EVENTS

Date:	Thursday, March 18, 2004
Time:	2:00 PM -- 4:30 PM
Location:	Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036

March 2004
Trade Remedies: Continuing Problems, New Solutions

On Thursday, March 18, 2004, AEI continued its Trade Policy Series with a conference evaluating the effectiveness of trade remedies and their future as a policy tools.  Ken Pierce, Willkie, Farr & Gallagher; Gary Hufbauer, Institute of International Economics; and Christopher Parlin, Jonas & Tuggey, addressed recent occurrences in the law and policy of subsidies and the issues that will challenge policymakers in the future.  In the second panel, AEI trade scholar Claude E. Barfield discussed his new book, High-Tech Protectionism: The Irrationality of Antidumping Laws (2003), followed by comments from Donald Cameron, a Kaye Scholar, and Thomas Prusa of Rutgers University. 

Ken Pierce
Willkie, Farr & Gallagher

Since I practice as a litigator and defense attorney, I would like to give you some examples and explanations as to how subsidy laws are applied. In theory, subsidies were a good thing, until they were manipulated by an agency, the U.S. Department of Commerce (Commerce), which has too much bias.  This is where law meets policy.  Before Commerce makes a determination in a subsidy case, substantial evidence must be presented.  This information is collected via questionnaires and interviews.  While this may seem fair, it takes the form, in practice, of "independent research" or secret interviews which are unannounced and in which legal counsel is not allowed to participate.  The questions are directed to a very specific agenda to find evidence to countervail a particular good or industry.  Commerce was given the authority to administer trade laws and serve as an advocate of U.S. firms, yet it is no wonder that many Commerce decisions are overturned when brought to the WTO.  The department often forces respondents to prove the negative, which places a heavy burden on the defense.  There is a fundamental commercial ignorance in applying subsidies, and Commerce cannot seem to understand this. 

Christopher Parlin
Loeffler, Jonas & Tuggey

I intend to focus on the WTO aspect of the subsidy/countervailing issues.  Certainly, I believe that countervailing duties remain the least favored of the trade remedies.  The title of this conference addresses the prevalence of subsidy-related problems, but I am positive that the solutions are not new despite the involvement of new industries.  The essential theme I see in the WTO cases is that we have only seen a minor, evolutionary change.  The WTO decisions have limited relevance to the critical substantive issues of credit, but they do provide insight regarding how to maneuver.  The limitations and qualifications do not apply in sunset cases, according to the WTO appellate body.  It also said that subsidy calculations do not have to be the same.  The appellate body relies on a textual dispute to administer decisions or overturn a case, and it abhors a failure by the investigating authority to provide adequate analysis.  In a current case concerning lumber, the appellate body did say that subsidies could occur in non-monetary form.  This was a very broad definition of financial contribution.  It overturned the panel decision that said the subsidy calculation had to come from the domestic market, despite pervasive government involvement.  Furthermore, the appellate body said one cannot automatically use the home market as a basis for the subsidy calculation.
 
Where the result is unreasonable, the appellate body said you can and should go beyond the home-market reference point, but they offered no guidance as to when. 

Gary Hufbauer
Institute of International Education

When discussing the role of subsidies today, it is important to consider two cases:  the Korean DRAMs and Canadian lumber.  In the DRAMs case, the common feature is keeping industrial assets in production through a public measure that erases or refinances substantial debt obligations. WTO rules should spell out the same remedy whenever a petitioner can establish that the firm would not continue operating if it had to treat the discharged or refinanced obligation as a variable cost.  If instead the WTO system closes off one survival route (e.g., state bank loans), but leaves others open (e.g. assumption of pension liabilities), public financial support will simply arrive through a different door. What is the appropriate remedy?  The countervailing duty (CVD) rate should be limited by the extent of trade injury, when that rate is less than the subsidy margin.  This would require a change in WTO rules, and an agreed methodology for measuring trade injury that occurs when a distressed plant continues operating.  Moreover, the duration of CVDs in such cases should not exceed five years after the resuscitation finance.  The long-running-more than twenty years-Canadian lumber case has richly rewarded law firms both in Canada and the United States.  Whether it has equally rewarded the trading system is another question. The appellate body held that when predominant suppliers receive public subsidies, in-country private market prices can be ignored.  The appellate body also held that pass-through analysis should be conducted whenever subsidized producers at stage one sell inputs at an arms-length price to independent producers at stage two.  However, when subsidized producers themselves produce stage two goods, it can be presumed that the subsidies affect all stage two exports.  The appellate body ruling on predominant suppliers seems reasonable; however, the pass-through ruling simply invites countries to promote favored industries by subsidizing non-traded inputs produced by primary industries.  

