explicit the link between China, trade and North Korea: “China is North Korea’s neighbor, sole treaty ally and main commercial partner,” they wrote. “Chinese entities are, in one way or another, involved with roughly 90% of North Korean trade. This affords China an unparalleled opportunity to assert its influence with the regime.”

The clear message: If you support North Korea’s regime economically, we’ll hurt you economically in return. It’s a Trumpian twist on Von Clausewitz’s famous dictum about war and politics: “(A trade) war is the continuation of politics by other means.”

As we’ve said before, we take a back seat to no one in advocating on behalf of free trade. But when one side routinely and systematically steals hundreds of billions of dollars worth of intellectual property, that’s no longer free trade. It’s piracy. . . .

North Korea’s nuclear blackmail, aided by China’s patronage, is not acceptable. If it takes trade sanctions to get China’s diplomatic attention, so be it. It’s time that China’s charade over its support of North Korea comes to an end.”

On August 8th, in an article entitled “Second Thoughts on Trade with China” William Galston for the Wall Street Journal stated:

“It is China’s techno-nationalism that poses the greatest threat to our future. In 2006 the Chinese government adopted a long-term plan to promote what it called “indigenous innovation.” As James McGregor, a leading expert on the Chinese economy, writes, China’s leading-edge firms were directed to obtain technology from their multinational partners through “co-innovation and re-innovation based on the assimilation of imported technologies.”

In practice, this meant giving American firms an offer Don Corleone would have recognized—either to “share their technologies with Chinese competitors—or refuse and miss out on the world’s fastest-growing market.” China’s ultimate goal is to use forced technology transfer to replace the U.S. as the world’s leading economy. . . .

Existing legal tools may not suffice to end these discriminatory practices. Although the WTO prohibits mandatory technology transfers, the Chinese government’s position is that trading technology for market access is purely a business decision. Protectionist government purchases are a key part of China’s strategy. . . .

If turning over our technological crown jewels to a foreign power is against the national interest, then our government should have the power to prevent it. But wielding this power without blowing up the international trade regime will not be easy.”

On August 21st, in an editorial entitled “Yes, China Steals U.S. Intellectual Property, But That Doesn’t Mean Trade With China Is A Bad Thing” Investors Business Daily tempered its initial response on the Section 301 case stating:

“Everyone is angry at China right now, and perhaps with good reason. China’s regime often bends trade rules to its own needs, and breaks them or ignores them when it’s convenient. . . .

The U.S. shouldn’t tolerate cheating on trade, by China or anyone else. It’s a matter of jobs and income for Americans and the companies that employ them.

Even so, that doesn’t mean everything China has done has been bad for the U.S. Far from it.

A new study, ” How Did China’s WTO Entry Benefit U.S. Consumers?” from the prestigious National Bureau of Economic Research, shows why. It notes that from the time China joined the World Trade Organization in 2000 to 2006, the U.S. inflation index for factory goods fell an estimated 7.6%.

This might not sound like a lot, but it is. “The resulting savings were large,” the study says. “U.S. manufacturing sector production was valued at $4.5 trillion in 2014, so if prices had been 7.6% higher, that production would have cost $340 billion more.”

That is, profits for U.S. firms were likely billions of dollars higher over that six-year period than otherwise. And prices to American consumers fell.

How did this happen? The simple answer is freer trade. China cut its average tariff on manufacturing inputs from 15% in 2000 to 9% in 2006, a 40% reduction. Meanwhile, China’s government lifted export limits on its domestic companies, got rid of capital requirements, eased restrictions on foreign investment, raised its limits on textile exports and lowered the number of goods that required import licenses.

The result: China’s factory exports to the U.S. surged 290% from 2000 to 2006.

According to the study, “69% of the growth was driven by new exporters offering a widening variety of products, while 16% was created by incumbent firms exporting new products.”

The lower tariffs and other reductions in trade restrictions led to a Chinese   productivity boom, with an average 10% per year gain in productivity for Chinese companies that exported to the U.S. As for the price of U.S. manufactured goods, about two-thirds of the 7.6% reduction in factory prices here was due to China’s tariff cuts.

But didn’t the food of Chinese factory-made goods to the U.S. decimate American manufacturing during this period? That’s a myth. As the U.S. Federal Reserve’s monthly manufacturing index shows, from 2000 to 2006 American factory output rose a healthy 11.5%. It wasn’t decimated by the surge in Chinese exports to the U.S. It only crashed when the financial crisis hit.

For its part, China’s communist    government in the  early  2000s  found   that taking  its hands off  the economy’s windpipe and engaging with the rest of the world through trade was  an  effective  strategy for making its economy grow. We  also  benefited  from that.

Now the Trump administration is warning an increasingly hostile China that its recent trade violations aren’t acceptable. China, in response, has blasted the U.S. for its “protectionism.”

We hope a negotiated solution can be found. At the same time, we might want to think seriously about it before we back a giant U.S.-China trade war that could make all of us, Americans and Chinese, much worse off.”

In early 2000, China’s brilliant economic guru Premier Zhu Rongyi believed that China should join the WTO, not for the benefit of the United States or Europe, but for the benefit of China.  Premier Zhu realized that China would benefit from free trade by breaking down its own protectionist walls, which isolated China from the rest of the World.

It is somewhat ironic that the United States is apparently moving in the opposite direction, building protectionist walls to protect its companies from foreign competition.  Many US politicians have fallen into the trap of international trade victimhood because they simply do not understand the benefits of free trade to the United States.

SECTION 201 SOLAR CELLS CASE

On May 17, 2017, Suniva filed a Section 201 Escape Clause against all Solar Cell imports from all countries at the US International Trade Commission (“ITC”).  On May 23, 2017, in the attached Federal Register notice, ITC iNITIATION NOTICE SOLAR CELLS, the ITC decided to go ahead and institute the case.  If the ITC reaches an affirmative determination, within 60 days the President must decide whether or not to impose import relief, which can be in the form of increased tariffs, quotas or an orderly marketing agreements.

At the ITC, Section 201 cases are a two stage process.  The ITC must first determine whether “crystalline silicon photovoltaic (“CSPV”) cells (whether or not partially or fully assembled into other products) are being imported into the United States in such increased quantities as to be a substantial cause of serious injury, or the threat thereof, to the domestic industry producing an article like or directly competitive with the imported articles.”  The ITC has determined that the investigation is “extraordinarily complicated” and will make its injury determination within 128 days after the petition was filed, or by September 22, 2017. The Commission will submit to the President the report required under section 202(f) of the Act (19 U.S.C. § 2252(f)(1)) within 180 days after the date on which the petition was filed, or by November 13, 2017.

Prehearing briefs and posthearing briefs have been filed at the ITC and the ITC hearing was held on August 15th and was reportedly 11 hours long.

If the ITC reaches an affirmative determination, it will go into a remedy phase and the hearing in that phase will be on October 3, 2017. Attached is the ITC public prehearing staff report, 2017.08.01 ITC Solar 201 Prehearing Report PUB.

The Staff Report shows that imports are up, value of imports are down, but US producers’ production and capacity have increased during the period of investigation 2012-2016.  Moreover, US producers’ profits and sales have increased in the period.  This is a very mixed staff report with no clear trends and could lead to a negative ITC injury determination on September 22nd.

Meanwhile, sixteen US senators have urged the ITC to consider how the increased tariffs on foreign solar cells could hurt the broader domestic solar industry. The letter specifically stated:

“We respectfully request that the commission carefully consider the potential negative impact that the high tariffs and minimum prices requested would have on the tens of thousands of solar workers in our states and on the hundreds of companies that employ them.”

The letter was signed by Senators: Heinrich (D-N.M.), Tillis (R-N.C.), Bennet (D- Colo.), Feinstein (D-Calif.), Whitehouse (D-R.I.), Perdue (R-Ga.), Gardner (R-Colo.), Heller (R-Nev.), Van Hollen (D-Md.), Moran (R- Kan.), Scott (R-S.C.), Cardin (D-Md.), King (I-Maine), Collins (R-Maine), Markey (D-Mass.) and Cortez Masto (D-Nev.).

ALUMINUM EXTRUSIONS CIRCUMVENTION

On July 26, 2017, in the attached memorandum, prc-aluminum-extrusions-ar-072617, the Commerce Department published in the Federal Register a notice of affirmative final determination of circumvention of the antidumping and countervailing duty orders on aluminum extrusions from the People’s Republic of China. The Department determined that heat-treated extruded aluminum products that meet the chemical specifications for 5050 grade aluminum alloy, regardless of producer, exporter, or importer, constitute later-developed merchandise, are circumventing the orders.

As a result of the Department’s anti-circumvention determination, all heat-treated extruded aluminum products from the People’s Republic of China that meet the chemical specifications for 5050 grade aluminum alloy are considered to be in-scope merchandise and must be included in responses to the Department’s questionnaires.

FALSE CLAIMS ACT—FURNITURE

In a previous blog post,  I mentioned that the real hammer against transshipment of products to evade trade orders is not recent legislation from Congress, but the False Claims Act.  Under the False Claims Act, private parties can file suits in Federal District Court alleging fraud on the US government because of foreign exporters and US importers decision to use transshipment and other methods to evade US antidumping and countervailing duties.  Under the FCA, the relator can look back at 10 years of past imports and the antidumping duties in question can be over 100, 200 or even 300%.  Under the FCA the remedy is triple damages and when looking at imports over such a long period of time, the remedy can result in enormous payouts.

The private party files an FCA complaint as a relator on behalf of the US government.  The US government then decides whether or not to intervene in the case.  If the US government chooses to intervene, the relator is entitled to 15 to 25% of the recovery of the US government.  In one small FCA case here in Washington regarding medical bills, a clerk at a hospital received a payout of $2 to 3 million so anyone can be a relator.

More on point, In an intervention complaint, US GOVT INTERVENTION BLUE FURNITURE CASE, the US government intervened in a False Claims Act filed against evasion of millions of dollars in antidumping duties on imports of wooden bedroom furniture from China.

The lawsuit brought by University Loft Co., an Indiana-based wooden bedroom furniture company, accuses Florida-based Blue Furniture Solutions LLC, founder and president and its chief financial officer  of importing wooden bedroom furniture from China without paying the 216.01 percent anti-dumping rate by making false statements to U.S. Customs and Border Protection (“CBP”).

In doing so, Blue Furniture escaped paying millions of dollars in duties and fees owed to the federal government from 2011 through 2015, the suit says.

The complaint states:

“To avoid the payment of anti-dumping duties and fees, defendants conspired with their Chinese manufacturers and exporters to fraudulently avoid customs duties and underpay fees owed to the United States by making false representations in entry documents about the nature and value of the imported merchandise.”

Specifically, the complaint states that Blue Furniture falsely identified its entries to Customs and Border Protection with codes and descriptions for merchandise that are not subject to antidumping duties.  But the complaint states that many of the wooden chests, dressers, nightstands, wardrobes and many of the beds imported were subject to antidumping duties.

In addition, the FCA complaint accuses the Florida-based company of instructing its China-based manufacturers and exporters how to mislabel and misclassify the merchandise on documents to be shown to CBP.

NEW TRADE CASES

ANTIDUMPING AND COUNTERVAILING DUTY CASES

STAINLESS STEEL FLANGES FROM CHINA

On August 16, 2017, the Coalition of American Flange Producers and its individual members, Core Pipe Products, Inc., and Maass Flange Corporation filed new antidumping and countervailing duty cases against imports of Stainless Steel Flanges from China and India.

FOREIGN ANTIDUMPING AND COUNTERVAILING DUTY LAW AND CASES

UNIVERSAL TRADE WAR CONTINUES

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.2017.30 Team’s newsletter-EN Vol.2017.32 Team’s newsletter-EN Vol.2017.33.

SECTION 337 AND IP CASES

NEW 337 CASES AGAINST CHINA

WI-FI ENABLED ELECTRONIC DEVICES

On August 29, 2017, Sharp Corporation and Sharp Electronics Corporation filed a section 337 case against imports of Wi-Fi Enabled Electronic Devices.  The respondent companies named in the complaint are:

Hisense Co., Ltd., China; Hisense Electronic, Co., Ltd., China; Hisense International (Hong Kong) Co. Ltd., Hong Kong; Hisense USA Corporation, Suwanee, Georgia; Hisense Electronics Manufacturing Company of America Corporation, Suwanee, Georgia; Hisense USA Multimedia R&D Center, Inc., Suwanee, Georgia; and Hisense Inc., Huntington Beach, California.

If you have any questions about these cases or about Trump and Trade, including the impact on agriculture, the impact on downstream industries, the Section 232 and 301 cases, the 201 case against Solar Cells, US trade policy, the antidumping or countervailing duty law, trade adjustment assistance, customs, False Claims Act or 337 IP/patent law, please feel free to contact me.

Best regards,

Bill Perry

US CHINA TRADE WAR–TRUMP AND TRADE, TRADE DROP, TAA FOR COMPANIES THE ANSWER, EC NME PROBLEM, UNIVERSAL TRADE WAR, CUSTOMS AND 337

White House Fountain Snow Pennsylvania Ave Washington DCTRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

US CHINA TRADE WAR NOVEMBER 14, 2016

Dear Friends,

This blog post contains several articles about trade and Trump after his victory on November 8th.  The Trump victory will have a significant impact on trade policy.  As stated below, the TPP is dead.  The Republican Congress will not oppose Trump and bring the TPP to the Congressional floor in the Lame Duck.  The TPP may only come back when and if the trade safety net, including Trade Adjustment Assistance for Firms/Companies, is fixed.

The trade impact on the Rust Belt states, Wisconsin, Michigan, Pennsylvania and Ohio, is a major reason for the Trump victory.  Trump’s victory means that trade wars may escalate.  But with the increase in trade wars, global trade has already started falling and that means a 2015 drop of $200 billion in US exports.  Exports create US jobs too and when exports fall US jobs fall.

As Congressman Don Bonker states, trade conflicts with China and other countries will increase both from the US and the Chinese side. Trump may well self-initiate trade cases against China and China will bring cases against the US.  But Congressional Republicans will try to limit Trump’s protectionist nature.

Xi Jinping of China has already stated that the Chinese government wants to work with President Trump because of the importance of the US China economic relationship.

Complicating the situation is that last week the EC has proposed a change to its antidumping and countervailing to allow it to continue to treat China as a nonmarket economy country or as a country which distorts its market by government practices.

On the other hand, we can expect Congress to work very close with President Trump on different policy initiatives to make the United States a much more fertile ground for US manufacturing.  This will mean cuts in Corporate tax rates and the reduction in production curtailing regulations.  Trump will try and do everything possible to increase jobs in the United States.  Hopefully, that will mean more support to Trade Adjustment Assistance for Companies, which is the only effective US trade remedy that saves companies and the jobs that go with them.

Under the Universal Trade War theme, there are articles by Chinese lawyers on Chinese antidumping law, along with newsletter from an Indian lawyer about Indian trade law.  Many of these cases in other countries target the United States.

In addition, there is an article about Customs Evasion in the Aluminum Extrusions antidumping case and several recent 337 intellectual property cases against China.

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

Best regards,

Bill Perry

TRADE AND TRADE POLICY

TRUMP VICTORY AND WHAT IT MEANS FOR TRADE

Donald Trump won the Presidency on November 8th, and on January 20, 2017 Trump will become the 45th President of the United States.  What does this mean for trade?

TPP IS DEAD

With the Trump victory, Republicans in the House and the Senate will not fight Trump and will not bring the Trans Pacific Partnership (“TPP”) to the floor during the Lame Duck session. According to recent press reports, Trump might try and renegotiate TPP, but as written, TPP  is dead.

Several weeks ago during the heat of the campaign, Paul Ryan, Speaker of the House of Representatives, stated that he could no longer campaign with Donald Trump.  ln a speech on November 9th, the day after the Trump victory, House Speaker Paul Ryan ate humble pie.

In his speech, Ryan made it very clear that Trump’s victory was the most “incredible political feat” of his lifetime.  For a video of Paul Ryan’s speech, see https://www.bing.com/videos/search?q=paul+ryan+speech+video+after+trump+victory&view=detail&mid=556B672FB48D720BC373556B672FB48D720BC373&FORM=VIRE

Ryan also made it clear that he was extremely grateful because Trump was the first time Republican Presidential candidate to win Wisconsin’s electoral votes, his home state, since 1984.  Ryan also stated that Trump had coat tails.  Trump’s victory allowed down ballet Republicans to win.  The most important example of that was Wisconsin Republican Senator Ron Johnson, who was in a very tough reelection campaign.  Trump’s victory helped Ron Jonson win and allowed the Republicans to hold on to the Senate by a 51 to 49 plurality.

The simple political reality is that Trump’s victory allowed the Republicans to hold a majority in the Senate and the House.

As Paul Ryan stated,

“Donald Trump heard a voice in this country that no one else heard.  He connected in ways with people that no one else did.  He turned politics on its head.  And now Donald Trump will lead a unified Republican government.”

There is no way that Paul Ryan is going to oppose Trump and bring the TPP to the floor of Congress in the face of that political feat.  Let the next Administration deal with this issue.  As explained below, the TPP will probably stay dead until Congress and the Administration fix the Trade Adjustment Assistance for Firms/Companies program and make many US companies competitive again so they can withstand competition from imports.

It should be noted that those Republicans that distanced themselves from Trump, such as Republican Senator Kelly Ayotte of New Hampshire, lost their races.  In light of the Trump victory and his opposition to Trump, Governor John Kasich will have little weight when he argues for the TPP.

TRUMP’S PROTECTIONIST ARGUMENT TO THE RUST BELT STATES DROVE HIS VICTORY

The big surprise in the Trump victory was that traditionally Democratic states, the Rust Belt, of Wisconsin, Michigan and Pennsylvania and Ohio all went for Trump.  To illustrate the shock to the Democratic party, Hilary Clinton did not even campaign in the State of Wisconsin because the Democrats assumed they had Wisconsin in the bag.  Why did these Rust Belt states go for Trump?  Trade.

The person who forecast this victory was Michael Moore, the very famous Democratic gadfly and movie producer.  In a true statement against interest, last summer Michael Moore explained why he, the Good Democrat, believed that Trump would win the election—the Rust Belt and Trade.  http://michaelmoore.com/trumpwillwin/.  Donald Trump spoke out against the US automobile companies moving their manufacturing to Mexico.  Trump threatened that if they did, a President Trump would impose a 35% tariff on all these cars coming back to the United States.  The Auto executives were stunned, but the Working Class in Michigan stood up and cheered.  See Moore’s powerful video predicting the Trump victory https://www.youtube.com/watch?v=YKeYbEOSqYc.  As Moore stated, Donald Trump is the “human Molotov cocktail” that these working people want to throw through the establishment window.

After the election, Moore also made it clear that it was not racism that allowed Trump to win.  As Moore stated, millions of Americans, who voted for Barak Hussein Obama for two terms, voted for Donald Trump.  See Moore’s video at http://dailycaller.com/2016/11/11/michael-moore-millions-of-trump-voters-elected-obama-twice-theyre-not-racist-video/.  To paraphrase Bill Clinton, the reason Trump won was “the economy stupid” and one of the major economic issues was trade.

Ohio’s Cuyahoga County Republican Party Chairman Robert S. Frost stated that he believes that Trump’s trade message had a deep and profound effect on the regional electorate in Ohio:

“The economy has been going gangbusters, the U.S. has been expanding its trade relationships … but there are people here who [were] working, at many times, very skilled jobs that they took a great deal of pride in. They felt like they were left behind in this economy, and Donald Trump spoke right to that in places like Youngstown to Detroit to Milwaukee.”

Exit polls showed that half of Michigan’s voters are of the opinion that free trade takes away jobs, and those trade skeptics broke for Trump by a 57 to 36 percent margin over Democratic nominee Hillary Clinton.  There are similar stories to be found in Ohio and Pennsylvania, where 47 percent and 53 percent of voters respectively felt that free trade hurts workers and jobs.

Trump’s arguments are the same protectionist arguments that Rust Belt Democrats have used to be elected for decades, but the Workers had seen no change.  By upending conventional Republican wisdom on trade, Trump opened the door to a whole new group of voters.  These workers in the Rust Belt are Nixon’s Silent Majority, the Reagan Democrats, that went for Trump.

As Frost further stated:

“Organized labor had thought that the Democrats had had their backs for the last 25 years, but they look around and see where they are, and they wonder why they had placed their faith there. Donald Trump went against what had been Republican orthodoxy on trade. Part of how we got there is that Hillary Clinton … began taking an internationalist position of trade for trade’s sake, as opposed to representing an American position on trade.”

Trump appealed to the emotions of workers who felt wronged by a steady pattern of trade liberalization that is, in their minds, was about to get much worse if the U.S. Congress had been able to ratify the Trans-Pacific Partnership accord,

On October 18, 2016 in an article in Real Clear Politics entitled “The Trump Trade Doctrine: A Path to Growth & Budget Balance”. Wilbur Ross & Peter Navarro explained why they believed the Trump Trade Policy would work:

Budget-deficit hawks often insist that the only way to balance the Federal budget is to raise taxes or cut spending. The far smarter path to balance the budget is simply to grow our economy faster.

From 1947 to 2001, the U.S. real gross domestic product grew at an annual rate of 3.5 percent. Since 2002, that rate has fallen to 1.9 percent — at the cost of millions of jobs and trillions of dollars of additional income and tax revenues.

Donald Trump’s economic plan will restore America’s real GDP growth rate to its historic norm.  It proposes tax cuts, reduced regulation, lower energy costs, and eliminating America’s chronic trade deficit. . . .

This new normal argument — it should more appropriately be called the “new dismal” — also ignores the self-inflicted negative impacts from poorly negotiated trade deals and the failure to enforce them. These bad deals include, most notably, NAFTA, China’s entry into the World Trade Organization in 2001, and, most recently, Hillary Clinton’s debilitating 2012 U.S.-Korea Free Trade Agreement.

In 2012, then Secretary of State Hillary Clinton promised that the “cutting edge” South Korean deal would create 70,000 new jobs. Instead, the US has lost 95,000 jobs and America’s trade deficit with South Korea has roughly doubled. Moreover, workers in the U.S. auto industry, particularly in states such as Michigan, Ohio, and Indiana, have been hard hit. . . .

Donald Trump has pledged to renegotiate every one of America’s bad trade deals according to the principles of the Trump Trade Doctrine. The Trump Trade Doctrine states that any new or renegotiated deal must increase the GDP growth rate, decrease the trade deficit, and strengthen the U.S. manufacturing base. . . .

Some critics will argue that reducing the flow of cheap imports from locales such as China, Mexico, and Vietnam will be inflationary and act as a regressive tax by denying lower-income households cheap imports. In reality, four decades of one-sided globalization and chronic trade deficits have shifted wealth and capital from workers to the mobile owners of capital and reduced the purchasing power of Americans.

A visit to cities like Johnstown, Pennsylvania, and Flint, Michigan, reveals quickly the falsehoods and broken promises of those who preach the gains from trade deficits — which are often financed by those who turn a profit from offshoring production. Trump’s proposals will reverse these trends, concentrate more wealth and purchasing power in the hands of domestic workers and result in substantially higher employment. This will more than offset any price increases. Moreover, as products develop a competitive advantage in America and increase their production and margins, prices per unit will go down.

To those alarmists who insist Trump’s trade policies will ignite a trade war, we say we are already engaged in a trade war — a war in which the American government has surrendered in before even engaging. Unfair trade practices and policies of our competitors are simply overlooked or ignored. As a well-documented result, America has already lost tens of thousands of factories, millions of jobs, and trillions in wages and tax revenues.

Donald Trump will simply put our government on the field in defense of American interests. As Trump pursues a policy of more balanced trade, our major trading partners are far more likely to cooperate with an America resolute about balancing its trade than they are likely to provoke a trade war.

This is true for one very simple reason: Our major trading partners and deficit counterparties are far more dependent on our markets — the largest in the world — than we are on their markets.

Consider that in 2015, we ran a trade deficit in goods of $746 billion. 76 percent of that trade deficit in goods concerned just four countries: China ($367 billion); Germany ($75 billion); Japan ($69 billion); and Mexico ($61 billion).

If we look at the bilateral relationships of America with each of these countries, improvement in our trade balance is clearly achievable through some combination of increased exports and reduced imports, albeit after some tough, smart negotiations — an obvious Trump strength.   The same possibilities exist with countries where we are running smaller, but nonetheless significant, deficits, such as Vietnam ($31 billion), South Korea ($28 billion), Italy ($28 billion), and India ($23 billion).

Such deficit reduction negotiations will not be wild-eyed, hip-shooting exercises. A key part of the Trump strategy will be to divert some of the products our deficit counterparties import to U.S. suppliers.

For example, many of our trading partners with which we run large trade deficits import substantial hydrocarbons from elsewhere. It would not be difficult for, say, China, Japan, Germany, and South Korea to buy more U.S. hydrocarbons. Trump intends to end the regulatory constraints on hydrocarbon production and hydrocarbon exports, resulting in as much as $95 billion gains for the U.S.

Our deficit counterparties also import lots of industrial equipment and supplies of plastics and other materials, some from the U.S. already. There is ample room here for them — along with countries like India, Mexico, and Vietnam — to switch vendors.

Trump’s strategic approach to trade negotiations would begin with product-by-product and country-by-country analyses. Our negotiators would set goals that are achievable and pursue them fiercely. No prior administration has ever approached trade as surgically as a Trump Administration would.

As a business person, rather than a politician, Trump understands this: There is no more reason to let our major trading partners take advantage of us than there is for a large private company to permit its vendors to do so.

You will notice we have not mentioned tariffs. They will be used if necessary against mercantilist cheating, but only in a very precise and defensive way.

Ultimately, our view is that doing nothing about unfair trade practices is the most hazardous course of action — and the results of this hazard are lived out every day by millions of displaced American workers and deteriorating communities. We simply cannot trade on their one-sided terms; they are just too destructive to the U.S. growth process.

At the end of the day — and on November 8th — voters have a very clear choice between Trump’s smart path to rapid growth and budget balance and Hillary Clinton’s new dismal world of economic stagnation. At least on the economy, this choice is clear.

Emphasis added.

The problem with the argument, however, is that it is based on the economic situation decades ago when the US was the largest market in the World.  That is no longer true.  China with its 1.2 billion population has a larger market than the US.  House Speaker Paul Ryan has cited many times that 75% of the World’s consumers are outside the United States.

The real problem with Trump’s trade policy is uncertainty.  No one knows how aggressive Trump will be in a new Administration.  Through the Commerce Department self-initiating antidumping and countervailing duty cases and bringing Section 201 Escape Clause cases against the World, a President Trump can certainly increase protectionist barriers in the US.

A President Trump can unravel NAFTA and dump the TPP, but if the US erects substantial barriers to US imports, countries around the World will respond by increasing barriers to US exports.

NOT RETALIATION RECIPROCITY

The problem with protectionism is that trade is a two-way street and what the US can do to countries, they can do back.  In my last blog post, I stated that although many US politicians, including Donald Trump, want to adopt a mercantilist trade policy which favors pushing exports and protecting US industries from imports, the US politicians simply do not understand retaliation.  In this blog post, I want to restate this because the issue is not retaliation.  It is reciprocity.

Retaliation implies a tit for tat response.  You attack us.  We attack you.  The United States files an antidumping case targeting $4 billion in imports of Solar Cells from China, and China responds with a meritless Chinese antidumping case targeting $2 billion in imports of Polysilicon from the United States.  But that is not what truly happened.  In the Chinese polysilicon case, for example, the Chinese polysilicon industry was truly being hurt by US imports.

The real issue is reciprocity.  If the US can use its antidumping and countervailing duty laws to find dumping and subsidization in more than 90% of the cases, the Chinese governments and governments around the World can make the same finding with regards to imports from the United States.  What goes around comes around.

Free trade agreements, such as the TPP and the TTIP, which would break this cycle are now dead as the US and each country wants to put its industries first and make their country and industries great again.  The rise in economic nationalism results in trade wars in which country after country will fire trade guns against each other.

The argument that trade wars are already going on is true, but what the pundits do not realize is that under Trump the trade wars will get bigger.  The US has antidumping and countervailing duty orders covering $30 billion in imports from China.  The Chinese government has orders blocking about $10 billion in imports from the US, including polysilicon, chicken, numerous chemical products, and steel products.  Just recently, the Chinese government has issued an antidumping order blocking over $1 billion in Chinese imports from the United States of distiller grains, and now there is talk about a case targeting $15 billion of imports of US soybeans.  What goes around comes around.

In a November 11th editorial, entitled “The Message Of Donald Trump’s Stunning Victory” the International Business Daily stated that the one policy which has to be reined in by Republicans in Congress is trade:

“Republicans will also have to work hard to temper Trump’s anti-free-trade instincts.  A trade war is the one big risk Trump’s presidency represents for the economy.  Trump has repeatedly the he is all in favor of free trade, and the GOP needs to hold him to those words.”

TRADE IS FALLING AROUND THE WORLD

Moreover, on October 30, 2016, Binyamin Applebaum in an article entitledA Little-Noticed Fact About Trade: It’s No Longer Rising” found that trade around the world is dropping, including a drop of $200 billion in US exports:

“The growth of trade among nations is among the most consequential and controversial economic developments of recent decades. Yet despite the noisy debates, which have reached new heights during this Presidential campaign, it is a little-noticed fact that trade is no longer rising. The volume of global trade was flat in the first quarter of 2016, then fell by 0.8 percent in the second quarter, according to statisticians in the Netherlands, which happens to keep the best data.

The United States is no exception to the broader trend. The total value of American imports and exports fell by more than $200 billion last year. Through the first nine months of 2016, trade fell by an additional $470 billion It is the first time since World War II that trade with other nations has declined during a period of economic growth. . ..

But there are also signs that the slowdown is becoming structural.  Developed nations appear to be backing away from globalization.

The World Trade Organization’s most recent round of global trade talks ended in failure last year. The Trans-Pacific Partnership, an attempt to forge a regional agreement among Pacific Rim nations, also is foundering. It is opposed by both major-party American presidential candidates. Meanwhile, new barriers are rising. Britain is leaving the European Union. The World Trade Organization said in July that its members had put in place more than 2,100 new restrictions on trade since 2008.

“Curbing free trade would be stalling an engine that has brought unprecedented welfare gains around the world over many decades,” Christine Lagarde, managing director of the International Monetary Fund, wrote in a recent call for nations to renew their commitment to trade. . . .

But even if growth rebounds, automation reduces the incentives to invest in the low- labor-cost developing world, and it reduces the benefits of such investments for the residents of developing countries.”

UNFAIR TRADE CASES DO NOT WORK; THEY DO NOT SAVE THE US COMPANIES

The problem with the potential Trump policy of bringing more unfair trade cases to solve the trade problem is that trade cases do not work.  They do not save the companies and the jobs that go with them.

Bethlehem Steel, a history that I am personally aware of, had 40 years of protection from steel imports through various antidumping and countervailing duty cases and orders.  Where is Bethlehem Steel today? Green fields.

Trying to stop a wave of low priced imports by filing an unfair trade cases is like putting finger in a dike when faced with a tidal wave engulfing the entire company and industry.

When an industry and company is faced with competition from imports it is so easy to engage in globalization/international trade victimhood.  We poor US companies cannot compete because all imports are dumped and subsidized.

For countries and companies faced with import competition, the easy solution is blame the foreigner.  The only way for a company to truly survive, however, is give up the globalization victimhood mindset and do what is necessary to make the company competitive again.

