“PROTECTIONISM BECOMES DESTRUCTIONISM; IT COSTS JOBS”
PRESIDENT RONALD REAGAN, JUNE 28, 1986
US CHINA TRADE WAR FEBRUARY 23, 2017
US CHINA TRADE WAR UPDATE MARCH 14, 2017
Recently learned from someone at a law firm that specializes in bringing antidumping (“AD”) and countervailing duty (“CVD”) trade cases that they are in the process of preparing a number of new cases against China and other countries. With a sympathetic Trump Administration and a very sympathetic Wilbur Ross as the new Secretary of Commerce, more cases are going to be filed.
ALUMINUM FOIL FROM CHINA
On March 9, 2017, the US Aluminum Foil Trade Enforcement Working Group, including Aleris Inc., Alpha Aluminum, Golden Aluminum, Granges Americas Inc., JW Aluminum Company, Novelis Corporation, Republic Foil Inc., Reynolds Consumer Products, and United Aluminum Corporation, filed major AD and CVD cases against more than $658 million of aluminum foil imports from China in 2016.
The petition alleges duties ranging from at a minimum of 38 percent to a high of 134 percent and targets 232 Chinese exporters and producers of aluminum foil. The aluminum foil covered by the complaint covers household aluminum foil as well as aluminum foil used in cookware, product packaging and heat exchangers found in cars and HVAC systems.
US importers can be liable for CVD duties on aluminum foil imports from China as soon as August 6, 2017 and AD duties on October 5, 2017.
Attached are the relevant parts of the AD and CVD complaints along with a list of the targeted Chinese exporters/producers and US importers. 2017.03.08 CHN-ALUMINUM FOIL Petition Vol I 1Narrative IMPORTERNAMES ONECHINAEXPTS TWO CHINA EXPORTS If anyone has any questions, please feel free to contact me.
SILICON METAL FROM AUSTRALIA, BRAZIL, KAZAKHSTAN AND NORWAY
Although the US industry may believe AD and CVD petitions will move the Chinese imports share to the US industry, that is not necessarily the case. Case in point, on March 8, 2016, Globe Specialty Metals Inc. filed major AD and CVD cases against imports of Silicon Metal from Australia, Brazil, Kazakhstan and Norway. Chinese silicon metal has been under an AD order with shut out rates since 1991.
Attached are the relevant parts of the AD and CVD complaints along with a list of the targeted Chinese exporters/producers and US importers. SMALL SILICON METAL PETITION
The first hearing at the ITC is March 29th. Commerce will issue questionnaires probably in the first week of April. Commerce Department preliminary determinations in the Countervailing Duty cases, which is when liability for importers begins, can happen as soon as August.
If anyone has any questions, please feel free to contact me.
With a sympathetic Trump Administration in power, there will be a sharp rise in AD and CVD cases against China and other countries.
US CHINA TRADE WAR FEBRUARY 23, 2017
This blog post contains several articles about Trump and Trade or the Trump Trade Report. To paraphrase Bob Dylan, “the times they are a changing” and in the trade area for importers and foreign exporters, a hard rain is going to fall. This problem is not limited to just imports from China. Trump is going to be much tougher on all imports from every country.
From Border Adjustment taxes to renegotiating NAFTA to pushing back on China, Mexico and even Germany, Trump is attacking all foreign countries that have a trade surplus with the United States. With trade, it is a brand new day under the Trump Administration.
But one other point on the end of the scale is that Wilbur Ross stated in his confirmation hearing that increased exports is one of the four major ways Trump intends to increase the US growth rate to 3 or 4%. But as indicated above, trade is a two-way street.
One way in which the House of Representatives wants to change the trade equation is border adjustment taxes, which may, in fact, be a response to the Value Added Taxes levied on US exports. Trump and Congress have apparently decided to fight fire with fire—mercantilism to fight mercantilism, border adjustment taxes to fight value added taxes, which put US exports at a major disadvantage.
No longer will the US take a passive approach to foreign trade barriers to US exports. Trump and his team will raise US trade barriers to counter the trade barriers erected by other countries. Reciprocity is the name of the game.
As stated below, with the Border Adjustment tax (“BAT”), this is shaping up to be a “huuge” fight between US importers, including retailers, such as Walmart, Amazon, Best Buy and Target, and small to large importers, such as Apple, on one side and major exporters, such as Boeing, Dow, Honeywell, Caterpillar, Johnson & Johnson. and General Electric, on the other side. Because of their enormous exports, these companies are looking at a tax bill of 0. On the other hand, for retailers a BAT could reduce their profits to 0 and force them into bankruptcy.
If the BAT goes through, as explained below and in the Universal Trade War post, the US can expect retaliation and one of the targets will be US agricultural exports.
Set forth below are posts on Trade, Border Adjustment Taxes, NAFTA renegotiation, Will Trump Withdraw from the WTO, Ross Confirmation hearings, Solar Cells and Solar Products Trade cases, major CAFC Cases in the AD and CVD area. In addition, yesterday, the ITC reached a negative injury determination in the Bus and Truck Tires from China AD and CVD case.
In addition, hopefully Trade Adjustment Assistance for Companies, which is the only effective US trade remedy that saves companies and the jobs that go with them, will expand.
Finally, in the 337 area, the CAFC has affirmed ITC sanctioning a foreign company for destroying evidence, US Steel has withdrawn its cyber hacking charge and a recent 337 intellectual property case was filed against China on TV Remotes.
If anyone has any questions or wants additional information, please feel free to contact me at my e-mail address email@example.com.
WILL TRUMP REALLY BE TOUGH ON TRADE OR IS IT A NEGOTIATING TACTIC?
In the confirmation hearing post below, Wilbur Ross states that the Trump Administration looks at exports as one of the four pillars to increase economic growth in the US. But as stated above, trade is a two-way street. Other countries have a say in whether the US can increase exports. Creating a trade war will cause US exports to fall and the Trump Administration will not be able to meet its objective of increasing economic growth.
If the Trump Administration takes trade actions blocking imports, it is guaranteed that the countries exporting those products will retaliate against the US and US exports will fall. Total 2016 exports to other countries were over $1 trillion with exports in December 2016 alone over $190 billion. See US Government Statistics at https://www.bea.gov/newsreleases/international/trade/2017/trad1216.htm.
What were the top export countries for US exports: Canada, Mexico, China, Japan and UK. The first three countries are the ones that Trump is attacking, and Trump has bought into the argument that because of the size of our market, these companies will simply stay silent when attacked.
Moreover, the Trump Administration has bought into the poisonous Kool-Aid argument that exports are good and imports are bad. US importers, therefore, are dirty birds. Through the proposed Border Adjustment Tax (BAT) and tougher enforcement of antidumping and countervailing duty cases by shortening already short deadlines for complicated submissions, the real companies being bashed are US importers, US companies who import products into the US and have to pay the added taxes and duties. Increased taxes and duties will not be a costless exercise. Importers will close and jobs will be lost. As US imports decline so will US exports, as foreign countries retaliate against the US and shut down US exports to their countries.
Killing the TPP also did not help US exports. Soon after being inaugurated, on January 23, 2017, three days after the inauguration President Trump signed an executive order announcing the US withdrawal from the Trans Pacific Partnership (“TPP”). With his executive order, Trump removed the U.S. from a 12-nation pact covering 40 percent of the global economy, which would have reduced or eliminated foreign tariffs on 18,000 different products exported by the United States.
On January 26, 2017 in an interview with Sean Hannity on Fox News, Trump explained that he did not like the TPP because it did not do anything for currency manipulation and because the Agreement would fall to the lowest denominator. Trump went on to say that his Administration intends to negotiate many bilateral trade agreements with the individual countries in the TPP:
“We’re going to make deals with every one of those countries. And you know what? If the deal doesn’t work out, we terminate the deal. When you get into the mosh pit, I call it — where you have all these countries together, you can’t get out of the deal.
And you take the lowest denominator. In other words, you have countries that don’t treat us well. They’re in there. We want to deal with the ones that treat us well. And if they don’t treat us well, we terminate or we give them a 30-day notice of termination. And then they come back and they want to renegotiate during that 30 days, and we get a better deal. We don’t make good deals anymore. You almost wonder who does these deals? How did it happen?
So just — look, to sum up, we’re going to make great trade deals. We’re going to bring back jobs. We’re going to have a strong military. We’re going to do great.”
For those readers from China and other countries, a mosh pit is where dancers get together often at a concert and mosh, jump up and down collide with each other.
The bottom line is that Trump intends to do more bilateral deals because that will give the US more leverage and enforcement power. In his meetings with Prime Ministers Abe of Japan and May of the United Kingdom, he indicated a willingness to have bilateral trade agreements with those countries.
Although many pundits have criticized the Trump decision to pull out of the TPP, in fact, there was not much support for the TPP in Congress. Even before the November election, many Congressional staffers told me that the TPP was in trouble.
In a speech on February 1st at the US Chamber of Commerce, Senate Finance Committee Chairman Orrin Hatch, RUtah, stated that it was important to put the “painful history” of the TPP behind and allow the Trump administration to move forward in creating a new trade strategy. In his speech Hatch pointed to the failure of the Obama Administration to build a consensus in Congress for the failure of the TPP, stating:
“I know this is painful history for many of you. It certainly is for me … I actually think these events can serve as a cautionary tale.”
Hatch went on to state that the Congressional renewal of Trade Promotion Authority passed in 2015, which came very late in the TPP negotiations, and only because Republicans became a majority in the Senate in the mid-term elections in 2014. In contrast, Trump has assumed power about a year and a half after Congress passed a renewal of Trade Promotion Authority in 2015. This law allows Congress to set standards and priorities for the nation’s trade agreements in exchange for an up or down Congressional vote without amendments once the Agreements are submitted for ratification.
According to Hatch, since TPA was not passed until the Obama Administration had negotiated nearly all of the TPP, it was too late for the TPP to get on a sound foundation. Since the Trump Administration has indicated a preference for bilateral deals, Hatch hopes that the new administration will embrace the unique opportunity but went on to state that Congress will be watching to make sure that any deals live up to the high standards set forth in TPA, stating:
“In all of these efforts, my chief concern will be whether the administration’s policies promote economic growth, expand individual opportunity, increase transparency and the rule of law, and, of course, promote and protect intellectual property rights. We have an unprecedented opportunity to modernize and rebalance our trade agenda to more closely reflect our values and economic interests.”
But critics of bilateral trade deals as compared to multilateral trade deals have pointed to the Most Favored Nation clause of the GATT, which requires each nation to treat all trading partners alike and not discriminate in their tariff policy between different WTO trading partners. Bilateral and regional trade deals are allowed, but only if the Agreements cover “substantially all the trade” in the products by the nations participating in that agreement.
