US CHINA TRADE WAR–SEQUESTRATION, CHINESE ANTIDUMPING ,CUSTOMS AND VITAMIN C, SOLAR ANTITRUST

Zhengyang Gate from Qianmen Gate Tiananmen Square Beijing ChinaDear Friends,

There have been a number of developments in the trade, customs, and antitrust areas, including the impact of the sequestration on the Trade area.

TRADE

 CITRIC ACID CAFC DECISION

In the attached Global Commodity Group v. United States case, the Court of Appeals for the Federal Circuit on March 7, 2013 affirmed the Commerce Department’s scope determination that a “blend” of 35% citric acid from China and 65% citric acid from other countries was within the scope of the antidumping order against Citric Acid from China.  CITRIC ACID CAFC DECISION

SEQUESTRATION

USTR General Counsel Timothy Reif stated at a recent conference in Washington DC that the forced budget cuts from sequestration will pose a “significant hurdle” to the agency, both in terms of negotiating trade agreements and launching new litigation to enforce U.S. rights under existing trade agreements.

USTR General Counsel Timothy Reif said that if the cuts hit, USTR “may no longer have the funding to initiate new legal disputes, which would result in reduced enforcement of trade agreements.” Reif further explained for USTR, “Those cuts will add a significant hurdle to these and other efforts … including through reduced staffing, reduced capability to engage with our trading partners needed to achieve these job-supporting trade goals.”

The forced budget cuts will amount to a 5-percent slash in non-defense spending, according to the latest estimate by the Office of Management and Budget (OMB). However, since the first round of cuts will cover the seven months from March 1 until the start of the fiscal year, the effective level of the cuts will amount to about 9 percent, OMB said.

In addition, the ability of Customs and Border Protection (CBP) to inspect containers coming into the United States at major seaports will likely slow down by up to five days as a result of the budget cuts, Deputy Commissioner David Aguilar said in a March 2 letter to the trade and travel industry.

This is due to fewer personnel and potentially reduced hours of operation as a result of a $512 million cut to CBP’s budget of $10.2 billion. Land ports of entry might also experience “significant daily back-ups,” Aguilar noted.

In a March 1 report to Congress in addition to CPB, OMB announced that USTR would be cut by $3 million, out of a budget of $52 million; the Commerce Department’s International Trade Administration will be cut by $23 million, out of $458 million; the International Trade Commission will be cut by $4 million, out of $80 million; and Commerce’s Bureau of Industry and Security will be cut by $6 million, out of $102 million.

CUSTOMS—COLLECTION OF ANTIDUMPING DUTIES FROM US BOND/INSURANCE COMPANIES

Under pressure from Congress, the Justice Department and Customs have launched collection actions against US bond, insurance, companies that put up bonds for new shipper review in various agricultural and seafood antidumping cases against Chinese companies.  See as an example the attached March 1, 2013 complaint against Lincoln General Insurance Company in the Court of International Trade seeking $4,527,586.00, plus pre- and post-judgment interest on bonds to cover imports of fresh garlic from the People’s Republic of China, produced and/or exported by Huaiyang Hongda Dehydrated Vegetable Co. (Hongda) during an antidumping new shipper review.  GARLIC AD LINCOLN GENERAL INSURANCE Ct Int Trade 13-86 complaint

CHINESE ANTIDUMPING CASES

Just received new antidumping injury regulations that have been released by MOFCOM.  See attached document. CHINA’S INJURY TEST IN ANTIDUMPING AND CVD CASES

ANTITRUST—VITAMIN C CASE

As a follow-up to my last blog, the Vitamin C antitrust jury trial continues along with the fireworks.

As stated in the last post, the Jury trial started on Monday, February 25 at the Federal District Court in New York City, with allegations that the price fixing by Chinese Vitamin C companies cost US businesses $54.1 million. Under US antitrust law, the remedy is triple damages or 54 million times 3.  The specific allegation is that China’s largest vitamin C makers voluntarily entered into a series of agreements that limited supply and artificially inflated prices U.S. purchasers paid for Vitamin C between 2002 and March 2006. About 80 percent of vitamin C used in the U.S. is produced in China.

The trial is historic because Chinese companies have never before been forced to defend themselves in an antitrust case in US court.