EXISTING PROGRAMS TO MAKE US MANUFACTURING COMPANIES MORE COMPETITIVE IS THE ANSWER TO THE TRADE PROBLEM — TAA FOR FIRMS/COMPANIES AND THE MEP MANUFACTURING PROGRAM– BUT THEY HAVE BEEN CUT TO THE BONE

As described in my September newsletter and uschinatradewar.com blog post, which can be found at http://uschinatradewar.com/us-china-trade-war-tpp-politics-taaf-the-answer-2-billion-missing-dumping-duties-as-cases-rise-customs-law-changes-solar-cells-337-customs-stop-infringing-imports/, free trade requires competitive US companies and industries.  For the US government to go forward with a free trade agenda and the passage of free trade agreements, it must restore the trade safety net.

The US Government already has successful programs to make US companies injured by imports competitive again, but they have been cut to the bone. Companies and Unions that want to take advantage of these programs and survive must first change their mindset and reject the defeatism of international trade/globalization victimhood.

Those programs are:

  • Trade Adjustment Assistance for Firms (Commerce)
  • The Hollings Manufacturing Extension Partnership (Commerce)

Economists and policy makers of all persuasions are now beginning to recognize the requirement for a robust response by this nation to foreign imports – irrespective of party affiliation or the particular free trade agreement under consideration at any given moment.  Companies, workers and Government officials need to stop blaming the foreigner and figure out what they can do to compete with the foreign imports. These two programs make US companies injured by imports competitive again.

Free trade does not have to be abandoned resulting in a lose lose situation for all countries.  When the US Government enters into Trade Agreements, such as NAFTA, the TPP, or the TTIP, Government action changes the market place.  All of a sudden US companies can be faced with a series of flash floods of foreign competition and imports that can simply wipe out US companies.  The US Government must restore the international trade safety net.

A starting point for a trade adjustment strategy would be for a combined Commerce-Labor approach building upon existing authorities and proven programs, that can be upgraded and executed forthwith.

Commerce’s Trade Adjustment Assistance for Firms (TAAF) has 11 regional (multi-state) TAAF Centers but the program has been cut to only $12.5 million annually. The system has the band-width to increase to a run rate of $50 million.  Projecting a four-year ramp up of $90 million (FY18-FY21), the TAA program could serve an additional 2,150 companies.

Foreign competitors may argue that TAA for Firms/Companies is a subsidy, but the money does not go directly to the companies themselves, but to consultants to work with the companies through a series of knowledge-based projects to make the companies competitive again.  Moreover, the program does not affect the US market or block imports in any way.

Does the program work?  In the Northwest, where I am located, the Northwest Trade Adjustment Assistance Center has been able to save 80% of the companies that entered the program since 1984.  The Mid Atlantic Trade Adjustment Assistance Center in this video at http://mataac.org/howitworks/ describes in detail how the program works and saved four companies and the jobs that go with them.  The reason TAA for Firms/Companies is so successful—Its flexibility in working with companies on an individual basis to come up with a specific adjustment plan for each company to make the companies competitive again in the US market as it exists today.

Increasing funding will allow the TAA for Firms/Companies program to expand its bandwidth and provide relief to larger US companies, including possibly even steel producers.  If companies that use steel can be saved by the program, why can’t the steel producers themselves?

But it will take a tough love approach to trade problems.  Working with the companies’ management and the Union to forget about Globalization victimhood and start trying to actually solve the Company’s problems that hinder its competitiveness in the market as it exists today.

In addition to TAA for Firms/Companies, another important remedy needed to increase competitiveness is Commerce’s Manufacturing Extension Partnership (MEP), which has a Center in each State and Puerto Rico.  MEP provides high quality management and technical assistance to the country’s small manufacturers with an annual budget of $130 million. MEP, in fact, is one the remedies suggested by the TAA Centers along with other projects to make the companies competitive again.

As a consequence of a nation-wide re-invention of the system, MEP is positioned to serve even more companies. A commitment of $100 million over four years would serve an additional 8,400 firms. These funds could be targeted to the small manufacturing firms that are the base of our supply chain threatened by foreign imports.

Each of these programs requires significant non-federal match or cost share from the companies themselves, to assure that the local participants have significant skin in the game and to amplify taxpayer investment.  A $250 million commitment from the U.S. government would be a tangible although modest first step in visibly addressing the local consequences of our trade policies. The Department of Commerce would operate these programs in a coordinated fashion, working in collaboration with the Department of Labor’s existing Trade Adjustment Assistance for Displaced Workers program.

TAA for Workers is funded at the $711 million level, but retraining workers should be the last remedy in the US government’s bag.  If all else fails, retrain workers, but before that retrain the company so that the jobs and the companies are saved.  That is what TAA for Firms/Companies and the MEP program do.  Teach companies how to swim in the new market currents created by trade agreements and the US government

In short – this serious and multi-pronged approach will begin the process of stopping globalization victimhood in its tracks.

Attached is a longer proposal, taaf-2-0-white-paper, on how to expand TAA for Firms/Companies and the MEP Program to make US companies more competitive again.

UNDER TRUMP TRADE CONFLICTS WITH CHINA WILL INCREASE

As readers may remember, my deep dive on the background of this election started with a February conversation and bet with my friend, former Democratic Congressman Don Bonker.  He firmly believed that Hilary Clinton would win in a landslide and the Democrats would win the Senate and the House.

I knew people that were going to vote for Trump and believed that although Clinton would probably win, it would be a close election and the Republicans would probably keep the Senate and definitely the House.  Trump won the election and the Republicans kept the Senate and the House.

Set forth below are Congressman Bonker’s thoughts on what he believes the Trump election means for future US Trade Policy regarding China.

‘Election Results:  U.S. China Relationship

Prepared by: Congressmen Don Bonker (Democrat)

Winston Churchill’s characterization of “democracy as the worst form of government except for all the others” was on full display in America’s 2016 presidential election.   Yesterday’s torrent of election results is revealing of America’s challenges ahead, not only domestically but internationally.  This report is focused on how the election results will affect the U.S. – China relationship.

CANDIDATES WEBSITE/POSITIONS ON CHINA

Hillary Clinton

Increase cooperation in areas of common interest

Reinforce alliances in the Asia-Pacific

Ratchet up the U.S. deterrent against Chinese cyberattacks

Take a stronger stance against China’s human rights record

Donald Trump

Increase U.S. military presence in and around the South China Sea

Investigate and punish China for unfair trade practices

Designate China a currency manipulator

Ratchet up the U.S. deterrent against Chinese cyberattacks

PRESIDENTIAL ELECTION RESULTS.   U.S. presidents are not elected by the popular vote but the so-called Electoral College – each of the 50 states select “electors” equal to the number of Congressmen — that determines the outcome.  The margin is significant in that a sweeping victory with over 300 electoral votes will demonstrate a public mandate that will make the newly elected Presidents’ governing more effective.  This year, Donald Trump’s victory with 289 electoral votes [which is now with Michigan and Arizona 309 votes] is not a big margin but his party being in control of both the Senate and House of Representatives, is a sufficient mandate, something of a populist uprising not seen in recent years.

The election of Donald Trump was unexpected and shocking, even troubling to many in the U.S. and around the world.  The electoral vote is revealing of why and how he won the election – his anti-trade and immigration messages resonated in the four or five rust-belt states that were expected to vote for Hillary Clinton.   Not unlike the Brexit vote, he played to the anger and fear that was directed at Wall Street and Washington, D.C., a movement that will definitely take the country in a new and perilous direction.

Most disconcerting is how a President Trump will conduct foreign policy given that he has no experience compared to Hillary Clinton, who served as Secretary of State and was expected to continue the Obama Administration’s policies and alliances with other countries.  The U.S. China relationship is all about economics and trade, so his Seven-Step Trade Plan is an indication of what lies ahead:

Immediate withdraw from TPP and a renegotiation of NAFTA.

Appoint the “toughest and smartest trade negotiators.

Direct Department of Commerce to “identify every violation of trade agreements a foreign country is currently using to harm our worker” and direct all Federal agencies to use “every tool under American and international law” to end abuses.

Instruct the Treasury Department to label China a currency manipulator, promising that any international devaluation would be met with sharply through tariffs and taxes.

The U.S. Trade Representatives would be instructed to bring trade cases against Beijing under both U.S. laws and the WTO.

If China does not stop its illegal activities, Trump said he would invoke specific safeguards and tariff protections under Section 201 of the Trade Act of 1974.

U.S. China Relationship

In past years, presidential candidates have been known for their “tough talk on China” during campaigns but eventually succumb to the geopolitical realities once they become president.  Donald Trump has gone way beyond tough talk in that he has been relentless in his China bashing and threats to take punishing actions based on unfair trade practices.

More alarming have been his comments threatening the U.S. – China relationship, on one occasion stating that “I’d love to have a trade war with China…if we did no business with China, frankly we will save a lot of money.”  This hopefully is more about rhetoric than policy and a sitting President and his advisors will be more realistic and engage China in ways that will be mutually beneficial.

Ultimately, it’s not so much about the rhetoric and issues but the relationship between the two heads of state.  President Obama and President Xi Jinping had a “trust” working relationship that may not go as easily with Donald Trump, but he is a master negotiator who knows how to work out deals with others.  Much will also depend on who will be his cabinet ministers and senior advisors.

U.S. – International.    Donald Trump’s election has many world leaders concerned given his pledge of radical actions that will project a different America.  For the past 50 years, America has been the undisputed leader worldwide but that is about to change, partly because both Donald Trump’s election is rooted in American anxiety, placing the blame on globalization and trade deals for job losses and economic hardship.  In recent years partisanship and politicalizing of U.S. foreign policy has intensified in a way that inhibits a President’s ability maintain America’s leadership globally.

What does this mean in terms of America’s leadership internationally?  The reverberating message and new mandate that comes out of the election may be alarming to foreign leaders in that a Trump Administration’s foreign policy will be unpredictable, to be sure, on both the economic and geopolitical fronts that will lead to greater uncertainty.  It will definitely be more protectionist given Mr. Trump’s ranting that trade deals have caused job losses and economic hardship.  More perplexing is whether a Trump presidency will abandon America’s alliances and commitments and embark on a course that is more self-serving.

Regardless of who was elected, one of the realities will be China possibly surpassing America as the world’s most powerful nation, which will be a dramatic wake-up call for a country that has proudly embraced this status for the past hundred years.  A Trump presidency taking the country down the path of isolationism may have America backing away from its global responsibilities compared to China’s highly focused set of objectives and its growing presence internationally.  Indeed, China has wisely avoided involvement in geopolitical and security issues, such as the Middle East, and instead is concentrating on economic and investment development, which rapidly advances their leadership standing around the world.

CONGRESSIONAL ELECTIONS    

Two weeks before the election, the Democrats were expected to take control of the U. S. Senate hopefully gaining enough seats to be the Majority Party that would be fully supportive of a Hillary Clinton presidency.  Instead the Republicans will now control both branches of the U.S. government.  However, it will not represent a consensus or cooperation given the deep divisions within the Republican Party, particularly how the Trump candidacy shattered political convention by criticizing Congressional leaders and charting his own path

U.S. Senate.  The Constitution specifies that one-third of the Senate positions are up every election year, which worked to the advantage of Democrats since most of the ballot positions were Republicans.  Yet the election results favored the Republicans who will maintain their 51-45 advantage for the next two years.  The Senate has the Constitutional authority to approve treaties and appointments to high-level positions and ambassadors.  There should be cooperation, given that the same party controls both branches, but Donald Trump has defied the conventional approach to doing business, so this will add to the uncertainty.

House of Representatives.  For the past six years the Republicans have been in control with a significant margin, despite divisions of within the Party that inhibits their ability to be productive.  Prior to the election, the Republicans held 247 of the 435 seats that are up for election every year, a safe margin.  While the Democrats did pick up eleven of the Republican held seats they will continue as the Minority Party for the next few years.

The same party in control of the White House and Congress would normally make for a productive session, but uncertainty lingers given the troubled relationship between Donald Trump and Speaker Paul Ryan.  Prior to the elections, a fractured Republican Party has been unified only by its opposition to President Obama’s policies, like Obamacare, so many questions remain about how the Speaker will preside over his own problems as he prepares to work with a Trump Administration.

In contrast to Congressman Bonker, my belief is that the US China relationship may, in fact, work out better than people think under President Trump.  While in China last month I met many Chinese who liked Trump, despite his trade policy, which was enlightening.

Although Trump will be tough in trade negotiations, Trump is a business man and likes to do deals.  That means he is truly open to negotiations.

Also many Conservative publications, such as the Wall Street Journal and Investors Business Daily (“IBD”), believe that Republican Congressional leaders, such as House Speaker Paul Ryan, may be able to prevent Trump from starting an all-out, hot, trade war against China.

But the US China cold trade war will definitely continue as there will be more US trade actions against China, and more Chinese trade actions against the US.  Both countries will feel the pain.

But the relationship will become even more complicated as the EC in response to the WTO December 11, 2016 deadline to grant China market economy status proposed on November 9th amending its antidumping and countervailing law to provide that although for WTO members normal value is determined on the basis of actual prices and costs in the foreign market, in certain circumstances, e.g., China, where prices and costs are distorted because of government intervention and not free market forces, the EC Commission can look at prices and costs outside China.

EC PROPOSES CHANGES TO ITS ANTIDUMPING AND COUNTERVAILING LAW TO IN EFFECT CONTINUE TO TREAT CHINA AS A NONMARKET ECONOMY COUNTRY

On November 9, 2016 the European Commission issued the attached proposed “Regulation of the European Parliament and Of The Council,” ec-china-market-economy-regs, on the way to calculate normal value for certain nonmarket economy countries, specifically China.

The EC Commission has proposed amending its antidumping law to provide that although for WTO members normal value is determined on the basis of actual prices and costs in the foreign market, in certain circumstances, where prices and costs are distorted because of government intervention and not free market forces, e.g., China, the EC Commission can look at prices and costs outside China, stating specifically if:

domestic prices and costs would not provide a reasonable basis to determine the normal value. This could be the case, for instance, when prices or costs are not the result of free market forces because they are affected by government intervention. Relevant considerations in this respect include, for instance, the fact that the market in question is to a significant extent served by enterprises which operate under the ownership, control or policy supervision or guidance of the authorities of the exporting country; the state presence in firms allowing the state to interfere with respect to prices or costs; the existence of public policies or measures discriminating in favour of domestic suppliers or otherwise influencing free market forces; and the access to finance granted by institutions implementing public policy objectives.

In such circumstances, it would be inappropriate to use domestic prices and costs to determine the value at which the like product should be normally sold (“the normal value”) and a new provision (Article 2(6)a) stipulates that the normal value would instead be constructed on the basis of costs of production and sale reflecting undistorted prices or benchmarks. For this purpose, the sources that may be used would include undistorted international prices, costs, or benchmarks, or corresponding costs of production and sale in an appropriate representative country with a similar level of economic development as the exporting country.

This methodology would allow the Commission to establish and measure the actual magnitude of dumping being practised in normal market conditions absent distortions.

For the sake of transparency and efficiency, the Commission services intend to issue public reports describing the specific situation concerning the market circumstances in any given country or sector. Of importance, the EU industry would be in a position to rely on and refer to the information contained in these reports when alleging in a complaint or a request for review that the domestic prices and costs in the exporting country are unsuitable to determine the normal value. Such reports and the evidence on which it is based would also be placed on the file of any investigation relating to that country or sector so that all interested parties would be in a position to express their views and comments.  . . .

In the light of experience gained in past proceedings, it is appropriate to clarify the circumstances in which significant distortions affecting to a considerable extent free market forces may be deemed to exist. In particular, it is appropriate to clarify that this situation may be deemed to exist, inter alia, when reported prices or costs, including the costs of raw materials, are not the result of free market forces because they are affected by government intervention. It is further appropriate to clarify that in considering whether or not such a situation exists regard may be had, inter alia, to the potential impact of the following: the market in question is to a significant extent served by enterprises which operate under the ownership, control or policy supervision or guidance of the authorities of the exporting country; state presence in firms allowing the state to interfere with respect to prices or costs; public policies or measures discriminating in favour of domestic suppliers or otherwise influencing free market forces; and access to finance granted by institutions implementing  public policy objectives. It is further appropriate to provide that the Commission services  may issue a report describing the specific situation concerning these criteria in a certain country or a certain sector; that such report and the evidence on which it is based may be placed on the file of any investigation relating to that country or sector . . . .

It is further appropriate to recall that costs should normally be calculated on the basis of records kept by the exporter or producer under investigation. However, where there are significant distortions in the exporting country with the consequence that costs reflected in the records of the party concerned are artificially low, such costs may be adjusted or established on any reasonable basis, including information from other representative markets or from international prices or benchmarks. In the light of experience gained in past proceedings, it is appropriate to further clarify that, for the purposes of applying the provisions introduced by this regulation, due account should be taken of all relevant evidence, including relevant assessment reports regarding the circumstances prevailing on the domestic market of the exporting producers and the evidence on which they are based, which has been placed on the file, and upon which interested parties have had an opportunity to . . .

Article 1

Regulation (EU) 2016/1036 is amended as follows:

In Article 2 the following paragraph 6a is inserted:

‘6a. (a) In case it is determined, when applying this provision or any other relevant provision of this Regulation, that it is not appropriate to use domestic prices and costs in the exporting country due to the existence of significant distortions, the normal value shall be constructed on the basis of costs of production and sale reflecting undistorted prices or benchmarks. For this purpose, the sources that may be used include undistorted international prices, costs, or benchmarks, or corresponding costs of production and sale in an appropriate representative country with a similar level of economic development as the exporting country, provided the relevant cost data are readily available. The constructed normal value shall include a reasonable amount for administrative, selling and general costs and for profits.

Significant distortions for the product concerned within the meaning of point (a) may be deemed to exist, inter alia, when reported prices or costs, including the costs of raw materials, are not the result of free market forces as they are affected by government intervention. In considering whether or not significant distortions exist regard may be had, inter alia, to the potential impact of the following: the market in question is to a significant extent served by enterprises which operate under the ownership, control or policy supervision or guidance of the authorities of the exporting country; state presence in firms allowing the state to interfere with respect to prices or costs; public policies or measures discriminating in favour of domestic suppliers or otherwise influencing free market forces; and access to finance granted by institutions implementing public policy objectives.

In Article 11(4), the following subparagraph is added:

‘In the case of a transition from a normal value calculated pursuant to the former Articles 2(7)(a) or 2(7)(b) to a normal value calculated pursuant to paragraphs 1 to 6a of Article 2, any review pursuant to this paragraph shall be deferred to the date on which the first expiry review following such transition is initiated.’

STEEL TRADE CASES

CERTAIN CARBON AND ALLOY STEEL CUT TO LENGTH PLATE FROM AUSTRIA, BELGIUM, CHINA, FRANCE GERMANY, ITALY, JAPAN, KOREA AND TAIWAN

On November 7, 2016, in the attached fact sheet, factsheet-multiple-ctl-plate-ad-prelim-11082016, Commerce announced its affirmative preliminary determinations in the antidumping duty investigations of imports of certain carbon and alloy steel cut-to-length plate from Austria, Belgium, China, France, Germany, Italy, Japan, Korea, and Taiwan.

For Austria, the antidumping rate is 41.97%.  For Belgium, the antidumping rate ranges from 2.41 to 8.5%.  For China, the antidumping rate is 68.27%.  For France, the antidumping rate ranges from 4.26 to 12.97%.  For Germany, the antidumping rate ranges from 0 to 6.56%.  For Italy, the antidumping rate ranges from 6.10 to 130.63%.  For Japan, the antidumping rate ranges from 14.96 to 48.64%.  For Korea the antidumping rate is 6.82%.  For Taiwan, the antidumping rate ranges from 3.51 to 28%.

CIRCULAR WELDED CARBON-QUALITY STEEL PIPE FROM OMAN, PAKISTAN, UNITED ARAB EMIRATES, AND VIETNAM

On October 24, 2016, Commerce in the attached fact sheet, pipe, announced its affirmative final determinations in the antidumping duty (AD) investigations of imports of circular welded carbon- quality steel pipe from Oman, Pakistan, the United Arab Emirates, and Vietnam, and countervailing duty (CVD) investigation of imports of circular welded carbon-quality steel pipe from Pakistan.

For Oman, the antidumping rate is 7.24%.  For Pakistan, the antidumping rate is 11.08% and the countervailing duty rate is 64.81%.  For United Arab Emirates the antidumping rates range from 5.58% to 6.43%.  For Vietnam the antidumping rate ranges from 0 to 113%

FOREIGN ANTIDUMPING AND COUNTERVAILING DUTY LAW AND CASES

UNIVERSAL TRADE WAR CONTINUES

With the election of Donald Trump, as stated in my last newsletter, the Universal Trade War will continue.  In addition to the US bringing antidumping and countervailing duty cases, countries around the World, such as EC, Canada, Mexico, Brazil, Argentina, India, Turkey, Ukraine, Russia, China, Indonesia, Malaysia, Korea, Japan, Taiwan, Australia Thailand, South Africa, and Vietnam, all are filing antidumping and countervailing duty cases against each other and the United States.  These countries have adopted the US law which finds dumping in 90% of the cases.  The US and the EC have created a Frankenstein in the antidumping law and the whole World has adopted it.

Compromise is the best way to settle trade disputes, but it is very difficult, if not impossible, to settle US antidumping and other trade cases.  What is “fair” trade for the United States is “fair” trade for every other country.  Many countries want to make their industries Great again.

Because of this situation, this part of the newsletter will concentrate on antidumping and countervailing duty cases in other countries.

CHINA

Set forth below are two articles by Chinese trade lawyers on how to respond in Chinese trade cases against the United States and other countries.

ROLAND ZHU, ALLBRIGHT LAW FIRM

A General Description of Anti-Dumping Regulation

of the People’s Republic of China

by Roland Zhu, Allbright Law Firm

In order to maintain foreign trade order and fair competition, China’s Ministry of Commerce (hereinafter referred to as “MOFCOM”) is responsible for conducting anti-dumping investigations against foreign exporters in case that imported products enter the market of the People’s Republic of China by way of dumping, and cause material damage or constitute a threat of material damage to an already established domestic industry, or cause a material impediment to the establishment of a domestic industry in accordance with the Foreign Trade Law of the People’s Republic of China, Regulations of the People’s Republic of China on Anti-Dumping and Interim Rules on Placing Cases on File for Antidumping Investigations, which are effective and applicable law.

Where there exists dumping or may exist dumping, an anti-dumping investigation may arise. A complete set of anti-dumping investigation procedure usually follows these steps:

  1. MOFCOM may place a case on file for antidumping investigations upon the application of an applicant; it may also place a case on file on its own initiative for anti-dumping investigations.
  2. MOFCOM shall, within 60 days as of its receipt of the application letter and the relevant evidence submitted by the applicant, examine whether the application is filed by the domestic industry or filed by representing the domestic industry, the contents of the application letter and the evidence attached to it, etc., and shall decide to initiate an investigation or not. Prior to the decision to initiate an investigation, the government of the exporting country (region) concerned shall be notified.
  3. MOFCOM shall publish the decision to initiate an investigation and notify the applicant, the known exporters and importers, the government of the exporting country (region) and other interested organizations and parties (hereinafter collectively referred to as “the interested parties”). As soon as the decision to initiate an investigation is published, MOFCOM shall provide the full text of the written application to the known exporters and the government of the exporting country (region).
  4. MOFCOM may conduct an investigation and collect information from the interested parties by, among other methods, sending questionnaires, using samples, holding public hearings and making on-the-spot verification.
  5. MOFCOM shall, on the basis of its findings, make a preliminary determination on dumping and injury, as well as on whether there exists a causal link between dumping and injury. The preliminary determination shall be published by MOFCOM.
  6. In cases where a preliminary determination on dumping, injury and the causal link between the two is affirmative, MOFCOM shall conduct further investigations on dumping, the dumping margin, the injury and its degree, and, make a final determination on the basis of its findings. The final determination shall be published by MOFCOM. Before the final determination is made, MOFCOM shall inform all known interested parties of the essential facts on which the final determination is based.
  7. An anti-dumping investigation shall be concluded within 12 months from the date of publication of the decision to initiate the investigation, and the period may be extended in special circumstances, but in no case shall the extension be more than 6 months.
  8. The anti-dumping measures taken by MOFCOM shall include provisional anti-dumping measures, price undertakings and anti-dumping duties. The period for applying the provisional anti-dumping measures shall not exceed four months from the effective date set forth in the public notice regarding the decision on provisional anti-dumping measures, and, in special circumstances, may be extended to nine months. The period for the levy of an anti-dumping duty and fulfillment of a price undertaking shall not exceed five years, and may be extended if, as a result of the review, it is determined that the termination of the anti-dumping duty would possibly lead to continuation or recurrence of dumping and injury.
  9. The review proceedings shall be conducted with reference to the relevant provisions of Regulations of the People’s Republic of China on Anti-Dumping. Any review shall be concluded within 12 months from the date of the decision of initiation of such a review.

Answers to General Questions about Chinese Antidumping cases are listed below or you may refer to the general description of Chinese anti-dumping regulations.

  1. Information on recent cases filed in China against other countries

Answer: Please see the table below, which summarizes recent cases filed in China during the year of 2016 against other countries are:

Initiation Date  Subject Merchandise  Investigation Type  Countries

1/12/2016  Dried Distiller Grains        AD and CVD             USA

2/5/2016    Pyridine                                AD Interim Review  Japan and India

4/20/2015   Vinyldine Chloride           Initial AD Review       Japan

Vinyl Chloride Copolymer Resin

9/22/2016     Sugar                        Safeguard       Multiple Countries  including Brazil/Argentina

  1. What agency makes the AD and CVD decision? What agency makes the injury determination? How long does the initial investigation take?  Are there mandatory companies?

Answer: The Trade Remedy and Investigation Bureau of the Ministry of Commerce of the People’s Republic of China (the “Bureau”) makes the AD and CVD decisions as well as the injury determinations. An anti-dumping or countervailing investigation shall be concluded within 12 months from the date of publication of the decision to initiate the investigation, and the period may be extended in special circumstances, but in no case shall the extension be more than 6 months. There are mandatory companies in China’s AD investigation. The applicant, the known exporters and importers, the government of the exporting country (region) and other interested organizations and parties can register to the Bureau in order to participate in this anti-dumping investigation within 20 days from the date of promulgation of the initial announcement. The Bureau selects the respondents among those who have submitted dumping sampling questionnaire by using sampling survey. For other interested parties, including those are not chosen to answer the investigation questionnaire and those don’t register to the Bureau, the Bureau may make determinations on the basis of the facts already known and the best information available.

  1. Is the Chinese antidumping and countervailing duty law prospective or retrospective, retroactive liability? Is there a public interest test? Are there annual reviews?  How long do the orders stay in place?

Answer:  For retrospective issues you mentioned above, according to the Article 93 of Legislation Law of the People’s Republic of China, Chinese antidumping and countervailing duty law shall not be retroactive, but the regulations formulated specially for the purpose of better protecting the rights and interests of citizens, legal persons and other organizations are excepted. The period for the levy of an anti-dumping duty shall not exceed 5 years, and may be extended as appropriate if, as a result of the review, it is determined that the termination of the anti-dumping duty would possibly lead to continuation or recurrence of dumping and injury. A midterm review may be conducted upon request by the interested parties and on the basis of examination of the relevant evidence submitted by the interested parties.

  1. Are there special rules for Non Market Economy Countries?

Answer:  There are no such special rules in China.

Attached are several weekly newsletters, teams-newsletter-en-vol-2016-38 teams-newsletter-en-vol-2016-39 teams-newsletter-en-vol-2016-40, issued by Roland Zhu and his trade group at the Allbright Law Office.

FRANK HANG, GLOBAL LAW OFFICE

How Should Foreign Companies Respond to an Antidumping Investigation in China

  1. Definition of Dumping

According to Chinese Law, dumping consists of three factors-Dumping, Injury and Causation. As for the calculation of Dumping Margin, the following shall be taken into consideration:

  • Dumping Margin= (Normal Value-Export Price)/CIF Price
  • Normal Value and Export Price shall be compared on the same level, usually ex-factory level
  • Comparison: a. weighted average Normal Value to weighted average Export Price; b. transaction-to-transaction comparison of Normal Value and Export Price; c. weighted average Normal Value to each transaction Export Price.

When calculating the Normal Value, the following methods are chosen by MOFCOM:

  • Domestic Sales Price
  • Constructed Value=Production Cost + S G & A + Reasonable Profit
  • Export Price to a Third Country (Region)

In terms of category of AD Duty, China’s normal practice is to assign antidumping rates to producers, not trading companies. And there are 3 different types of rates for the enterprises to bear:

  • Individual Rate
  • Weighted Average Rate
  • Country-wide Rate (Best Information Available, BIA)

When it comes to Injury Analysis, several factors shall be considered by MOFCOM: Imported Volume, Imported Price and other factors such as actual and potential decline of domestic industry in sales, profits, output, market share, productivity, return on investment or utilization of capacity, etc., factors affecting domestic prices; the magnitude of the margin of dumping, the actual or potential negative effects of the dumped imports on the domestic industry’s cash flow, inventories, employment, wages, growth, ability of capital raising or investment, etc.

Cumulative Assessment means that the margin of dumping established in relation to the dumped imports from each country (region) is no less than 2 percent, and the volume of such imports from each country (region) is not negligible. It is negligible if the volume of the dumped imports from a particular country (region) is found to account for less than 3 percent of the total imports of the like products, unless countries (regions) which individually account for less than 3 percent of the total imports of the like products collectively account for more than 7 percent of the total imports of the like products.

  1. AD Investigating Procedures

In China, the AD Investigating Authority is MOFCOM Trade Remedy and Investigation Bureau who is not only in charge of determination of dumping margin but also in charge of determination of injury and causation. 

Following procedures in a Chinese AD Investigation Case: Filing of the Petition are:

Filing Responding Registration, Issuing Questionnaires, Submitting Questionnaire Responses, Preliminary Determination, Public Hearing, On-site Verification, Final Determination, Price Undertaking, Administrative Reconsideration, Administrative Lawsuit, Interim Review, Sun-set Review, New Shipper Review, etc.

Within 10 working days after the deadline of filing the responding registration, the investigating authority will issue questionnaires to the registered companies. If the registered companies are numerous, the investigating authority will use sampling (usually 2 mandatory companies for each country/area).

It is important to note that foreign producers/foreign exporters must submit their responding registration documents to the investigating authority within 20 days as of the date of initiation through a PRC practicing attorney or by themselves. If they fail to do so, foreign producers will be treated as non-cooperative and MOFCOM will use the best information available (“BIA”) to make determination.

For the respondents, when submitting Questionnaire Response, they need to keep in mind that the questionnaire response must be submitted to the investigating authority within 37 days as of the date of the issuance of the questionnaires. The responding companies may apply for extension and the investigating authorities usually only give an extension of 7 days. And the questionnaire responses must be submitted through a PRC practicing attorney. After receiving the questionnaire responses, the investigating authority will review them and issue the supplementary questionnaires if certain questions require clarification or explanation further.

In an Interim Review, an application for interim review shall be filed within 30 days as of the expiration date of each year after the effective date of AD measures. The producers applying for interim reviews must have exported the subject merchandise to China within a period of 12 months prior to the application, and the export referred must have been made in sufficient quantities.