Bilateral trade negotiations, with a country, such as Japan, can be difficult because of the issue of subsidies and lobbying by interest groups. Companies who will lose business to imports from the country will be energized to lobby for special protection. Agricultural subsidies can also kill a deal. In Japan agricultural interests for products, such as beef, rice and citrus fruit, are very strong and will be difficult to overcome.
Trump has held difficult phone negotiations with the Presidents of Mexico and Australia and has been shooting at any country with a trade surplus with the US, including China, Germany and Mexico. He also initially stated that he was going to tear up NAFTA.
Trump is also attacking currency manipulation, not only against Mexico, China and Japan, but also Germany. Recently, Peter Navarro, who heads Trump’s National Trade Council, told the Financial Times newspaper that the euro was like an “implicit Deutsche Mark” whose low valuation gives Germany an edge over the United States and its European partners. Navarro’s statement pushed the Euro up about 0.5 percent against the U.S. dollar and created a response from German Chancellor Angela Merkel, who stated that Germany respects the independence of the European Central Bank.
In fact, all of Trump’s arguments against Mexico, has caused the Mexican peso to drop to the lowest level in years, making it much more profitable to set up manufacturing operations in Mexico. So President Trump has to be careful about what he wishes for.
Despite the tough talk, in his first telephone conference with President Xi Jinping from China, Trump was much more diplomatic stating that he would abide by the “one China” policy. As indicated below, after meeting with President Trudeau of Canada, Trump stated that he was not going to tear up NAFTA. He was going to tweak it and that his trade problems were not with Canada, but with Mexico.
On January 23rd, the day he pulled out of TPP, Trump met with CEOs of a dozen of the largest American manufacturers pledging to deeply cut regulations and reduce corporate taxes, but in exchange, Trump told the US companies they must stay in the country and continue employing Americans. As Trump stated:
“Don’t leave. Don’t fire your people in the United States. We have the greatest people.”
He also threatened to impose a “substantial border tax” on companies that move production out of the country.
After the meeting, Andrew Liveris of Dow Chemical stated that although they initially discussed the BAT, Trump:
“is not going to do anything to harm competitiveness. He’s going to actually make us all more competitive, recognizing there’s a transition here. You can’t get things done overnight.”
Trump, in fact, may be listening to his critics on trade. On January 17, 2017, Bloomberg News published an editorial entitled “Trump’s Trade Plan is a Looming Disaster”, in which they state in part:
“Even by his standards, President-elect Donald Trump’s statements on trade have been stunning in their recklessness. His proposals essentially amount to the repudiation of a system that has fostered global stability and lifted hundreds of millions of people out of poverty over the last several decades — and if he actually intends to execute his radical agenda, there’s little to stop him. . . .
The right approach is to focus on competitiveness, opportunity and effective social insurance. Education reform, tax reform, deregulation, and investment in the right kind of infrastructure could raise the long-term rate of growth and spread the benefits to more workers. Trump deserves some credit for taking up some of these points. . . .
If Trump follows through on trade, it won’t be long before he and his supporters regret it. Declaring a trade war on the world can only lead to collapsing confidence and recession. Yet if the system of international commerce, painstakingly put together over decades, is carelessly torn down, rebuilding it won’t be easy or quick — however much a chastened Trump administration might wish to.
Mr. President-elect: Just don’t do it.”
WILL TRUMP UNILATERALLY IMPOSE TARIFFS?
But the question being asked is could Trump unilaterally impose tariffs? One proposal circulating the Congress is the Global Trade Accountability Act, which would limit the President’s executive power to impose regulations, which would have a major impact on the US economy, and also to unilaterally impose tariffs.
Although I have been of the opinion that Trump could not unilaterally impose tariffs because under the Constitution Congress controls trade, not the President, the 1917 Trading with the Enemy Act (TWEA), delegates to Presidents the power to impose tariffs and block imports from countries that are hostile to the US and in the event of a national emergency. In 1971 Richard Nixon justified a 10% surcharge on all imports using the Korean War as the National Emergency. Although the TWEA’s opening language says it pertains “in time of war,” the current President could use it to impose tariffs, citing the wars in Iraq and Afghanistan. The International Emergency Economic Powers Act of 1977, like the TWEA, and six other statues give Presidents vast power to regulate international commerce during an “unusual and extraordinary threat,” which the current President thinks is the nation’s current condition.
The next question, however, is whether Trump would actually unilaterally impose tariffs. I think not because all the cautionary statements from friendly press publications, such as the Investors Business Daily and the Wall Street Journal, and many conservative economists and business leaders have warned Trump not to do it because it would create a trade war that would destroy jobs. The statements apparently have had some effect on Donald Trump. Trump does not want a trade war where all trade stops. Trump wants a deal. As indicated below, because of economic reality, Trump is no longer stating let’s trash NAFTA. Trump wants to tweak it. He wants a deal.
The key to understanding Trump and trade is his determination to bring jobs back to the United States. At an hour long extraordinary press conference on February 16, 2017, Trump stated in part:
THE PRESIDENT: Among their [Cabinet’s] responsibilities will be ending the bleeding of jobs from our country and negotiating fair-trade deals for our citizens. Now, look, fair trade. Not free, fair. If a country is taking advantage of us, not gonna let that happen anymore. Every country takes advantage of us, almost. I may be able to find a couple that don’t, but for the most part that would be a very tough job for me to do. Jobs have already started to surge.
Since my election, Ford announced it will abandon its plans to build a new factory in Mexico and will instead invest $700 million in Michigan, creating many, many jobs. Fiat-Chrysler announced it will invest $1 billion in Ohio and Michigan, creating 2,000 new American jobs. They were with me a week ago. You know, you were here. General Motors, likewise, committed to invest billions of dollars in its American manufacturing operation.
Keeping many jobs here that were going to leave. And if I didn’t get elected, believe me, they would have left, and these jobs and these things that I’m announcing would never have come here. Intel just announced that it will move ahead with a new plant in Arizona that probably was never going to move ahead with. And that will result in at least 10,000 American jobs. Walmart announced it will create 10,000 jobs in the United States just this year because of our various plans and initiatives. There will be many, many more, many more. These are few that we’re naming. Other countries have been taking advantage of us for decades, decades and decades and decades, folks. And we’re not gonna let that happen anymore, not gonna let it happen.
As one pundit recently mentioned, if Trump can deliver on jobs, the media lynch mob will be left holding an empty rope. To see the entire Trump press conference, which was extraordinary, see https://www.youtube.com/watch?v=JqaeVCl9gcA.
The biggest threat to international trade, however, is not a unilateral Trump trade action, which will hurt jobs, but the proposal to impose a border adjustment tax, which, in effect, will result in almost a 14% tariff on all imports into the US. This is shaping up to be a true trade war in Congress and the Administration between importers, such as small to medium size import companies, retailers and other companies that are dependent upon imports, such as Apple, and major US exporters, such as Boeing, Johnson & Johnson and GE. This also appears to be a fight between the House and the Senate, as explained more below. If the BAT is passed, there will then be a trade war with other countries as many foreign countries will retaliate and bring WTO actions against US.
Another problem with a border adjustment tax is that it would cause the US dollar to increase in value, which then could cause Trump to hammer other countries for devaluing their currencies and currency manipulation.
BORDER ADJUSTMENT TAXES
As stated in my last blog posts, the big issue in the trade area right now is border adjustment taxes and tax reform. Today, new Treasury Secretary Mnuchin said tax reform will take place in August 2017 and it is a priority for the Trump Administration. Part of that reform is Border Adjustment Taxes. See http://www.foxbusiness.com/politics/2017/02/23/treasury-secretary-mnuchin-lays-out-aggressive-timeline-for-tax-reform.html. As Mnuchin states, although a US deficit of $20 trillion, which was doubled by President Obama, is a concern, the more important issue is economic growth, which will result in more tax revenue. To get economic growth, taxes and regulations have to be cut.
Trump and Republicans in the Congress, especially the House, appear to be moving ahead with an alternative to tariffs to spur US manufacturing and that is taxes. There is now an attempt in Congress to give American-made products a big tax advantage over their foreign competitors through border adjustment taxes, and, in effect, counter the value added taxes used in other countries to deter imports. As Kevin Brady, Chairman of House Ways and Means, argues, almost 80% of countries border adjust their taxes. That includes Mexico, Canada, China, and the European countries, putting US exports at a substantial disadvantage. For Brady’s argument, see videos at the following links, https://www.youtube.com/watch?v=1yYHGoFmNEk&feature=youtu.be and
Under a border adjustment tax (“BAT”), a 20% tax would be applied against all domestic products and imported products. But the domestic producer would be allowed to deduct all the domestic costs associated with producing that product. Thus if a $100 product was produced in the US, the domestic producer could deduct $70 in costs, resulting in a 20% tax on $30 or a $6 tax. But there would be no deduction of domestic costs for a $100 import resulting in a 20% tax on the full $100 or a $20 tax, giving the domestic product a 14% tax advantage. The BAT would not apply to exports.
This proposal has welled up from the House of Representatives and is strongly supported by House Speaker Paul Ryan and the Chairman of House Ways and Means, Kevin Brady. Their argument is that border adjustment tax is needed to offset value added taxes in other countries. As Brady stated on February 3rd to reporters, “The more Americans understand that our businesses are competing with one hand tied behind their back, the more support this provision will generate.” Brady argues that the BAT is the only way to end the “Made in America” tax.
One example given is that if an automobile is produced in the US and exported to Mexico, a 35% corporate tax is levied on the profits of the US automaker and then the US automobile is hit with a 16% value added tax when it comes into Mexico. On the other hand, when an automobile is produced in Mexico for shipment to the US, there is no corporate tax on the export and no corresponding tax in the US on the Mexican export to the US. In effect, Ryan and Brady argue that this is a tremendous incentive to move manufacturing out of the United States to countries with value added taxes, such as Mexico, China, Canada, EU and many other countries.
Border adjustments serve as a way to level the playing field and alter value-added consumption taxes many countries, including European countries, Mexico, Canada and China, impose on each stage of production, as products are sold internationally. Proponents argue that the BAT is not trade policy and does not favor exports over imports. Instead, according to Douglas Holtz- Eakin, the president of the American Action Forum, the BAT “levels the playing field” so American producers can compete overseas, and goods purchased domestically are all subject to the same taxes.
As stated on the Ways and Means website:
“Our bold Blueprint for tax reform takes historic action to unleash job creation and economic growth in America. One of the most pro-growth features is that we’re finally going to end the self-imposed “Made in America” tax on U.S. exports – a backwards feature of our nation’s current tax code that gives foreign-made products an advantage over American-made goods, services, and intellectual property.