The Chinese Vitamin C companies’ defense is that the Chinese government compelled the companies to set the prices—the foreign compulsion defense through the China Chamber of Commerce for Import & Export of Medicine & Health Products (“Chamber”).  But the Chinese companies must prove that the Chinese government actually compelled the Chinese companies to set the price floor for the Vitamin C exports on pain of penalty.

Chinese manufacturers began discussing ways to protect vitamin-C prices and limit exports after the cost for the product plummeted to $3 per kilogram by the end of 2001. The companies entered into written pricing agreements during meetings of a vitamin-C subgroup of the government-controlled Chamber.

The Chinese companies received help from the Chamber in coordinating their pact, but each of the manufacturers voluntarily agreed to enter into the price-fixing agreement. Membership in the Chamber is voluntary, and each of the companies is allowed to set the organization’s rules and elect its officers.  Jurors have been shown internal documents to argue that the companies acted independently of the Chinese government.

As the trial continued in New York City, on Monday, March 4th, Mr. Feng Zhenying, China Pharmaceutical Group Ltd.’s executive director, stated that vitamin C manufacturers fabricated customs documents to get around a Chinese government mandated price floor.

In response to the Plaintiff’s questions, CPG’s Feng Zhenying said vitamin C makers could submit false documents to Chinese customs officials when companies wanted to sell the product below the mandated $3.35 price floor.  U.S. customers sometimes demanded vitamin C prices that were lower than the Chinese government allowed.

China implemented a so-called verification and chop process to ensure vitamin C wholesale prices were at least $3.35 per kilogram and export contracts required a seal from the Chamber. But Monday’s testimony from Feng, who also served as Weisheng’s general manager, suggests Vitamin C companies worked around government controls depending on market demand.

On Tuesday, March 5, 2013, at the Trial, Mr. Qiao Haili, a former director of China Chamber of Commerce for Import & Export of Medicine & Health Products, who had authority over the vitamin C subgroup, testified that Chinese vitamin C makers were forced to fix prices or risk being banned from the lucrative U.S. market by the Chinese government.  He also testified in the Brooklyn federal courtroom that vitamin C manufacturers faced stiff penalties if they didn’t follow price and export quotas.

Haili testified that China’s decision to ease its control over the market in 1993 led to “cruel and harsh” competition between manufacturers, which drove vitamin C prices so low that the government was concerned other nations would initiate antidumping actions against the industry.

The cutthroat pricing was driven by U.S. customers who selected and stayed with manufacturers that sold the product at the lowest possible price.  Haili described U.S. purchasing decisions as “very irrational” because they valued rock-bottom prices over quality and other factors. He stated that this posed a problem for China because it limited the amount of U.S. dollars being brought back into China and hindered the growth of the nation’s vitamin C industry.

“It affected the well-being of the country,” Haili said through a translator.

On Wednesday, March 6, 2013, however, Mr. Qiao Haili, testified at the Vitamin C antitrust jury trial that he had doubts about his power to enforce rules that forced the industry to fix prices, contradicting previous testimony.

Counsel for the plaintiffs showed the jury a report that had been sent to the Ministry of Commerce, or MOFCOM, in July 2003, stating the group the agency had formed to regulate vitamin C manufacturers lacked legal authority to penalize companies that didn’t follow industry rules.  Haili wrote in the memo that the rules of the Chamber were a mere formality that “only honest fellows would follow,” because they lacked enforcement mechanisms. The memo also asked the Chinese government to clearly define what legal basis the Chamber has for punishing companies that step out of line.

The memo contradicted previous statements Haili had made to the jury that the Chamber could levy harsh penalties if companies didn’t agree to follow industry rules, including prohibiting a company from exporting vitamin C.

In response to the price fixing allegation, the Chinese Vitamin C companies have argued that the Chinese government, through the Chamber, compelled them to fix prices of their exports. Their argument, known as the sovereign compulsion defense, presents one of the key questions facing the jury:

Did Chinese law force the Chinese companies to collude on price.

On Wednesday Haili clarified that portions of the memo discussing the Chamber’s inability to enforce its rules and stated that they related to penicillin, not vitamin C.  Plaintiff’s counsel representing U.S. companies pointed out that the memo did not mention penicillin.

Haili testified that under verification and chop, introduced in May 2002, vitamin C export contracts needed to receive a chamber stamp. To get it, companies were required to sell the nutrient at or above a $3.35-per-kilogram pay floor.