  1. Key Points of AD Defense Strategies
  • Establishing an overall responding strategy before submitting the questionnaire responses to MOFCOM;
  • Collaborating with the respondent’s department of administration, sales, production, finance, in-house counsel, foreign attorneys, PRC attorneys closely and efficiently;
  • Accountant’s role is important in the calculation of dumping margin;
  • Well-prepared for on-site verification;
  • Communicating effectively with MOFCOM officials at different levels;
  • Cooperate with other respondents on non-injury defense;
  • Leverage the exporting country (region)’s government;
  • Obtaining support from importers and down-stream companies.

INDIA

Attached is a newsletter, ls-international-trade-amicus-september-2016, from the Lakshmikumaran & Sridharan Law Firm in New Delhi on Indian antidumping law.

CUSTOMS LAW

ALUMINUM EXTRUSIONS

On October 26, 2016, the Wall Street Journal in an article entitled “Homeland Security Probes U.S. Aluminum Firms Over Chinese Imports” reported that Federal investigators had launched an investigation into whether Liu Zhongtian, a Chinese billionaire and the founder and chairman of aluminum giant China Zhongwang Holdings Ltd., was engaged in transshipment of aluminum extrusions to the United States in violation of US civil and criminal laws.

Commerce is investigating whether a New Jersey company, Aluminum Shapes LLC, imported pallets to remelt as a way to avoid a countervailing duty rate of 374%, part of a broader probe into Mr. Liu’s activities. The Commerce Department said preliminary findings would be released in coming weeks. Aluminum Shapes last month denied that the pallets were used as raw material for its plant.

Homeland Security is also investigating whether nearly one million tons of aluminum shipped to Aluminicaste Fundición de México, a factory once owned by Mr. Liu’s son, were part of an effort to evade U.S. tariffs by routing the metal through another country to disguise its origins.

SECTION 337 AND IP CASES

NEW 337 CASES

OPTICAL FIBERS

On October 31, 2016, DSM Deso Tech, Inc. and DSM IP Assets B.V. filed a 337 patent case against UV Curable Coatings for Optical Fibers, Coated Optical Fibers, and Products from China.  The relevant parts of the ITC notice along with the names of the Chinese respondent companies are below.

Commodity:

UV Curable Coatings for Optical Fibers, Coated Optical Fibers, and Products

Filed By:
Christine E. Lehman

Firm/Organization:
Finnegan, Henderson, Farabow, Garrett, & Dunner, LLP

Behalf Of:

DSM Deso Tech, Inc. and DSM IP Assets B.V.

Description:

Letter to Lisa R. Barton, Secretary, USITC; requesting that the Commission conduct an investigation under section 337 of the Tariff Act of 1930, as amended, regarding Certain UV Curable Coating for Optical Fibers, Coated Optional Fibers, and Products Containing Same. The proposed respondents are Momentive UV Coatings (Shanghai) Co., Ltd., China and OFS Fitel, LLC, Norcross, Georgia.

SWEETENERS

On October 27, 2016, Celanese filed a 337 patent case against High Potency Sweeteners, ACE-K, from China.  The relevant parts of the ITC notice along with the names of the Chinese respondent companies are below.

Commodity:

High-Potency Sweeteners

Filed By:

Joshua B. Pond

Firm/Organization:

Kilpatrick Townsend & Stockton LLP

Behalf Of:
Celanese International Corporation, Celanese Sales U.S. Ltd. and Celanese IP Hungary Bt

Description:

Letter to Lisa R. Barton, Secretary, USITC; requesting that the Commission conduct an investigation under section 337 of the Tariff Act of 1930, as amended, regarding Certain High-Potency Sweeteners, Processes for Making Same, and Products Containing Same. The proposed respondents are Suzhou Hope Technology Co., Ltd., China; Anhui Jinhe Industrial Co., Ltd., China; and Vitasweet Co., Ltd.,   China.

MOBILE ELECTRONIC DEVICES

On October 14, 2016, Qualcomm filed a 337 patent case against Mobile Electronic Devices from China.  The relevant parts of the ITC notice along with the names of the Chinese respondent companies are below.

Received:

Friday, October 14, 2016

Commodity:

Mobile Electronic Devices

Filed By:

Blaney Harper

Firm/Organization:

Jones Day

Behalf Of:

Qualcomm Incorporated

Description:

Letter to Lisa R. Barton, Secretary, USITC; requesting that the Commission conduct an investigation under section 337 of the Tariff Act of 1930, as amended, regarding Certain Mobile Electronic Devices. The proposed respondents are Zhuhai Meizu Technology Co., Ltd., China; Zhuhai Meizu Telecom Equipment Co., Ltd., China; Dest Technology Limited, China; LGYD Limited, China; and Overseas Electronics, Inc., Chicago, IL.

If you have any questions about these cases or about Trump and Trade, US trade policy, TPP, the antidumping or countervailing duty law, trade adjustment assistance, customs, False Claims Act or 337 IP/patent law in general, please feel free to contact me.

Best regards,

Bill Perry

 

US CHINA TRADE WAR–UNIVERSAL TRADE WAR, TPP IN LAME DUCK, SPOTTING POTENTIAL AD CASES, CUSTOMS, FALSE CLAIMS ACT, VITAMIN C ANTITRUST, IP AND 337

Lotus Garden Boat Buildings Yue Feng Pagoda Summer Palace BeijinTRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

US CHINA TRADE WAR OCTOBER 7, 2016

INTERVIEW ON WHAT US COMPANIES CAN DO IN THE PRESENT TRADE CRISIS

Just did an interview on what US companies can do to cope with the current trade crisis.  Hope you will find it of interest.  http://www.turbineagency.com/industry-insights/2016/10/25/accelerateb2b-how-do-global-trade-deals-really-impact-us-businesses

Dear Friends,

This blog post contains several new article and articles that have been posted on the Harris Moure blog, www.chinalawblog.com from the HM Trade Practice Group, including Adams Lee, Emily Lawson and myself.  The new articles also reflect my discussions during my recent three-week trip to China meeting with various Chinese companies, the Chinese Ministry of Commerce (“MOFCOM”), and Chinese trade lawyers.

The most important point is that the US China Trade War is expanding and has now become a universal trade war.  Although the US continues to bring numerous antidumping (AD) and countervailing duty (CVD) cases against China, the Chinese government is now bringing and will bring numerous AD and CVD cases against the US.

In the recent Chinese antidumping case against Distiller Grains from the US, the Chinese government has levied a 33% rate against $1.6 billion in US exports to China.  There are rumors that the Chinese government may soon bring AD and CVD cases targeting $15 billion in US exports of soybeans to China.

Meanwhile numerous countries have adopted their own AD and CVD laws modeled on the US and EU and are bringing cases not only against China, but also against the US.

The only recent trade developments that would break the retaliation cycle are the Trans Pacific Partnership (TPP) and the TTIP deal with Europe and both trade agreements are in serious trouble.

In addition, set forth below are articles on how to spot an AD and CVD trade case coming and what do when your company is a target of a trade case, magnesium and steel cases, trade cases against Europe, and Trade Adjustment Assistance by David Holbert, who heads the Northwest Trade Adjustment Assistance Center.  In addition, there are a number of articles on Customs law, False Claims Act, including an FCA case against Furniture and Customs enforcement action against Honey.  Finally, there is an article on recent Second Circuit Decision in the Vitamin C Antitrust Case and the antidumping back story, a Criminal Trade Secrets case, a new 337 case and the Section 337 article translated into Chinese.

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

Best regards,

Bill Perry

TRADE POLICY AND TPP

US CHINA ANTIDUMPING TRADE WAR IS NOW A UNIVERSAL ANTIDUMPING TRADE WAR

As Donald Trump and Hilary Clinton duel during the Presidential debate about who can be more protectionist, during my recent trip to China I learned that what was once a US China Trade War has now become a universal trade war.  Country after country have adopted the US and EC Antidumping law and are filing case after case against other countries and the US.

Thus countries, such as EC, Canada, Mexico, Brazil, Argentina, India, Turkey, Ukraine, Russia, China, Indonesia, Malaysia, Korea, Japan, Taiwan, Australia Thailand, South Africa, and Vietnam, all are filing antidumping and countervailing duty cases against each other and the United States.  These countries have adopted the US law which finds dumping in 90% of the cases.  The US and the EC have created a Frankenstein in the antidumping law and the whole World has adopted it.

Although Donald Trump, Hilary Clinton and many US politicians want to adopt a mercantilist trade policy which favors pushing exports and protecting US industries from imports, the US politicians simply do not understand retaliation.  What the US can do to other countries, those countries can do back.  President Reagan understood the retaliation danger of protectionism and a mercantilist trade policy, but many present day US politicians do not.  So all of these countries are following the US lead and implementing a mercantilist trade policy.

Free trade agreements, such as the TPP and the TTIP, which would break this cycle are now all in deep trouble as each country wants to put its industries first and make their country and industries great again.  The rise in nationalism results in trade wars in which country after country will fire trade guns against each other.  As Jack Ma of Alibaba recently mentioned on CNN, real wars start when trade stops.  See http://money.cnn.com/2016/09/02/technology/jack-ma-alibaba-g20/

During my recent trip to China, in the attached notice, ddgs-list-of-dumping-margin-of-each-company_en ddgs-preliminary-finding-summary-translation_en, on September 23, 2016, the Chinese government announced a 33% preliminary antidumping duty targeting $1.6 billion in imports from the United States of DDGS, Distiller’s Dried Grains with or without Solubles, which is used as an ingredient for animal feed.

During this trip, officials at the Chinese Ministry of Commerce (“MOFCOM”) told me that more trade cases will be coming next year against the US.  In fact, there are rumors that the Chinese government will soon bring an AD and CVD case targeting $15 billion in US soybean exports to China.  This is the number one US export to China.  Now that China is bringing more trade cases against the US, these cases will hurt US companies and the jobs that go with them.

On the US side, the election of either Donald Trump or Hilary Clinton in November will mean more US trade cases next year against not only China, but many other countries as well.

On September 22, 2016, MOFCOM in China initiated an escape clause/safeguard action against Sugar from Brazil, Cuba, Guatemala, Australia, South Korea and Thailand alleging tariffs up to 155.90%.

On September 15, 2016, India brought its own antidumping case against Polybutadiene Rubber from South Korea, Russia, South Africa, Iran and Singapore.

Taiwan has brought a Steel antidumping case against China.

More and more cases will be filed in 2017 around the World and many will target the United States, China, and numerous other countries.  Compromise is the best way to settle trade disputes, but it is very difficult, if not impossible, to settle US antidumping and other trade cases.  What is “fair” trade for the United States is “fair” trade for every other country.  Many countries want to make their industries Great again.

TPP IN THE LAME DUCK KEEPS ON TICKING

As mentioned in my last blog post, I believe that if Hilary Clinton is elected, President Obama will push for the Trans Pacific Partnership (“TPP”) to come up for a vote during the Lame Duck Session.  Many Congressional leaders appeared to  oppose tbringing up TPP in the Lame Duck.  But with Hilary Clinton’s resurgence in the Polls after the first debate, there is more talk about the TPP coming up in the Lame Duck, the period after the Presidential election and before the end of the year, as President Obama pushes hard for passage of the legislation.

On September 16, 2016, Ohio Governor Republican John Kasich in an interview with CNN stated that he supports passage of the TPP and will support President Obama in this legislative push in the Lame Duck.  See http://edition.cnn.com/2016/09/15/politics/john-kasich-trans-pacific-partnership/index.html

Governor Kasich made clear that he feels “it’s his “responsibility and duty as a leader” — no matter the political cost — to help President Barack Obama push the Trans-Pacific Partnership through Congress.

Kasich stated that

“I have never been an ideological supporter of free trade. The ideologues used to come to me and be frustrated with me.  But when you look at these agreements in a real sense – and this one is much different than even NAFTA.”

Kasich added that when Russian and Chinese leaders oppose the TPP, that is one reason to vote for the TPP, “We have to do this.”

Kasich further stated,

“This is the first time the candidates in both major political parties say they are opposed to free trade. It’s astounding to me.  I welcome the fact that people will criticize me for putting my country ahead of my party.”

The interview came after Kasich met with President Obama in the Oval Office with former New York City Mayor Michael Bloomberg, former George W. Bush administration Treasury Secretary Hank Paulson, Atlanta Mayor Kasim Reed and others for a meeting on the 12-nation Pacific Rim deal.

Kasich further stated:

“This is an opportunity for the Congress to carry out its responsibility. Frankly, if I have to come down here and spend some time lobbying my Republican colleagues, I’m more than glad to do that.

There’s definitely some people I can call and talk to.  This is a big deal. I mean, if we were to just walk away with this — with both candidates saying they don’t want this — we turn our backs on Asia.

He also played down the political potency of Trump’s anti-trade position in manufacturing-heavy Ohio, saying it’s not why Trump might win the state.

On September 26, 2016, Robert Samuelson, a well-known economist, published an article entitled “Will TPP Rise from the Dead”, stating:

With Obama’s term ending and his already-modest influence eroding by the day, TPP seems dead. But it may still be in intensive care.

In a speech to the Peterson Institute for International Economics, a Washington think tank, Rep. Kevin Brady, R-Texas, chairman of the House Ways and Means Committee whose jurisdiction includes trade agreements, said that the TPP could still be ratified in the lame-duck session after the election and before a new Congress takes office.

Samuelson went on to state that Brady gave two major reasons to approve the TPP.

First, geopolitical:  The TPP would enhance US influence in the Pacific region and offset China’s growing economic and political power. TPP would give the United States a major role in regulating global commerce in the 21s century. The trade agreement codifies rules on “intellectual property” (patents, copyrights), data flows and state-owned firms

Ratification would be a strong signal to Asia that the United States intends to remain a Pacific power.

“The second reason is economic: Asia remains a fast-growing region. TPP would eliminate most tariffs among the 12 member countries, aiding American exporters in these markets. The advantage may be particularly important in services (tourism, consulting, finance and engineering), where U.S. firms are especially strong. In 2015, the United States had a $762 billion deficit in goods trade (machinery, steel, medical equipment) and a $262 billion surplus in services trade, leaving an overall deficit of $500 billion.  According to the Peterson Institute, the 12 countries in the TPP accounted for about 36% of the world economy and 24% of global trade in 2014.”

Samuelson goes on to quote Brady on why he does not dismiss TPP’s prospects as bleak, “People change once they get into office.”

Samuelson then states:

Translation: The campaign’s anti-trade and anti-globalization rhetoric might recede before the realities of governing. Although Brady didn’t say so, one implication is that a victorious Hillary Clinton might put up only token opposition to TPP, both because the case for approval is strong and because she might feel obligated to Obama for his political support.

But Brady went on to state that getting a deal would be difficult. With many Democrats adamantly opposed to TPP, President Obama would need to rely on Republicans to approve the agreement. But if President Obama cannot round up enough Democratic votes to ensure victory, Republicans will not go out on a political limb and bring the agreement up during the Lame Duck.

“We are running out of time,” Brady told the Peterson audience. As Samuelson stated, “The TPP may yet wind up in the political morgue.”

TRADE

CHINA IMPORTS: KNOW YOUR RISKS

By Adams Lee, Harris Moure International Trade Group

Every year U.S. producers file 10-15 petitions asking the U.S. government to investigate whether certain products imported into the US are sold at unfair prices (antidumping or AD) or are unfairly subsidized (countervailing duty or CVD). Many of the AD/CVD cases target products imported from China. Odds are good that at least two new AD/CVD petitions will be filed by Halloween and as many as five by year end.

Our clients often ask our international trade lawyers how they can determine the likelihood of a AD/CVD petition that could adversely affect their ability to compete in the US market. Each AD/CVD petition is unique to the product and industry it covers, but most AD/CVD investigations fall within a handful of categories. Understanding what has led to the filing of previous AD/CVD petitions can help you as a producer, exporter, or importer, recognize if and when to expect a new AD/CVD petition that could directly affect you. The following are some of the indicators you should be checking to determine whether your imported into the USA product will be next.

The Regulars. Certain domestic industries have been frequent filers of AD/CVD actions. Companies in these industries are veterans of AD/CVD actions; they don’t ask if a new petition will be filed, only when it will be filed.

  • Steel of all types (carbon steel, stainless steel, flat products, pipe, rebar, wire rod, wire, etc.) from all over the world. The latest wave of steel AD/CVD investigations are being completed with high AD/CVD margins in most cases.
  • Softwood Lumber from Canada. The latest round of the US-Canada Lumber wars is set to begin as new AD/CVD petitions are likely to be filed in October 2016. Filing a new AD/CVD petition may be necessary to push US-Canada negotiations to a meaningful level.

The Big Box Effect. When Walmart, Lowes, or Target switch their sourcing of a product from a domestic manufacturer to a foreign (read Chinese) one, it is quite common for the jilted domestic supplier to file an AD/CVD petition in an effort to save their business. Boltless steel shelving units, wood flooring, ironing tables, and candles are all examples of this, and all involving products from China.

US Products Squeezed by Imports. It is not uncommon for an AD/CVD petition to be filed by a US producer that makes a higher quality product but is starting to lose out to foreign producers with lower quality but cheaper products. Frozen shrimp from multiple countries, garlic from China, and wooden bedroom furniture from China are some examples of this.

Pressure from Downstream Customers. Many AD/CVD petitions involve products that are material inputs used to make a downstream finished product. Petitions can be triggered by larger downstream producers switching to, or just threatening to switch to imports to pressure smaller upstream suppliers to lower prices.  Many chemical products from China, tire products from China and other countries, kitchen racks from China are examples of this.

AD/CVD Actions on Upstream ProductsSometimes AD/CVD actions filed by other domestic industries trickle down and harm downstream domestic industries. For example, US wire rod producers filed AD/CVD petitions that resulted in AD/CVD duties against imported wire rod. But these wire rod duties ended up hurting US wire producers, who in turn filed their own AD/CVD duties against imported wire.

Dying Dinosaurs/Last Survivors. Some AD/CVD petitions are filed by the remaining members of a nearly extinct domestic industry dealing with decreasing demand and increased import pressure. Sometimes the AD/CVD actions allow the surviving US producers to stay in the US market protected from import competition.  Examples of this are wooden bedroom furniture, magnesium and innersprings from China.

Other Countries’ AD/CVD actions. The US is not the only country that acts to protect its domestic industries from unfair foreign trade. AD/CVD actions filed in Canada, India, the EU, Brazil, and even China are warning signs of industries facing tight competitive pressure. Imports blocked from one market are often diverted to other available markets. A prime example of this are products from China which first had AD/CVD filed in the EU before the US took action.

All of the above scenarios are good indicators of an imminent filing of a new United States’ AD/CVD petition, so if you are seeing these market conditions in your industry, an AD/CVD petition is probably in your near future.

WHAT SHOULD YOU DO WHEN THE CUSTOMS ANTIDUMPING AND COUNTERVAILING DUTY BOGEYMAN IS COMING AFTER YOUR IMPORTED CHINA PRODUCTS

By Adams Lee, Harris Moure International Trade Group

In China Imports Know Your Risks (above), I wrote about how companies can recognize impending antidumping (AD) or countervailing duty (CVD) petitions. In this post I address what you as an importer, exporter or foreign producer should do if you see an AD/CVD storm looming.

The first thing you should do is determine whether the AD/CVD petition will directly hit your primary operations. The second thing you should do is figure out how best to defend yourself interests if the AD/CVD petition is headed directly your way. The third thing you should do if you do get hit by AD/CVD duties is to figure out damage control going forward.

  1. New AD/CVD Petition – Are my products affected? AD/CVD petitions include a proposed scope definition that identifies the products covered. AD/CVD scope definitions can be complicated and unclear. They may be broader or narrower than the Customs tariff classifications normally used to identify such imports. Even if you think your products are outside the scope of the petition, U.S. Customs may disagree. U.S. Customs commonly demands that you first pay an AD/CVD deposit, assuming that your products are within the scope of the AD/CVD petition, and then Customs will return your deposit only if you get a Department of Commerce (DOC) ruling that your products are actually outside the scope. For example, with aluminum extrusions from China, the DOC has received around a hundred scope ruling requests to clarify whether certain products are included or excluded from the scope of that order.

Once you know the scope definition, you can evaluate the degree to which the AD/CVD action could impact your business.  Sometimes you and your customer can find alternatives to replace the subject AD/CVD products with either non-subject products or by your sourcing from non-subject countries. If you have options to switch away from the products covered by the AD/CVD action, it may not be necessary to participate in the AD/CVD investigation.

  1. AD/CVD investigations – How to defend? If your product is squarely within the scope of the AD/CVD petition and the U.S. market is worth fighting for, you should determine the best way to prepare for the AD/CVD investigation. If you have enough time before a petition is filed, you theoretically can try to adjust your sales to remedy whatever is causing the dumped or subsidized sales, most commonly by raising your prices for certain products or customers or by modifying your production operations by lowering or reallocating costs. Unfortunately, most companies are not proactive about planning to avoid AD/CVD actions and instead react only after a petition is filed. We find this especially true of our clients that import from China, as opposed to Europe.

Once an AD/CVD investigation is initiated, foreign producers and exporters and US importers should try to defend their interests before the two agencies responsible for making AD/CVD determinations: The International Trade Commission (ITC) determines whether a domestic industry is injured or threatened with injury by reason of the subject imports and the Department of Commerce (DOC) determines how much the subject imports are dumped or subsidized.

In ITC investigations, the best defenses are presented when the foreign producers, US importers, and US purchasers can organize and explain why the subject imports should not be blamed for any decline in the domestic industry’s performance. Because the ITC examines a broad range of data regarding the US market for the subject product, a comprehensive explanation of relevant market conditions is necessary to a winning argument.

In DOC investigations, the foreign producer and exporters are the primary respondents to the DOC’s questionnaires. These companies must provide extensive corporate structure, sales and cost data, often through multiple rounds of questionnaires. The DOC uses the submitted data to calculate AD/CVD margins.  Unaffiliated US importers usually do not need to submit data in DOC investigations and reviews, but they often will closely monitor the DOC’s proceedings because they will ultimately be responsible for paying the AD/CVD duties. See Sourcing Product From China: You Should Know About Importer of Record Liability.

The key to any AD/CVD defense is participating fully in both the DOC’s and the ITC’s investigations. If you don’t participate, you have no chance of winning. If a party does not respond on time or with complete responses, the DOC and the ITC can apply the adverse facts available that inevitably lead to higher AD/CVD margins. US importers should at least actively monitor DOC’s proceedings because their final AD/CVD liability often depends on how well the Chinese producers and exporters are able to respond to DOC’s questionnaires. It is not uncommon for the Chinese producer or exporter to mount a weak or no defense, leaving the U.S. importer essentially “holding the bag.” There are many things you can and should do to try to prevent this from happening to you.

  1. How to Plan for Life with AD/CVD. The overwhelming majority of AD/CVD petitions lead to orders for imposing AD/CVD duties.  But depending on the scope definition of the AD/CVD order, it may be possible for you to maintain your business operations by identifying alternative out-of-scope products or by switching your product sourcing to a non-subject country. But in switching sourcing, US importers should be careful to avoid actions that could be considered schemes designed primarily to evade AD/CVD duties, as the DOC can extend orders through circumvention investigations. Customs too can conduct its own investigation of duty evasion allegations.

Also, because the United States uses a retrospective AD/CVD system, foreign suppliers and US importers have the opportunity each year to try to lower their dumping margin. Since AD/CVD duties are “remedial”, foreign producers and U.S. importers have ample opportunity to adjust their production and sales operations so that they can sell “fairly” to the U.S. market, as defined by the U.S. trade laws and with proper planning and disciplined execution, companies can sometimes make even minor adjustments to reduce or eliminate their AD/CVD duty liability.

Bottom Line: You are not without defenses when the AD/CVD bogeyman appears to be heading for you. There are things you can do both to stop it from attacking your business and things you can do to restore your business once attacked.

Editor’s Note: This post focuses on products exported from China to the United States, but its advice applies with equal force to products exported from any other country to the United States and with nearly equal force to products exported from any other country to any other country that also has AD/CVD sanctions.

CAFC MAGNESIUM METAL DECISION

On October 6, 2016, in the attached decision, cafc-magnesium, the Court of Appeals for the Federal Circuit affirmed the Commerce Department’s decision that replacement of stainless steel retorts used to produce magnesium metal was an overhead expense and not a direct cost in the Magnesium Metal from China antidumping case.

STEEL TRADE CASES

CARBON AND ALLOY STEEL CUT-TO-LENGTH PLATE FROM CHINA AND KOREA

On September 7, 2016, in the attached fact sheet, clt-plate-cvd-prelim-fs-090716, Commerce issued an affirmative preliminary CVD determination in the initial investigation of certain carbon and alloy steel cut-to-length plate from China and a negative preliminary determination in the CVD investigation of imports from Korea.

China CVD rate best on all facts available is 210.50% and Korea’s CVD rate is 0.

CARBON AND ALLOY STEEL CUT-TO-LENGTH PLATE FROM BRAZIL, SOUTH AFRICA AND TURKEY

On September 16, 2016, in the attached fact sheet, factsheet-multiple-ctl-plate-ad-prelim-091616, Commerce announced its affirmative preliminary determinations in the AD investigations of imports of certain carbon and alloy steel cut-to-length plate from Brazil, South Africa, and Turkey.

Brazil’s antidumping rate is 74.52%.  South Africa’s antidumping rates range from 87.72% to 94.14%.  Turkey’s antidumping rates range from 42.02% to 50%.

STAINLESS STEEL SHEET AND STRIP FROM CHINA

On September 12, 2016, in the attached fact sheet, factsheet-prc-stainless-steel-sheet-strip-ad-prelim-091216, Commerce announced its affirmative preliminary determination in the AD investigation of imports of stainless steel sheet and strip from China.  The antidumping rates range from 63.86% to 76.64%.

TRADE CASES AGAINST EUROPE

EUROPEAN TARGETS IN ANTIDUMPING AND COUNTERVAILING DUTY CASES AND WHAT CAN BE DONE TO GET BACK IN THE US MARKET AGAIN

Recently, there have been several articles about the sharp rise in AD and CVD/trade remedy cases in the last year.  By the second half of 2016, the US Government has reported that twice as many AD and CVD cases have been initiated in 2015-2016 as in 2009.

China is not the only target.  AD cases have been recently filed against a number of European countries, including Carbon and Alloy Steel Plate from Austria, Belgium, Germany, and Italy; Steel Flanges from Italy and Spain; and Rubber from Poland.

In addition, there are outstanding AD and CVD orders against Germany on brass sheet and strip, seamless pipe, sodium nitrite and non-oriented electrical steel.  In addition to Germany, other EU Countries have been hit on various steel products, including a number of stainless steel products, from Spain, Belgium and Italy; brass sheet and strip from France and Italy, isocyanurates from Spain, pasta from Italy, paper from Portugal and Uranium from France. The oldest US AD order in place today is pressure sensitive plastic tape from Italy, which was issued in 1977.

Under US law Commerce determines whether dumping is taking place.  Dumping is defined as selling imported goods at less than fair value or less than normal value, which in general terms means lower than prices in the home/foreign market or below the fully allocated cost of production.  Antidumping duties are levied to remedy the unfair act by raising the US price so that the products are fairly traded.

Commerce also imposes Countervailing Duties to offset any foreign subsidies provided by foreign governments so as to raise the price of the subsidized imports.

AD and CVD duties can only be imposed if there is injury to the US industry, which is determined by the ITC.  But in determining injury, the law directs the ITC to cumulate, that is add together all the imports of the same product from the various foreign countries.

The real question many companies may have is how can AD and CVD rates be reduced so that the European company can start exporting to the US again.  US AD and CVD laws are considered remedial, not punitive statutes.  Thus, every year in the month in which the AD or CVD order was issued, Commerce gives the parties, including the domestic producers, foreign producers and US importers, the right to request a review investigation based on sales of imports that entered the US in the preceding year.

Thus, the AD order on electrical steel from Germany was issued in December 2014.   In December 2016, the German producer can request a review investigation of the electrical steel that entered, was actually imported into, the US during the period December 1, 2015 to November 31, 2016.

EU companies may ask that it is too difficult to export a 17 metric ton container of covered product to the US, requesting a nonaffiliated importer to put up an AD of 50 to over 100%, which can require a payment of $1 million USD or more.  In contrast to European law, however, the US AD and CVD law is retrospective.  Thus the importer posts a cash deposit when it imports products under an AD or CVD order, and the importer will get back the difference plus interest at the end of the review investigation.

More importantly, through a series of cases, Commerce has let foreign producers export smaller quantities of the product to use as a test sale in a review investigation if all other aspects of the sale are normal.  Thus in a chemical case, we had the exporter put a metric ton of the chemical in question in a container with other products and that metric ton served as the test sale to establish the new AD rate.

EU Companies may also ask how we can make sure that we are not dumping.  The answer is dump proofing and computer programs.  In contrast to China, EU companies are considered market economy companies and, therefore, Commerce must use actual prices and costs in the European country to determine whether it is dumping or not.  Computer programs can be used to reduce the dumping margin significantly by modeling US prices and EU home market prices to eliminate or significantly reduce antidumping rates.

How successful can companies be in reviews?  In one EU Steel case, we dropped the dumping rate from over 17% in the initial investigation to 0% in the review investigation.  In a chemical from China case, we dropped a dumping rate of over 200% to 0%, allowing the Chinese company to become the exclusive exporter of the product for decades per order of the US government.

Playing the AD and CVD game in review investigations can significantly reduce AD and CVD rates and get the EU company back in the US market again

TRADE ADJUSTMENT ASSISTANCE FOR FIRMS/COMPANIES

David Holbert, who heads the Northwest Trade Adjustment Assistance Center (“NWTAAC”), is writing a series of posts on the NWTAAC website on how Trade Adjustment Assistance for Firms/Companies helps injured companies injured by imports.  This is the first post.

Imports are Like a Thousand Flash Floods Injuring US Companies That Are Not Competitive

The issue of trade competition and lost jobs is well discussed in the media.  I work with small and medium-sized enterprises (SMEs) who are negatively affected by trade competition, what is often called “trade impact” in policy lingo. It’s a big issue. According to the U.S Trade Representative, the United States’ 30 million SMEs account for nearly two-thirds of net new private sector jobs in recent decades.

For large companies or from a macro-economic perspective, import competition may seem like a rising tide – one that can be anticipated, prepared for or proactively mitigated. For small and medium-sized businesses, not equipped with diverse product lines, resources or change acumen, import competition feels more like a flash flood.

What is it like for those companies?  When trade impact hits, sales drop off, often suddenly.

  • Contract manufacturers build to specification for customers, often larger companies. For this group, trade impact could mean the loss of a major customer moving operations to a foreign country (and finding parts suppliers there), or simply an importer arriving on the scene with lower cost products.
  • For a consumer products company, trade impact will probably first arrive with falling sales to the big retail chains since they are the most sensitive to supplier prices.
  • For a commodity producer things are a little more predictable. There may be a change in currency valuation or the rise of a new industry in a foreign country. Regardless, these highly price sensitive markets will suddenly have a lower price option.
  • Commercial products producers will usually have more time. When imports arrive they will sell to generally more informed customers who usually value factors other than price. But the fall will come, just more slowly.

Sales could fall off for many reasons. How do you know its trade related? You ask or you ask around. It shouldn’t take long to find out.