Here’s a simple example of how today’s “Made in America” tax helps our foreign competitors at the expense of American businesses and workers:
Consider two global companies: an American company that manufactures tractors in Ohio, and its European rival that manufactures tractors in Germany. With the “Made in America” tax imposed by the current U.S. tax code, the Ohio-based company is subject to U.S. tax on every tractor they make here and sell in Europe. Meanwhile, the European rival pays no U.S. tax on the tractors they make in Germany and sell in America. Imports are not taxed under the current U.S. system but American exports are.
Basically, the “Made in America” tax on U.S. exports works exactly like it sounds – if you make products in America, you’re taxed when you sell them abroad. But if you make products abroad, you’re not taxed when selling them here. In this way, our nation’s current tax code provides a direct incentive for businesses to move operations and jobs overseas. After all, if it’s not “Made in America,” it’s not subject to the “Made in America” tax.
Ending the self-imposed “Made in America” tax on U.S. exports is a bold solution that will help our businesses and workers compete and win anywhere in the world – but especially here at home. . . .
Our major international competitors stopped taxing their own exports a long time ago. Now, it’s America’s turn to do the same. Ending the self-imposed “Made in America” tax on U.S. exports is a win for our economy and for Americans of all walks of life.”
On its website, on January 18, 2017 Ways and Means published a World map showing that” more than 160 countries around the world use some sort of ‘border adjustable’ tax.” As Ways and Means further states:
“As shown on the map below, we are one of very few countries worldwide that still taxes the sale of our own exports. Why does this matter? Because this completely backwards feature of our current tax code gives foreign-made products a competitive advantage over “Made in America” goods, services, and intellectual property. . . .
all the countries with “border adjustable” taxes, meaning the country does not apply this tax to the sale of their own exports. These countries make up more than 70% of the global economy. The group includes all of our major international competitors in Europe, Asia, and even here in North America with Canada and Mexico.”
The Website then goes on to state that the countries that do not border adjust their taxes, include the United States “and a small group of others such as Suriname, Angola, and Laos. Not to mention we are also in the company of countries like North Korea, Cuba, Syria, Iraq, and Afghanistan. Along with the United States, these and a handful of other countries do apply this tax to the sale of their own exports.”
On February 3, 2017, Chairman Brady in a speech at Georgetown Law School argued the BAT represents a simple pro-growth tax plan that will “leapfrog America from dead last among our competitors” through measures that include slashing taxes, allowing small-business owners to file as companies and not individuals, and ending what he calls a “Made in America” tax assessed based on the headquarters of the U.S. manufacturer.
Brady argued that the US should adopt the practices of its international “competitors” by adopting the same taxes that “adjust” at the border, adding taxes to imports from foreign countries and taking off taxes on domestic manufacturers. As Brady stated:
“This ‘Made in America’ tax is one of the most antiquated, uncompetitive, and anti-growth features of today’s U.S. tax code. It puts our ‘Made in America’ goods, services, and intellectual property at a direct tax disadvantage here at home and around the world. And, worst of all, it provides a direct tax incentive for businesses to move jobs, investment, and operations outside the United States. After all, if it’s not made in America, it’s not subject to the ‘Made in America’ tax.”
Brady argues that the tax is not based on the value-added tax, or VAT, employed by other countries but on cash-flow, levied on cash coming into a business minus the cash flowing out. That means American businesses will no longer be disadvantaged overseas or incentivized to move their jobs, headquarters and more out of the country, because they won’t be taxed on exports bound beyond U.S. borders. As Brady states:
“If your American-made product or service is sold abroad, it’s not going to bear U.S. tax. Period. In the end, this move to eliminate the ‘Made in America’ tax is a simple but very powerful way to promote true competition based on price, quality, and service instead of tax regimes.”
Brady also states that the BAT represents the best chance to implement reform that includes a 20 percent cap on the corporate tax rate, what he called the lowest “in modern history for American businesses of all sizes.” According to Brady, the U.S. hasn’t been this close in 30 years, and the opportunity may not happen again.
In response to questions as to whether the BAT will create a trade war, Brady states that the US is simply creating a tax equivalent to the VAT, “What will they complain about? Stop copying us?”
Brady also argues that a strengthened dollar under the policies, combined with stronger competition driving down costs, will help address concerns that consumer prices will take an upswing. But that could also lead to the Trump argument that countries are intentionally undervaluing their currency and currency manipulation. US officials are very good at wanting to have their cake and eat it too.
More importantly, the BAT is a key part, a pillar, of the House Tax proposal because estimates are that a BAT would raise more than $1 trillion over a decade. A trillion dollars in revenue pays for Trump’s border wall and also an infrastructure spending program. In addition, the Republican/Trump proposal is to lower the corporate tax rate from 35% to 15 or 20% and also lower the personal tax rate. Republicans in Congress have long argued that any additional spending items and tax cuts must be revenue neutral because of the massive Federal multi trillion dollar deficits. Moreover, to get tax reform through the Senate using reconciliation, which only requires the 52 Republican Senate votes, the proposed tax reform must be revenue neutral after ten years. The tax cuts after ten years cannot increase the Federal deficit. A trillion dollars in revenue from a BAT would certainly help to offset tax cuts and spending increases making the BAT tax a key to the Republican efforts to revamp the tax code without adding to the deficit.
Thus, Grover Norquist, a famous conservative tax critic and the founder of Americans for Tax Reform, does not oppose the BAT and has stated about tax reform:
“I think it’s coming together much faster than I thought. The House Republicans and Trump have put together a plan. It’s coming together. It’s not completely finished, but it’s settled.”
Trump himself has not come out against the BAT tax, but has called the House plan “too complicated” shortly before his inauguration. When he realized that it would help pay for the Mexican border wall and would give an incentive to keep manufacturing in the US, however, Trump appears to be warming up to the idea.
The only fly in the BAT ointment, however, is the Senate. On February 1, 2017, in a speech at the US Chamber of Commerce, Senator Orrin Hatch, Chairman of the Senate Finance Committee, said he has questions about the BAT. Hatch does not intend to oppose or ignore the House plan, but the Senate would not simply rubber stamp it. As Hatch stated, “I’m not trying to be coy, and I’m not playing hide-the-ball with my opinions.”
Hatch stated he needed to know more about who would bear the burden of the tax plan, whether border adjustment is consistent with international trade rules, and stated:
“First, who will ultimately bear the tax? To what extent will it be borne by consumers, workers, shareholders, and foreigners? Second, is border adjustability consistent with our international trade obligations? We don’t have definitive answers to any of those questions at this particular point. And without them, I don’t think I can give definitive positions.”
Hatch went on to state that the Republicans only have a 52-48 majority in the Senate and it will be difficult to get a bipartisan deal on tax policy. Republican Senators, such as Mike Lee of Utah and David Perdue of Georgia, also have criticized the BAT. Hatch further stated:
“I’m simply saying that a major concern on tax reform is producing a bill that can get through the Senate, and that is likely going to require a separate Senate tax reform process, which will almost surely end up looking different from what passes in the House. And, once again, that’s not a bad thing.”
A number of Senate Republicans have raised doubts about a border-adjusted tax, including Georgia’s David Perdue and Utah’s Mike Lee, who said in an editorial in the Federalist magazine that it ‘‘could ravage huge swaths of our economy.’’ Lee has also stated:
“This ends up becoming a VAT-like substance and I think it would end up having a lot of the negative characteristics of both a VAT and a tariff … I really don’t like it.”
Democrats on the Senate Finance Committee have blasted the proposal, saying in a December memo that it was ‘‘risky, untested, and especially vulnerable to unforeseen consequences’’ like soaring consumer prices.
Some of the Republican Senators opposed to the BAT are: Arkansas Senators Tom Cotton and John Boozman (Walmart), Georgian Senator Johnny Isakson (Home Deport), North Carolina Senators Richard Burr and Thom Tillis (Lowe’s).
Since tax reform will likely be done through reconciliation, which requires a majority vote, Republicans can only afford to lose two Senators on border adjustability.
In fact, one key Senate Republican, Majority Whip John Cornyn of Texas, has expressed his opposition to the BAT because he is worried about the impact on the Texas oil refiners.
Sen. David Perdue, R-Ga, has urged his fellow Senators to reject the BAT, arguing that the tax is “regressive, hammers consumers and shuts down economic growth.” Perdue was previously the CEO of Dollar General, a retailer, which is heavily dependent on imported goods from Asia. Perdue states:
“Since all imports would be taxed, the clear effect of the proposed border adjustment tax is an increase in consumer prices. This would hammer consumer confidence and lower overall demand, thus putting a downward pressure on jobs.
For sure, the tax code needs substantive change, but when Congress combines good ideas with bad ideas into a single sweeping bill, the bad ideas become law. This proposed border adjustment tax is a bad idea and should not become a permanent part of our tax code.”
Another Republican sceptic is Sen. Mike Rounds, R-S. D, who states:
“We want to have good export opportunities but you’re also talking about folks that are consuming in the United States that have benefited from inexpensive imports. You’re really talking about a major change in the United States in terms of who pays the bills and … we better darn well know what the impact on the economy is before we start making major changes.”
OPPONENTS AND PROPONENTS OF THE BAT
Industries that are heavily reliant on imports, like retailers, mobile phone producers and oil refiners, have attacked the BAT along with free-market groups linked to the billionaire Koch brothers. Now there are two Coalitions of US companies fighting against and for the BAT.
On the Anti-BAT side are the Americans for Affordable Products, who argue that the House plan would both drastically slash profits for retailers and drive up prices for consumers. More than 120 trade groups are a member of this Coalition, including the following trade groups, The National Retail Federation, the American International Automobile Dealers Association, and the National Grocers Association, and such companies as Nike, Best Buy, luxury conglomerate LVMH and Dollar General. As Brian Dodge, a spokesman for Retail Industry Leaders Association, stated, ‘‘This ultimately comes down to a decision of whether or not policy makers are willing to heap a tax onto consumers so that some corporations can never pay taxes again.’’
A retailer’s entire profit, which is often a very thin margin, will be consumed by the BAT, a new federal corporate tax. About one-third of the durable goods that Americans buy are imported, and that number increases for those in the low- and middle-income brackets. So, whether they’re shopping online or at a local retailer, a BAT will be like a vast hidden sales tax that drives up the cost of purchases and forces retailers to cut costs, including jobs, in order to compete.