Before jurors were shown his report to MOFCOM, Haili testified Wednesday that verification and chop gave the Chamber a powerful tool against vitamin C manufacturers who violated the organization’s rules. In response to questions, Haiti said he could cancel contracts, limit export volume and order companies to halt production if vitamin C supply was greater than demand.

Haiti said that prior to the implementation of verification and chop, he could only recommend to the Ministry of Foreign Trade and Economic Cooperation, MOFCOM’s predecessor, possible sanctions for violating companies.  “After 2002, I could actually stop the verification and chop for the violating members, and they had no way to export,” Haiti said through a translator.

On Thursday, March 7, 2013, Mr. Qiao Haili restated his point that vitamin C manufacturers were required to fix prices as part of the Ministry of Commerce’s coordination of the industry, despite the memo that was shown to the jury on Wednesday.  Mr. Qiao Haili testified that domestic manufacturers came to consensus on export pricing “under our forceful command,” referring to his role in the Chamber group that regulated the industry.  Haili, a primary defense witness, then concluded his testimony after three days on the witness stand.

U.S. purchasers claim that collusion in China’s vitamin C industry cost them $54.1 million.  Closing arguments are expected next week.

The missed point in Mr. Qiao Haili’s testimony is the impact of antidumping cases on Chinese companies.  The Chamber started to set these prices because US antidumping cases were wiping Chinese products out of the US market.  In fact, one antidumping order against a Chinese chemical product has been in place for almost 30 years wiping all Chinese imports out of the US market.  This appears to have been a missed opportunity to make that point at the trial.

On Monday, March 11th, the trial continued and the economists made competing presentations regarding damages.  One report for the Chinese defendants was prepared by NERA Economic Consulting President Dr. Lawrence Wu.  Dr. Wu concluded that demand for vitamin C increased dramatically beginning in November 2002 in response to the severe acute respiratory syndrome, or SARS, outbreak in Asia.

In response, for the plaintiffs Dr. B. Douglas Bernheim, a Stanford University economics professor, said the report was misleading, overstated the affect that SARS, and later avian flu, had on vitamin C demand, and didn’t meet widely accepted economic standards.  Dr. Bernheim stated that the report attributing sharp price increases to fears over SARS and avian flu outbreak- as opposed to industry collusion is “nonsensical” and riddled with mathematical errors.

One outcome of Wu’s economic model is that it predicts vitamin C prices were actually lower for several months while the alleged collusion was still going on, Bernheim said.  “The conclusions are just not right,” Bernheim said.  Chinese manufacturers commissioned the report to find potential errors with an economic model Bernheim crafted for U.S. companies used to calculate their potential damages.

Dr. Wu argued in his report that Chinese manufacturers should at most be on the hook for $2.2 million in damages for alleged price fixing, substantially less than the $54.1 million U.S. companies are seeking at trial.

The economists’ testimony comes as the Court prepares to send the case to the jury later this week.  Closing arguments are expected to begin Wednesday.

SOLAR CELLS ANTITRUST CASE

In the Solyndra v. Suntech et al antitrust case, attached is the Defendants’ joint motion to dismiss Plaintiff’s complaint.  The first count in the motion is that Solyndra’s claim under Section 1 of the Sherman Act of a cartel by the Chinese companies should be dismissed because Solyndra failed to allege facts sufficient to support a plausible conspiracy to lower prices.  SOLYNDRA CHINESE DEFENDANTS Motion to Dismiss

JAPANESE FREIGHT COMPANIES

 On March 8, 2013, the US Justice Department announced that two Japanese air freight forwarding companies agreed to plead guilty and to pay criminal fines totaling $18.9 million for their roles in a conspiracy to fix certain fees in connection with the provision of air freight forwarding services for air cargo shipments from Japan to the United States.  “K” Line Logistics Ltd. has agreed to pay a $3,507,246 criminal fine and Yusen Logistics Co. Ltd. has agreed to pay a $15,428,207 criminal fine.  See attached announcement.  DOJ JAPAN FREIGHT COMPANIES

If you have any questions about these cases or legal areas, please feel free to contact me.

In addition, I will be in China from March 17 to the 30th, first in Beijing and then in Shanghai.  If anyone wants to talk to me in person about these developments, please feel free to contact me.

Best regards,

Bill Perry