Imports arrive product by product. Companies move offshore factory by factory.  A domestic company makes that product, is part of the supply chain needed to make the product or is part of that commodity industry. When the imports arrive (or the factory moves), that one company or set of suppliers or community of producers is directly in the way. All of this happens in what can seem to be a relatively normal looking manufacturing neighborhood. Across the street there might be a company making another product that is experiencing no trade competition. Next door a third company might have gone through trade impact years ago and has adjusted. For small and medium sized companies, trade impact can be surprisingly direct and specific.

Here are some examples of what I’m talking about.

  • A commercial products company makes a specialized tool. A couple of other U.S. and European companies make similar products with some parity between price and features. One year they are at the big industry trade show and see a product, similar to theirs (and the others), but priced about 40% lower. Three months later sales started slipping.
  • A contract manufacturer that machines metal parts had gravitated away from stainless steel to titanium and built for several competitors in the same industry. Foreign producers had mastered stainless steel over the last decade. But as of a recent year, those producers finally mastered titanium as well. One by one, the manufacturer’s customers started buying imports. Once one did, it had a cost advantage, so the others had to go along also.
  • A nut grower was maintaining a slim profit. Then, a certain country decided to incentivize its nut growers to achieve more efficiency and export capability. It took a while, but when the imported nuts started arriving, they were at a price point below break-even for the domestic producer.
  • A safety products producer sold through a variety of retailers. One year, seemingly out of the blue, the big box stores stopped ordering. It didn’t take long to figure out why. A similar imported product was on the shelves at about half the price.

In future posts I’ll cover the steps to recovery. They are many effective tools in the economic recovery toolbox.  In many cases, companies that employed these resources are now unrecognizable through increased scale and product changes. Interestingly, a surprising number become significant exporters.

My role at the Northwest Trade Adjustment Assistance Center is to help small and medium-sized companies that are negatively impacted by trade competition through grants of up to $75,000.  Our non-profit organization administers a federal program serving companies in Washington, Oregon, Idaho and Alaska. You can learn more about us at NWTAAC.org.

CUSTOMS LAW

IMPORTING GOODS FROM CHINA: THE RISKS ARE RISING

By Adams Lee, Harris Moure International Trade Group

Last month I wrote about how importers from China need to be on their guard since U.S. Customs and Border Protection (CBP) has implemented new regulations to investigate allegations of antidumping (AD) and countervailing duty (CVD) evasion. See Importing From China: One More (New) Thing You Need To Know.

It didn’t take long, as U.S. Customs has already begun its first wave of investigations: Wheatland Tube, a US steel pipe producer, on September 14, 2016 announced it had filed with CBP an allegation of duty evasion on imports of Chinese circular welded steel pipe.

CBP has published a timeline for conducting its investigations and a process diagram (EAPA Investigation Timeline) and this newly filed allegation will be a test case to see how CBP will conduct its new duty evasion investigations. Hopefully, CBP will soon address many of the questions raised by the new regulations. How will parties be allowed to participate? What information from the investigation will be made public? How will CBP define “reasonable suspicion” of duty evasion?

This steel pipe investigation is likely to be the first of many CBP duty evasion investigations that are to come, many (probably most) of which will target Chinese products subject to AD/CVD duties. For how to figure out the risk quotient for the products you import from China, check out China Imports: Know Your Risks.

The new antidumping and countervailing duty regulations will unquestionably require an increased number of importers and foreign manufacturers to formally respond to CBP’s questions in response to allegations. Given the strong political pressure by domestic U.S. industries calling for tougher enforcement of US trade laws (not to mention the rising opposition to free trade among the American populace), Chinese producers and exporters and US importers should be prepared for increased CBP activity. CBP is likely looking to punish someone hard to set an example of their improved enforcement.

Getting Your China Products Through U.S. Customs: The 101

By Emily Lawson, Harris Moure International Trade Group

If you are importing products from China you need to do your homework to make sure your incoming shipments into the United States comply with U.S. Customs laws and regulations. Compliance with U.S. Customs laws and regulations is critical in avoiding your shipments being detained or seized, and/or penalties assessed. Common issues importers of products from China typically face include the following:  

  Not determining proper classification and duty rate for products. If you plan to import and sell on a Delivered Duty Paid basis, you should consider customs duties in your costs and that means you should know all of your applicable duty rates before you import. Also certain products are subject to high antidumping or countervailing duties in addition to regular customs duties, which may be as high as 300%.

   Failing to mark the product with the country of origin of manufacture.  Generally goods of foreign origin for import into the U.S. or immediate containers of the goods must be marked legibly and in a conspicuous location with the country of origin in English. Failure to do so accurately  can result in civil and even possibly criminal penalties.

  Not properly marking wood packing material. All wood packing material for products imported into the U.S. must be properly  treated and marked prior to shipping. Failure to meet the treatment and marking requirements may cause shipments to be delayed and penalties issued. 

  Failing to provide complete commercial invoices. Customs regulations provide that specific data must be included on the commercial invoice for U.S. Customs purposes, including a detailed description of the merchandise, and correct value information. Omission of this information may result in improper declaration to U.S. Customs at the time of import and expose you to penalties.

  Failing to meet other U.S. Government agency requirements.  Goods imported for sale in the U.S. must satisfy the same legal requirements as those goods manufactured in the United States. U.S. Customs enforces the laws of other agencies in the U.S., including, the Food and Drug Administration, the Consumer Product Safety  Commission (CPSC), and the Environmental Protection Agency, in addition to others. Therefore, if toys, for example, are exported to the U.S., detailed CPSC requirements, including for testing, must be met prior to export.

   Distribution of many trademarked and copyrighted items. Items which are trademarked and copyrighted are restricted by contractual agreements that give exclusive rights to specific companies to distribute the product in the U.S. Imports of improperly  trademarked or copyrighted items can be seized at the U.S. border and can subject you as the importer to penalties.

 Taking the time to identify  the required U.S. Customs laws and regulations for the products to be shipped to the U.S. from China will help you maintain seamless delivery  of your merchandise to U.S. customers and avoid civil and criminal penalty  exposure.

FALSE CLAIMS HAMMER GETS BIGGER — THIRD CIRCUIT HOLDS FCA’S APPLICATION TO FALSE STATEMENTS MADE TO US CUSTOMS

On October 5, 2916, the Third Circuit Court of Appeals  in the attached decision in United States ex rel Customs Fraud Investigations, LLC. v. Vitaulic Company, us-vs-vitaulic, reversed the Federal District Court and held that a failure to label imported goods with the proper country of origin is actionable under the False Claim Act (“FCA”).  Vitaulic had imported millions of pounds of steel pipe with the wrong country of origin.

In holding that this is an actionable claim under the FCA, the Court stated:

These actions, according to CFI, give rise to the present qui tam action under the so-called “reverse false claims” provision in the False Claims Act (FCA).  Typically, a claim under the FCA alleges that a person or company submitted a bill to the government for work that was not performed or was performed improperly, resulting in an undeserved payment flowing to that person or company. The FCA was enacted as a reaction to rampant fraud and price gouging by merchants supplying the Union army during the Civil War. In this case, by contrast, the allegation is not that Victaulic is obtaining monies from the government to which it is not entitled, but rather that it is retaining money it should have paid the government in the form of marking duties. Wrongful retention cases such as these are known as “reverse false claims” actions.

The Court went on to state:

Of particular importance here, the Senate Report discussed “customs duties for mismarking country of origin,” and how such duties would be covered by the amended reverse false claims Provision. . . .

The plain text of the FCA’s reverse claims provision is clear: any individual who “knowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the Government” may be subject to liability. As alleged by CFI in the amended complaint, Victaulic declined to notify the Bureau of Customs and Border Protection of its pipe fittings’ non-conforming status. This failure to notify resulted in the pipe fittings being released into the stream of commerce in the United States and, consequently, marking duties being owed and not paid.

From a policy perspective, the possibility of reverse false claims liability in such circumstances makes sense in the context of the larger import/export regulatory scheme created by Congress. Because of the government’s inability to inspect every shipment entering the United States, an importer may have an incentive to decline to mention that its goods are mismarked on the assumption that the mismarking will not be discovered. In doing so, an importer avoids its obligation under 19 U.S.C. § 1484 to provide the government with such information as is necessary to enable the Bureau of Customs and Border Protection to determine whether the merchandise may be released from government custody or whether it must be properly marked, re-exported or destroyed.

HONEY AND FURNITURE

FURNITURE

On September 30, 2016, Ecologic Industries LLC and OMNI SCM LLC controlled by a Daniel Scott Goldman agreed to pay $1.525 million to settle a civil False Claims Act suit alleging it conspired to make false statements to avoid paying duties on wooden furniture imported from China to avoid the antidumping duties on Wooden Bedroom Furniture from China.  The companies sell furniture for student housing.

The case was filed by a whistleblower Matthew Bissanti, who is the former president and director of OMNI.  The Justice Department reported that Bissanti will receive $228,750 as his share of the settlement.

HONEY

On Aug 12, 2016, in the attached notice, to-bee-or-not-to-bee_-cbp-and-partners-seized-132-drums-of-hone, Customs and Border Protection announced seizure of 42 tons of illegally imported Chinese honey.  The honey was contained in 132 fifty-five gallon drums that were falsely declared as originating from Taiwan to evade antidumping duties applicable to Chinese honey. The evaded antidumping duties on this shipment of Chinese honey would be nearly $180,299.

ANTITRUST LAW

VITAMIN C ANTITRUST CASE—THE REAL ANTIDUMPING BACK STORY

On September 20, 2016, the Second Circuit Court of Appeals handed down its attached decision in the Vitamin C Antitrust case against the Chinese companies, In Re: Vitamin C Antitrust Litigation, vitamin-c-13-4791_opn-2d-cir-sept-20-2016.  In its decision, the Court of Appeals reversed the Federal District Court’s decision that the Chinese Vitamin C companies had fixed prices in violation of the US antitrust because Chinese government action, in effect, insulated the Chinese companies from US antitrust liability.

The Court of Appeals made the correct decision because as indicated below, I have personal knowledge as to the reason the Chinese government set the Vitamin C export price scheme in place to raise Chinese export prices—to deter US and other Antidumping cases.

As the Court of Appeals stated in its opinion:

the Chinese Government filed a formal statement in the district court asserting that Chinese law required Defendants to set prices and reduce quantities of vitamin C sold abroad, and because Defendants could not simultaneously comply with Chinese law and U.S. antitrust law . . .

The Court of Appeals then reversed the District Court “on international comity grounds” and ordered the District Court to dismiss the complaint with prejudice.

In effect, the Second Circuit held that based on comity grounds, that is, respect for Chinese law as evidenced by a formal statement and submission of the Chinese government that the Chinese government lawfully set up a scheme to raise Vitamin C prices, the Federal District Court should have dismissed the case.  The Court of Appeals held that the District Court should have deferred to the Chinese government and exempted the Chinese companies from the application of the US antitrust law based on the state action defense.  It should be noted that the Federal Government and State Governments through state action can insulate US domestic companies from the application of the US antitrust law.

The Court of Appeals specifically determined in the decision that:

The official statements of the Ministry should be credited and accorded deference. . . .The  2002  Notice,  inter  alia,  demonstrates  that  from  2002  to  2005,  the relevant time period alleged in the complaint, Chinese law required Defendants to participate in the PVC regime in order to export vitamin C. This regulatory regime allowed vitamin C manufacturers the export only vitamin C subject to contracts that complied with the “industry‐wide negotiated” price.

Although the 2002 Notice does not specify how the “industry‐wide negotiated” price was set, we defer to the Ministry’s reasonable interpretation that the term means what it suggests—that members of the regulated industry were required to negotiate and agree upon a price.  . . ..

In this context, we find it reasonable to view the entire PVC regime as a decentralized means by which the Ministry, through the Chamber, regulated the export of vitamin C by deferring to the manufacturers and adopting their agreed upon price as the minimum export price. In short, by directing vitamin C manufacturers to coordinate export prices and quantities and adopting those standards into the regulatory regime, the Chinese Government required Defendants to violate the Sherman Act. . . .

Because we hold that Defendants could not comply with both U.S. antitrust laws and Chinese law regulating the foreign export of vitamin C, a true conflict exists between the applicable laws of China and those of the United States.

The Court of Appeals went on to state:

Moreover, there is no evidence that Defendants acted with the express purpose or intent to affect U.S. commerce or harm U.S. businesses in particular. Rather, according to the Ministry, the regulations at issue governing Defendants’ conduct were intended to assist China in its transition from a state‐run command economy to a market‐driven economy, and the resulting price‐fixing was intended to ensure China remained a competitive participant in the global vitamin C market and to prevent harm to China’s trade relations. While it was reasonably foreseeable that China’s vitamin C policies would generally have a negative effect on Plaintiffs as participants in the international market for vitamin C, as noted above, there is no evidence that Defendants’ antitrust activities were specifically directed at Plaintiffs or other U.S. companies.

The purpose of the Chinese export scheme was not to damage US customers or businesses.  In fact, just the opposite was true.  The Chinese government wanted to keep exports flowing.

What was the concern of the Chinese government?  US and other antidumping cases, which could wipe Chinese exports out of the US market for decades.  This was the true number one anticompetitive threat that the Chinese government and companies were facing.  Was this a realistic threat?  Sure was.

The period that the export price scheme was set in place was 2002-2005.  On July 11, 2002, after losing an antidumping case in the mid-90s against Saccharin from China despite very high antidumping rates because of a no injury determination by the US International Trade Commission (“ITC”), PMC, the sole US producer of saccharin, filed a second antidumping case against saccharin from China.  The Chinese Chamber of Commerce in charge of the Saccharin case was the Chamber of Commerce for Medicines, the same Chamber in charge of the Vitamin C case.

On July 2, 2003, the Commerce Department issued an antidumping order against all imports of saccharin from China with rates ranging from an individual dumping rate of 249.39% to 329.29% for all other Chinese companies, effectively blocking all Chinese saccharin from China.  The Antidumping Order was in effect for 10 years.

Although one company that I represented was after three and a half years able to reduce its dumping rate down to 0%, all other Chinese saccharin was blocked out of the US market for 10 years.  Market prices for saccharin in the US soared from a low $1.50 per pound in the investigative period to a price well over $10 a pound.

And US plaintiff companies in the Vitamin C case were complaining about the price rise in Vitamin C exports to the US??!!  I am sure the increase was not 10 times.

Since I represented the Chinese saccharin industry in the Saccharin antidumping case, the Chamber of Commerce for Medicine and I were very aware of the devastating effect a US or other antidumping case could have on Chinese companies and exports.  After the antidumping order was issued, in the Summer of 2003 the Chamber called me to a meeting with the Chinese Vitamin C producers and the Chinese Ministry of Commerce (“MOFCOM”} to discuss how to deter US and other antidumping cases.  The Chamber and MOFCOM were very worried that intense Chinese price competition would lead to a wave of antidumping cases against the Vitamin C companies.

The Vitamin C companies, the Chamber and MOFCOM asked what can we do if there is a threat of an antidumping case.  Since Commerce and all other countries treat China as a nonmarket economy country and refuse to use actual prices and costs in China to determine antidumping cases, the general practice of dump proofing where antidumping consultants use computer programs to eliminate the unfair act, dumping, is not an option for Chinese companies.

The only remedy I could think of was that the Chinese government impose an export price floor.  That approach worked in the 90s with another Chamber of Commerce when there was a threat of a US antidumping case against Silicon Carbide from China.  The US Silicon Carbide producer in the one company US industry never filed their threatened antidumping case against China because of the export price floor the Chamber with MOFCOM’s consent put in place.

After suggesting that the Chamber set up an export price floor with MOFCOM’s involvement, I went on to state that MOFCOM would have to issue a law, regulation or action to show that the Government mandated the establishment of the system to insulate the Chinese companies from attack under the US antitrust laws.

The Chamber did set up the export price system for Vitamin C exports to stop US and other antidumping cases from being filed against the Chinese companies.  No Vitamin C antidumping cases were filed because the export price system was put in place.

As indicated by the Second Circuit, MOFOM did take government action to set up the export price scheme, which, in turn, insulated the Chinese companies from US antitrust liability.

The lesson of the story is that although the purpose of US antitrust law is to protect consumers and competition in the US market, the real threat to US consumers and market competition is the US antidumping law.

CRIMINAL IP/TRADE SECRET CASE

On October 5, 2016, the Justice Department in the attached notice, chinese-national-sentenced-to-prison-for-conspiracy-to-steal-tr, announced the sentencing of Mo Hailong, a/k/a Robert Mo, a Chinese national to three years in Federal prison for a conspiracy to steal trade secrets.  Mr. Mo Hailong was the Director of International Business of the Beijing Dabeinong Technology Group Company, commonly referred to as DBN. DBN is a Chinese conglomerate with a corn seed subsidiary company, Kings Nower Seed.

According to the plea agreement, Mo Hailong admitted to participating in a long-term conspiracy to steal trade secrets from DuPont Pioneer and Monsanto. Mo Hailong participated in the theft of inbred corn seeds from fields in Iowa and elsewhere for the purpose of transporting the seeds to DBN in China. The stolen inbred, or parent, seeds were the valuable trade secrets of DuPont Pioneer and Monsanto.

U.S. Attorney Kevin E. VanderSchel stated:

“Mo Hailong stole valuable proprietary information in the form of seed corn from DuPont Pioneer and Monsanto in an effort to transport such trade secrets to China. Theft of trade secrets is a serious federal crime, as it harms victim companies that have invested millions of dollars and years of work toward the development of propriety technology. The theft of agricultural trade secrets, and other intellectual property, poses a grave threat to our national economic security. The Justice Department and federal law enforcement partners are committed to prosecuting those who in engage in conduct such as Mo Hailong.”

SECTION 337 AND IP CASES

NEW 337 CASES

On October 6, 2016, Nite Ize, Inc. filed a major 337 case against Device Holders, many of which come from China.  The relevant parts of the ITC notice along with the names of the Chinese respondent companies are below.

Commodity:

Device Holders

Filed by:

James B. Altman

Firm/Organization:

Foster, Murphy, Altman & Nickel, PC

Behalf of:

Nite Ize, Inc.

Description:

Letter to Lisa R. Barton, Secretary, USITC; requesting that the Commission conduct an investigation under section 337 of the Tariff Act of 1930, as amended, regarding Certain Device Holders, and Components Thereof. The proposed respondents are Shenzhen Youtai Trade Company Limited, d/b/a NoChoice, China; REXS LLC, Lewes, DE; Spinido, Inc., Brighton, CO; Luo, Qiden, d/b/a Lita International Shop, China; Guangzhou Kuaguoyi E-commerece co., ltd., d/b/a Kagu Culture, China; Shenzhen New Dream Technology Co., Ltd., d/b/a Newdreams, China; Shenzhen Gold South technology Co., Ltd. d/b/a Baidatong, China; Zhao Chunhui d/b/a Skyocean, China; Sunpauto Co., ltd., HK; Wang Zhi Gang d/b/a China; Dang Yuya d/b/a Sminiker, China; Shenzhen Topworld Technology Co.,    d/b/a IdeaPro, Hong Kong; Lin Zhen Mei d/b/a Anson, China; Wu Xuying d/b/a Novoland, China; Shenzhen New Dream Sailing Electronic Technology Co., Ltd., d/b/a MegaDream, China; Zhongshan Feiyu Hardware technology Co., Ltd d/b/a YouFo, China; Ninghuazian Wangfulong Chaojishichang Youxian Gongsi, Ltd., d/b/a EasybuyUS, China; Chang Lee d/b/a Frentaly, Duluth, GA; Trendbox USA LLC d/b/a Trendbox, Scottsdale, AZ; Timespa d/b/a Jia Bai Nian (Shenzhen) Electronic Commerce Trade CO., LTD., China; Tontex d/b/a Shenzhen Hetongtai Electronics Co., Ltd., China; Scotabc d/b/a ShenChuang Opto-electronics Technology Co., Ltd., China; Tenswall d/b/a Shenzhen Tenswall International Trading Co., Ltd., La Puente, CA; Luo Jieqiong d/b/a Wekin, China; Pecham d/b/a Baichen Technology Ltd., Hong Kong; Cyrift d/b/a Guangzhou Sunway E-Commerce LLC., China; Rymemo d/b/a Global Box, LLC., Dunbar, PA; Wang Guoxiang d/b/a Minse, China; Yuan I d/b/a Bestrix, China; Zhiping Zhou d/b/a Runshion, China; Funlavie, Riverside, CA; Huijukon d/b/a Shenzhen Hui Ju Kang technology Co., Ltd., China; Zhang Haujun d/b/a CeeOne, China; Easy Acc d/b/a Searay LLC., Newark, DE; Barsone d/b/a Shenzhen Senweite Electronic Commerce Ltd., China; Oumeiou d/b/a Shenzhen Oumeiou Technology Co., Ltd., China; Grando d/b/a Shenzhen Dashentai Network Technology Co., Ltd., China; Shenzhen Yingxue Technology Co., Ltd., China; Shenzhen Longwang Technology Co., Ltd., d/b/a LWANG, China; Hu Peng d/b/a AtomBud, China

CHINESE VERSION OF 337 ARTICLE

Set forth below is a Chinese version of the 337 English article published last month followed by the original English version.

阻止来自中国的侵权产品:337条款调查案

随着亚马逊和eBay加大力度引入中国卖家,以及越来越多的中国制造商另辟蹊径生产本身的产品,向我们在中国的律师咨询有关盗版产品和仿冒问题的公司数目也随之猛增。若该问题涉及到把侵权产品进口到美国,拥有美国知识产权的公司可以采取强大的补救措施进行反击。其中一个最强有力的补救措施就是337条款调查案,它可以用来阻止侵权产品进入美国,无论该产品生产自何处。

337条款调查案(该名称源自于19 U.S.C. 1337法令)可用来打击侵犯版权、商标、专利或商业秘密的进口品。但是由于注册商标和版权拥有人一般上可以采取其它的法律行动,337条款调查案对专利、未注册商标和商业秘密的拥有人尤其有效。虽然该调查案通常局限于知识产权,正在对钢铁产品进行的337调查案中,美国钢铁业试图将不公平行为的定义扩大以便将入侵计算机系统和违反反垄断行为包含在内。

首先,美国国际贸易委员会(“ITC”)会发起337条款的调查。如果ITC发现某进口货侵犯了特定的知识产权,可以发出排除令(exclusion order),美国海关就会扣留所有侵权的进口货。

大量种类各异的产品已经因337条款调查案而被禁止入口:从玩具(魔方拼图、椰菜娃娃)、鞋类(匡威运动鞋)、大型机器(造纸机)、消费类产品(首饰盒、汽车配件、电子香烟和烫发器)到高科技产品(电脑、手机和半导体芯片)等等。

337条款是知识产权和贸易的混合型法令,某个美国产业必须证明受到了伤害。伤害证明的要求很低,几乎所有的案例都符合此要求——只许一些销售损失就能证明伤害。对符合美国产业的要求可说是关键所在。美国产业通常是一家持有相关知识产权的公司。如果该知识产权是一项注册商标、版权或专利,美国产业的要求范围已扩大至凡在美国进行的工厂和设备、劳动力或资本的重大投资,以及专利权开发的实质性投资,包括工程、研发或授权许可,均可视为国内产业。然而,ITC最近提高了美国产业的要求,让专利“流氓”或非执业实体更难提出337调查案诉求。

337条款调查案由行政法官(ALJ)负责审理,诉讼过程迅速且激烈,一般上只需12至15个月来完成。ITC收到一份337调查的申请后,有30天的时间来决定是否立案。一旦确定立案,ITC会将诉状和调查通知答辩方。外国被诉方有30天的时间应诉,美国国内的被诉方则只有20天的时间应诉。如果进口商或外国被诉方没有做出回应,ITC会可认定公司放弃抗辩而发出排除令。

ITC在337调查案中所采取的是“对物”管辖权,也就是针对进口到美国的产品进行管辖。这很合理:ITC无权管制外国公司,但有权管制其进口产品。一般而言,337条款调查案和大多数的普通诉讼案不同,申诉方可以打赢一家1)不可能送达诉状、2)未能出庭聆讯,以及3)不可能被追讨款项的中国公司。

337条款调查案所采取的补救措施是颁布排除令,阻止答辩方的侵权产品进入美国。但是在某些特殊情况下,如果某个产品非常容易制造,ITC可以发布普遍排除令,不分来源地禁止所有同类侵权产品进入美国。以我处理过的魔方拼图案件为例,Ideal公司(申请人)把超过400家台湾公司列为侵犯其普通法商标的答辩人。ITC在1983年发布了普遍排除令(General Exclusion Order),阻止非Ideal公司制造的魔方产品进入美国市场,这一禁令沿用至今。除了排除令,ITC也可以发布制止令(cease and desist orders),禁止美国进口商继续售卖相关侵权产品。

337条款调查案的双方也可以选择庭外和解,但是和解协议必须经由ITC复审。我们经常协助客户尽早解决337条款调查案,以减少他们的诉讼费用。在20世纪90年代初期,RCA针对中国进口的电视提出了337条款调查。所有涉及的中国公司通过与RCA签署授权许可协议,迅速地解决了该调查案。

337条款调查案中的答辩人通常可以通过修改本身产品的设计来避开相关的侵权指责。约翰迪尔(John Deere)曾经指控把拖拉机漆成绿色和黄色的中国公司侵犯了约翰迪尔的商标,因而提出了一项著名的337条款调查案。大部分的中国答辩人与申诉人达成协议并改变拖拉机的颜色,例如蓝红色。

关键点:337条款调查案是ITC发起的强有力诉讼案,美国公司应该把它视为阻止侵权产品进入美国市场的手段。另一方面,涉及这些调查案的美国进口商和外国答辩人应该认真地对待它们,并且迅速做出回应,因为排除令发出后可延续多年有效。

 STOP IP INFRINGING PRODUCTS FROM CHINA AND OTHER COUNTRIES USING CUSTOMS AND SECTION 337 CASES

With Amazon and Ebay having increased their efforts at bringing in Chinese sellers and with more and more Chinese manufacturers branching out and making their own products, the number of companies contacting our China lawyers here at Harris Moure about problems with counterfeit products and knockoffs has soared. If the problem involves infringing products being imported into the United States, powerful remedies are available to companies with US IP rights if the infringing imports are products coming across the US border.

If the IP holder has a registered trademark or copyright, the individual or company holding the trademark or copyright can go directly to Customs and record the trademark under 19 CFR 133.1 or the copyright under 19 CFR 133.31.  See https://iprr.cbp.gov/.

Many years ago a US floor tile company was having massive problems with imports infringing its copyrights on its tile designs.  Initially, we looked at a Section 337 case as described below, but the more we dug down into the facts, we discovered that the company simply failed to register its copyrights with US Customs.

Once the trademarks and copyrights are registered, however, it is very important for the company to continually police the situation and educate the various Customs ports in the United States about the registered trademarks and copyrights and the infringing imports coming into the US.  Such a campaign can help educate the Customs officers as to what they should be looking out for when it comes to identifying which imports infringe the trademarks and copyrights in question.  The US recording industry many years ago had a very successful campaign at US Customs to stop infringing imports.

For those companies with problems from Chinese infringing imports, another alternative is to go to Chinese Customs to stop the export of infringing products from China.  The owner of Beanie Babies did this very successfully having Chinese Customs stop the export of the infringing Beanie Babies out of China.

One of the most powerful remedies is a Section 337 case, which can block infringing products, regardless of their origin, from entering the U.S.  A Section 337 action (the name comes from the implementing statute, 19 U.S.C. 1337) is available against imported goods that infringe a copyright, trademark, patent, or trade secret. But because other actions are usually readily available to owners of registered trademarks and copyrights, Section 337 actions are particularly effective for owners of patents, unregistered trademarks, and trade secrets. Although generally limited to IP rights, in the ongoing Section 337 steel case, US Steel has been attempting to expand the definition of unfair acts to include hacking into computer systems and antitrust violations.

The starting point is a section 337 investigation at the US International Trade Commission (“ITC”).  If the ITC finds certain imports infringe a specific intellectual property right, it can issue an exclusion order and U.S. Customs will then keep out all the infringing imports at the border.

Section 337 cases have been brought and exclusion orders issued against a vast range of different products: from toys (Rubik’s Cube Puzzles, Cabbage Patch Dolls) to footwear (Converse sneakers) to large machinery (paper-making machines) to consumer products (caskets, auto parts, electronic cigarettes and hair irons) to high tech products (computers, cell phones, and semiconductor chips).

Section 337 is a hybrid IP and trade statute, which requires a showing of injury to a US industry. The injury requirement is very low and can nearly always be met–a few lost sales will suffice to show injury. The US industry requirement can be a sticking point. The US industry is usually the one company that holds the intellectual property right in question. If the IP right is a registered trademark, copyright or patent, the US industry requirement has been expanded to not only include significant US investment in plant and equipment, labor or capital to substantial investment in the exploitation of the IP right, including engineering, research and development or licensing.  Recently, however, the ITC has raised the US industry requirement to make it harder for patent “trolls” or Non Practicing Entities to bring 337 cases.

Section 337 cases, however, are directed at truly unfair acts.  Patents and Copyrights are protected by the US Constitution so in contrast to antidumping and countervailing duty cases, respondents in these cases get more due process protection.  The Administrative Procedures Act is applied to Section 337 cases with a full trial before an Administrative Law Judge (“ALJ”), extended full discovery, a long trial type hearing, but on a very expedited time frame.

Section 337 actions, in fact, are the bullet train of IP litigation, fast, intense litigation in front of an ALJ.  The typical section 337 case takes only 12-15 months. Once a 337 petition is filed, the ITC has 30 days to determine whether or not to institute the case. After institution, the ITC will serve the complaint and notice of investigation on the respondents. Foreign respondents have 30 days to respond to the complaint; US respondents have only 20 days. If the importers or foreign respondents do not respond to the complaint, the ITC can find the companies in default and issue an exclusion order.

The ITC’s jurisdiction in 337 cases is “in rem,” which means it is over the product being imported into the US. This makes sense: the ITC has no power over the foreign companies themselves, but it does have power over the imports. What this means in everyday terms is that unlike most regular litigation, a Section 337 case can be effectively won against a Chinese company that 1) is impossible to serve, 2) fails to show up at the hearing, and 3) is impossible to collect any money from.

The remedy in section 337 cases is an exclusion order excluding the respondent’s infringing products from entering the United States. In special situations, however, where it is very easy to manufacture a product, the ITC can issue a general exclusion order against the World.  In the Rubik’s Cube puzzle case, which was my case at the ITC, Ideal (the claimant) named over 400 Taiwan companies as respondents infringing its common law trademark. The ITC issued a General Exclusion Order in 1983 and it is still in force today, blocking Rubik’s Cube not made by Ideal from entering the United States. In addition to exclusion orders, the ITC can issue cease and desist orders prohibiting US importers from selling products in inventory that infringe the IP rights in question

Section 337 cases can also be privately settled, but the settlement agreement is subject to ITC review. We frequently work with our respondent clients to settle 337 cases early to minimize their legal fees. In the early 1990s, RCA filed a section 337 case against TVs from China. The Chinese companies all quickly settled the case by signing a license agreement with RCA.

Respondents caught in section 337 cases often can modify their designs to avoid the IP right in question. John Deere brought a famous 337 case aimed at Chinese companies that painted their tractors green and yellow infringing John Deere’s trademark. Most of the Chinese respondents settled the case and painted their tractors different colors, such as blue and red.