Rick Woldenberg, CEO of Learning Resources, has stated “I’m losing sleep. I am scared out of my mind.” Learning Resources has signed on to the coalition and is a family-owned company in Vernon Hills, Illinois that makes educational toys and employs 150 people in the U.S. Woldenberg estimates that under the GOP plan his federal tax rate would rise to 165 percent from 39.6 percent, which would mean he would have to raise prices by 10 percent to 15 percent to stay viable, and would have to lay off employees.
Stephen Lamar, executive vice president at the American Apparel & Footwear Association, describes the BAT “as an existential threat” and has stated “[W]hen they crunch the numbers, it really affects things like solvency and profits.”
Lamar said companies would likely have to pass along higher prices to shoppers, who wouldn’t tolerate it. Companies say they also would have to try to squeeze suppliers for more savings and fear they might even have to lay off workers or close stores. He also said a shirt label saying “Made in China,” doesn’t tell the whole story. Seventy percent of the value of the garment supports U.S jobs in areas like design and logistics.
On Wednesday, February 15th, the CEOs of a number of retailers in the Americans for Affordable Products, including the CEOS of AutoZone Inc., Best Buy Co., Gap Inc., J.C. Penney Co., JoAnn Stores, Target Corp., Tractor Supply Co. and Walgreens, met with President Trump to discuss the BAT.
On February 15th, Apple Inc. Chief Financial Officer Luca Maestri said a U.S. border tax would hurt the US economy by raising costs for consumers and making it harder for companies to compete overseas. Apple buys most of its components from outside the U.S. and most of its devices are assembled overseas. Asked about US manufacturing, Maestri stated the global technology supply chain is too big for even Apple to change.
On the Pro-BAT side is The American Made Coalition, which is made of major exporters, such as General Electric, Boeing, Dow Chemical, Johnson & Johnson, Pfizer and Honeywell International Inc., who argue that border adjustability would be a boon to economic growth. These exporters could see a tax bill of 0 because of the high percentage of their exports. As the American Made Coalition states on its website:
Our Challenge: America has been left behind as other countries have lowered their tax rates and reduced the cost of doing business. At the same time, many of the companies we compete against are based in countries that have already moved to a modern territorial tax system and border-adjust a significant portion of their taxes, putting American made goods and services at a disadvantage. We aim to recalibrate the American economy by making it easier to invest in American businesses, American products, and American workers.
Steve Forbes on behalf of the Taxpayers Protection Alliance disagrees. In a January 25, 2017 letter to Forbes Magazine, Forbes came out against the BAT stating that it is equivalent to a national sales tax:
“but please do not attempt to pay for one set of tax cuts with a massive new set of costly tax increases on consumers, namely the trillion-dollar border adjustment tax that is currently part of the GOP Tax Reform Blueprint. Rather than imposing a costly new national sales tax on imports, one that will dramatically raise prices of everyday goods and services, Congress would be wise to focus their attention on spending cuts.
President Trump has a bold and effective tax reform plan that reduces individual and corporate tax rates without a massive new tax on consumers. He’s right, cut the rates and cut the spending! It’s simple and it will have a multiplier effect on job creation and economic growth.
Furthermore, it won’t leave those who provided you with your majority status wondering whether they should quickly take it back in 2018 after experiencing the immediate sticker shock of a border adjustment tax.
For those who continue to argue that the border adjustment tax is not actually a new tax, I’d ask them to please answer this simple question: If it is not a tax, then where does the $1 trillion in new tax revenue it is set to produce come from? Need a hint? And for those that believe such a new tax will raise the value of the dollar to offset any additional costs that result for consumers, please be prepared to respond to your constituents who may see the price of a gallon of gas go up 30 cents, or the cost of other daily goods increasing 20 percent or more, if the dollar increases or not. And that’s a big if!
The border adjustment tax is bad economic policy, but it is even worse politics.”
On February 21, 2017, CEOs from 16 companies, including Boeing, Dow Chemical, Caterpillar and General Electric, wrote a letter to congressional leaders in support of the BAT. The CEOs state that the BAT would incentivize capital investment, stop corporate inversions and acquisitions, and spur job growth in the U.S. The letter further states:
“For the first time in 30 years, the U.S. has a real opportunity to adopt major reforms, and the change cannot come soon enough. If you are successful, the U.S. will level the international playing field by replacing the most antiquated tax code in the developed world with the most modern.”
As for the World Trade Organization, WTO regulations allow border adjustments on “indirect taxes,” which includes sales, excise and value-added taxes, and all taxes other than direct taxes, such as an income tax. The House GOP tax plan moves away from direct corporate income taxes and toward a consumption tax, but it isn’t a pure VAT either.
To become more VAT-like, the plan could eliminate the deduction for wages and the payroll tax. That idea is unpopular with Republicans who have avoided calling it a VAT tax during the rollout of the plan.
Brady has said he is confident the plan would be upheld if other countries tried to challenge it in the WTO. The U.S. could also negotiate with the organization on altering WTO regulations to allow the hybrid plan, which has come to be known as a destination-based cash flow tax.
The Europeans have a different idea, arguing that the BAT is based on a misunderstanding of how the VAT works. VAT is viewed by the US as discriminatory because it applies to imports but exempts exports. But this view is mistaken and reflects a failure to understand how VAT works. The VAT is a tax on consumption and its incentive effect is identical to a sales tax. VAT does not discriminate against imports, since the consumer pays the same VAT on imported products and those produced at home. And the VAT does not discriminate in favor of exports since under the VAT system, producers act merely as tax collectors. Producers are neutral on whether they sell at home or abroad. When they sell at home, they turn the proceeds of the VAT over to the government, minus the VAT they paid on their supplies, leaving them whole.
When they sell abroad, there is no VAT charged to their customers but, provided they can show proof that the merchandise has been exported, they can reclaim the VAT they paid on their supplies, again leaving them whole.
It is true that a Belgian consumer buying a US product pays a much higher VAT than a US consumer pays in Sales Tax, but that is a choice entirely in the hands of the US government. They could raise the Sales Tax or introduce a VAT at levels similar to Europeans, raise the additional tax revenue they seek, and remain entirely WTO consistent.
Deutche Bank (DB) believes that a BAT would lead to a trade war due to a deterioration in terms of trade:
“while currency adjustment would be gradual and incomplete, even a fraction of the theoretically implied 25% adjustment would be material for the dollar and would leave ample scope for border tax adjustments to severely undermine bilateral trade relations. Mexico, Canada and Asia would be most severely hit by US border taxes while commodity exporters, and most of Europe would be less affected. The magnitudes of the damage would be enormous in our view.”
So the first trade war will be internal between importers and the second trade war will be external.
It has been reported that the EU is gearing up for what may be the most important WTO case in history against the BAT. If the US loses the case at the WTO, will it cause the US to leave the WTO? See the article below.
U.K. Prime Minister Theresa May probably will take an interest, as without a special deal the U.K. stands to suffer a serious reversal. A border tax could turn a UK surplus of around $1 billion into a deficit of around $19 billion, almost a fifth of gross trade between the two countries.
On February 8, 2017, the Canadian government threatened to respond in kind if the Trump administration introduces new taxes on cross-border trade between the two countries. Following a meeting with President Donald Trump’s Secretary of State Rex Tillerson in Washington, D.C., Canada’s Foreign Affairs Minister Chrystia Freeland stated that any new tariffs on exports will be strongly opposed.
On February 9, 2017, it was reported that the proposal to impose a BAT on Mexican goods has increased concerns that Mexican will retaliate against U.S. natural gas and petroleum exports.
Mexico is the U.S.’s largest energy trading partner behind Canada, with U.S. gas and refined fuels flowing south and Mexican crude oil flowing north. The Energy trading balance has moved in favor of the U.S. in recent years, with $20.2 billion worth of U.S. energy exports sent to Mexico compared to $8.7 billion worth of U.S. energy imports from Mexico. Much of that is fueled by growing demand for cheap and abundant U.S. gas to power Mexico’s electricity sector.
Both countries are co-dependent on each other in this area. A BAT tax could cause Mexico’s economic growth to fall, decreasing its energy demands. At the same time, the impact would be compounded if Mexico retaliates with tariffs of its own that make U.S. energy exports more expensive.
The fear is that a BAT tax would set off a series of falling dominos with one falling domino being the ongoing construction of new cross-border infrastructure connecting U.S. producers to Mexico.
WILL TRUMP WITHDRAW FROM THE WTO??
Could a WTO loss on the BAT for the US cause it to withdraw from the WTO?
In a February 13, 2017 article in Forbes entitled “Trump May Withdraw U.S. From WTO,” John Brinkley states:
“During the presidential transition period, Dan DiMicco, the former CEO of Nucor Steel Corp., was thought to be the likely choice to be the U.S. Trade Representative in the Trump administration.
Let us be thankful that didn’t happen.
DiMicco said in an interview with CNBC last week that President Trump might withdraw the United States from the World Trade Organization.
“President Trump, during his election run, made it very clear that if we cannot get the WTO to enforce the rules that everybody agreed to when they joined up, then the WTO will have lost its effectiveness and we will re-evaluate whether we even belong to the WTO or not,” he said.
During the 2016 presidential campaign, Trump himself has said he might cancel America’s WTO membership, but he hasn’t said anything about it publicly since taking office.
The WTO certainly has problems, but failure to enforce its rules is among the least of them. Its Dispute Settlement Body has received about 500 complaints during the last 20 years and has issued rulings in 350 of them. Most of the rest were resolved through consultations between the parties.
The Obama administration filed 26 disputes in the DSB, most of them against China, and won every one that has been decided to date.
If Trump imposes any of the punitive tariffs he has threatened, DiMicco is going to find out how wrong he is about the WTO’s willingness to enforce its rules.
Hitting Mexico with a 35 percent tariff, or a 20 percent tariff, or whatever number Trump dreams up next would violate NAFTA and WTO rules. A 45 percent tariff against China would violate WTO rules. Both countries would retaliate in kind and would drag the United States into a WTO dispute settlement proceeding. And they’d win.
Trump has called the WTO a “disaster.” Withdrawing from it would be a disaster. Other countries could raise tariffs against us, dump products in our markets, steal our intellectual property and cheat us every which way from Tuesday and our ability to retaliate would be severely weakened.
Trump keeps complaining that other countries are taking advantage of us. If that’s true, why would he decouple the United States from the one organization that can do something about it?
It’s astonishing that our president and his commerce secretary, Wilbur Ross, believe that protectionism and economic isolationism are the yellow brick road to a renaissance of American manufacturing. It’s amazing that they don’t know that every administration that has walked that road has found that it leads to higher unemployment and lower economic growth.
There is reason for hope, though – if you’re an optimist, that is. Trump has nominated a man who actually knows something about trade to be his U.S. trade representative. Robert Lighthizer was a deputy U.S. trade representative during the Reagan administration and has been practicing trade law at a prestigious Washington law firm since then. It’s hard to know how much clout he’ll have against Ross and Peter Navarro, the head of Trump’s new National Trade Council. The Economist called him a “China-bashing eccentric.”