There are many important subsidy rulings ahead.  WTO rules on tax practices still adhere to the archaic distinction between direct and indirect taxes (the underlying issue in the FSC/ETI case).  At some point, the United States may refuse to tolerate this nonsense. There are two big problems: few firms have a commercial interest in challenging such subsidies, and the subsidies are often conferred at the sub-federal level, which is loosely regulated by WTO rules. There is a major imbalance between legislative and judicial functions of the WTO.  As a result, judges, not diplomats, formulate subsidy law (and much else) in the WTO legal system.  As a solution, a substantial minority of WTO members (measured by number of members plus percent of world trade) should be able to block appellate body decisions.

Panel II

Claude E. Barfield
AEI

I wrote this book mainly for people not necessarily involved in trade remedies and those in Congress.  I wanted to review the basics of antidumping and subsidies, without much emphasis on the politics involved.  In many sectors, it is clear that often the costs are far greater than the benefits.  What we thought were strategic industries turned out to be commodities.  The point is that in most cases there were unintended negative consequences, and I think that we will see a recycling of old circumstances.

I suggest three things.  First, we need to go back to basics and attack the conventional wisdom that you cannot substitute competition laws for antidumping.  Second, suppose we cannot defeat antidumping and accept it in some form. I address the current defense of antidumping laws.  Finally, I contend that we should substitute safeguards for antidumping.  I concede that we do need a safety valve but ask how does one do so in a less destructive manner.  Regarding competition policy, the argument is that you cannot make a substitution between antidumping and antitrust law.  I argue that if one looks at the economic rationale, one can say while the laws have different histories and constituencies, the only credible rationale relates to predation and the ability of a foreign exporter to come into a domestic market and price so low as to push everyone out and become a monopoly.  Cases to the contrary only show competition in practice, and that is legal.  In recent years, the Clinton administration proposed a sweeping expansion of the defense of antidumping.  If we accept the system as is, we need to introduce more elements of competition policy, such as determining the concentration of a particular industry in a given region. We should be able to make these kinds of distinctions before we place an antidumping duty.  There should be a more political process in the end, similar to safeguards.  The president should be able to intervene and conduct a national interest test to change whatever Commerce and the ITC have recommended.  I am skeptical about independent organizations mainly because the regulations they enforce are biased to the home market.  Ultimately we do need a safety valve to protect our industries when needed, and I think safeguards are the best tools.

Thomas Prusa 
Rutgers University

Antidumping extends well beyond a level playing field.  There are many strategic and anti-competitive effects of antidumping that are often overlooked.  It facilitates collusion.  Antidumping creates an opportunity to arrange anticompetitive reductions in trade.  Further, it can punish firms who deviate from cartel-like arrangements.  Antidumping also raises rivals costs. Even the threat of filing a case can increase costs.  In the case of foreign rivals, it discourages firms from making investments in U.S. markets.  Disrupting global supply chains harms domestic rivals.  Foreign direct investment is disrupted when such protectionist measures cause foreign firms to invest in order to avoid being foreclosed from the market.  If U.S. firms want to maintain presence in these important markets, they may well have to make more investment than they would otherwise.  Therefore, antidumping may encourage outflow of capital investment, and hence, contribute to more outsourcing.

Donald Cameron
Kaye Scholar

A brief synopsis of Claude's book makes the point that any economic basis for antidumping is long gone.  It is now a legal device designed to impose taxes on foreign goods.  This is a tax, pure and simple.  This is a revenue stream for which no one is accountable, and the Byrd amendment allows us to distribute the revenue to the damaged industry.  The problem is an issue of competition.  There is no moral content associated with the dumping law-nothing that is fair or unfair.  It does not measure fairness; instead, it measures the amount of tax imposed.  One will find that the numbers are inflated.  Another issue to consider with antidumping is that the laws are structured to cede trade policy to private interests.  Dumping is an unyielding trade policy tool.  It may be that the results are counterproductive to national public policy.  The problems Claude identified can be attributed to many sectors including technology and lumber.  The future of dumping will rest in agriculture, where trade barriers are slowly being removed.  An increase in antidumping usually occurs in industries where barriers to trade have been eliminated in an effort to get back to the same levels of protectionism. 

I contend that solutions to antidumping are hard to find.  The most interesting proposal suggests broader considerations and includes more public interests in determining injury.  This would be useful.  Whenever the process is politicized, respondents get nervous.  The reality is that there is rarely a one-sided judgment from the president that would be in the respondent's interests.  In theory it would be a great idea but would require a significant shift in thinking.  Concerning safeguards, the idea is right-at least in theory.  However, now safeguards are also prevalent today, much like antidumping.  At least in dumping there are rules, whereas in safeguards it relies too much on politics.  If we really want to make a difference in antidumping, then we should put a five-year limit on actions.

AEI research assistant Jessica Browning prepared this summary.