Bottom Line: Section 337 cases are intense litigation before the ITC, and should be considered by U.S. companies as a tool for fighting against infringing products entering the United States. On the flip side, US importers and foreign respondents named in these cases should take them very seriously and respond quickly because exclusion orders can stay in place for years.

If you have any questions about these cases or about US trade policy, TPP, the antidumping or countervailing duty law, trade adjustment assistance, customs, False Claims Act or 337 IP/patent law in general, please feel free to contact me.

Best regards,

Bill Perry

 

 

US CHINA TRADE WAR–TPP POLITICS, TAAF THE ANSWER, $2 BILLION MISSING DUMPING DUTIES AS CASES RISE, CUSTOMS LAW CHANGES, SOLAR CELLS, 337 CUSTOMS STOP INFRINGING IMPORTS

US Capitol North Side Construction Night Washington DC ReflectioFIRM UPDATE

In mid-August, Adams Lee, a well- known Trade and Customs lawyer from White & Case in Washington DC, has joined us here at Harris Moure in Seattle.  Adams has handled well over 100 antidumping and countervailing duty cases.  Attached is Adams’ bio, adams-lee-resume-aug-16, and his article is below on the new Customs Regulations against Evasion of US Antidumping and Countervailing Duty Orders.

Adams and I will both be in China from Sept 11th to October 1st in Beijing, Shanghai and Nanjing.  If anyone would like to talk to us about these issues, please feel free to contact me at my e-mail, bill@harrismoure.com.

TRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

US CHINA TRADE WAR SEPTEMBER 8, 2016

Dear Friends,

Trade continues to be at the center of the Presidential primary with a possible passage of the Trans Pacific Partnership during the Lame Duck Session.  This blog post contains the sixth, and maybe the most important, article on Trade Adjustment Assistance for Companies of a several part series on how weak free trade arguments have led to the sharp rise of protectionism of Donald Trump and Bernie Sanders and the now possible demise of the Trans Pacific Partner (“TPP”).

The first article outlined the problem and why this is such a sharp attack on the TPP and some of the visceral arguments against free trade.  The second article explored in depth the protectionist arguments and the reason for the rise of Donald Trump and Bernie Sanders.  The third article explored the weak and strong arguments against protectionism.  The fourth article discussed one of the most important arguments for the TPP—National Security.  The fifth article discussed why the Commerce Department’s and the US International Trade Commission’s (ITC) policy in antidumping (“AD”) and countervailing duty (“CVD”) cases has led to a substantial increase in protectionism and national malaise of international trade victimhood.

The sixth article provides an answer with the only trade program that works and saves the companies and the jobs that go with them—The Trade Adjustment Assistance for Firms/Companies program along with MEP, another US manufacturing program.  The Article will describe the attempts by both Congress and the Obama Administration to kill the program, which may, in fact, have resulted in the sharp rise in protectionism in the US.

To pass the TPP, Congress must also provide assistance to make US companies competitive in the new free trade market created by the TPP.  Congress must restore the trade safety net so that Congress can again vote for free trade agreements, and the United States can return to its leadership in the Free Trade area.  The Congress has to fix the trade situation now before the US and the World return to the Smoot Hawley protectionism of the 1930s and the rise of nationalism, which can lead to military conflict.

In addition, set forth below are articles on a possible new antidumping case on Aluminum Foil from China and the rise of AD and CVD cases, the $2 billion in missing AD and CVD duties, the new Customs regulations to stop Transshipment in AD and CVD cases, the upcoming deadlines in the Solar Cells case in both English and Chinese, recent decisions in Steel cases,  antidumping and countervailing duty reviews in September against Chinese companies, and finally an article about how to stop imports that infringe US intellectual property rights, either using US Customs law or Section 337 at the US International Trade Commission (“ITC”).

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

Best regards,

Bill Perry

TRADE PROTECTIONISM IS STILL A VERY BIG TOPIC OF THE PRESIDENTIAL ELECTION; THE TPP PROBABLY IS NOT COMING UP IN THE LAME DUCK

As mentioned in my last newsletter, I believe that if Hilary Clinton is elected, President Obama will push for the Trans Pacific Partnership (“TPP”) to come up for a vote during the Lame Duck Session.  The Congress, however, has other ideas.

In early August, U.S. House Speaker Paul Ryan stated that he saw no reason to bring up the TPP in the Lame Duck because “we don’t have the votes.”  Ryan went on to state:

“As long as we don’t have the votes, I see no point in bringing up an agreement only to defeat it.  They have to fix this agreement and renegotiate some pieces of it if they have any hope or chance of passing it. I don’t see how they’ll ever get the votes for it.”

Democratic Senator Ron Wyden stated in late August that he will not take a position on the TPP until Senate Majority Leader Mitch McConnell brings the TPP up for a vote.  But on August 26th, Mitch McConnell stated that passage of the Trans-Pacific Partnership will be the next president’s problem, saying that the Senate will not vote on the treaty this year:

“The current agreement, the Trans-Pacific [Partnership], which has some serious flaws, will not be acted upon this year.  It will still be around. It can be massaged, changed, worked on during the next administration.”

With this statement, McConnell appears to have killed passage during the Obama Administration.

But businesses continue to push for the TPP.  On Sept 6th, the California Chamber of Commerce urged its Congressional delegation to pass the TPP.  In the attached Sept 7th letter, 9-7finaltppletter, the Washington State Council on International Trade also urged its Congressional delegation to pass TPP, stating:

“with 40 percent of Washington jobs dependent upon trade, it is paramount that we prioritize policies and investments that increase our state’s international competitiveness. That is why it is so important that you join us in calling for an immediate vote on the TPP; according to a newly released Washington Council on International Trade-Association of Washington Business study, Washington could have already increased our exports by up to $8.7 billion and directly created 26,000 new jobs had the TPP been implemented in 2015.

While the U.S. has some of the lowest import duties in the world on most goods, our local Washington exporters are faced with thousands of tariffs that artificially inflate the cost of American-made goods. TPP will help eliminate these barriers . . ..

TPP aligns with Washington’s high standards, setting 21st century standards for digital trade, environmental protections, and labor rules .  . . .  If we want to increase our competitiveness and set American standards for global trade, we must act now with the TPP.

This election season’s rhetoric has been hostile toward trade, but the TPP’s benefits for our state are undeniable. It is imperative that our state steps up to advocate for the family wage jobs and economic opportunities created by trade, and the time to do so is now.”

Despite the Congressional opposition, ever the optimist, President Obama keeps pushing for passage during the Lame Duck.  On August 30th, the White House Press Office stated:

“The president is going to make a strong case that we have made progress and there is a path for us to get this done before the president leaves office.”

On September 1, 2016, at a Press Conference in Hangzhou, China for the G20 meeting, President Obama said he is still optimistic about passage of the Trans-Pacific Partnership trade agreement. Obama argued that the economic benefits of the pact would win out once the “noise” of the election season subsides.

The President said he plans to assure the leaders of the other countries that signed the TPP that the U.S. will eventually approve the deal despite the very vocal opposition from Democratic and Republican lawmakers and Presidential candidates.

President Obama went to state:

“And it’s my intention to get this one done, because, on the merits, it is smart for America to do it. And I have yet to hear a persuasive argument from the left or the right as to why we wouldn’t want to create a trade framework that raises labor standards, raising environmental standards, protects intellectual property, levels the playing field for U.S. businesses, brings down tariffs.”

Obama stated that although other countries, such as Japan, have troubles passing the TPP, the other countries:

“are ready to go.  And what I’ll be telling them is that the United States has never had a smooth, uncontroversial path to ratifying trade deals, but they eventually get done”

“And so I intend to be making that argument. I will have to be less persuasive here because most people already understand that. Back home, we’ll have to cut through the noise once election season is over.  It’s always a little noisy there.”

As mentioned in the last blog post, one of the strongest arguments for the TPP is National Security.  Trade agreements help stop trade wars and military conflict.  But despite that very strong point, the impact of free trade on the average manufacturing worker has not been beneficial.

In a recent e-mail blast, the Steel Workers make the point:

“Because of unfair trade, 1,500 of my colleagues at U.S. Steel Granite City Works in Granite City, Illinois are still laid-off. It’s been more than six months since our mill shut down.

Worker unemployment benefits are running out. Food banks are emptying out. People are losing their homes. City services might even shut down.

But there’s finally reason for hope. The Commerce Department recently took action to enforce our trade laws by placing duties on unfairly traded imports from countries like China. That will help ensure steel imports are priced fairly — and allow us to compete . . . .

All told, nearly 19,000 Americans have faced layoffs across the country because of the steel imports crisis.

China is making far more steel than it needs. China knows this is a problem, and repeatedly has pledged to cut down on steel production. But nothing has changed . . . .

China’s steel industry is heavily subsidized by its government, and it also doesn’t need to follow serious labor or environmental rules. But China has to do something with all that steel, so it dumps it into the United States far below market value.”

In a recent Business Week article, Four Myths about Trade, Robert Atkinson, the president of the Information Technology and Innovation Foundation, made the same point stating:

The Washington trade establishment’s second core belief is that trade is an unalloyed good, even if other nations engage in mercantilism. . . . it doesn’t matter if other nations massively subsidize their exporters, require U.S. companies to hand over the keys to their technology in exchange for market access, or engage in other forms of mercantilist behavior.  . . .

But China and others are proving that this is folly. In industry after industry, including the advanced innovation-based industries that are America’s future, they are gaming the rules of global trade to hold others back while they leap forward. . ..

It’s a reflection of having lost competitive advantage to other nations in many higher-value-added industries, in part because of foreign mercantilist policies and domestic economic-policy failures.

The Author then goes on to state the US must be tough in fighting mercantilism and “vigilantly enforce trade rules, such as by bringing many more trade-enforcement cases to the WTO, pressuring global aid organizations to cut funding to mercantilist nations, limiting the ability of companies in mercantilist nations to buy U.S. firms, and more.”

But this argument then runs into reality.  As indicated below, Commerce finds dumping in about 95% of the cases.  Thus, there are more than 130 AD and CVD orders against China blocking about $30 billion in imports.  Presently more than 80 AD and CVD orders are against raw materials from China, chemicals, metals and various steel products, used in downstream US production.  In the Steel area, there are AD and CVD orders against the following Chinese steel products:

carbon steel plate, hot rolled carbon steel flat products, circular welded and seamless carbon quality steel pipe, rectangular pipe and tube, circular welded austenitic stainless pressure pipe, steel threaded rod, oil country tubular goods, steel wire strand and wire, high pressure steel cylinders, non-oriented electrical steel, and carbon and certain alloy steel wire rod.

There are ongoing investigations against cold-rolled steel and corrosion resistant/galvanized steel so many Chinese steel products from China are already blocked by US AD and CVD orders with very high rates well over 100%.

AD and CVD orders stay in place for 5 to 30 years and yet the companies, such as the Steel Industry, still decline.  After 40 years of protection from Steel imports by AD and CVD orders, where is Bethlehem Steel today?  The Argument seems to be that if industries simply bring more cases, the Commerce Department is even tougher and the orders are enforced, all US companies will be saved, wages will go up and jobs will be everywhere.

The reality, however, is quite different.  In fact, many of these orders have led to the destruction of US downstream industries so does hitting the Chinese with more trade cases really solve the trade problem?

More importantly, although Commerce does not use real numbers in antidumping cases against China, it does use actual prices and costs in antidumping steel cases against Korea, India, Taiwan, and many other countries.  In a recent antidumping case against Off the Road Tires from India, where China faces dumping rates of between 11 and 105%, the only two Indian exporters, which were both mandatory respondents, received 0% dumping rates and the Commerce Department in a highly unusual preliminary determination reached a negative no dumping determination on the entire case.

Market economy countries, such as Korea and India, can run computer programs to make sure that they are not dumping.  This is not gaming the system.  This is doing exactly what the antidumping law is trying to remedy—elimination of the unfair act, dumping.

Antidumping and countervailing duty laws are not penal statutes, they are remedial statutes and that is why US importers, who pay the duties, and the foreign producers/exporters are not entitled to full due process rights in AD and CVD cases, including application of the Administrative Procedures Act, decision by a neutral Administrative Law Judge and a full trial type hearing before Commerce and the ITC, such as Section 337 Intellectual Property cases, described below.

In fact, when industries, such as the steel industry, companies and workers along with Government officials see dumping and subsidization in every import into the United States, this mindset creates a disease—Globalization/International Trade victimhood.  We American workers and companies simply cannot compete because all imports are dumped and subsidized.

That simply is not true and to win the trade battles and war a change in mindset is required.

In his Article, Mr. Atkinson’s second argument may point to the real answer.  The US government needs to make US manufacturing companies competitive again:

It must begin with reducing the effective tax rate on corporations. To believe that America can thrive in the global economy with the world’s highest statutory corporate-tax rates and among the highest effective corporate-tax rates, especially for manufacturers, is to ignore the intense global competitive realities of the 21st century. Tax reform then needs to be complemented with two other key items: a regulatory-reform strategy particularly aimed at reducing burdens on industries that compete globally, and increased funding for programs that help exporters, such as the Export-Import Bank, the new National Network for Manufacturing Innovation, and a robust apprenticeship program for manufacturing workers. . . .

if Congress and the next administration develop a credible new globalization doctrine for the 21st century — melding tough trade enforcement with a robust national competitiveness agenda — then necessary trade-opening steps like the Trans-Pacific Partnership will once again be on the table and the U.S. economy will begin to thrive once again.

When it comes to Trade Adjustment Assistance, however, as Congressman Jim McDermott recently stated in an article, workers do not want handouts and training.  They want jobs.  The only trade remedy that actually provides jobs is the Trade Adjustment Assistance for Firms/Companies program and MEP, another manufacturing program.

FREE TRADE REQUIRES COMPETITIVE US COMPANIES— TAA FOR FIRMS/COMPANIES AND THE MEP MANUFACTURING PROGRAM ARE THE ANSWER

On August 17th, in a letter to the Wall Street Journal, the author referred to “the longstanding Republican promotion of trade as an engine of growth.” The author then goes on to state:

But what Donald Trump sees and the Republican elites have long missed is that for trade to be a winner for Americans, our government must provide policies for our industries to be the most competitive in the world. Mr. Zoellick and others promoted trade without promoting American competitiveness.  . . .

Mr. Zoellick should take a lesson from the American gymnasts in Rio and see how competitiveness leads to winning.

Although Donald Trump might agree with that point, there are Government programs already in effect that increase the competitiveness of US companies injured by imports, but they have been cut to the bone.

This is despite the fact that some of the highest paying American jobs have routinely been in the nation’s manufacturing sector. And some of the highest prices paid for the nation’s free trade deals have been paid by the folks who work in it. What’s shocking is the fact that that isn’t shocking anymore. And what’s really shocking is that we seem to have accepted it as the “new normal.” Now where did that ever come from?

How did we get here? How did we fall from the summit? Was it inexorable? Did we get soft? Did we get lazy? Did we stop caring? Well perhaps to some extent. But my sense of it is that too many of us have bought into the idea of globalization victimhood and a sort of paralysis has been allowed to set in.

Now in my opinion that’s simply not in America’s DNA. It’s about time that this nation decided not to participate in that mind set any longer. Economists and policy makers of all persuasions are now beginning to recognize the requirement for a robust response by this nation to foreign imports – irrespective of party affiliation or the particular free trade agreement under consideration at any given moment.  Companies, workers and Government officials need to stop blaming the foreigner and figure out what they can do to compete with the foreign imports.

There is no doubt in my mind that open and free trade benefits the overall U.S. economy in the long run. However, companies and the families that depend on the employment therein, indeed whole communities, are adversely affected in the short run (some for extended periods) resulting in significant expenditures in public welfare and health programs, deteriorated communities and the overall lowering of America’s industrial output.

But here’s the kicker: programs that can respond effectively already exist. Three of them are domiciled in our Department of Commerce and one in our Department of Labor:

  • Trade Adjustment Assistance for Firms (Commerce)
  • The Hollings Manufacturing Extension Partnership (Commerce)
  • Economic Adjustment for Communities (Commerce)
  • Trade Adjustment Assistance for Displaced Workers (Labor)

This Article, however, is focused on making US companies competitive again and the first two programs do just that, especially for smaller companies.  Specific federal support for trade adjustment programs, however, has been legislatively restrictive, bureaucratically hampered, organizationally disjointed, and substantially under-funded.

The lessons of history are clear. In the 1990’s, after the end of the Cold War and the fall of the Soviet Union, the federal government reduced defense industry procurements and closed military facilities. In response, a multi-agency, multi-year effort to assist adversely affected defense industries, their workers, and communities facing base closures were activated. Although successes usually required years of effort and follow on funding from agencies of proven approaches (for example the reinvention of the Philadelphia Naval Shipyard into a center for innovation and vibrant commercial activities), there was a general sense that the federal government was actively responding to a felt need at the local level.

A similar multi-agency response has been developed in the event of natural disasters, i.e., floods, hurricanes, tornadoes and earthquakes. Dimensions of the problem are identified, an appropriate expenditure level for a fixed period of time is authorized and the funds are deployed as needed through FEMA, SBA and other relevant agencies such as EDA.

The analogy to trade policy is powerful.  When the US Government enters into Trade Agreements, such as the TPP, Government action changes the market place.  All of a sudden US companies can be faced, not with a Tidal Wave, but a series of flash floods of foreign competition and imports that can simply wipe out US companies.

A starting point for a trade adjustment strategy would be for a combined Commerce-Labor approach building upon existing authorities and proven programs, that can be upgraded and executed forthwith.

Commerce’s Trade Adjustment Assistance for Firms (TAAF) has 11 regional (multi-state) TAAF Centers but the program has been cut to only $12.5 million annually. The amount of matching funds for US companies has not changed since the 1980s. The system has the band-width to increase to a run rate of $50 million.  Projecting a four-year ramp up of $90 million (FY18-FY21), the TAA program could serve an additional 2,150 companies.

Foreign competitors may argue that TAA for Firms/Companies is a subsidy, but the money does not go directly to the companies themselves, but to consultants to work with the companies through a series of knowledge-based projects to make the companies competitive again.  Moreover, the program does not affect the US market or block imports in any way.

Does the program work?  In the Northwest, where I am located, the Northwest Trade Adjustment Assistance Center has been able to save 80% of the companies that entered the program since 1984.  The MidAtlantic Trade Adjustment Assistance Center in this video at http://mataac.org/howitworks/ describes in detail how the program works and why it is so successful—Its flexibility in working with companies on an individual basis to come up with specific adjustment plans for each company to make the companies competitive again in the US market as it exists today.

Increasing funding will allow the TAA for Firms/Companies program to expand its bandwidth and provide relief to larger US companies, including possibly even steel producers.  If companies that use steel can be saved by the program, why can’t the steel producers themselves?

But it will take a tough love approach to trade problems.  Working with the companies to forget about Globalization victimhood and start trying to actually solve the Company’s problems that hinder its competitiveness in the market as it exists today.

In addition to TAA for Firms/Companies, another important remedy needed to increase competitiveness is Commerce’s Manufacturing Extension Partnership (MEP), which has a Center in each State and Puerto Rico.  MEP provides high quality management and technical assistance to the country’s small manufacturers with an annual budget of $130 million. MEP, in fact, is one the remedies suggested by the TAA Centers along with other projects to make the companies competitive again.

As a consequence of a nation-wide re-invention of the system, MEP is positioned to serve even more companies. A commitment of $100 million over four years would serve an additional 8,400 firms. These funds could be targeted to the small manufacturing firms that are the base of our supply chain threatened by foreign imports.

Each of these programs requires significant non-federal match or cost share from the companies themselves, to assure that the local participants have significant skin in the game and to amplify taxpayer investment.  A $250 million commitment from the U.S. government would be a tangible although modest first step in visibly addressing the local consequences of our trade policies. The Department of Commerce would operate these programs in a coordinated fashion, working in collaboration with the Department of Labor’s existing Trade Adjustment Assistance for Displaced Workers program.

TAA for Workers is funded at the $711 million level, but retraining workers should be the last remedy in the US government’s bag.  If all else fails, retrain workers, but before that retrain the company so that the jobs and the companies are saved.  That is what TAA for Firms/Companies and the MEP program do.  Teach companies how to swim in the new market currents created by trade agreements and the US government

In short – this serious and multi-pronged approach will begin the process of stopping globalization victimhood in its tracks.

Attached is White Paper, taaf-2-0-white-paper, prepares to show to expand TAA for Firms/Companies and take it to the next level above $50 million, which can be used to help larger companies adjust to import competition.  The White Paper also rebuts the common arguments against TAA for Firms/Companies.

ALUMINUM FOIL FROM CHINA, RISE IN ANTIDUMPING CASES PUSHED BY COMMERCE AND ITC

On August 22, 2016, the Wall Street Journal published an article on how the sharp rise of aluminum foil imports, mostly from China, has led to the shutdown of US U.S. aluminum foil producers.  Articles, such as this one, often signal that an antidumping case is coming in the near future.

Recently, there have been several articles about the sharp rise in antidumping and countervailing duty/trade remedy cases in the last year.  By the second half of 2016, the US Government has reported that twice as many antidumping (“AD”) and countervailing duty (“CVD”) case have been initiated in 2015-2016 as in 2009.

China is not the only target.  AD cases have been recently filed against steel imports from Austria, Belgium, Brazil, China, France, Germany, Italy, Japan, South Korea, South Africa, Taiwan, and Turkey; Steel Flanges from India, Italy and Spain; Chemicals from Korea and China, and Rubber from Brazil, Korea, Mexico and Poland.

The potential Aluminum Foil case may not be filed only against China.  In addition to China, the case could also be filed against a number of foreign exporters of aluminum foil to the United States.

Under US law Commerce determines whether dumping is taking place.  Dumping is defined as selling imported goods at less than fair value or less than normal value, which in general terms means lower than prices in the home/foreign market or below the fully allocated cost of production.  Antidumping duties are levied to remedy the unfair act by raising the US price so that the products are fairly traded.

Commerce also imposes Countervailing Duties to offset any foreign subsidies provided by foreign governments so as to raise the price of the subsidized imports.

AD and CVD duties can only be imposed if there is injury to the US industry, which is determined by the US International Trade Commission (“ITC”).  But in determining injury, the law directs the ITC to cumulate, that is add together all the imports of the same product from the various foreign exporters.  Thus if a number of countries are exporting aluminum foil in addition to China, there is a real incentive for the US aluminum foil industry to file a case against all the other countries too.

There are several reasons for the sharp rise in AD and CVD cases.  One is the state of the economy and the sharp rise in imports.  In bad economic times, the two lawyers that do the best are bankruptcy and international trade lawyers.  Chinese overcapacity can also result in numerous AD and CVD cases being filed not only in the United States but around the World.

Although the recent passage of the Trade Preferences Extension Act of 2015 has made it marginally better to bring an injury case at the ITC, a major reason for the continued rise in AD and CVD cases is the Commerce and ITC determinations in these cases.  Bringing an AD case, especially against China, is like the old country saying, shooting fish in a barrel.

By its own regulation, Commerce finds dumping and subsidization in almost every case, and the ITC in Sunset Review Investigations leaves antidumping and countervailing duty orders in place for as long as 20 to 30 years, often to protect single company US industries, resulting in permanent barriers to imports and the creation of monopolies.

Many readers may ask why should people care if prices go up a few dollars at WalMart for US consumers?  Jobs remain.  Out of the 130 plus AD and CVD orders against China, more than 80 of the orders are against raw materials, chemicals, metals and steel, that go directly into downstream US production.  AD orders have led to the closure of downstream US factories.

Commerce has defined dumping so that 95% of the products imported into the United States are dumped.  Pursuant to the US Antidumping Law, Commerce chooses mandatory respondent companies to individually respond to the AD questionnaire.  Commerce generally picks only two or three companies out of tens, if not hundreds, of respondent companies.

Only mandatory companies in an AD case have the right to get zero, no dumping margins.  Only those mandatory respondent companies have the right to show that they are not dumping.  If a company gets a 0 percent, no dumping determination, in the initial investigation, the antidumping order does not apply to that company.

Pursuant to the AD law, for the non-mandatory companies, the Commerce Department may use any other reasonable method to calculate antidumping rates, which means weight averaging the rates individually calculated for the mandatory respondents, not including 0 rates.  If all mandatory companies receive a 0% rate, Commerce will use any other reasonable method to determine a positive AD rate, not including 0% rates.

So if there are more than two or three respondent companies in an AD case, which is the reality in most cases, by its own law and practice, Commerce will reach an affirmative dumping determination.  All three mandatory companies may get 0% dumping rates, but all other companies get a positive dumping rate.  Thus almost all imports are by the Commerce Department’s definition dumped.

Under the Commerce Department’s methodology all foreign companies are guilty of dumping and subsidization until they prove their innocence, and almost all foreign companies never have the chance to prove their innocence.

Commerce also has a number of other methodologies to increase antidumping rates.  In AD cases against China, Commerce treats China as a nonmarket economy country and, therefore, refuses to use actual prices and costs in China to determine dumping, which makes it very easy for Commerce to find very high dumping rates.

In market economy cases, such as cases against EU and South American countries, Commerce has used zeroing or targeted dumping to create antidumping rates, even though the WTO has found such practices to be contrary to the AD Agreement.

The impact of the Commerce Department’s artificial methodology is further exaggerated by the ITC.  Although in the initial investigation, the ITC will go negative, no injury, in 30 to 40% of the cases, once the antidumping order is in place it is almost impossible to persuade the ITC to lift the antidumping order in Sunset Review investigations.

So antidumping orders, such as Pressure Sensitive Tape from Italy (1977), Prestressed Concrete Steel Wire Strand from Japan (1978), Potassium Permanganate from China (1984), Cholopicrin from China (1984), and Porcelain on Steel Cookware from China (1986), have been in place for more than 30 years.  In 1987 when I was at the Commerce Department, an antidumping case was filed against Urea from the entire Soviet Union.  Antidumping orders from that case against Russia and Ukraine are still in place today.

In addition, many of these antidumping orders, such as Potassium Permanganate, Magnesium, Porcelain on Steel Cookware, and Sulfanilic Acid, are in place to protect one company US industries, creating little monopolies in the United States.

Under the Sunset Review methodology, the ITC never sunsets AD and CVD orders unless the US industry no longer exists.

By defining dumping the way it does, both Commerce and the ITC perpetuate the myth of Globalization victimhood.  We US companies and workers simply cannot compete against imports because all imports are dumped or subsidized.  But is strangling downstream industries to protect one company US industries truly good trade policy?  Does keeping AD orders in place for 20 to 30 years really save the US industry and make the US companies more competitive?  The answer simply is no.

Protectionism does not work but it does destroy downstream industries and jobs.  Protectionism is destructionism. It costs jobs.

US MISSING $2 BILLION IN ANTIDUMPING DUTIES, MANY ON CHINESE PRODUCTS

According to the attached recent report by the General Accounting Office, gao-report-ad-cvd-missing-duties, the US government is missing about $2.3 billion in unpaid anti-dumping and countervailing duties, two-thirds of which will probably never be paid.

The United States is the only country in the World that has retroactive liability for US importers.  When rates go up, US importers are liable for the difference plus interest.  But the actual determination of the amount owed by the US imports can take place many years after the import was actually made into the US.

The GAO found that billing errors and delays in final duty assessments were major factors in the unpaid bills, with many of the importers with the largest debts leaving the import business before they received their bill.

“U.S. Customs and Border Protection reported that it does not expect to collect most of that debt”.  Customs and Border Protection (“CBP”) anticipates that about $1.6 billion of the total will never be paid.

As the GAO report states:

elements of the U.S. system for determining and collecting AD/CV duties create an inherent risk that some importers will not pay the full amount they owe in AD/CV duties. . . . three related factors create a heightened risk of AD/CV duty nonpayment: (1) The U.S. system for determining such duties involves the setting of an initial estimated duty rate upon the entry of goods, followed by the retrospective assessment of a final duty rate; (2) the amount of AD/CV duties for which an importer may be ultimately billed can significantly exceed what the importer pays when the goods enter the country; and (3) the assessment of final AD/CV duties can occur up to several years after an importer enters goods into the United States, during which time the importer may cease operations or become unable to pay additional duties.

The vast majority of the missing duties, 89%, were clustered around the following products from China: Fresh Garlic ($577 million), Wooden Bedroom Furniture ($505 million), Preserved Mushrooms ($459 million), crawfish tail meat ($210 million), Pure Magnesium ($170 million), and Honey ($158 million).

The GAO Report concludes at page 56-47:

We estimate the amount of uncollected duties on entries from fiscal year 2001 through 2014 to be $2.3 billion. While CBP collects on most AD/CV duty bills it issues, it only collects, on average, about 31 percent of the dollar amount owed. The large amount of uncollected duties is due in part to the long lag time between entry and billing in the U.S. retrospective AD/CV duty collection system, with an average of about 2-and-a-half years between the time goods enter the United States and the date a bill may be issued. Large differences between the initial estimated duty rate and the final duty rate assessed also contribute to unpaid bills, as importers receiving a large bill long after an entry is made may be unwilling or unable to pay. In 2015, CBP estimated that about $1.6 billion in duties owed was uncollectible. By not fully collecting unpaid AD/CV duty bills, the U.S. government loses a substantial amount of revenue and compromises its efforts to deter and remedy unfair and injurious trade practices.

But with all these missing duties, why doesn’t the US simply move to a prospective methodology, where the importer pays the dumping rate calculated by Commerce and the rate only goes up for future imports after the new rate is published.

Simple answer—the In Terrorem, trade chilling, effect of the antidumping and countervailing duty orders—the legal threat that the US importers will owe millions in the future, which could jeopardize the entire import company.  As a result, over time imports from China and other countries covered by AD and CVD order often decline to 0 because established importers are simply too scared to take the risk of importing under an AD and CVD order.

CUTSOMS NEW LAW AGAINST TRANSSHIPMENT AROUND AD AND CVD ORDERS; ONE MORE LEGAL PROCEDURE FOR US IMPORTERS AND FOREIGN EXPORTERS TO BE WARY OF

By Adams Lee, Trade and Customs Partner, Harris Moure.

U.S. Customs and Border Protection (CBP) issued new attached regulations, customs-regs-antidumping, that establish a new administrative procedure for CBP to investigate AD and CVD duty evasion.  81 FR 56477 (Aug. 22, 2016). Importers of any product that could remotely be considered merchandise subject to an AD/CVD order now face an increased likelihood of being investigated for AD/CVD duty evasion. The new CBP AD/CVD duty evasion investigations are the latest legal procedure, together with CBP Section 1592 penalty actions (19 USC 1592), CBP criminal prosecutions (18 USC 542, 545), and “qui tam” actions under the False Claims Act, aimed at ensnaring US importers and their foreign suppliers in burdensome and time-consuming proceedings that can result in significant financial expense or even criminal charges.

The following are key points from these new regulations:

  • CBP now has a new option to pursue and shut down AD/CVD duty evasion schemes.
  • CBP will have broad discretion to issue questions and conduct on-site verifications.
  • CBP investigations may result in interim measures that could significantly affect importers.
  • CBP’s interim measures may effectively establish a presumption of the importer’s guilt until proven innocent.
  • Other interested parties, including competing importers, can chime in to support CBP investigations against accused importers.
  • Both petitioners and respondents will have the opportunity to submit information and arguments.
  • Failure to cooperate and comply with CBP requests may result in CBP applying an adverse inference against the accused party.
  • Failing to respond adequately may result in CBP determining AD/CVD evasion has occurred.