Navarro said in a January 29 interview with Fox News that the Trump administration would approach Australia about negotiating a free trade agreement. The U.S. and Australia already have a free trade agreement.
Lighthizer said in 2010, “USTR should pursue WTO litigation with respect to all such examples of non-compliance (by China). If necessary, Congress should give USTR additional resources to increase its ability.”
While at USTR, he told the New York Times, “I try to be friendly in negotiations. I’m not the theatrical type.”
Based on those two statements, one can infer that Lighthizer’s philosophy and modus operandi are diametrically opposed to those of his boss-to-be and of the rabid protectionists Ross and Navarro.
He’ll have a tough row to hoe if he hopes to inject some sanity into the Trump administration’s trade policies. Let’s wish him luck.”
But as mentioned in my last blog post, Lighthizer has also stated that the WTO should not be treated as a religion. In 2010 statement testimony to the US-China Economic and Security Review Commission, LIGHTHIZER 2010 STATEMENT US CHINA ECONOMIC SECURITY COMMISSION, Lighthizer stated:
Indeed, I would take the argument even further. Trade policy discussions in the United States have increasingly been dominated by arcane disputations about whether various actions would be “WTOconsistent” – treating this as a mantra of almost religious or moral significance. The fact is that the WTO is built upon a framework of mutual concessions and purported mutual benefits from expanded trade and open markets. WTO commitments are not religious obligations, do not (and should not be construed to) impinge upon national sovereignty, and are not subject to coercion by some WTO police force. Viewing them as such – and implicitly establishing this viewpoint as the inviolate touchstone of all U.S. trade policy – is at odds with the structure of the WTO itself, not to mention the vociferous and repeated statements made by proponents of the WTO when it was established.
In this regard, WTO commitments represent mutually beneficial, marketopening stipulations by individual countries. Where a country fails to fully implement commitments it has made, other countries are given the right to reciprocally suspend marketopening commitments of their own – in an amount precisely equivalent to, and no greater than, the value of trade they have lost as a result of the derogation that has occurred. In this way, the entire WTO system is in a very real sense premised upon the assumption of relatively equal costs and benefits among and between WTO participants – whereby compliance with WTO norms is encouraged by the knowledge that derogations will result in the suspension of equivalent trade concessions. Where this relationship does not hold – that is, where a trade relationship has become so unbalanced that the threat of retaliation pales in comparison to the potential benefits of derogation – it only makes sense that a sovereign nation would consider what options are in its own national interest (up to and including potential derogation from WTO stipulations).
This need not be seen as some fundamental threat to the integrity of the WTO system. Indeed, let me state explicitly that I am not advocating that the United States leave the WTO – that body is too important to us and the global trading system. I am merely pointing out that derogation may be a common sense, economically rational analysis by participants in the system – whereby potential decisions to derogate from WTO rules give rise to compensatory rights of other parties within the system.
Indeed, such an approach is plainly anticipated by the WTO agreements and has been acknowledged by U.S. policymakers. Properly understood, WTO rules do not infringe on the ability of individual nations to make their own sovereign decisions about economic policies –subject to the rights and obligations that flow from the WTO agreements themselves and any derogation of those agreements. In this regard, U.S. officials have consistently stated that WTO commitments do not interfere with our national sovereignty, and that WTO rulings cannot alter U.S. law. These points were made repeatedly by Members of Congress during the debate over whether the United States should join the WTO. Furthermore, USTR has plainly stated that WTO legal panels “have no authority to change U.S. law or to require the United States or any state or local government to change its laws or decisions.” USTR has specifically explained that other countries cannot force the United States to comply with WTO law; instead, their only available response is to retaliate by withdrawing trade benefits . . .”
The point is if a WTO panel finds that a BAT is illegal, but at the same time finds VATs imposed by numerous other countries, including the EU, Mexico, Canada and China, on US exports legal, might that be a reason for the US to leave the WTO?
President Trump has already formally notified both Canada and Mexico that he intends to renegotiate NAFTA. The negotiations will probably start sometime this summer. After meeting with Canadian Prime Minister Trudeau on February 14, 2017, President Donald Trump stated that for Canada only minor changes are needed in NAFTA to improve trade relations in contrast to the situation with Mexico. Trump stated:
“We have a very outstanding trade relationship with Canada.”
With regards to NAFTA, Trump stated:
“We’ll be tweaking it. We’ll be doing certain things that are going to benefit both of our countries. It’s a much less severe situation than what’s taken place on the southern border. On the southern border, for many, many years, the transaction was not fair to the United States. It was an extremely unfair transaction. . . .
“We’re going to work with Mexico. We’re going to make it a fair deal for both parties. We’re going to get along very well with Mexico.”
As Trump stated, part of the renegotiated deal will be ways to smooth the flow of goods over the border:
“We’re also doing some cross-border things that will make it a lot easier for trade and a lot better and a lot faster for trade. Through technology we have some really great ideas and they’ll be implemented fairly quickly.”
But on February 21, 2017, Canada also made clear that any negotiations to renew the North American Free Trade Agreement (“NAFTA”) would involve all three member nations. So the US cannot simply negotiate with Canada and then negotiate with Mexico. As Canadian foreign minister stated Tuesday at a conference:
“We very much recognize that NAFTA is a three-nation agreement and were there to be any negotiations, those would be three-way negotiations.”
So no tweaking the agreement with Canada only will be allowed.
TRUMP’S NEW TRADE TEAM
WILBUR ROSS CONFIRMATION HEARING
The Senate Confirmation Vote on Wilbur Ross to be the 39th Secretary of Commerce will be held on February 27th. Ross’s confirmation hearing was held on January 28, 2017 before U.S. Senate Committee on Commerce, Science and Transportation. During that hearing, Ross indicated a more aggressive enforcement of the Antidumping (AD) and Countervailing (CVD) law, but also that increased exports are a key pillar in increasing US Economic Growth. With regard to Trade Policy in General, in his opening statement, Ross stated:
”I am not anti-trade, I am pro trade but I’m pro sensible trade, not pro trade that is to the disadvantage of the American worker and the American manufacturing community. I think we should provide access to our market to those countries who play fair, play by the rules and give everybody a fair chance to compete. Those who do not should not get away with it, they should be punished and severely. I think that we cannot afford trade that is inherently bad for American workers and for American businesses, but I think there are plenty of opportunities to expand our exports. I think the number one objective will be expanding our exports.”
But one problem with Ross’s general point, in 2016 the US exported over a $1 trillion in products to other countries. Being tough on imports means the other countries can be tough on US exports so Wilbur Ross must be careful that the rhetoric and actions of Trump, Navarro and himself do not create a trade war. Overplaying one’s hand truly can lead to a trade war where everyone is hurt.
With regards to China, Ross stated:
“China is the most protectionist country of very large countries. They have both very high tariff barriers and very high non-tariff trade barriers to commerce. So they talk much more about free trade than they actually practice. We would like to levelize that playing field and bring the realities a bit closer to the rhetoric.”
With regards to the Steel Industry and trade problems, Ross points to China:
“The fundamental problem with the steel industry is overcapacity particularly in China. China has 1 billion tons of capacity. That’s half of the world’s capacity. They need something like 700 million tons domestically. They’re actually producing 800 million tons and putting 100 million tons out into the world markets. Often at dumping prices. So I think one of the things where we need do very careful attention to more tariff activity is the anti-dumping requirements that we should impose on the steel industry and on the aluminum industry as well. That’s a very big issue.”
Ross also stated that one issue of major importance is the failure to collect antidumping and countervailing duties:
“One of the things that horrified me is I studied about enforcement is there are literally billions of dollars of countervailing duties that are never collected because the foreigners set up little shell companies here, we impose a duty, there’s nobody home when we come time to collect. I think that kind of thing has to be fixed. There’s not much point going through a multiyear trade case if then — in case you win you don’t even collect the countervailing duties. That doesn’t change anybody’s behavior and it’s a loss of revenue to the federal government.”
But as stated before in these newsletters, the United States is the only country that has retroactive liability in US antidumping and countervailing duty cases. Even China has a prospective system. Many importers would welcome a prospective system because they would not face bankruptcy if they import products under an antidumping and/or countervailing duty order. A prospective system would also eliminate collection problems.
With regards to multilateral trade agreements, such as the TPP, as compared to bilateral trade agreements, Ross stated:
A couple of things. One, in general, I think it’s easier and quicker to negotiate bilateral agreements than it is multilateral, and my concerns about the multilaterals are not that there’s anything inherently wrong with them, but as somebody who has negotiated a lot of transactions, I can tell you the more complex the environment within which you’re negotiating, the less likely you are to get to a sensible result because what really happens is several things. Say you’re negotiating with 12 different countries, you go to the first one and you want some concession from them, they say yes, we’ll give you that concession but we want something back. So that takes a little nick out of us. Then you go to the next country, you negotiate with them. They take a little nick. Keep doing that 12 times, you get a lot of nicks. And what happens is the other countries get the benefit of things they didn’t even ask for . . .
The problem with the TPP was it permits more than 60% of the content of a car to come from countries outside the TPP. That did not “strike me as the world’s best idea particularly from the point of view of protecting the automotive industry because in automotive, about 70% of the jobs are in the part suppliers
With regards of persuading foreign companies to set up production operations in the United States, Ross stated that the big problem is taxes:
“we’re not competitive in terms of our marginal tax rate with many other countries against whom we compete. Mexico’s corporate tax rate is about half of what it is in our country and many other countries. So I think if we can become more competitive in the tax rate, it would be a very good thing not only for keeping American companies staying here, but also for encouraging foreign companies to come here. So I think that’s probably the biggest single tool that we could use.
So I’m much more in favor of carrots than of sticks.”
When asked whether he would use his legal authority in antidumping and countervailing duty cases to self-initiate cases, Ross stated:
“I’m an activist and I think that that tool of self-anything initiation is a useful one. Industries with a lot of small companies, very hard for them to get the data together, get the funding together and worst of all, it takes a very long time for them to initiate the case. I think the duration of these cases has got to be shortened, and if anything we can do to shorten it at the front end would be good. Self-anything self- self-initiation is a very good tool for that. To me, part of any negotiation is the psychology of the participants and do the degree that we showed them we’re willing to self-initiate, that’s a more aggressive stand on cheating than perhaps has been exemplified before. I think it’s important from its actual curative effect, its preventative effect and the psychological effect on the cheaters.”