The new CBP regulations (19 CFR Part 165) establish a formal process for how it will consider allegations of AD/CVD evasion. These new regulations are intended to address complaints from US manufacturers that CBP was not doing enough to address AD/CVD evasion schemes and that their investigations were neither transparent nor effective.

AD/CVD duty evasion schemes typically involve falsely declaring the country of origin or misclassifying the product (e.g., “widget from China” could be misreported as “widget from Malaysia” or “wadget from China”).

Petitions filed by domestic manufacturers trigger concurrent investigations by the U.S. Department of Commerce (DOC) and the U.S. International Trade Commission (ITC) to determine whether AD/CVD orders should be issued to impose duties on covered imports. The DOC determines if imports have been dumped or subsidized and sets the initial AD/CVD rates.  CBP then has the responsibility to collect AD/CVD duty deposits and to assess the final amount of AD/CVD duties owed at the rates determined by DOC.

US petitioners have decried U.S. Customs and Border Protection (CBP) as the weak link in enforcing US trade laws, not just because of it often being unable to collect the full amount of AD/CVD duties owed, but also because how CBP responds to allegations of AD/CVD evasion. Parties that provided CBP with information regarding evasion schemes were not allowed to participate in CBP’s investigations and were not notified of whether CBP had initiated an investigation or the results of any investigation.

CBP’s new regulations address many complaints regarding CBP’s lack of transparency in handling AD/CVD evasion allegations. The new regulations provide more details on how CBP procedures are to be conducted, the types of information that will be considered and made available to the public, and the specific timelines and deadlines in CBP investigations:

  • “Interested parties” for CBP investigations now includes not just the accused importers, but also competing importers that submit the allegations.
  • Interested parties now have access to public versions of information submitted in CBP’s investigation of AD/CVD evasion allegations.
  • After submission and receipt of a properly filed allegation, CBP has 15 business day to determine whether to initiate an investigation and 95 days to notify all interested parties of its decision. If CBP does not proceed with an investigation, CBP has five business days to notify the alleging party of that determination.
  • Within 90 days of initiating an investigation, CBP can impose interim measures if it has a “reasonable suspicion” that the importer used evasion to get products into the U.S.

Many questions remain as to how CBP will apply these regulations to actual investigations.  How exactly will parties participate in CBP investigations and what kind of comments will be accepted?  How much of the information in the investigations will be made public? How is “reasonable suspicion” defined and what kind of evidence will be considered? Is it really the case that accused Importers may be subject to interim measures (within 90 days of initiation) even before they receive notice of an investigation (within 95 days of initiation)?

These new AD/CVD duty evasion regulations further evidence the government’s plans to step up its efforts to enforce US trade laws more effectively and importers must – in turn – step up their vigilance to avoid being caught in one of these new traps.

UPCOMING DEADLINES IN SOLAR CELLS FROM CHINA ANTIDUMPING CASE—CHANCE TO GET BACK INTO THE US MARKET AGAIN

There are looming deadlines in the Solar Cells from China Antidumping (“AD”) and Countervailing Duty (“CVD”) case.  In December 2016, US producers, Chinese companies and US importers can request a review investigation in the Solar Cells case of the sales and imports that entered the United States during the review period, December 1, 2015 to November 31, 2016.

December 2016 will be a very important month for US importers because administrative reviews determine how much US importers actually owe in AD and CVD cases. Generally, the US industry will request a review of all Chinese companies. If a Chinese company does not respond in the Commerce Department’s Administrative Review, its AD and CVD rate could well go to the highest level and for certain imports the US importer will be retroactively liable for the difference plus interest.

In my experience, many US importers do not realize the significance of the administrative review investigations. They think the AD and CVD case is over because the initial investigation is over.  Many importers are blindsided because their Chinese supplier did not respond in the administrative review, and the US importers find themselves liable for millions of dollars in retroactive liability.

In February 2016, while in China I found many examples of Chinese solar companies or US importers, which did not file requests for a review investigation in December 2015.  In one instance, although the Chinese company obtained a separate rate during the Solar Cells initial investigation, the Petitioner appealed to the Court.  The Chinese company did not know the case was appealed, and the importer now owe millions in antidumping duties because they failed to file a review request in December 2015.

In another instance, in the Solar Products case, the Chinese company requested a review investigation in the CVD case but then did not respond to the Commerce quantity and value questionnaire.   That could well result in a determination of All Facts Available giving the Chinese company the highest CVD China rate of more than 50%.

The worst catastrophe in CVD cases was Aluminum Extrusions from China where the failure of mandatory companies to respond led to a CVD rate of 374%.  In the first review investigation, a Chinese company came to us because Customs had just ruled their auto part to be covered by the Aluminum Extrusions order.  To make matters worse, an importer requested a CVD review of the Chinese company, but did not tell the company and they did not realize that a quantity and value questionnaire had been sent to them.  We immediately filed a QV response just the day before Commerce’s preliminary determination.

Too late and Commerce gave the Chinese company an AFA rate of 121% by literally assigning the Chinese company every single subsidy in every single province and city in China, even though the Chinese company was located in Guangzhou.  Through a Court appeal, we reduced the rate to 79%, but it was still a high rate, so it is very important for companies to keep close watch on review investigations.

The real question many Chinese solar companies may have is how can AD and CVD rates be reduced so that we can start exporting to the US again.  In the Solar Cells case, the CVD China wide rate is only 15%.  The real barrier to entry is the China wide AD rate of 249%

US AD and CVD laws, however, are considered remedial, not punitive statutes.  Thus, every year in the month in which the AD or CVD order was issued, Commerce gives the parties, including the domestic producers, foreign producers and US importers, the right to request a review investigation based on sales of imports that entered the US in the preceding year.

Thus, the AD order on Solar Cells from China was issued in December 2012.   In December 2016, a Chinese producer and/or US importer can request a review investigation of the Chinese solar cells that were entered, actually imported into, the US during the period December 1, 2015 to November 31, 2016.

Chinese companies may ask that it is too difficult and too expensive to export may solar cells to the US, requesting a nonaffiliated importer to put up an AD of 298%, which can require a payment of well over $1 million USD.  The US AD and CVD law is retrospective.  Thus the importer posts a cash deposit when it imports products under an AD or CVD order, and the importer will get back the difference plus interest at the end of the review investigation.

More importantly, through a series of cases, Commerce has let foreign producers export smaller quantities of the product to use as a test sale in a review investigation if all other aspects of the sale are normal.  Thus in a Solar Cells review investigation, we had the exporter make a small sale of several panels along with other products and that small sale served as the test sale to establish the new AD rate.

How successful can companies be in reviews?  In a recent Solar Cells review investigation, we dropped a dumping rate of 249% to 8.52%, allowing the Chinese Solar Cell companies to begin to export to the US again.

Playing the AD and CVD game in review investigations can significantly reduce AD and CVD rates and get the Chinese company back in the US market again

SOLAR CELLS FROM CHINA CHINESE VERSION OF THE ARTICLE

中国进口太阳能电池反倾销案即将到来的最后期限重返美国市场的机会

针对原产自中国的太阳能电池反倾销(“AD”)和反补贴税(“CVD”)案的期限迫在眉睫。2016年12月,美国制造商、中国公司和美国进口商可以要求当局复审调查于2015年12月1日至2016年11月31日的审查期间进口并在美国销售的太阳能电池案例。

2016年12月将会是美国进口商的一个重要月份,因为行政复审将决定美国进口商在AD和CVD案中的实际欠款。一般上,美国业者会要求当局对所有中国公司进行复审。如果一家中国公司没有对商务部的行政复审做出回应,它很可能被征收最高的AD和CVD税率,美国进口商也将被追溯征收特定进口产品的差额及利息。

就我的经验而言,许多美国进口商并没有意识到行政复审调查的重要性。他们认为初步调查结束后,AD和CVD案也就此结束。许多进口商因为其中国供应商没有对行政复审做出回应,导致他们本身背负数百万美元的追溯性责任而因此措手不及。

2016年2月,我在中国期间发现很多中国太阳能公司或美国进口商没有在2015年12月提出复审调查请求。在其中一个例子中,某中国公司虽然在太阳能电池初步调查期间获得了单独税率,但是申请人向法庭提出了上诉。该中国公司并不知道有关的上诉案,结果进口商由于无法在2015年12月提出复审要求,现在欠下了数百万美元的反倾销税。

在另一个与太阳能产品有关的案例中,某中国公司针对CVD案提出了复审调查的要求,却没有对商务部的数量和价值问卷做出回应。这很可能导致当局根据“所有可得的事实”(All Facts Available)来向该中国公司征收超过50%的最高对华CVD税率。

在众多的CVD案例中,中国进口的铝合金型材所面对的局面最糟糕,受强制调查的公司若无法做出相关回应可被征收374%的CVD税率。一家中国公司在首个复审调查时联系上我们,因为海关刚裁定他们的汽车零部件属于铝合金型材生产项目。更糟的是,一家进口商在没有通知该中国公司的情况下,要求当局对其进行CVD审查,而他们也不晓得当局已经向他们发出一份数量和价值问卷。我们立即在初审的前一天提交了QV做出了回应。

可是这一切都已经太迟了,虽然该中国公司位于广州,商务部却逐一地根据中国的每一个省份和城市的补贴,向该中国公司征收了121%的AFA税率。我们通过向法庭提出上诉,将税率减少到了79%,可是这一税率还是很高,因此所有公司都有必要仔细地关注复审调查。

很多中国太阳能产品企业最想知道的,是如何降低AD和CVD税率,好让我们能再次将产品进口到美国。以太阳能电池的案例来看,当局向中国征收的统一性CVD税率仅为15%。当局向中国征收的统一性AD税率高达249%,这才是真正的入市门槛。

不过,美国的AD和CVD法律被认为是补救性而不是惩罚性法规,所以商务部每年在颁布AD或CVD令后,会在该月份允许包括美国国内生厂商、外国生厂商和美国进口商在内的各方,对上一年在美国销售的进口产品提出复审调查的要求。

因此,针对中国进口的太阳能电池的AD令是在2012年12月颁布的。一家中国生厂商和/或美国进口商可以在2016年12月,要求当局对从2015年12月1日至2016年11月31日期间进口到美国的中国太阳能电池进行复审调查。

中国公司或许会问,要求一家无关联的进口商承担298%的AD税,也就是支付超过1百万美元的费用,以便进口大批的太阳能电池到美国,是否太困难也太贵了。美国的AD和CVD法律是有追溯力的。因此,在AD或CVD令下,进口商在进口产品时会支付现款押金,并在复审调查结束后取回差额加上利息。

更重要的是,在一系列的案例中,商务部已经允许外国生厂商在其它销售方面都正常的情况下,出口少量产品作为试销用途。所以在一宗太阳能电池的复审调查案中,我们让出口商在销售其它产品的同时,出售少量的电池板作为试销用途以建立新的AD税率。

公司在复审案中的成功率有多大?在最近的一宗太阳能电池复审调查案中,我们将倾销率从249%下降到8.52%,协助中国太阳能电池公司重新进口产品到美国。

在复审调查期间了解如何应对并采取正确的策略,可以大幅度降低AD和CVD税率,并让中国公司重返美国市场。

STEEL TRADE CASES

HOT ROLLED STEEL FLAT PRODUCTS

On August 5, 2016, in the attached fact sheet, factsheet-multiple-hot-rolled-steel-flat-products-ad-cvd-final-080816, Commerce issued final dumping determinations in Hot-Rolled Steel Flat Products from Australia, Brazil, Japan, Korea, the Netherlands, Turkey, and the United Kingdom cases, and a final countervailing duty determination of Hot-Rolled Steel Flat Products from Brazil, Korea, and Turkey.

Other than Brazil, Australia and the United Kingdom, most antidumping rates were in the single digits.

In the Countervailing duty case, most companies got rates in single digits, except for POSCO in Korea, which received a CVD rate of 57%.

SEPTEMBER ANTIDUMPING ADMINISTRATIVE REVIEWS

On September 8, 2016, Commerce published the attached Federal Register notice, pdf-published-fed-reg-notice-oppty, regarding antidumping and countervailing duty cases for which reviews can be requested in the month of September. The specific antidumping cases against China are: Crawfish Tailmeat, Foundry Coke, Kitchen Appliance Shelving and Racks, Lined Paper Products, Magnesia Carbon Bricks, Narrow Woven Ribbons, Off the Road Tires, Flexible Magnets, and Steel Concrete Reinforcing Bars.   The specific countervailing duty cases are: Kitchen Appliance Shelving and Racks, Narrow Woven Ribbons, Off the Road Tires, Flexible Magnets, and Magnesia Carbon Bricks.

For those US import companies that imported : Crawfish Tailmeat, Foundry Coke, Kitchen Appliance Shelving and Racks, Lined Paper Products, Magnesia Carbon Bricks, Narrow Woven Ribbons, Off the Road Tires, Flexible Magnets, and Steel Concrete Reinforcing Bars during the antidumping period September 1, 2015-August 31, 2016 or the countervailing duty period of review, calendar year 2015, the end of this month is a very important deadline. Requests have to be filed at the Commerce Department by the Chinese suppliers, the US importers and US industry by the end of this month to participate in the administrative review.

This is a very important month for US importers because administrative reviews determine how much US importers actually owe in AD and CVD cases. Generally, the US industry will request a review of all Chinese companies. If a Chinese company does not respond in the Commerce Department’s Administrative Review, its antidumping and countervailing duty rate could well go to the highest level and for certain imports the US importer will be retroactively liable for the difference plus interest.

STOP IP INFRINGING PRODUCTS FROM CHINA AND OTHER COUNTRIES USING CUSTOMS AND SECTION 337 CASES

With Amazon and Ebay having increased their efforts at bringing in Chinese sellers and with more and more Chinese manufacturers branching out and making their own products, the number of companies contacting our China lawyers here at Harris Moure about problems with counterfeit products and knockoffs has soared. If the problem involves infringing products being imported into the United States, powerful remedies are available to companies with US IP rights if the infringing imports are products coming across the US border.

If the IP holder has a registered trademark or copyright, the individual or company holding the trademark or copyright can go directly to Customs and record the trademark under 19 CFR 133.1 or the copyright under 19 CFR 133.31.  See https://iprr.cbp.gov/.

Many years ago a US floor tile company was having massive problems with imports infringing its copyrights on its tile designs.  Initially, we looked at a Section 337 case as described below, but the more we dug down into the facts, we discovered that the company simply failed to register its copyrights with US Customs.

Once the trademarks and copyrights are registered, however, it is very important for the company to continually police the situation and educate the various Customs ports in the United States about the registered trademarks and copyrights and the infringing imports coming into the US.  Such a campaign can help educate the Customs officers as to what they should be looking out for when it comes to identifying which imports infringe the trademarks and copyrights in question.  The US recording industry many years ago had a very successful campaign at US Customs to stop infringing imports.

For those companies with problems from Chinese infringing imports, another alternative is to go to Chinese Customs to stop the export of infringing products from China.  The owner of Beanie Babies did this very successfully having Chinese Customs stop the export of the infringing Beanie Babies out of China.

One of the most powerful remedies is a Section 337 case, which can block infringing products, regardless of their origin, from entering the U.S.  A Section 337 action (the name comes from the implementing statute, 19 U.S.C. 1337) is available against imported goods that infringe a copyright, trademark, patent, or trade secret. But because other actions are usually readily available to owners of registered trademarks and copyrights, Section 337 actions are particularly effective for owners of patents, unregistered trademarks, and trade secrets. Although generally limited to IP rights, in the ongoing Section 337 steel case, US Steel has been attempting to expand the definition of unfair acts to include hacking into computer systems and antitrust violations.

The starting point is a section 337 investigation at the US International Trade Commission (“ITC”).  If the ITC finds certain imports infringe a specific intellectual property right, it can issue an exclusion order and U.S. Customs will then keep out all the infringing imports at the border.

Section 337 cases have been brought and exclusion orders issued against a vast range of different products: from toys (Rubik’s Cube Puzzles, Cabbage Patch Dolls) to footwear (Converse sneakers) to large machinery (paper-making machines) to consumer products (caskets, auto parts, electronic cigarettes and hair irons) to high tech products (computers, cell phones, and semiconductor chips).

Section 337 is a hybrid IP and trade statute, which requires a showing of injury to a US industry. The injury requirement is very low and can nearly always be met–a few lost sales will suffice to show injury. The US industry requirement can be a sticking point. The US industry is usually the one company that holds the intellectual property right in question. If the IP right is a registered trademark, copyright or patent, the US industry requirement has been expanded to not only include significant US investment in plant and equipment, labor or capital to substantial investment in the exploitation of the IP right, including engineering, research and development or licensing.  Recently, however, the ITC has raised the US industry requirement to make it harder for patent “trolls” or Non Practicing Entities to bring 337 cases.

Section 337 cases, however, are directed at truly unfair acts.  Patents and Copyrights are protected by the US Constitution so in contrast to antidumping and countervailing duty cases, respondents in these cases get more due process protection.  The Administrative Procedures Act is applied to Section 337 cases with a full trial before an Administrative Law Judge (“ALJ”), extended full discovery, a long trial type hearing, but on a very expedited time frame.

Section 337 actions, in fact, are the bullet train of IP litigation, fast, intense litigation in front of an ALJ.  The typical section 337 case takes only 12-15 months. Once a 337 petition is filed, the ITC has 30 days to determine whether or not to institute the case. After institution, the ITC will serve the complaint and notice of investigation on the respondents. Foreign respondents have 30 days to respond to the complaint; US respondents have only 20 days. If the importers or foreign respondents do not respond to the complaint, the ITC can find the companies in default and issue an exclusion order.

The ITC’s jurisdiction in 337 cases is “in rem,” which means it is over the product being imported into the US. This makes sense: the ITC has no power over the foreign companies themselves, but it does have power over the imports. What this means in everyday terms is that unlike most regular litigation, a Section 337 case can be effectively won against a Chinese company that 1) is impossible to serve, 2) fails to show up at the hearing, and 3) is impossible to collect any money from.

The remedy in section 337 cases is an exclusion order excluding the respondent’s infringing products from entering the United States. In special situations, however, where it is very easy to manufacture a product, the ITC can issue a general exclusion order against the World.  In the Rubik’s Cube puzzle case, which was my case at the ITC, Ideal (the claimant) named over 400 Taiwan companies as respondents infringing its common law trademark. The ITC issued a General Exclusion Order in 1983 and it is still in force today, blocking Rubik’s Cube not made by Ideal from entering the United States. In addition to exclusion orders, the ITC can issue cease and desist orders prohibiting US importers from selling products in inventory that infringe the IP rights in question

Section 337 cases can also be privately settled, but the settlement agreement is subject to ITC review. We frequently work with our respondent clients to settle 337 cases early to minimize their legal fees. In the early 1990s, RCA filed a section 337 case against TVs from China. The Chinese companies all quickly settled the case by signing a license agreement with RCA.

Respondents caught in section 337 cases often can modify their designs to avoid the IP right in question. John Deere brought a famous 337 case aimed at Chinese companies that painted their tractors green and yellow infringing John Deere’s trademark. Most of the Chinese respondents settled the case and painted their tractors different colors, such as blue and red.

Bottom Line: Section 337 cases are intense litigation before the ITC, and should be considered by U.S. companies as a tool for fighting against infringing products entering the United States. On the flip side, US importers and foreign respondents named in these cases should take them very seriously and respond quickly because exclusion orders can stay in place for years.

 

If you have any questions about these cases or about the antidumping or countervailing duty law, US trade policy, trade adjustment assistance, customs, or 337 IP/patent law in general, please feel free to contact me.

Best regards,

Bill Perry

IMPORTERS OF RECORD AND FALSE CLAIMS ACT HAMMER AGAINST TRANSSHIPMENT

House of Representatives US Capitol North Side Night Stars WashTRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

US CHINA TRADE WAR AUGUST 3, 2016 

Dear Friends,

Set forth below are two more articles on importer of record liability for antidumping and countervailing duties and the False Claims Act hammer against illegal transshipment around US antidumping and countervailing duties.

Best regards,

Bill Perry

IMPORTERS OF RECORD LIABILITY FOR ANTIDUMPING AND COUNTERVAILING DUTIES

The US Importer of Record is liable for antidumping and countervailing duties. The Importer of Record is the company listed in Block 26 of the U.S. Customs 7501 form. When I told a former US Senator this, he responded by saying he “thought the Chinese company was liable for the duties, not the US company.”

Under US Antidumping, Countervailing Duty and Customs laws, the Importer of Record must exercise reasonable care in importing products and in filling out Customs forms. The Importer of Record must correctly state the products’ country of origin and also whether Antidumping and Countervailing duties apply to the imported products. A knowingly false statement on a Customs form constitutes criminal fraud.

If AD or CVD rates go up in a subsequent review investigation, the Importer of Record is retroactively liable for the difference, plus interest. Retroactive liability for AD and CVD cases is a particular problem involving goods imported from China, because the Commerce Department treats China as a nonmarket economy (“NME”) country. Dumping is generally defined as selling products in the United States below their normal value, which generally means selling products in the United States below their prices in the home market or below the fully allocated cost of production.

Since China is a NME, Commerce refuses to use actual China prices and costs to determine whether a company is dumping. It instead uses complicated consumption factors for raw materials and other inputs and multiplies the factors by surrogate values from five to ten constantly changing countries to calculate a cost of production for the Chinese company. All this makes it impossible for the Chinese manufacturer/exporter to know whether it is dumping, never mind the US importer.

In the Mushrooms from China antidumping case, from the time the antidumping order was  issued in 1999 through numerous subsequent yearly review investigations, many antidumping rates were in the single digits because Commerce used India as the surrogate country. But when in 2012 Commerce switched from India to Columbia as the surrogate country, the Antidumping rates went from less than 10% to more than 200% because of surrogate values for straw and cow manure in Columbian import statistics. The Importers of Record then became liable for the difference in the duty rates, plus interest.

How can you as an importer of products from China (or from anywhere else for that matter) avoid getting hit with a massive antidumping or countervailing duty fee? Do not become the Importer of Record. The dollars saved by this can be staggering.

In the Wooden Bedroom Furniture from China initial investigation, for example, I represented a company importing from a Chinese furniture company.  Based on my advice, the importer pushed the Chinese furniture producer to become the importer of record for its own sales to the company.

In the initial investigation, the Chinese furniture company received an AD rate of 16%.  In the first review investigation, however, Commerce determined that the questionnaire data did not verify and issued the Chinese furniture company an AD rate of 216%.

The US company estimated that the Chinese producer exported $100 million, which created $200 million in retroactive liability for US importers.  The Chinese company then decided not to do the second review investigation creating another $200 million in retroactive liability for a total of $400 million in retroactive liability created by just one Chinese company.

My client, however, escaped liability because it was not the importer of record on the sales from that Chinese company, but many US import companies were not so lucky and went bankrupt.

If your company is the Importer of Record and its antidumping or countervailng duty rates go up, you need to realize that U.S. antidumping and countervailing duty laws are remedial, not penal statutes. This means requesting review investigations at the Commerce Department, appealing adverse rulings to the Courts and working with Customs can often substantially reduce your duties or even eliminate them entirely. Chinese exporters also can (and often do) use the Commerce review process to reduce their antidumping and countervailing duty rates so that they can export to the US again.

BEWARE THE FALSE CLAIMS ACT HAMMER WHEN IMPORTING PRODUCTS FROM CHINA

Chinese companies and the U.S. importers of their products often tell me that they are not concerned about U.S. Antidumping (“AD”) and Countervailing Duty (“CVD”) orders because they can “just get around those orders by transshipping the products to Malaysia, Vietnam, Philippines, Sri Lanka, India, or some country before sending them on to the United States.” Their plan is to relabel the products with a new country of origin and then export the products to the US free of AD and CVD duties, without US Customs and Border Protection (“CBP”) ever being the wiser.

Wrong.

Not only has CBP become expert at discovering such evasions, but the penalties — both civil and criminal — when caught have become very harsh. Importers that knowingly falsely label the country of origin on their imports are subject to significant fines and penalties under 19 USC 1592 and to criminal prosecution under 18 USC 542 (import by using false statement) and 18 USC 545 (smuggling). Lying about a product’s country of origin can subject you, the importer, to 20 years in Federal prison.

Immigration and Customs Enforcement (“ICE”) has conducted criminal investigations against a number of products under AD and CVD orders, including honey, saccharin, citric acid, lined paper products, pasta, polyethylene bags, shrimp, catfish, crawfish, garlic, steel, magnesium, pencils, wooden bedroom furniture, wire clothing hangers, ball bearings and nails. Many of these investigations have led to criminal convictions and large fines and penalties.

US importers have also been prosecuted and sentenced to prison for bringing in Chinese products, such as honey, garlic, wooden bedroom furniture and wire clothing hangers, by means of false Country of Origin statements so as to evade US AD and CVD orders.

Many Chinese companies do not realize that U.S. Customs laws can be used to go after not only US importers that have filed the false documents at Customs, but through a conspiracy charge against Chinese (and other foreign exporters) involved in setting up the transshipment. In one case, a Chinese seafood executive was arrested at a seafood show in Belgium based on a US extradition warrant for evasion of a US AD order and ending up spending six months in a Belgian prison before he was released.

US Customs, ICE and the Justice Department can be very tough investigators and prosecutors.

The real hammer against evasion of US AD and CVD orders, however, is the False Claims Act (“FCA”).  The FCA ( 31 U.S.C. § 3729) allows people or companies, designated a “Relator”, to file what are termed “qui tam” lawsuits against individuals or companies that directly or indirectly defrauded the Federal government.  Through qui tam lawsuits, the informants or “whistleblowers” may recover triple damages on the government’s behalf.  Anyone who knows of the fraud, including a competitor company, may file a qui tam lawsuit, and they do.

Relators can be competing companies in the United States, China or elsewhere or even individual employees working at those companies.  Relators file these qui tam actions to attack competitors and to get 15 to 30 percent of whatever the triple damages the U.S. Government recovers as a result of the lawsuit.

The most likely to file these lawsuits are your foreign competitors, Chinese competitor, U.S. competitors, U.S. importers, your employee at your Chinese exporting company, your employee at your U.S. importing company.  But sometimes they are brought by someone who simply learned of what you are doing.  Because the person or company that brings such an action can be awarded millions and even tens of millions of dollars, the incentive to file is huge. If you want to get a better idea of just how lucrative these lawsuits can be, do a Google search for lawyers looking to take on qui tam lawsuits. There are hundreds, if not thousands of lawyers, willing and eager to take such suits.  Reportedly the most lucrative Google keyword search is “qui tam”.

The qui tam relator’s lawsuit is filed confidentially and is not served on the defendants, but on the US Government.  The US Government then determines whether to intervene and pursue the action or settle the matter with the defendant. If the U.S. Government intervenes, it takes on primary responsibility for the case. If the U.S. Government decides not to intervene, the relator may dismiss the lawsuit or pursue the lawsuit on its own.

Under the False Claims Act, relators and the government can look backward as much as ten years after the date on which the violation was committed. When looking at imports over 10 years subject to antidumping orders with very high rates of over 50 to over 300%, the amounts being evaded are usually enormous. In one False Claims Act we handled, the antidumping duties evaded were over $80 million. When those duties were tripled, and additional penalty sums were added for false statements and attorneys’ fees, the complaint against numerous importers exceeded $300 million. Our original complaint has resulted in an ongoing penalty action for $80 million against one U.S. importer, with the relator entitled potentially to $12 to $24 million of this sum.

Both the U.S. Government and private companies and individuals have huge incentives to bring more False Claims Act cases against those who transship and seek to evade U.S. antidumping and countervailing duties.

If you are exporting to the United States or importing into the United States, you need to be wary of the hammer against transshipment—the False Claims Act.

US China Trade War–Rise in Trump/Sanders Protectionism, Steel Cases, New AD and 337 Cases, False Claims Act

 New York City Skyline East River Empire State Building NightTRADE IS A TWO WAY STREET
“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”
PRESIDENT RONALD REAGAN, JUNE 28, 1986
US CHINA TRADE WAR JUNE 7, 2016 

Dear Friends,

This is the second article of a several part series on how weak free trade arguments have led to the sharp rise of protectionism of Donald Trump and Bernie Sanders and the probable demise of the Trans Pacific Partnership (“TPP”).  The first article outlined the problem and why this is such a sharp attack on the TPP and some of the visceral arguments against free trade.  The second article will explore in depth the protectionist arguments and the reason for the rise of Donald Trump and Bernie Sanders.

Subsequent articles will describe the weak free trade arguments to counter the protectionism, the Probable Demise of the TPP, failure of Congressional Trade Policy and what can be done to provide the safety net that will allow Congress again to vote for free trade agreements so that the United States can return to its leadership in the Free Trade area.  Congress has to fix the trade situation now before the US and the World return to the Smoot Hawley protectionism of the 1930s.

In addition, set forth are several developments involving steel trade litigation, antidumping and countervailing duty reviews against Chinese companies, new antidumping and countervailing duty cases, new 337 cases against Chinese companies and finally a new False Claims Act settlement against a US importer for evasion of US antidumping duties.

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

Best regards,

Bill Perry

REASONS FOR THE RISE OF TRUMP SANDERS PROTECTIONISM IN THE UNITED STATES

As part two of my series of articles on how weak free trade arguments have created the rise in protectionism and the probably demise of the Trans Pacific Partnership (“TPP”), in this segment I will describe some of the reasons for the rise of Trump and Sanders and the protectionism that goes with it.

The simple truth is that when weak academic, theoretical economic arguments for free trade meet the hard visceral arguments of bombed out US factories and the loss of millions of manufacturing jobs, the free trade arguments melt away.  Weak theoretical free trade arguments will not be enough to stop the wave in protectionism sweeping the United States.  More has to be done.

In a recent article in Time Magazine entitled “Welcome to the Election from Hell”, Frank Luntz, a well-known pollster for Fox and CBS, stated that because there is so much anger in the focus groups and the US electorate, he has lost control of the focus groups he uses to test ideas.  One Trump supporter stated that he is not mad, he is angry and then stated:

“Because anger is way more than mad.  Angry is what happens when you’ve been kicked around like a dog for too long, and you’re ready to fight back.”

This explains the rise of Donald Trump and Bernie Sanders- anger in the electorate and also explains why recent polls have Donald Trump running neck in neck with Hilary Clinton.  Both Trump and Sanders are political outsiders.  Hilary is the symbol of the establishment and from what we are seeing from the electorate, this is definitely an outsider’s year.

But why has trade become a center of the Presidential campaign?  What explains the sharp rise in protectionism?

LOSS OF JOBS EXPLAINS THE RISE IN PROTECTIONISM

Jim McDermott in a May 11th article in the New York Post entitled, “Trump, Sanders Voters Don’t Want Handouts — They Want Jobs” stated:

“A popular knock on voters who support Donald Trump or Bernie Sanders because they have been “left behind” by free trade, globalization and technological progress is that they want a handout from Uncle Sam.

But the truth is the opposite: These voters want to work. They want jobs. And that’s the key to understanding their support for Trump or Sanders. . . .

In this political season, I’ve been asking some of them and their friends, and their now-adult kids, which presidential candidates they find appealing. Only two find support:  Sanders, the Vermont socialist, and Trump, the New York billionaire. Both candidates appeal to a working class that is frustrated, fed up and downright angry.

Neither can be bought.

To understand the simmering discontent of working-class folks who are attracted to  one (or both) of these candidates, you need to imagine you’ve either lost a job or  cannot break into the work force. Viewed from these perspectives, an academic debate about whether free trade results in net job losses or gains is mostly meaningless. These people want a good job, or at least a job no worse than the job they lost. Their economic futures seem to be on life support.

We can’t ignore the centrality of work in people’s lives. Most people want to work. Most people want to contribute to society and take care of their families. When the government adopts free-trade policies that pick winners (the better educated who gain new jobs) and losers (manufacturing workers), the government also needs to cushion the blow for the losers.

Since this hasn’t happened for the last couple of decades, anger has been building and is now finding a political outlet. Many Americans start to wonder: Our government helps rich Wall Street bankers but not Main Street homeowners? Supports elite universities but not vocational schools? Lowers taxes on the wealthiest Americans?

Our government has an obligation to help people adjust to seismic policy changes, like free trade. In the last couple of decades, trade agreements have resulted in, for example, the technology industry gaining ground, and the steel industry losing ground.  Besides picking winners and losers, free-trade policies introduce major economic anxiety into many previously stable families. . . .

Sanders and Trump tap into this disillusionment. They’re paying attention to the working class. They appear to actually understand, on a visceral level, the challenges faced by these Americans — and at least they seem to understand these voters aren’t moochers.  In different ways, they’re offering seething working-class Americans pathways to reclaiming what they’ve lost.

Until we admit that we have come precariously close to ending true social mobility in America, we’ll continue to see angry working-class voters approaching their boiling point. . . .”

The labor unions, such as the AFL-CIO, echo Mr. McDermott’s point.  The Unions say they do not want Trade Adjustment Assistance (“TAA”) for workers.  They want no more trade agreements.  TAA for workers is not good enough.  The Labor Unions want jobs for their workers.

As explained more below, it is the collateral destruction created by Trade Agreements, which puts the TPP directly at risk.  It is also the failure of Congressional policy when it comes to Trade Adjustment Assistance, in part, that has created this problem.  Congress gives $711 million in trade adjustment assistance to retrain workers for jobs, a very important program, but the jobs, in fact, may not exist.

But to save the companies and the jobs that go with them, Congress gives only $12.5 million total nationwide to help companies adjust to import competition and allow them to continue to exist and prosper along with jobs that go with them.

Trade Agreements, such as the TPP, do not create huge tidal waves of imports, but flash floods, which concentrate in one area and can wipe out US companies in an entire industry when they have no guidance on how to compete, survive and navigate through those flash floods.

But more on that below and in the next segment.  In this segment we need to analyze the tidal wave of rising protectionism in the United States.  If one combines the Trump and Sanders voters, that is a clear majority of the US voting electorate, and the one point that Trump and Sanders have in common is no more trade agreements and protecting the US workers from import competition.  Too many jobs have been lost.

In an April 25, 2016 CNN article, entitled “Resetting Red and Blue in the Rust Belt,” Jeremy Moorhead describes interviews with voters in Buffalo New York, Erie, Pennsylvania and Youngstown Ohio.  No Presidential candidate has ever been able to win an election without taking the state of Ohio, so it is critical to every Presidential candidate.  Jeremy Moorhead states:

“The voters of the Rust Belt have shaken up the 2016 presidential campaign: Hoping to jolt a political system they see as ineffective and out of touch, they have repeatedly revolted by supporting unlikely, anti-establishment candidates.

In both Donald Trump and Bernie Sanders, these voters see a potential for change they haven’t felt in generations. They say they are willing to shed party allegiances and reimagine their priorities this year, even voting for a self-described democratic socialist, or for a flame-throwing real estate developer who has never served in government.

In doing so, they have become the engine of one of the most extraordinary elections in modern U.S. history.

Frustration with the economic and political system is especially strong in the Rust Belt, a section of the country in the Northeast and Midwest once at the heart of the United States’ manufacturing boom. Decades after the decline of heavy industries like steel production and coal mining, the region continues to struggle with decaying infrastructure, population decline and high unemployment.

Voters there are worried about economic stagnation and crime plaguing their communities.  They are disappointed in Washington’s elected officials. They are calling out for swift, radical change. . . .

BUFFALO NEW YORK

Buffalo demonstrates Trump’s remarkable appeal across the country to non-traditional Republican voters. Here, there are working- and middle-class voters, former supporters of President Barack Obama and individuals who have supported Democrats in the past now drawn to Trump’s promise of dramatic change.

In the First Ward of South Buffalo on the corner of Ohio and Michigan Avenues, there is a favorite spot among locals called the Swannie House. Wiles has owned the place for 33 years and sits on a stool in the corner of the bar every day, his feet elevated on the window sill because of a bad back. It’s “the perfect corner because you hear everything,” he says.

These days, it seems everyone wants to talk about one thing: Donald Trump.

“It doesn’t matter if you’re black, you’re green, you’re white, you’re a Martian with tentacles. It doesn’t matter,” Wiles, 60, says. “They’re all talking about Trump.” . . . .

YOUNGSTOWN OHIO

Downtown Youngstown looks like a booming college town.  . . .

But away from the center of downtown, things get bleak — fast.

Along the former industrial corridor of Steel Valley, giant structures that used to be steel mills are now rusting and vacant. There are abandoned homes all across the city, a reminder of the thousands of residents who fled the area in the 1970s and ’80s when the mills shut down.

Although Ohio’s unemployment rate mirrors the national figure of 5%, it is much higher in Youngstown: 8.2%.  . .  .

ERIE PENNSYLVANIA

Spend a day talking to the residents of Erie — some 90 miles southwest of Buffalo — and you’re likely to learn two things. First, the General Electric plant in Lawrence Park is laying off 1,500 workers. Second, Presque Isle was recently voted in USA Today as the number one freshwater beach in the country.

Erie bled thousands of jobs over the years as manufacturing-based companies left the area, moving to the South or overseas in search of cheaper labor. . . . .”

On April 4, 2016, David Goldstein for the Portland Press Herald in an article entitled, “Blue Collar Voters: Trade is Killing Us,” stated:

“Establishment voices of economists, government and business officials argue that trade deals are critical in a global economy, and great for America. But critics such as organized labor call them “death warrants.”

And in blue collar communities in Wisconsin and across the industrial Midwest, that economic angst, coupled with some sense of betrayal, helps explain the roiling politics of 2016. . . . .

Wisconsin has lost more than 68,000 manufacturing jobs since the mid-1990s when the first of several controversial trade pacts with Mexico, China and others took hold. . …

That’s the case here in South Milwaukee, a community of more than 20,000 people whose economy is built around the sprawling Caterpillar plant, which builds huge steam shovels and other mining equipment. Its predecessor, Bucyrus International, built shovels that were used to dig the Panama Canal.

Now, Caterpillar has laid off about 600 of its 800-plus workers over the past two years because of a business slowdown.

“It’s had a pretty large impact,” said Brad Dorff, an assembler at Caterpillar and the local Steelworkers Union president. “Whether it’s small grocery stores, a hardware store down the street, local taverns; they used to get a lot of business from the people that live in this community who were making a good living, a good wage working here.”

Wisconsin’s heavy manufacturing sector, once one of the country’s strongest, has been taking a lot of punches in recent years. General Motors, General Electric, Chrysler, Joy Global Surface Mining and Manitowoc Cranes have all cut jobs or closed operations in recent years for a variety of reasons.

Hometown companies such as Kohler, the plumbing supply manufacturer; and Trek Bicycles have offshored jobs to India, China and Taiwan.

Meanwhile, Madison, the state capital, will lose 1,000 jobs over the next two years as the 100-year-old iconic Oscar Mayer meat processing plant shuts down. And just east on I-94 in Jefferson, Tyson Foods will cease operations at its pepperoni processing plant, cutting 400 jobs. . . .

The turmoil feeds into a debate over trade that’s playing out in the 2016 campaign. . . .

In Wisconsin, voters are about evenly split on whether free trade agreements have helped or hurt, according to a recent Marquette University Law School poll.

In Michigan and Ohio, a majority of primary voters in both parties believed trade kills jobs in the U.S. rather than creates them.

That’s the feeling inside union halls and communities that lie in the shadow of shuttered factories. Trade deals like NAFTA (North American Free Trade Agreement) and TPP (Trans-Pacific Partnership) spell only uncertainty and distress.

“We’ve watched a lot of our friends lose their jobs,” said Dorff, inside the local steelworkers union hall just blocks from the Caterpillar plant. “They have homes that now they can’t afford. They have families they have to support. They lost their insurance. Their kids have diabetes and they’re trying to get medication. It literally breaks your heart.”

The Business Roundtable, an association of corporate executives of major companies, say that international trade supports 1 in 5 Wisconsin jobs, and that cheaper manufacturing costs overseas lowers prices for consumers in this country.

“It is an economic fact of life that both businesses and their employees benefit when we sell more products overseas, and consumers enjoy a wider range of products at lower prices,” Jerry Jasinowski, former president of the National Association of Manufacturers, said in a recent statement.

But since NAFTA, which removed tariff barriers between the U.S. Canada and Mexico, went into effect in 1994, and Congress’ granting of permanent normal trade status to China in 2000, a key question has been how much have those decisions contributed to job losses at home.

Economists generally say that overall, trade creates more prosperity, and that displaced workers will find other work. But competition from China has meant the loss of 2.4 million jobs, according to a recent report by the National Bureau of Economic Research, a private nonprofit research group.

It pointed out that industries are often concentrated in certain parts of the country – the Midwest, for instance – and that local economies have not had the capacity to absorb those workers the Chinese competition has displaced.

Julie Granger, senior vice president of the Metropolitan Milwaukee Association of Commerce, said that in a global economy, the notion that “free trade encourages the loss of local jobs … is not always the most responsible way to look at it. If we are not engaged in the global economy, we will lose more jobs.

There’s no going back. It’s the same story in Milwaukee as it in other cities: many of lowest skilled jobs simply were disappearing.”

So is organized labor, long the backbone of the working class, a force in Wisconsin politics and a persistent critic of the trade deals. From 2014-2015, union membership as a percentage of the Wisconsin workforce fell to 8.3 percent from nearly 12 percent, according to the U.S. Bureau of Labor Statistics.

But organized labor has been under siege in Wisconsin for a while.  Take the General Motors plant in Janesville, Wis. GM wrung significant concessions out of the United Autoworkers to help keep the plant open. But the automaker closed it eventually anyway in 2009, putting 850 people out of work.”

The article quotes Roger Hinkle, Wisconsin AFL-CIO employment training specialist:

“Free traders always point to free trade being good for everybody.  There’s a mountain of victims who don’t have to look at some theoretical report to feel, Yes.  I was directly affected by this.“

The ironic point in this article, however, is the closure of Caterpillar.  Caterpillar is dependent on cheap steel as a raw material input, and they have been a major opponent of all the steel trade cases brought by the Union and US Steel because high prices for steel, their raw material input, makes them less competitive with companies, such as Komatsu, which have access to the lower cost steel.

As explained in more detail below, the recent decisions of the Commerce Department to impose large antidumping and countervailing duties on imports of steel from China and other countries has had an extremely negative impact on downstream US industries that use steel as a raw material input.

In fact, of the 130 outstanding antidumping and countervailing duty orders against China, over 80 of them are directed at raw material inputs—chemicals, metals and steel, which go directly into downstream US production and have a direct impact on their cost.  Raw Material trade cases rob Peter to pay Paul.

Although Congressional representatives and Senators do not care if trade protectionism causes consumer products to go up by a few dollars at Wal Mart, what happens if these higher duties on imports means that companies in their Districts and States have to close and the jobs are lost because the companies cannot compete in the downstream markets.

STEEL TRADE CASES

COLD ROLLED STEEL

On May 17, 2016, in the attached fact sheet, cold rolled, Commerce made a final dumping and countervailing duty determinations in the Cold-Rolled Steel Flat Products case from China and Japan cases.  Because the Chinese companies refused to cooperate in the investigation, they received an antidumping rate of 265.79% and a countervailing duty rate of 256.44%.  Japanese Steel was hit with an antidumping rate of 71.35 percent.

Commerce was able to hand down such high margins because the Chinese and Japanese respondents refused to cooperate with the Department allowing it to very high impose duties on the basis of adverse facts available on an expedited basis.  Chinese companies refused to cooperate because since the Commerce Department considers China a nonmarket economy country and refuses to use actual prices and costs in China to determine dumping, it is impossible to win the case.

On May 20, 2016, the Wall Street Journal issued an editorial entitled, “Obama Front-Runs Trump on China” stating:

“The Obama Administration may not sound like Donald Trump when talking about trade with China, but it isn’t above using protectionism for political gain.  On Tuesday the U.S. Commerce Department increased a tariff on “dumped” Chinese cold-rolled steel to 522%, a move that will hurt American manufacturers who need the steel to remain competitive.

The tariff may score some populist points with voters in an election year.  It also may be a ploy to get lawmakers to ratify the Trans-Pacific Partnership trade agreement before President Obama leaves office.  But past experience suggests that such gambits inflame protectionist sentiment rather than tamp it down.

President George W. Bush imposed tariffs of up to 30% on a broad range of Chinese steel products in 2002.  The Consuming Industries Trade Action Coalition says the tariffs cost the US economy 200,000 jobs and $4 billion in lost wages. . . . .

[Low Chinese steel prices are] good news for the U.S. Since steel is an important raw material for many industries, China’s trade partners benefit from its wasteful policies.  Lower prices make companies that use steel more competitive and bring down prices for consumers.

Daniel Pearson for the CATO Institute conservatively estimates that that American companies using steel produce $990 billion in value added, more than 16 times the output of the U.S. steel industry, and also employ 16 times more workers.  If tariffs on Chinese imports raise the U.S. price of steel, these companies’ costs will be higher than foreign competitors,’ hurting their ability to grow and provide more jobs for Americans.

The article goes on to complain that US Steel companies do not make the same range of products as Chinese companies and that the Cold Rolled determination “is a warm up for the fight over granting China market economy status in December.”

The Editorial concludes:

“The larger question is whether the steel tariffs herald a new and more bitter era of trade retaliation.  Previous skirmishes have been damaging but stopped short of full escalation.  But Mr. Trump and Hilary Clinton have run for President as protectionists, and Mr. Obama’s surrender to steel interests is a bad omen.”

CORROSION RESISTANT STEEL

On May 25, 2016, in the attached factsheet, factsheet-multiple-corrosion-resistant-steel-products-ad-cvd-final-052516, Commerce announced its affirmative final determinations in the antidumping duty (AD) and countervailing duty (CVD) investigations of imports of corrosion-resistant steel products (CORE) from China, India, Italy, Korea; its affirmative final determination in the AD investigation of imports of CORE from Taiwan; and its negative final determination in the CVD investigation of imports of CORE from Taiwan.

Again, since the Chinese companies refused to cooperate because of the nonmarket economy status of China, Chinese companies received an antidumping rate of 209.97% and a countervailing duty rate of 241.07%.

Antidumping and Countervailing duty rates for market economy countries, however, were much lower with India dumping rates between 3 to 4% and countervailing duty rates between 8 to 29%.  Italy received rates of between 12 to 92%, Korea 8 to 47%, and Taiwan antidumping rate of 3.77% and 0% countervailing duty rate.  As market economy companies, Commerce must use actual prices and costs in those countries to calculated antidumping rates and to value subsidies.

On June 1, 2016, the Wall Street Journal in an article entitled “Steel Tariffs Create a Double-Edged Sword” reported that there is already an impact on downstream US production:

New tariffs on imports are boosting steel prices in the U.S., offering a lifeline to beleaguered American steelmakers but raising costs for manufacturers of goods ranging from oil pipes to factory equipment to cars. . . .

The Article goes on to state that the U.S. benchmark for “hot rolled coil index has risen more than 60% per ton” and that:

is creating problems for some steel buyers . . .

Steelcase Inc. Chief Executive James Keane said a tariff on a special kind of Japanese steel could cost one of its subsidiaries [Polyvision] $4 to $5 million a year . . . where it employs 200 people.  If nothing changes, we would have to close our Oklahoma plant.

The Article also reports that US “Car companies have been lobbying against steel tariffs.”

The problem with the Wall Street Journal Editorial and Article is that they assume President Obama has discretion not to impose the tariffs.  These cases were not brought under Section 201, the Escape Clause, which provides for Presidential approval or disapproval of the duties, but under the US antidumping and countervailing law where there is no discretion.  In contrast to most countries around the World, including Europe, Canada and yes China, the US antidumping and countervailing duty law do not have a public interest test.  Since the Chinese and Japanese companies did not cooperate, pursuant to the US antidumping and countervailing duty law, the Administration had no choice but to impose very high antidumping and countervailing duties on those imports.

If the US International Trade Commission (“ITC”) goes affirmative in its injury determination and by statute it cannot give any weight to arguments by downstream producers, antidumping and countervailing duty orders will be issued and those orders can stay in place for 5 to 30 years.

STEEL 337 STEEL CASE

On May 26, 2016, the ITC instituted the section 337 case against Chinese steel import.  In the attached notice, USITC Institutes 337 Steel Case, the ITC stated:

The investigation is based on a complaint filed by U.S. Steel Corporation of Pittsburgh, PA, on April 26, 2016.  The complaint alleges violations of section 337 of the Tariff Act of 1930 in the importation into the United States and sale of certain carbon and alloy steel products through one or more of the following unfair acts:  (1) a conspiracy to fix prices and control output and export volumes, in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1; (2) the misappropriation and use of U.S. Steel’s trade secrets; and (3) the false designation of origin or manufacturer, in violation of the Lanham Act, 15 U.S.C. § 1125(a).  The complainants request that the USITC issue a general exclusion order, a limited exclusion order, and cease and desist orders.

The last two counts of the notice are traditional issues subject to section 337 cases.  It is count 1 that raises the interesting issues.

The last time the ITC found a Section 337 violation based on an antitrust cause of action was in 1978 in Certain Welded Steel Pipe &Tube, No. 337-TA-29.  Although the ITC found a violation, the President vetoed the determination, in part, because of pressure from the Justice Department, antitrust division.

The antitrust cause of action, however, has not been eliminated from section 337.  Section 337 does not specifically define what is an antitrust violation, but presumably it should overlap the Sherman Act.  The US Steel compliant specifically references the Sherman Act.

Recently former U.S. International Trade Commission Chairman Daniel Pearson stated that this is the widest 337 complaint he has ever seen, but went on to state that a sudden closure of the U.S. market to foreign steel would have dire consequences for the domestic economy.  Pearson specifically stated:

“I don’t believe I’ve ever seen a 337 petition that is this broad. To me, it sounds a lot like overreach. There’s no way that I could see someone closing off all imports of steel into the U.S. and not have enormous effects on consumer welfare and other factors that are specified in the statute. I’m flummoxed by this.”

337 is broadly tailored to address “unfair methods of competition or unfair acts.” Still, Pearson speculated that the ITC may well reject the petition and informally advise U.S. Steel to more squarely focus its arguments on the trade secret prong.

The ITC, however, did not reject the petition and instituted the case.

Pearson’s concern about the case is the broad nature of the company’s desired remedy, the general exclusion order. He stated:

“U.S. Steel is not happy with imports, and they may have decided to just take this shot and see what happens.  I have no idea whether or not they think they will be successful; I would rather guess not.”

But to date US Steel has been successful.

My fear, however, is that Chinese steel companies will think that this is like an antidumping and countervailing duty case and they can choose not to cooperate.  Failure to cooperate in a 337 case could lead to a total exclusion order against every steel product produced by every single Chinese steel company that does not participate in the case and that exclusion order from the US market could be in place for up to 30 years.

The antitrust claim in the 337 case by its conspiracy claim has already expanded and brought every single Chinese steel company into the case and a refusal to cooperate in the investigation could well lead to their exclusion from the US market for years to come.

NEW ANTIDUMPING AND COUNTERVAILING DUTY CASES AGAINST CHINA

On May 25, 2016, in the attached relevant pages of the attached petition, REVISED AMONIUM SULFATE PETITION, PCI Nitrogen, LLC filed an antidumping and countervailing duty case against ammonium sulfate from China.

JUNE ANTIDUMPING ADMINISTRATIVE REVIEWS

On June 2, 2016, Commerce published the attached Federal Register notice, JUNE REVIEW INVESTIGATIONS, regarding antidumping and countervailing duty cases for which reviews can be requested in the month of June. The specific antidumping cases against China are:  Artist Canvas, Chlorinated Isocyanurates, Furfuryl Alcohol, High Pressure Steel Cylinders, Polyester Staple Fiber, Prestressed Concrete Steel Rail Tie Wire, Prestressed Concrete Steel Wire Strand, Silicon Metal, and Tapered Roller Bearings.

The specific countervailing duty case is: High Pressure Steel Cylinders.

For those US import companies that imported :  Artist Canvas, Chlorinated Isocyanurates, Furfuryl Alcohol, High Pressure Steel Cylinders, Polyester Staple Fiber, Prestressed Concrete Steel Rail Tie Wire, Prestressed Concrete Steel Wire Strand, Silicon Metal, or Tapered Roller Bearings during the antidumping period June 1, 2015-May 31, 2016 or the countervailing duty period of review, calendar year 2015, the end of this month is a very important deadline. Requests have to be filed at the Commerce Department by the Chinese suppliers, the US importers and US industry by the end of this month to participate in the administrative review.

This is a very important month for US importers because administrative reviews determine how much US importers actually owe in 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.

While in China recently, I found so many examples of Chinese solar companies or US importers, which did not file requests for a review investigation.  In one instance, although the Chinese companies obtained separate rates during the initial investigation, the Petitioner appealed to the Court and through a Court determination the Chinese companies lost their separate rates.  Several Chinese companies and US importers did not know the case was appealed, and the importers now owe millions in antidumping duties because they failed to file a request for a review investigation in December.

CUSTOMS

FALSE CLAIMS ACT

On April 27, 2016, in the attached news release, california-based-z-gallerie-llc-, the Justice Department announced that Z Gallerie LLC agreed to pay $15 million to resolve allegations that the company engaged in a scheme to evade antidumping duties on imports of wooden bedroom furniture from the People’s Republic of China (PRC), in violation of the False Claims Act.  The relator , the private company that reported the fraud, will obtain $2.4 million of the $15 million.  As the Justice Department stated in its release:

“This settlement reflects the Department of Justice’s commitment to ensure that those who import and sell foreign-made goods in the United States comply with the law, including laws meant to protect domestic companies and American workers from unfair competition abroad,” said Principal Deputy Assistant Attorney General Benjamin C. Mizer, head of the Justice Department’s Civil Division.  “The Department of Justice will zealously pursue those who seek an unfair advantage in U.S. markets by evading the duties owed on goods imported into this country.” . . .

The particular duties at issue in this case are antidumping duties, which protect domestic manufacturers against foreign companies “dumping” products on U.S. markets at prices below cost.  Imports of wooden bedroom furniture manufactured in the PRC have been subject to antidumping duties since 2004.

The settlement announced today resolved allegations that Z Gallerie evaded antidumping duties on wooden bedroom furniture imported from the PRC from 2007 to 2014, by misclassifying, or conspiring with others to misclassify, the imported furniture as pieces intended for non-bedroom use on documents presented to CBP.  For example, Z Gallerie allegedly sold certain Bassett Mirror Company products, including a six-drawer dresser and three-drawer chest, as part of a bedroom collection; however, these goods were misidentified on CBP documents, using descriptions such as “grand chests” and “hall chests,” in order to avoid paying antidumping duties on wooden bedroom furniture. . . .

“Under the new Trade Facilitation and Trade Enforcement Act, CBP will likely see an increase in these types of settlements as the streamlined processes take effect concerning allegations of duty evasion,” said CBP Commissioner R. Gil Kerlikowske. “The Act reinforces CBP’s existing authorities and tools to collect and investigate public allegations of duty evasion improving the overall effectiveness and enforcement of CBP law enforcement actions concerning illicit trade activity, specifically in the area of antidumping and countervailing duty evasion schemes.”

“Companies that intentionally mislabel shipments or misrepresent the value of goods being imported into the United States to avoid paying the appropriate duties do so in an attempt to create an unfair advantage over businesses that play by the rules,” said Special Agent in Charge Nick S. Annan of U.S. Immigration and Customs Enforcement’s Homeland Security Investigations (ICE HSI) in Atlanta.  “This type of activity hurts legitimate U.S. businesses and, by extension, our overall national economy.  Uncovering these types of schemes will continue to be a major investigative priority for ICE HSI.”

The allegations resolved by the settlement were originally brought by whistleblower Kelly Wells, an e-commerce retailer of furniture, under the qui tam provisions of the False Claims Act.  The act permits private parties to sue on behalf of the United States those who falsely claim federal funds or, as in this case, those who avoid paying funds owed to the government or cause or conspire in such conduct.  The act also allows the whistleblower to receive a share of any funds recovered.  Wells will receive $2.4 million as her share of the settlement.

IP/PATENT AND 337 CASES

NEW SECTION 337 CASES FILED AGAINST CHINA

On May 5, 2016, Aspen Aerogels Inc. filed a Section 337 case against Composite Aerogel Insulation Materials and Methods for Manufacturing from China.  The proposed respondents are: Nano Tech Co., Ltd.,  China and Guangdong Alison Hi-Tech Co., Ltd., China.

On May 19, 2016, Intex Recreation Corp. and Intex Marketing Ltd. filed a new section 337 case against imports of Inflatable Products and Processes for Making the Same from China.  The respondent companies in China and Hong Kong are Bestway (USA) Inc., Phoenix, Arizona; Bestway Global Holdings Inc., China; Bestway (Hong Kong) International Ltd., Hong Kong; Bestway Inflatables & Materials Corporation, China; and Bestway (Nantong) Recreation Corp., China.

Complaints are available upon request

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

Best regards,

Bill Perry

US CHINA TRADE WAR–WEAK FREE TRADE ARGUMENTS CREATE PROTECTIONISM AND PROBABLE DEMISE OF TPP, STEEL, ANTIDUMPING REVIEWS AND NEW 337 CASE

White House Night Pennsylvania Ave Washington DCTRADE IS A TWO WAY STREET

“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”

PRESIDENT RONALD REAGAN, JUNE 28, 1986

US CHINA TRADE WAR MAY 19, 2016 UPDATE

Dear Friends,

The ITC has released its report on the Trans Pacific Partnership and a new 337 cases have been filed against US importers and Chinese companies on inflatable devices.

Best regards,

Bill Perry

ITC RELEASES TPP REPORT

On May 18, 2016, The US International Trade Commission (“ITC”) released its attached report on the Trans Pacific Partnership Agreement (“TPP”), ITC TPP REPORT.  The Main Findings of the ITC Report are set forth below.  The Report was a mixed bag finding that the overall US economy would grow by 0.23% by $57.23 billion by year 15 of the Agreement (2032) with agriculture being the biggest winner followed by services with a modest increase in employment.  But the ITC report also found that manufacturing, natural resources and the energy sectors would lose business by $10.8 billion (0.1 percent) lower with the TPP Agreement than it would be compared with baseline estimates without the agreement.

But the major gains with the TPP are in the other areas with the ITC finding that “the two new electronic commerce provisions that protect cross-border data flows and prohibit data localization requirements to be crucial to the development of cross-border trade in services.  . . .”

Outside Parties emphasized:

“the importance of TPP chapters addressing intellectual property rights, customs and trade facilitation, investment, technical barriers to trade, sanitary and phytosanitary standards, and state-owned enterprises.”

With the release of the ITC TPP Report, the Congress is free to take up the passage of the TPP.  U.S. Trade Representative Michael Froman stated that the ITC’s report will be just one of the arguments the Administration will use to push Congress to vote on the ratification of the agreement before President Barack Obama leaves office.  Froman specifically stated:

“The ITC report provides another strong argument for why TPP should be passed this year. It is part of a growing body of evidence that shows that TPP will benefit our economy at home and allow the U.S. to help set the rules of the road for trade in the Asia Pacific.”

Although Congressional experts originally indicated a possibility of taking the TPP up during the summer, the strong protectionist tide in the Presidential Election has prompted many experts both in and out of Congress to predict that the lame-duck session of Congress following the November elections as the first real opportunity for Congress to consider the TPP.

In a conference call with reporters, however, Froman revealed that USTR is moving forward with an expedited implementation of the TPP to make sure that the 11 other nations in the agreement are ready to comply with its terms as soon as the Agreement takes effect.  Usually the implementation process does not begin until the deal is ratified, but as USTR Froman states:

“We’ve begun an accelerated implementation process to be sure that we can give members of Congress the confidence they need that by the time the agreement enters into force that our trading partners will have fully complied with the terms of the agreement and that their constituents will get the full benefit of the deal.”

The ITC’s Report Main Findings are:

“The Commission used a dynamic computable general equilibrium model to determine the impact of TPP relative to a baseline projection that does not include TPP. The model estimated that TPP would have positive effects, albeit small as a percentage of the overall size of the U.S. economy. By year 15 (2032), U.S. annual real income would be $57.3 billion (0.23 percent) higher than the baseline projections, real GDP would be $42.7 billion (0.15 percent) higher, and employment would be 0.07 percent higher (128,000 full-time equivalents). U.S. exports and U.S. imports would be $27.2 billion (1.0 percent) and $48.9 billion (1.1 percent) higher, respectively, relative to baseline projections. U.S. exports to new FTA partners would grow by $34.6 billion (18.7 percent); U.S. imports from those countries would grow by $23.4 billion (10.4 percent).

Among broad sectors of the U.S. economy, agriculture and food would see the greatest percentage gain relative to the baseline projections; output would be $10.0 billion, or 0.5 percent, higher by year 15. The services sector would benefit, with a gain of $42.3 billion (0.1 percent) in output. Output in manufacturing, natural resources, and energy would be $10.8 billion (0.1 percent) lower with the TPP Agreement than it would be compared with baseline estimates without the agreement.

Many stakeholders consider two new electronic commerce provisions that protect cross-border data flows and prohibit data localization requirements to be crucial to the development of cross-border trade in services, and vital to optimizing the global operations of large and small U.S. companies in all sectors.

TPP would generally establish trade-related disciplines that strengthen and harmonize regulations, increase certainty, and decrease trade costs for firms that trade and invest in the TPP region. Interested parties particularly emphasized the importance of TPP chapters addressing intellectual property rights, customs and trade facilitation, investment, technical barriers to trade, sanitary and phytosanitary standards, and state-owned enterprises.

NEW SECTION 337 CASE FILED AGAINST CHINA

On May 19, 2016, Intex Recreation Corp. and Intex Marketing Ltd. filed a new section 337 case against imports of Inflatable Products and Processes for Making the Same from China.  The respondent companies are in China and Hong Kong.  Please see relevant notice below:

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 Inflatable Products and Processes for Making the Same. The proposed respondents are: Bestway (USA) Inc., Phoenix, Arizona; Bestway Global Holdings Inc., China; Bestway (Hong Kong) International Ltd., Hong Kong; Bestway Inflatables & Materials Corporation, China; and Bestway (Nantong) Recreation Corp., China.

If anyone wants a copy of the complaint, please feel free to contact me.