As a lawyer with personal experience in self-initiating antidumping cases, in the 1980s while at Commerce I was involved in counseling the Commerce Department in the 256K Dram computer chip case, which was self-initiated against Japan, I am personally aware of the problem facing Commerce. The problem Wilbur Ross faces is that Commerce does not truly control the case. To win an antidumping and countervailing duty case, the US International Trade Commission (“ITC”) must reach an injury determination. When I was at the ITC in the early 1980s, Commerce self-initiated several antidumping cases against imported steel products under the Trigger Price Mechanism. The problem is that under the Trigger Price Commerce lost every case it self-initiated at the ITC, often in the 45-day preliminary injury determination. It was embarrassing.
Later at Commerce I counseled the Deputy Assistant Secretary in the 256 K DRAM case, on how to testify at the ITC in the final injury investigation. Luckily, Commerce reached a suspension agreement with Japan and there was no final injury investigation.
While at Commerce, many officials looked upon the ITC as a loose cannon. Commerce and the Administration do not control the ITC as it is an independent agency with six Commissioners and no more than three Commissioners from the same political party. The ITC is the agency closest to the Congress and acts more like a Court than a Department under the control of the President. Just today, February 22nd, as stated below, the ITC reached a negative injury determination in the major antidumping and countervailing duty case against bus and truck tires from China.
Moreover, the other problem with “Industries with a lot of small companies” is that in injury cases, the Court of International Trade has required the ITC in its injury determination to receive questionnaires responses from at least 50% of the US industry. In one case on Sweaters of Man-Made Fiber, the ITC was forced to reach a negative injury determination after review by the Court of International Trade because the Court stated without questionnaire responses from more than 50% of the US industry, substantial evidence does not support the ITC’s injury determination. So to self-initiate cases, Wilbur Ross needs to figure out how to deal with the ITC.
Throughout the confirmation hearing, Wilbur Ross stated that increasing exports is a critical element in the US Growth percentage up to 3 to 4% a year from the “new dismal” of 2% under President Obama. But to keep exports increasing a trade war is not a good idea. When asked how to push up the US Growth rate, Ross stated that with Peter Navarro he published an editorial in the Wall Street Journal outlining the four to five planks needed to increase the growth rate. Ross went on to state:
“Second, improving our trade balance, particularly by stimulating exports. Well, I think the first thing we have to do is to deal with the unfair, both tariff and nontariff trade barriers that other countries impose on us. It’s a little weird that we have very low tariffs and China has very high tariffs. That seems to me to be a bit of an imbalance and it’s one thing to talk about free trade, we would like to have our trading partners also practice free trade and do it in a more balanced manner than has been done at present. So I think a American ingenuity and American labor can compete very effectively.”
But unfortunately Ross may not understand that there is no free trade agreement with China. The Agreement with China is the US-WTO Accession Agreement, in which the US agreed to give China Most Favored Nation (MFN) status and treat China like every other trading country, including Russia and Iran. Unfortunately, as readers of this newsletter know, in the antidumping and countervailing duty area, China is treated worse than Russia or Iran because it is considered a nonmarket economy country and the US refuses to use actual costs and prices in China to determine whether a Chinese company is dumping. Commerce uses fake numbers, surrogate values from 5 to10 different surrogate countries, to construct a cost in China, values which in almost every case have no real relationship to prices and costs in China. As a result, the Commerce Department itself does not know which Chinese companies are truly dumping.
Ross appears to be less worried about agriculture, because he stated that if China cannot get soybeans from the US, he does not know where they will get them from because the US and Brazil are the largest world suppliers and a very small percentage China is farmable. But the fourth largest producer of soybeans in the World is China.
Moreover, as one Kansas Senator stated during the hearing, China can bring its own antidumping and countervailing duty cases, which it did against distiller grains from the US. Ross responded:
“We need to deal with those. It’s not enough to have a trade agreement that just hits tariffs. And it’s one of the reasons I think there should be systematic reopeners of trade agreements after a few-year period, because it’s hard to anticipate the ingenuity that some of these folks have to get around the intent of the agreement. So I think an automatic reopener, whether it’s a sunset provision or just a reopener, would be a very useful thing to look back on what was originally contemplated, look back on what was originally projected to occur and say if we didn’t achieve those objectives why not and what do we need to do to fix them? I think an agreement like NAFTA is more than 40 years old and there’s never been a systematic transparent review of it.”
Senators also asked about bilateral trade agreements and TPA. Ross responded:
“TPA is an important tool because what it gives is relative assurance to the party with whom you’re negotiating that you can deliver because any negotiation is handicapped if you’re not sure the other guy can deliver on what has been negotiated. So it’s a big help in that regard.”
Ross also stated that the President will consult with Congress and that he was aware that the Smoot Hawley tariff did not work out so well. Ross went on to state:
“I think reciprocity is an important concept in trade agreements. And I think there are other important concepts as well. To me another one is simultaneity of concessions. We have tended to in prior agreements to make our concessions up front and the other party makes their concessions later. But the problem is sometimes later doesn’t come because when you have weak enforcement provisions and you’ve already made your concessions a little bit hard to unscramble the egg. So I think reciprocity is another concept going forward. I think simultaneity is another concept going forward. I think as I’ve mentioned I think while you were out of the hearing room the concept of an automatic re-examination after a period of time to find out, well, what worked, what didn’t work, and what should we fix, I think there are a number of these conceptual issues that have not been present in prior trade agreements. But I would hope that if confirmed I can contribute toward designing kind of a model trade agreement where we would introduce into it certain principles that would have to be in any agreement. I think it’s a huge mistake to start out each time with kind of a blank page from ground zero. Makes it take longer. Makes it harder to negotiate. The best negotiating tool is to be able to tell someone I can’t change this, this is official policy, you know it is, we got it in ten other deals, we’re not going to give you anything different. That’s a much better position in my opinion than starting out with a blank slate.”
One Indiana Senator specifically asked:
“Can you reassure the tens of thousands of Hoosiers that their livelihoods will not be put at risk by restrictive tariffs that might interrupt global supply chains?”
Wilbur Ross responded:
“As I have said often publicly I think the best way to deal with the trade deficit is increased exports . . . The number two is to get companies to build their factories here.
Tariffs do have a useful role. They have a useful role as a negotiating tool i’m aware of our trade in particular. That kind of [smoot hawley] approach didn’t work very well and it didn’t work very well then and it very likely wouldn’t work very well now.”
Ross also stated that he wanted to self-initiate trade cases and shorten the time given to “the perpetrators”. As Ross stated:
“Yes. I like the idea of using self-initiation to bring these cases. It will shorten the duration of the preparatory time and if we are also stricter about not granting extensions to the perpetrators. Historically they refuse to comply on a timely basis with requests for information. I’m not going — if confirmed i would not look very kindly on the perpetrators deliberately delaying cases by not providing information.
We are not going to initiate every case but i think by initiating them it will a, send a message to the people on the other side that we are getting more serious about this. Second, it would definitely accelerate the process and I will figure out some way to allocate people power to that activity. It will be a much more important activity if I am secretary of commerce than it had been historically. . . .”
The problem with these comments is that they show a lack of knowledge about US antidumping and countervailing duty law. First, AD and CVD laws are not penal statutes. That is why Commerce can use procedures that do not give full due process to the respondents. The Administrative Procedures Act and its requirement of neutral decision makers, such as an Administrative Law Judge, does not apply. The AD and CVD law are remedial statutes and the objective of their remedy is to remedy the unfair acts. If Secretary Ross wants to make the AD and CVD law penal statutes, many more due process rights will have to be given to the US importers, who pay the duties.
Second, if a foreign respondent does not timely reply to a Commerce Department questionnaire, they get all facts available, which is the highest AD or CVD rate, often over 100%. The Commerce Department’s 100-page AD and CVD questionnaires are extremely complicated and require respondents to submit voluminous paperwork to Commerce along with very complicated databases. When I worked at Commerce in the 1980s, Japanese tapered roller bearing companies submitted computer tapes that had so much information on them that they blew out the mass computer storage system at NIH. Although these databases can now be submitted on DVDs, they are just as complicated.
Respondents need time to collect the information and submit it to Commerce. They are not gaming the system. And that is why they request and obtain extensions.
But as stated before, when market economy countries are respondents in antidumping cases, even before a case is filed, companies in those countries can use computer programs to run their numbers and make sure that they are not dumping. In effect, the foreign companies are doing exactly what the US AD and CVD law direct them to do—remedy their unfair acts.
Commerce has also taken steps very recently to accelerate AD/CVD proceedings by shortening the deadlines for the submission of new factual information
Lighthizer’s confirmation to be United States Trade Representative (“USTR”) is on hold because he has represented foreign governments in the past. Because of this past representation, Lighthizer needs a waiver from both the House and the Senate. Democrats are holding up the process to get passage of a Miners Protection Act.
NEW PROPOSAL—MAKE CURRENCY MANIPULATION A COUNTERVAILABLE SUBSIDY IN COUNTERVAILING DUTY CASES AGAINST CHINA AND RUN UP THE RATES EVEN MORE
On February 13, 2017, it was reported that the Trump Administration is exploring a new tactic to discourage China and other countries from undervaluing their currency to boost imports—make currency manipulation an unfair subsidy under the CVD law. Such a change could be a violation of the WTO Countervailing Duty Agreement.
But a bigger problem is that the IMF has already stated almost a year ago that China is no longer undervaluing its currency. Instead China within the last year has spent $1 trillion to boost up the value of the Yuan against the dollar and other currencies. China may be manipulating its currency, but right now it is doing it so as to overvalue the yuan, not undervalue it.
NO INJURY DETERMINATION BY ITC IN BUS AND TRUCK TIRES CASE FROM CHINA
Yesterday, February 22, 2017, BUS AND TRUCK TIRES NEGATIVE, the United States International Trade Commission (ITC) determined that a U.S. industry is not materially injured or threatened with material injury by reason of imports of truck and bus tires from China that are subsidized and sold in the United States at less than fair value.
Chairman Rhonda K. Schmidtlein and Commissioner Irving A. Williamson voted in the affirmative. Vice Chairman David S. Johanson and Commissioners Meredith M. Broadbent and F. Scott Kieff voted in the negative. Commissioner Dean A. Pinkert did not participate.
As a result of the USITC’s negative determination, Commerce will not issue antidumping and countervailing duty orders on imports of these products from China.
The ITC can reach negative injury determinations in AD and CVD cases, and Trump Administration officials should take note.
SOLAR CELLS AND SOLAR PRODUCTS ANTIDUMPING AND COUNTERVAILING DUTY REVIEW INVESTIGATIONS
This month is an important time for Foreign exporters and US importers in the Solar Cells and Solar Products from China Antidumping and Countervailing Duty cases. On February 13, 2017, in the attached notice, Initiation Notice 2015 2016 Solar Cells, the Commerce Department initiated the antidumping and countervailing duty case, Solar Cells from China. This review investigation will cover solar panels imported from China with Chinese solar cells in them during the period December 1, 2015 through November 30, 2016.
The first document, the attached quantity and value questionnaire, prc-qvq-crystalline-silicon-photovoltaic-cells-ad-ar-021417
, is due at the Commerce Department on March 1st.
Separate Rate applications, certifications and no shipment letters are due at Commerce by March 13, 2017.
For those foreign exporters that exported and US importers that imported products subject to the Solar Products from China Antidumping and Countervailing Duty Orders, which covers Chinese solar panels with foreign solar cells in them, during the time period February 1, 2016 through January 31, 2017, February is the anniversary month to request a review investigation.
If you have any questions about these two orders, please feel free to contact me.
CHANGZHOU HARDWOOD FLOORING CAFC DECISION—SMALL VICTORY FOR CHINESE
On February 15, 2017, the Court of Appeals for the Federal Circuit (“CAFC”) issued the attached determination in Changzhou Hardwood Flooring Co. et al. vs United States, CHANGZHOU FLOORING CAFC DECISION, regarding the antidumping determination in Multilayered Woodflooring from China initial investigation. In that case, despite the fact that the three mandatory respondents in the antidumping initial investigation all received 0% antidumping rates, Commerce calculated a positive dumping rate for the other 70 Chinese companies that submitted a separate rates application in the case. Pursuant to its regulations and past cases, Commerce finds dumping in 100% of the cases against China. In those past cases, Commerce states that in determining the separate rates for Chinese companies it will use the average dumping/CVD rate of the mandatory companies reviewed, excluding de minimis rates and all other rates.
The CAFC, however, in its determination is not reversing Commerce. It is making Commerce jump through another hoop. Commerce has to make a finding, describe in detail, why it believes the “expected method” averaging the three 0s is not reasonably reflective of potential dumping margins of non-investigated companies.
The key part of the CAFC determination states:
“But the Statement of Administrative Action accompanying the Uruguay Round Agreements Act—which Congress has deemed “authoritative . .. states that the “expected method” is to “weight-average the zero and de minimis margins and margins determined pursuant to the facts available, provided that volume data is available.” Uruguay Round Agreements Act, Statement of Administrative Action . . .
If Commerce reasonably concludes that “this method is not feasible” or would result “in an average that would not be reasonably reflective of potential dumping margins for non-investigated exporters or producers,” it “may use other reasonable methods.”
Thus the Court is saying the “expected method” of averaging the three 0s is preferential and Commerce must overcome that preference. Commerce can still find dumping for the non-investigated Chinese companies, but it must justify its decision more. So this is a small victory for the Chinese companies, which could become big, depending upon what Commerce does from here.
In a prior case, Albemarle Corp. et al. v. U.S. et al., the CAFC made clear that Commerce needs “substantial evidence” if it wants to deviate from what’s called the “expected method” for importers assessed zero or de minimis dumping rates.
TRADE ADJUSTMENT ASSISTANCE FOR FIRMS/COMPANIES – A BETTER ALTERNATIVE TRADE REMEDY WHICH ACTUALLY WORKS
In my newsletter last month, we discussed the Trade Adjustment Assistance for Firms/Companies program, which provides trade adjustment assistance to companies injured by imports. The objective of TAA for Companies is to save the company and by saving the company it saves the jobs that go with that company.
In contrast to TAA for workers, TAAF or TAA for Companies is provided by the Economic Development Administration at the Commerce Department to help companies adjust to import competition before there is a massive lay-off or closure. Yet the program does not interfere in the market or restrict imports in any way.
Right now the total cost to the US Taxpayer for this nationwide program is $12.5 million dollars—truthfully peanuts in the Federal budget. Moreover, the Federal government saves money because if the company is saved, the jobs are saved and there are fewer workers to retrain and the saved company and workers end up paying taxes at all levels of government rather than being a drain on the Treasury.
As stated in my last newsletter, TAA for Firms/Companies works. In the Northwest, where I am located, the Northwest Trade Adjustment Assistance Center, http://www.nwtaac.org/, has been able to save 80% of the companies that entered the program since 1984. The Mid-Atlantic Trade Adjustment Assistance Center, http://www.mataac.org, uses a video, http://mataac.org/howitworks/, to show in detail how the program resulted in significant turnarounds for four companies. The reason the TAA for Firms/Companies is so successful—Its flexibility in working with companies on an individual basis to come up with a specific adjustment plan to make them competitive once again in the US market as it exists today. For a sample recovery plan, see http://mataac.org/documents/2014/06/sample-adjustment-plan.pdf, which has been developed specific to the strengths, weaknesses and threats each company faces.
But as also stated in my last blog post, in this environment with so many injured companies, funding for TAA for Firms/Companies has to be increased so it can do its job. At the confirmation hearing, future Commerce secretary Wilbur Ross was asked about EDA and stated:
“Yes. I think e.d.a. can be a very valuable source of seed money for projects and kind of matching things, triggering other sources of economic help to get things jump started. I think that given its budgetary constraints that’s probably the most that it can do. But i think that can be a very valuable function if properly applied.”
FOREIGN ANTIDUMPING AND COUNTERVAILING DUTY LAW AND CASES
UNIVERSAL TRADE WAR CONTINUES
With the election of Donald Trump, as stated in my last blog post, the Universal Trade War will continue. In addition to the US bringing AD and CVD cases, countries around the World, such as EC, Canada, Mexico, Brazil, Argentina, India, Turkey, Ukraine, Russia, China, Indonesia, Malaysia, Korea, Japan, Taiwan, Australia, Thailand, South Africa, and Vietnam, all are filing antidumping and countervailing duty cases against each other and the United States. These countries have adopted the US law which finds dumping in 90% of the cases. The US and the EC have created a Frankenstein in the antidumping law and the whole World has adopted it.
Compromise is the best way to settle trade disputes, but it is very difficult, if not impossible, to settle US antidumping and other trade cases. What is “fair” trade for the United States is “fair” trade for every other country. Many countries want to make their industries Great again.
Because of this situation, this part of the blog post will concentrate on trade cases in other countries and how other countries see the trade problem with the United States. It will also discuss potential US exports that can be retaliation targets.
KEY RETALIATION TARGET—AGRICULTURE
In the past, many reporters have asked me what could China or other countries retaliate against. The United States does not export much. Robert Lighthizer’s statement to the China commission quoted above reflects the same point. US exports are simply too small. In the face of large trade deficits with China, Mexico and other countries in the manufacturing area, what is the US exporting that can be a retaliation target?
As indicated above, US trade data indicate that US exports for 2016 were over $1 trillion. In the Wilbur Ross confirmation hearings, you could hear the real concern of many Senators, especially from the agriculture states, that products from their states could be retaliation targets. The Agriculture Senators should be worried about retaliation against exports by their State.
In a February 17, 2017 article in Forbes entitled “Trump’s Trade Policies Are Bad News for American Farmers”, John Brinkley answers the retaliation target question—Agriculture:
For American farmers and ranchers, voting for Donald Trump was something of a crap shoot.
Those who supported him liked what he said about environmental regulations and estate taxes, both of which he wants to abolish. But they didn’t like what he said about NAFTA and other trade agreements, such as that NAFTA was “a disaster,” and the Trans-Pacific Partnership represented the “rape” of the United States.
Of course, presidential candidates always promise to do things they can’t do unilaterally, like shut down the Department of Education. So, farmers and ranchers can be forgiven for not knowing that the president can’t snap his fingers and change the tax code or make a water quality regulation disappear.
He can, however, pull the United States out of trade agreements, as Trump has already done with the TPP and intends to do with the unfinished Trans-Atlantic Trade and Investment Partnership, which the Obama administration was negotiating with the European Union. He also wants to renegotiate NAFTA. That makes farmers and ranchers nervous, because Trump’s goal is to help manufacturers, not farmers.
This is, in part, a consequence of the way he ran his presidential campaign. Other candidates go into diners and cafes to sit with people and talk to them about what’s on their minds. They meet with farmers, autoworkers and teachers. They visit farms, small businesses and factories. They listen and learn.
Trump never bothered with any of that. He just held rallies where he could say whatever he wanted, lash out at journalists, Mexicans and Muslims, and bask in the adulation of his adoring followers.
Consequently, one of the countless things he failed to learn is that American farmers and ranchers depend heavily on access to foreign markets for their livelihood. The United States is the world’s largest producer of soybeans and about half the annual crop is exported. China, which is a particular target of Trump’s wrath, is the world’s largest buyer of American-grown soybeans. Most American soybean farmers plant their crops specifically for export to China. If Trump starts a trade war with China, those farmers will be in a tough spot.
Darci Vetter, who was the chief agricultural trade negotiator in the Obama administration, pointed out that the United States is a surplus agricultural producer and “China has over a billion people who need to eat.” And China’s farmers can’t come close to feeding them all.
“We really need each other,” she said yesterday at a Washington International Trade Association event on U.S.-China trade issues.
Farmers and ranchers were counting on Congress to ratify the TPP before Trump took office. That didn’t happen and Trump trashed the TPP on his first day in the White House.
The consequences of that are far too numerous to list here. But here are a couple that apply to agriculture:
As poor countries like Vietnam become less poor, their people want more of the luxuries that citizens of developed countries enjoy, like beef and wine. American ranchers and vintners were looking forward to providing those things duty-free under the TPP. Now, Vietnam is likely to turn to Australia and other countries for them.
Japan imports most of its beef from Australia. The TPP would have put American beef producers on equal footing with the Australians in competing for sales in the Japanese market. Now, they are left to watch as Australia continues to outsell them there.
American Farm Bureau President Zippy Duvall said in an interview that farmers were “very nervous and concerned” about Trump’s trade policies. But he said they were encouraged by the fact that Trump says he plans to negotiate bilateral trade agreements with Japan and others.
Of course, the TPP was finished, signed and ready for ratification. Bilateral agreements take years to negotiate to conclusion.
Sen. Pat Roberts, R-Kansas, who chairs the Agriculture Committee, told Politico that he wants to know who is in charge of administration trade policy and “why on earth we are not having more of a conversation on a very robust and predictable trade policy?”
After he and other senators met with Trump administration officials Wednesday about trade policy, Sen. Chuck Grassley, R-Iowa, said, “I pointed out that U.S. agriculture is often the first target when countries retaliate against the United States on trade. . . If the president can negotiate better deals for the United States, I’m all for it, but I don’t want to see anything that hurts major sectors of the economy, like agriculture.”