US CHINA TRADE WAR MAY 12, 2016 BLOG POST

Dear Friends,

As mentioned in my last blog post, as of May 1, 2016, I am no longer at the Dorsey law firm.  The transition is complete and my new law firm is Harris Moure, here in Seattle and my new e-mail address is bill@harrismoure.com.  The US China Trade War blog and newsletter are now coming from Harris Moure.

As also mentioned, Dan Harris, my partner, has a very famous blog, www.chinalawblog.com, which is followed by many companies that are interested in doing business in and with China.  Dan is determined to enlarge my readership so he is pushing me to write more smaller articles and take long articles, such as those on the TPP and the rise of protectionism in the US, and make them a series.

In that light, set forth below is the first of a several part series on how weak free trade arguments have led to the sharp rise of protectionism of Donald Trump and Bernie Sanders and the probable demise of the TPP.  The first article will outline the problem and why this is such a sharp attack on the Trans Pacific Partnership and some of the visceral arguments against free trade.  The second article will explore in depth the protectionist arguments and the reason for the rise of Donald Trump and Bernie Sanders and the weak free trade arguments to counter the protectionism.  The final article will focus on the Probable Demise of the TPP, failure of Congressional Trade Policy and what can be done to provide the safety net that will allow Congress again to vote for free trade agreements so that the United States can return to its leadership in the Free Trade area.

The Congress has to fix the trade situation now before the US and the World return to the Smoot Hawley protectionism of the 1930s.

In addition, set forth are several developments involving steel trade litigation, antidumping and countervailing duty reviews against Chinese companies and a new 337 patent case against Chinese companies.

If anyone has any questions or wants additional information, please see my blog, www.uschinatradewar.com or feel free to contact me at my new e-mail address bill@harrismoure.com.

Best regards,

Bill Perry

WEAK FREE TRADE ARGUMENTS CREATE THE RISE OF TRUMP/SANDERS PROTECTIONISM AND PROBABLE DEMISE OF TRANS PACIFIC PARTNERSHIP (“TPP”)

Three weeks ago former Democratic Congressman Don Bonker, a good friend, told me “The TPP is dead”.  Don has always been very skeptical that the Trans Pacific Partnership (“TPP”) would pass Congress.

Don also believes Hilary Clinton will beat Trump in a landslide, and the Democrats will take both the Senate and the House.  Although Clinton may win, I do not believe that it will be a blowout and do not believe the Republicans will lose both the Senate and especially the House.

Don told me he did not know one person voting for Trump.  My 95 old mother voted for Trump in the Massachusetts primary because as a former Republican state committeewomen, she saw a groundswell of Trump support from Democrats, with many, such as her hairdresser, asking “how do I become a Republican to vote for Trump”.  The last time she saw that was 1980 when Reagan won the Presidency and took Massachusetts.  In fact, the Massachusetts Registry of Voters has reported 100s of thousands of Democrats switching parties to vote for Trump.  Massachusetts is a very, very Blue Democratic state.

Another good friend, a Oregon factory owner, told me he is voting for Trump and all of his friends are voting for Trump.  A recent Quinnipac poll has Trump and Clinton in a dead heat in the three crucial swing states—Florida, Ohio and Pennsylvania.

This is momentum and the momentum at the present time is with Trump.  With momentum Trump will be able to expand his base, but it is questionable whether Clinton can do so.

But it is the second point of Don’s argument that is of interest to this audience.  If the Democrats take the Congress, he firmly believes the US will become much more protectionist because of the Democratic relationship to the labor unions.  All the labor unions are opposed to the TPP.

So the Democrats are becoming even more protectionist as well as the Republicans under Donald Trump.  This is a huge groundswell of US protectionism on both sides of the political equation, which could very well kill the TPP and move the United States down a very protectionist path.

On the Republican side, Trump himself has condemned the TPP and in Cosa Mesa, California and subsequent speeches stated that in a Trump Administration there will be no free trade agreements.  In fact, in an April 28, 2016 editorial on Trump’s recent Foreign Policy speech, the Wall Street Journal’s one sharp disagreement with Trump is his trade policy:

“Mr. Trump’s threats of trade wars with China, Mexico and Japan may please nationalists, but such brinkmanship could well provoke another global recession.  American interests must come first but the trade-offs are inevitably complex Republican and Democratic Presidents since the 1930s have concluded that trade is a net benefit to the economy. . . .”

In an April 27, 2016 article in the Wall Street Journal entitled “How Trump Killed Reaganism”, William Galston states:

Economic issues were secondary, which permitted business-oriented Republican elites to dominate their party’s economic agenda with free trade, a welcoming immigration policy and efforts to “reform”—that is, cut—major entitlement programs. As late as George W. Bush’s second term, these concerns remained paramount.

With the onset of the Great Recession, however, the alliance between the white working class and business elites began to fray. Workers blamed trade for the loss of millions of manufacturing jobs, and blamed immigrants for declining wages as well as for rising welfare expenditures and social disorder. Amid rising economic uncertainty, these voters were in no mood to put their remaining sources of economic reassurance—Social Security and Medicare—on the chopping block. “Limited government” meant cutting programs for the undeserving poor, not for working- and middle-class households.

Enter Donald Trump, who proposes to turn Reaganism on its head.  . . . Mr. Trump rejects current trade treaties as bad bargains struck by inept U.S. negotiators and paints immigration as an assault on American workers and society itself.

So it has come to this: A mercantilist isolationist is the odds-on favorite to win the Republican presidential nomination. Whether or not he goes on to win the general election, the Republican Party cannot return to what it once was.

The Reagan era has ended, and what comes next is anyone’s guess.

With the Indiana primary, Trump consolidated his position as the nominee for the Republican party, but what about Bernie Sanders on the Democratic side?  He won the Indiana primary and recently the West Virginia primary.  In response to my last article on the Trump Impact on Trade Policy, one Canadian exporter/US importer contacted me to say that Trump’s position on international trade is why it is better to support Senator Bernie Sanders:

I read your interview on LinkedIn about the Trump effect on International trade if he becomes President.  It was short, and sweet and pretty well summed up most people’s feelings who are in business.  We debate both him and Bernie Sanders up here in Canada and find it all fascinating.  The people who are supporting Trump would actually be better served supporting Sanders for his beliefs, with his policies better serving the “less” educated.  Trumps policies will bury his followers and they don’t seem to grasp it at all.  Protectionism is SO PASSE it’s scary they are even discussing it.

The e-mail illustrates an important problem with the Bernie Sanders alternative.  When it comes to international trade, Donald Trump and Bernie Sanders are two peas in a pod.  Frankly, on trade Bernie Sanders may be more protectionist than Donald Trump.  Why??

Trump has said that when he talks about high tariffs on Chinese imports, that is only a threat, a bargaining ploy to get better leverage in any negotiation with China and other countries.  Thus during the Florida debate Donald Trump clarified his stance on increased tariffs for foreign goods, stating that he would consider massive hikes as “threats” designed to force China and other countries to “behave.”

In the Florida debate, Trump specifically called the 45 percent “tax” on Chinese imports a threat:

It was not a tax, it was a threat. It will be a tax if they don’t behave. Take China as an example. I have many friends, great manufacturers, they want to go into China. They can’t. China won’t let them. We talk about free trade. It’s not true free trade, it’s stupid trade.

Trump went on to state that China is dumping its goods into the US market with “no tax, no nothing, no problems.” Trump further argued that U.S. manufacturers cannot get into the Chinese market:

I have the best people, manufacturers, they can’t get in. When they get in, they have to pay a tremendous tax.  If [China and other countries] don’t follow the rules and regulations so that we can have it equal on both sides, we will tax you. It doesn’t have to be 45, it could be less. But it has to be something because our country and our trade and our deals and most importantly our jobs are going to hell.

On the Democratic side, Bernie, who wants to keep labor union support, is not making threats.  In fact, Bernie Sanders on trade is just as protectionist, if not more protectionist than Donald Trump as illustrated on his Presidential website, which states, in part:

Bernie Sanders believes that the top priority of any trade deal should be to help American workers. Unfortunately, as Bernie has warned year after year, American trade policy over the last 30 years has done just the opposite. Multinational corporations – who have helped to write most of these trade deals – have benefited greatly while millions of American jobs have been shipped overseas.

American trade policy should place the needs of American workers and small businesses first.

Bernie’s strong opposition to destructive “free trade” deals began with NAFTA in 1993. . . .    As with NAFTA, Bernie warned in 2000 that Permanent Normal Trade Relations with China would help multinational corporations at the expense of workers and the environment. ….

The TPP follows in the footsteps of the previous pro-corporate trade deals. It lacks safeguards to protect American jobs and the environment while giving massive benefits to large multinational corporations. . . .

Bernie has stated repeatedly that his top priority is making sure that all Americans have access to good paying jobs. For this reason he has been a leader in Congress in the fight against the free trade agreements that have been negotiated over the past three decades. Bernie’s passionate warnings against these deals have, unfortunately for American workers, all been proven right as these trade deals have offshored a massive amount of decent paying jobs and have closed tens of thousands of factories across our country. . . .

Why is Bernie against most trade agreements?

He believes that free trade agreements like NAFTA, Permanent Normal Trade Relations with China, and the U.S.-Korea Free Trade Agreement have allowed too many American jobs to move overseas. . . .

As he said in 1993 on the House floor before voting against it, “NAFTA may be a good deal for the people who own our corporations, but it is a bad deal for American workers, for our family farmers, and it is bad for the environment.”

And Bernie is nothing if not consistent. Here he is over 20 years later warning against the Trans-Pacific Partnership:

“Let’s be clear: the TPP is much more than a “free trade” agreement. It is part of a global race to the bottom to boost the profits of large corporations and Wall Street by outsourcing jobs; undercutting worker rights; dismantling labor, environmental, health, food safety and financial laws; and allowing corporations to challenge our laws in international tribunals rather than our own court system.

With regard to trade with China, Bernie Sanders states on his Presidential website:

Bernie firmly believes that current trade relations with China are detrimental to job growth and wealth equality in the United States. Referring specifically to the 2015 Trans-Pacific Partnership [which does not include China], Bernie has decried trade deals with China as being “designed to protect the interests of the largest multi-national corporations at the expense of workers, consumers, the environment and the foundations of American democracy.” . . .

Time and time again, Bernie has voted against free trade deals with China. In 1999, Bernie voted in the House against granting China “Most Favored Nation” status. In 2000, Bernie voted against Permanent Normal Trade Relations with China which aimed to create jobs, but instead lead to the loss of more than 3 million jobs for Americans.

“Let’s be clear: one of the major reasons that the middle class in America is disappearing, poverty is increasing and the gap between the rich and everyone else is growing wider and wider is due to our disastrous unfettered free trade policy.” . . .

With these statements, Bernie Sanders sounds just like Donald Trump.  To see Bernie Sanders in action on trade, see his statements on the Senate floor against the Trans Pacific Partnership and China.  See http://feelthebern.org/bernie-sanders-on-trade/ and http://feelthebern.org/bernie-sanders-on-china/.

In his China speech, just like Senator Sessions, who advises Donald Trump on trade, Sanders confuses normal trade relations with China with a Free Trade Agreement, stating that PNTR was a free trade agreement with China.  When the US gave normal trade relations with China, it did not set up a Free Trade Agreement with China.  Permanent Normal Trade Relations (“PNTR”) only means that China is treated like all other countries, such as Iran, Syria, Russia, Ukraine and many other countries.  There is no unfettered free trade agreement with China.

Both the Democrats and the Republicans have now made international trade and free trade agreements one of the burning issues in the Presidential election.  On March 10, 2016, CNN Reporter Stephen Collinson in an article entitled, “How Trump and Sanders tapped America’s Economic Rage” stated:

Finally, somebody is listening. Donald Trump and Bernie Sanders might be poles apart in their politics and temperament, but they are voicing visceral feelings of economic disenfranchisement and alienation among pessimistic voters who feel they’ve been ignored for years.

The billionaire and the democratic socialist are in different ways speaking for vast populations of Americans who feel threatened by globalization, who question the benefits of “free trade” that political leaders have peddled for decades and who believe distant elites control the economy in ways detrimental to their lives and prospects.

It is turning out to be a potent electoral brew –which has lifted insurgent candidates like Trump and Sanders throughout the 2016 cycle and challenged foes like Hillary Clinton and establishment Republicans who have found it tougher to reconcile the grass-roots anger. . . .

Trump’s message is explosive, identifying culprits in what he sees as the corrupt cabal of Washington politicians and supposedly sinister outsiders, like illegal immigrants, job-stealing Chinese firms or tough negotiators who run rings around effete U.S. officials in places like Vietnam and Japan. To his backers, he is the fiercest shark in a global pool who, if nothing else, will have the rest of the world again fearing America’s bite. . . .

The story was similar on the Democratic side, where 57% of Democratic voters in Michigan said trade takes away U.S. jobs. Among people who thought so, Sanders was the most popular candidate.

“I think the key to him winning in Michigan was his clear message on the trade policies,” Sanders campaign manager Jeff Weaver told CNN . . . . “Michigan is a state that has been devastated by bad trade deals. He has opposed every one and Secretary Clinton has supported almost every one. People in Michigan know what the real impact of that is.”

But Sanders has established a narrative difficult to counter. His approach to Americans’ anxieties is to offer a “political revolution,” one that would rewrite the rules of the American economy — and the global one — according to a much more progressive blueprint.

His denunciations of Wall Street “oligarchs” and complaints of a “rigged” economy and a “corrupt” campaign finance system play into the feelings of his supporters that they are powerless to address the worsening conditions of their lives.

He hammers NAFTA and pacts with China, that have boosted global trade flows, fed America’s addiction for cheap goods from abroad, but also left a trail of victims in industrial states where the manufacturing base just could not compete with the low-wage rising economies of Asia and elsewhere.

And Clinton has also yet to come up with an effective riposte to assaults by Sanders on her paid speeches to Wall Street firms after she stepped down as secretary of state.

The Sanders win in Michigan has some of his supporters sensing that a campaign that seems inexorably trending away from him may at least thrive through the journey through primaries in Rust Belt states like Pennsylvania, Illinois and Wisconsin that often turn on blue-collar issues.

And even if he cannot catch Clinton, Sanders can take credit for dragging her to her left on economic questions, as she now speaks in her stump speech about the need to make hollowed out American communities “whole” again. . . .

To see the entire article, see http://www.cnn.com/2016/03/09/politics/sanders-trump-econom… 3/11/2016

Although it is certain that Hilary Clinton will win the Democratic nomination, Bernie Sanders has forced Clinton to move to the left and take a much tougher stance on international trade.  There is talk that Hilary may take Senator Sherrod Brown of Ohio, as her Vice President, a  very strong protectionist, who is viscerally opposed to the TPP.

The hot protectionist rhetoric of Donald Trump and Bernie Sanders have made international trade one of the center points of the election.  The simple truth is that when weak academic, theoretical economic arguments for free trade meet the hard visceral arguments of bombed out US factories and the loss of millions of manufacturing jobs, the free trade arguments melt away.

On March 15, 2016, the New York Times in an article entitled, “On Trade, Angry Voters Have a Point” stated:

Were the experts wrong about the benefits of trade for the American economy? . . .

Voters’ anger and frustration, driven in part by relentless globalization and technological change, may not propel either candidate to the presidency. But it is already having a big impact on America’s future, shaking a once-solid consensus that freer trade is, necessarily, a good thing.

“The economic populism of the presidential campaign has forced the recognition that expanded trade is a double-edged sword,” wrote Jared Bernstein, former economic adviser to Vice President Joseph R. Biden Jr.

What seems most striking is that the angry working class — dismissed so often as myopic, unable to understand the economic trade-offs presented by trade — appears to have understood what the experts are only belatedly finding to be true:  The benefits from trade to the American economy may not always justify its costs. . . .

In another study they wrote with Daron Acemoglu and Brendan Price from M.I.T., they estimated that rising Chinese imports from 1999 to 2011 cost up to 2.4 million American jobs. . . .

The Chinese export onslaught, however, left a scar on the American working class that has not healed. That disproportionate impact suggests Washington officialdom might do well to reassess its approach to future trade liberalization. . . .

Perhaps most important, the new evidence from trade suggests American policy makers cannot continue to impose all the pain on the nation’s blue-collar workers if they are not going to provide a stronger safety net.

That might have been justified if the distributional costs of trade were indeed small and short-lived. But now that we know they are big and persistent, it looks unconscionable.  (emphasis added.)

One of the reasons for the sharp rise in protectionism is the weak safety net, trade adjustment assistance, especially trade adjustment assistance for companies, which will be discussed in follow-up articles on this topic,

On March 15, 2016, Phyllis Schafly, a well-known Republican pundit, stated on Invstors.com that the Republican candidates are turning against trade deals, stating:

The first question asked of the presidential candidates at the most recent Republican debate, hosted by CNN in Miami on March 10, was “whether trade deals have been good for the American workers.”

Moderator Jake Tapper observed that one of Donald Trump’s “signature issues” has been his criticism of “disastrous trade deals” that have destroyed many good middle-class jobs that existed a generation ago. . . .

Ohio Gov. John Kasich likes to remind everyone that he “grew up in a blue collar family,” but votes he cast during his 18 years in Congress helped to decimate the manufacturing base of his home state. Kasich voted for the North American Free Trade Agreement in 1994, and in 2000 he voted to grant the “normal” trading privileges, which allowed China to enter the World Trade Organization. . . .

Sen. Ted Cruz once voted in favor of presidential trade authority before reversing himself on the subsequent vote last year. Cruz now says he opposes the TPP, but Congress has never rejected a trade deal after giving the president the authority to negotiate it.

“I am different in one primary respect, and that’s trade,” Trump insisted in the debate, explaining that “trade deals are absolutely killing our country.” He has proposed tariffs to offset abusive practices such as currency devaluation by “certain countries that are taking advantage of the United States and laughing at our stupidity.” . . . .

According to the 200-year-old theory of free trade, workers who lose manufacturing jobs to China should be able to find new jobs in other industries that benefit from a trade surplus, such as the pharmaceutical industry, or in non-tradable industries such as medicine and legal services. But millions of these workers, many of whom are men struggling to support their families, have not found adequate replacement jobs.

Some settle for lower-paying jobs, while others give up entirely, creating a social issue as well as an economic one. The percentage of men between 25 and 54 years old who are not employed has tripled in the last half century, and many who had been working at $40-per-hour manufacturing jobs are now receiving only $10-per-hour jobs at Wal-Mart or fast-food joints. . . .

In the general election in November, there will be millions of voters ready to cast their ballots for a candidate who stands up for American workers rather than catering to lobbyists who seek free-trade deals.

Pat Buchanan, a well-known Republican conservative, who also ran for the Presidency, stated in an April 4, 2016 commentary entitled  “What Trump has Wrought,” states:

But this city of self-delusion should realize there is no going back for America. For, whatever his stumbles of the last two weeks, Trump has helped to unleash the mightiest force of the 21st century: nationalism. Transnationalism and globalism are moribund.

Buchanan further states that Trump’s first issue is illegal immigration and building a wall along the Southern border to keep illegal immigrants out, but then goes on to state:

If immigration is the first issue where Trump connected with the people, the second is trade.  Republicans are at last learning that trade deficits do matter, that free trade is not free. The cost comes in dead factories, lost jobs, dying towns and the rising rage of an abandoned Middle America whose country this is and whose wages have stagnated for decades.

Economists who swoon over figures on consumption forget what America’s 19th-century meteoric rise to self-sufficiency teaches, and what all four presidents on Mount Rushmore understood.

Production comes before consumption. Who owns the orchard is more essential than who eats the apples. We have exported the economic independence Hamilton taught was indispensable to our political independence. We have forgotten what made us great.

China, Japan, Germany – the second, third and fourth largest economies on earth – all owe their prosperity to trade surpluses run for decades at the expense of the Americans. . . .

Patriotism, preserving and protecting the unique character of our nation and people, economic nationalism, America First, staying out of other nation’s wars – these are as much the propellants of Trumpism as is the decline of the American working and middle class.

Trump’s presence in the race has produced the largest turnout ever in the primaries of either party. He has won the most votes, most delegates, most states. Wisconsin aside, he will likely come to Cleveland in that position.

If, through rules changes, subterfuge and faithless delegates, party elites swindle him out of the nomination, do they think that the millions who came out to vote for Trump will go home and say: We lost it fair and square?

Do they think they can then go back to open borders, amnesty, a path to citizenship, the Trans-Pacific Partnership and nation building?

Whatever happens to Trump, the country has spoken. And if the establishment refuses to heed its voice, and returns to the policies the people have repudiated, it should take heed of John F. Kennedy’s warning: “Those who make peaceful revolution impossible, make violent revolution inevitable.”

For full article, see http://www.wnd.com/2016/04/what-trump-has-wrought/

The point is that both political wings of the the United States are becoming very protectionist in response to strong pressure from US voters.  On the right, Donald Trump, who is now the presumptive nominee of the Republican party, is firmly against all trade agreements, including the TPP.  On the left, Bernie Sanders in many ways is more protectionist than Trump and has succeeded in pulling Clinton to a much more protectionist position.

Understand that one reason newspapers, such as the Wall Street Journal, are attacking Trump on trade is that the Republican party traditionally has been very free trade, while the Democratic party, which relies on labor union support, has been much more protectionist.  The only reason that the TPP was completed is because Trade Promotion Authority was enacted into law last summer in 2015.  The only reason TPA passed the Congress is that the Republicans won both the Senate and the House.

Prior to the election, Senator Harry Reid, who heads the Democrats in the Senate, blocked all the trade bills, including the TPA, from coming to the Floor of Congress.

So to my liberal friends who think that Bernie Sanders would be more free trade than Donald Trump and the Republicans, that is simply not the fact.

Sanders has succeeded in pushing Hilary to be more protectionist and that is not good for the passage of the TPP. As John Brinkely of Forbes predicted several months ago, in a Presidential year with regards to the TPP, anything can happen and it has.  The United States is becoming much more protectionist.

Bill Reinsch, president of the National Foreign Trade Council, which has been a driving force for trade liberalization for over 100 years, recently stated:

There are always winners and losers in trade deals, but the losses tend to be short-term and specific while the gains are usually long-term and diffuse.  So you’ve got a growing mass of cranky, alienated voters.

Daniel Ikenson, director of the free market oriented Cato Institute’s Center for Trade Studies, recently stated:

It’s almost like there’s a reckoning coming due here.  The base of the Republican party is really growing increasingly skeptical of trade and Trump is the perfect demagogue to tap into that sentiment and magnify the concerns.

The next article in this series will deal first with the visceral gut wrenching arguments against free trade and the weak free trade arguments in response.  The article after that will deal with the probable demise of the TPP and finally the solution to the trade crisis, truly creating a safety net to help companies and workers adjust to import competition.  Only when there is a true safety net will the dialogue on free trade change.

THE ONGOING STEEL CASES

Many companies have been asking me about the ongoing Steel antidumping and countervailing duty cases so this section will address the Steel cases in more detail.

NEW STEEL ANTIDUMPING AND COUNTERVAILING DUTY CASE

On April 8, 2016 Arcelormittal USA LLC, Nucor Corp., and SSAB Enterprises LLC filed a new antidumping and countervailing duty case against imports of Certain Carbon and Alloy Steel-Cut-To-Length Plate from Austria, Belgium, Brazil, China, France, Germany, Italy, Japan, Korea, South Africa, Taiwan and Turkey.

APRIL 12 AND 13 USTR COMMERCE HEARINGS ON STEEL

On April 12, 2016, at a hearing in Washington DC members of Congress, union representatives and steel executives pushed the United States Trade Representative (“USTR”) to initiate antidumping proceedings at the Commerce Department against huge imports of subsidized and antidumping Chinese steel imports arguing that the administration needs to step in to protect domestic industry.

At the present time, however, there are very few major Chinese steel products not blocked by US antidumping and countervailing duty measures.  Preliminary determinations have been issued against galvanized and cold-rolled steel from China with very high antidumping and countervailing duty rates against both products, wiping them out of the US market.  Many, many Chinese steel products from China are currently covered by an antidumping (“AD”) order and often also a countervailing duty (“CVD”) order, including carbon steel plate, hot rolled carbon steel flat products, circular welded carbon quality steel pipe, light walled rectangular pipe and tube, circular welded carbon quality steel line pipe, circular welded austenitic stainless pressure pipe, steel threaded rod, oil country tubular goods, prestressed concrete steel wire strand, seamless carbon and alloy steel standard line and pressure pipe, high pressure steel cylinders, prestreessed concrete steel rail tire wire, non-oriented electrical steel, and carbon and certain alloy steel wire rod.

Despite 100s of outstanding AD and CVD orders against steel imports from China and other countries, the American steel market has shrunk to 86 million tons of production, competing against the more than 100 million tons China exports, out of 1.2 billion tons of total production.  But most of that Chinese steel was exported to other countries and third country imports from countries, such as Korea, Taiwan, India, and other countries, with low if not 0%, antidumping and countervailing duty rates are entering the United States.

Leo Gerard, president of the United Steelworkers, said the best way to save the American steel industry is for the Obama administration to step out publicly and get involved in initiating antidumping proceedings.

Although transshipment has been a substantial problem, if legitimate importers are involved, they expose themselves to criminal prosecution for Customs fraud.  US Customs law is certainly not a toothless as it is portrayed.

Sen. Amy Klobuchar, D-Minn., also urged the Commerce Department and Department of Homeland Security to step up enforcement at the nation’s ports, including increased inspections and possibly turning away ships carrying illegally subsidized steel.

U.S. Trade Representative Michael Froman, in opening statements as well as questions to the panelists, pointed to more than $1 billion in recent U.S. exports of steel products and touted the 149 current AD and CVD orders against imported steel, $900,000 in seizures for flouting those duty orders and a 10 percent increase in Commerce Department staff to work on unfair trade practice proceedings.

Democratic Senator Sherrod Brown of Ohio, Hilary Clinton’s possible running mate, urged the administration to support a section 201 petition if brought by a segment of the steel industry, which he said should lead to quick imposition of “appropriate” tariffs.  Steel pipe and tube producers seem to be most interested in the section 201 option. Other steel industry segments see it as too uncertain, given that the World Trade Organization has overturned all but one global safeguard the U.S. imposed in the past, including the 2001 section 201 steel case.

Senator Brown raised another option: WTO cases against China’s overcapacity, which appears to refer to a challenge claiming that the exports of its excess capacity driven by subsidies are undercutting or depressing the price of steel in the World market. “The only way to address this is with a WTO case,” Brown said. “China is in violation of its WTO obligations.”

NEW SECTION 337 UNFAIR TRADE CASE AGAINST ALL CHINESE CARBON ALLOY STEEL COMPANIES AND ALL STEEL PRODUCTS FROM CHINA

As mentioned in the last newsletter, on April 26, 2016, US Steel Corp filed a major 337 unfair trade case against all the Chinese steel companies seeking an exclusion order to bar all imports of carbon and alloy steel from China.

U.S. Steel Corp. is accusing Chinese steel producers and their distributors of conspiring to fix prices, stealing trade secrets and false labeling to avoid trade duties.  It is asking the U.S. International Trade Commission (“ITC”) to issue an exclusion order excluding all the Chinese steel from the US market and also cease and desist orders prohibiting importers from selling any imported steel that has already been imported into the United States.

Having worked at the ITC on 337 cases and later in private practice, section 337 is generally aimed at imports that infringe intellectual property rights, such as patents, trademarks or copyrights.  Moreover, one provision of section 337(b)(3) provides that when any aspect of a section 337 case relates to questions of dumping or subsidization, the Commission is to terminate the case immediately and refer the question to Commerce.

Also in the past when section 337 was used to bring antitrust cases, there was intense push back by the Justice Department.  Customs and Border Protection also may not be happy with the use of section 337 to enforce US Custom law.

But section 337 cases are not antidumping and countervailing duty cases.  There are no mandatory companies and lesser targets.  All the Chinese steel companies are targets, and this will be intense litigation with very tight deadlines.  If the individual Chinese steel companies do not respond to the complaint, their steel exports could be excluded in 70 days to six months.  Section 337 cases are hard- nosed litigation on a very fast track.

If you are interested in a copy of the complaint, please feel free to contact me.

On April 27, 2016, the Chinese Ministry of Commerce (“MOFCOM”) urged the ITC and US government to reject U.S. Steel’s request to ban all imports from China’s biggest steel mills over allegations of price-fixing and trade-secret theft.

MOFCOM stated that U.S. Steel’s request for an investigation under Section 337 of the Tariff Act was better suited for intellectual property disputes than for commodities like steel. The country said the complaint should be dismissed in favor of “dialogue, communication and joint efforts to address the problem of excess capacity” in the steel market.

UNION FILES SECTION 201 CASE ON ALUMINUM, BUT THEN WITHDRAWS IT 

As mentioned in my last blog post, on April 18, 2016 the United Steelworkers Union filed a section 201 safeguard case against aluminum imports from all countries at the US International Trade Commission (“ITC”).

But after intense pressure from the US Aluminum producers, on April 22nd the Union withdrew the petition.  Apparently, the US Aluminum producers have production facilities in Canada and also part of the Union was in Canada and not happy with the case.

MAY ANTIDUMPING ADMINISTRATIVE REVIEWS

On May 2, 2016, Commerce published the attached Federal Register notice, REVIEWS MAY 2016, regarding antidumping and countervailing duty cases for which reviews can be requested in the month of May. The specific antidumping cases against China are:  Aluminum Extrusions, Circular Welded Carbon Quality Steel Line Pipe, Citric Acid and Citrate Salt, Iron Construction Castings, Oil Country Tubular Goods, Pure Magnesium, and Stilbenic Optical Brightening Agents.

The specific countervailing duty cases are: Aluminum Extrusions and Citric Acid and Citrate Salt.

For those US import companies that imported :  Aluminum Extrusions, Circular Welded Carbon Quality Steel Line Pipe, Citric Acid and Citrate Salt, Iron Construction Castings, Oil Country Tubular Goods, Pure Magnesium, and Stilbenic Optical Brightening Agents during the antidumping period May 1, 2015-April 30, 2016 or the countervailing duty period of review, calendar year 2015, the end of this month is a very important deadline. Requests have to be filed at the Commerce Department by the Chinese suppliers, the US importers and US industry by the end of this month to participate in the administrative review.

This is a very important month for US importers because administrative reviews determine how much US importers actually owe in 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.

Recently, there are many examples of Chinese solar companies or US importers, which did not file requests for a review investigation.  In one instance, although the Chinese companies obtained separate rates during the initial investigation, the Petitioner appealed to the Court.  Several Chinese companies and US importers did not know the case was appealed, and the importers now owe millions in antidumping duties because they failed to file a request for a review investigation in December 2015.

NEW 337 CASE AGAINST CHINA

On May 5, 2016, Aspen Aerogels Inc. filed a 337 patent case at the ITC against imports of Composite Aerogel Insulation Materials and Methods for Manufacturing from China against Nano Tech Co., Ltd. and Guangdong Alison Hi-Tech Co., Ltd. In China.

If anyone wants a copy of the complaint, please feel free to contact me.

If anyone has any questions about these cases or about the US trade policy, trade adjustment assistance, customs, 337, IP/patent, products liability, US/China antitrust or securities law in general, please feel free to contact me.

Best regards,

Bill Perry

William E. Perry

Attorney

600 Stewart Street, Suite 1200
Seattle, Washington  98101
tel: 206.224.5657 – fax: 206.224.5659
cell: 206.235.4175
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