Negotiate better deals? Don’t bet on it.
“I’m going to try and demonstrate that we are going through a pretty rough patch in agriculture,” Roberts said. If Trump makes good on his promises to turn U.S. trade policy into a war against imports, “we are going to get into a very difficult situation.”
HOW CHINA CAN RETALIATE AGAINST THE US
In an article below, International Trade Lawyer Adams Lee at Harris Bricken sets out the ways China can retaliate against the United States:
Trump’s Early Trade Actions
China Gets Ready for The U.S.-China Trade War
By Adams Lee
President Trump has already acted upon some of his trade-related campaign promises. One of his first official actions was to withdraw the United States from the Trans-Pacific Partnership (TPP). Trump also floated the idea of imposing a 20% tax on all imported Mexican goods in order to pay for the US-Mexico border wall, but then appears to have backed off that idea. Below I discuss how these early trade actions of the Trump administration may benefit China the most, instead of benefitting America first. Also, I discuss how China is not standing idly by, but rather is positioning itself to defend or retaliate against U.S. trade actions that target China
Trump’s TPP Withdrawal – In signing the executive order withdrawing the United States from the TPP, President Trump merely signed the death certificate for a trade deal that was practically comatose well before he took office. Trump described the TPP (along with basically every other trade agreement) as a “bad deal” that would result in a “death blow for American workers.” Many commentators, however, have noted that China will be the biggest winner from Trump’s abandonment of the TPP. The TPP aimed to reduce trade barriers and tariffs across 12 countries, but specifically did not include China. The TPP was part of a strategic U.S. pivot towards Asia that attempted to strengthen American economic ties in the region to counter-balance China’s increasing power in the region. With the demise of the TPP and Trump’s “America First” position, other Asian countries such as Australia, South Korea, and the Philippines, likely will be drawn even tighter within China’s expanding economic sphere of influence in the region. China also has a clear opportunity to fill the political leadership void in the region created by Trump’s withdrawal from TPP. China now could take the place of the United States in the TPP, but appears more likely to push for the completion of its own proposed Regional Comprehensive Economic Partnership (RCEP) which includes many of the same Asian countries that were part of TPP, but not the United States. If RCEP is successfully negotiated, the U.S industries stand to lose significant market share throughout the Asian countries that will have preferential rates with its RCEP partners, but not the United States.
Trump Floats, Then Walks Back, Proposal for 20% tax on Mexican imports. –The Twitterverse exploded with people very upset that avocados and tequila could cost more because of Trump’s proposal to impose a 20% tax on all Mexican imports. White House spokesperson Sean Spicer rushed to explain that the idea of the 20% tax was not really a policy proposal, but just one example of the options of how to pay for the U.S.-Mexico border wall. The fact that Trump paused after the idea of a 20% tax on imported Mexican goods got such a bad reaction (“Guacapocalypse!!”) is good news for China, at least temporarily. During the campaign, Trump had proposed a 45% tax on all Chinese imports. But if U.S. consumers hated the idea of a 20% tax on Mexican goods, it seems likely that a 45% tax on Chinese imports would trigger an even stronger outrage because of the broader spectrum of goods from China that would be affected. Instead of a straight tariff on imports, however, Trump may now try to impose a border adjustment tax (BAT) similar to what House Republicans have suggested. But calling it a tariff or a more complicated BAT won’t change the bottom line impact that either option would make imports more expensive and US consumers would bear the brunt of those increased costs.
China thus far has publicly taken the high road and stated no one wins in a U.S.-China Trade war. However, China also has taken the following steps to better position itself to defend, or to more aggressively retaliate, against the United States if Trump insists on escalating the trade war.
China’s WTO Challenge v. U.S. Continuing NME Status for China – China insists that when it negotiated the terms that allowed China to accede to the WTO in 2001, the United States agreed that it would treat China as a non-market economy (“NME”) in antidumping cases but only for another fifteen years, after which it would be treated like all other market economy countries. Unfortunately for China, the Chinese negotiators for the 2001 US-China WTO Accession agreement were primarily politicos, and not lawyers. Because this agreement was not drafted precisely as the Chinese intended, the United States has been able to parse the language to come up with a plausible legal argument that the U.S.-China WTO Accession did not call for an absolute hard deadline for the termination of China’s NME status, but rather provided only a conditional promise to terminate China’s NME status. The revocation of China’s NME status is a high priority objective among China’s leadership. Immediately after the December 11, 2016 fifteenth anniversary of China’s WTO accession, China filed a WTO challenge against the United States continued application of NME status in antidumping cases against China.
China’s Increasing Opposition to U.S. AD/CVD Proceedings – China’s complaint against the United States’ refusal to grant market economy status will take many years to work its way through the WTO dispute settlement process. In the meantime, China will not just wait to see if the WTO will rule in its favor. China just within the past month has become more outspoken against U.S. Department of Commerce (DOC) determinations in AD/CVD proceedings against China. China’s Ministry of Commerce (MOFCOM) recently issued press releases objecting to specific methodologies used by DOC and ITC to obtain inflated AD/CVD rates in a wide variety of cases involving off-road tires, biaxial geogrids, hardwood plywood and amorphous silica fabric, carbon and alloy steel, and ammonium sulfate. Previously, MOFCOM usually only monitored the outcomes of DOC and ITC cases, but rarely commented on any specific issues arising from U.S. AD/CVD proceedings. This recent increased activity from MOFCOM objecting to very specific and often technical AD/CVD legal issues in US investigations signals a more aggressive policy stance by the Chinese government to support Chinese companies that are subject to US AD/CVD proceedings.
China’s AD/CVD Actions against U.S. Exports to China – Not only is China playing more aggressive defense in U.S. AD/CVD proceedings, China is also starting to take the offensive and initiate their own AD/CVD cases against certain U.S. exports to China. On January 12, 2017, MOFCOM announced the final results in the AD/CVD investigations against dried distiller grains (DDGs) from the United States and issued AD and CVD margins of 42.2%-53.7% and 11.2-12.0% that were higher than expected. DDGs is an ethanol by-product used as animal feed, and in 2015 China imported 6.8 million tons of DDGS from the United States worth $2 billion and was the single largest export market for U.S. DDGs producers. MOFCOM’s DDGs determination indicates that China is looking to use its own AD/CVD actions not only to score political points, but also to have an economic impact. It is rumored that China already has received an AD/CVD petition against soybeans from the United States and is just waiting for an appropriate time to officially initiate these investigations, probably in reaction to a U.S. action against China.
US exports of soybeans to China are close to $10 billion so that is one big fat retaliation target.
CHINA AD/CVD NEWSLETTERS
Attached are newsletters from Chinese lawyer Roland Zhu and his trade group at the Allbright Law Office about developments in Chinese Customs and trade law. Team’s newsletter-EN Vol.2017.07Team’s newsletter-EN Vol.2017.06Team’s newsletter-EN Vol.2017.05Team’s newsletter-EN Vol.2017.04
There are rumors in Ukraine that a new antidumping and countervailing duty case will be filed against Solar Cells and Panels from China. If anyone wants more information about the situation, please feel free to contact me.
SECTION 337 AND IP CASES
CAFC SANCTIONS IN TURKISH TRADE SECRETS 337 CASE
On February 16, 2017, in the attahed Organik Kimya Sanayi ve Ticaret AS et al. v. International Trade Commission decision, CAFC TURK 337 SANCTIONS OPINION, the CAFC affirmed the ITC’s determination to find a Turkish company in default, issue an exclusion order for 25 years, and fine the company and its counsel $2 million in legal fees for destroying evidence in a trade secrets 337 case brought by Dow Chemical Co.
The Court specifically determined that the Commission had not abused its discretion in imposing default judgment sanctions because Organik Kimya had destroyed “potentially hundreds of thousands of files” despite explicit orders preserve documents and then tried to deceive the judge.
As the CAFC stated:
“Indeed, these facts put this case squarely within the Supreme Court’s admonition that ‘the most severe in the spectrum of sanctions provided by statute or rule must be available to the district court in appropriate cases’ to penalize a party’s sanctionable conduct and to deter future parties from repeating such conduct.”
US STEEL WITHDRAWS CYBER HACKING COUNT IN 337 CASE
On February 15, 2017, it was reported that U.S. Steel Corp. had announced that in the Section 337 Steel Products from China/Matter of Certain Carbon and Alloy Steel Products case it will withdraw allegations that its Chinese competitors hacked and stole trade secrets for the production of high-tech steel. US Steel cited the “unbearable burden” it faced proving its case before the ITC in a 337 proceeding.
In direct contrast to AD and CVD cases, however, which US Steel has been involved in for decades, section 337 is a penal statute, not a remedial statute. The burden then is on US Steel to prove its case at the ITC, where in an AD and CVD case the burden is on the foreign companies to prove that they are not dumping.
US Steel also has problems with the rest of it case, as the ITC Administrative Law Judge has already dismissed the antitrust claims against the Chinese companies. Now the shoe is on other foot and US Steel has to actually prove its allegations and the company is finding that difficult to do. An ITC 337 case is not an antidumping and countervailing duty case at Commerce where US Steel has a major advantage over the foreign companies.
NEW 337 CASES AGAINST CHINA
TV REMOTE CONTROLLERS
On January 26, 2017, in the attached ITC notice, REMOTE TV CONTROLLLERS, OpenTV, Inc., Nagra USA, Inc., Nagravision SA, and Kudelski filed a section 337 case on Digital Television SetTop Boxes, Remote Control Devices against Comcast Corporation, Philadelphia, Pennsylvania; Comcast Cable Communications, LLC, Philadelphia, PA; Comcast Cable Communications Management, LLC, Philadelphia, PA; Comcast Business Communications, LLC, Philadelphia, PA; Comcast STB Software I, LLC, Wilmington, Delaware; ARRIS International plc, Suwanee, GA; ARRIS Group, Inc., Suwanee, GA; ARRIS Technology, Inc., Horsham, PA; ARRIS Enterprises LLC, Suwanee, GA; ARRIS Solutions, Inc., Suwanee, GA; ARRIS Global Ltd. (formerly Pace Ltd.), United Kingdom; Pace Americas, LLC, Boca Raton, FL; Pace USA, LLC, Boca Raton, FL; Universal Electronics Inc., Santa Ana, CA; Gemstar Technology (China) Co. Ltd., China; Gemstar Technology (Qinzhou) Co. Ltd., China; and Gemstar Technology (Yangzhou) Co. Ltd., China.
If you have any questions about these cases or about Trump and Trade, border adjustment taxes, US trade policy, the antidumping or countervailing duty law, trade adjustment assistance, customs, False Claims Act or 337 IP/patent law, please feel free to contact me.