421 Afterthoughts

[MULTIPLE UPDATES AT BOTTOM]

First off, a big thanks to the guys at Power Line for the nice words re: my initial analysis of the President's timid Section 421 decision. (And welcome to the many first-time readers who have stumbled here because of my earlier Section 421 post.)

Now, a few random thoughts after letting the President's decision sink in:

(1) Well, that didn't take long.

As Reuters reports, the Chinese Government immediately responded to President Obama's announcement with, ahem, extreme displeasure:

China decried a U.S. decision to impose added duty on Chinese made tires, saying the move sent a dangerous protectionist signal before a G20 summit and could stoke reactions impeding global recovery.

...

China's minister of commerce, Chen Deming, indicated he took this latest trade dispute with Washington especially seriously.

"This is a grave act of trade protectionism," Chen said in a statement put on his ministry's website (www.mofcom.gov.cn) on Saturday.

"Not only does it violate WTO rules, it contravenes commitments the United States government made at the G20 financial summit, and is an abuse of special safeguard provisions that sends the wrong signal to the world."

...

The Chinese Ministry of Commerce spokesman, Yao Jian, said the U.S. move could spark a "chain reaction of trade protectionist measures that could slow the current pace of revival in the world economy", according to the ministry website.

...

But the Chinese spokesman Yao accused the Obama administration of acting without sufficient proof and bowing to protectionist forces, spurning Chinese efforts at compromise.

"This step has harmed China, as well as harming U.S. interests, and even more it sends the wrong trade protectionist signal to the world before the Pittsburgh summit," said Yao.

...

China warned of protectionist ripples from the dispute.

"Although the world economy has shown some positive developments, the outlook for economic revival remains tortuous, and rampant trade protectionism can only delay the course of recovery," said Yao, the Chinese spokesman.

Fan Rende, the president of the China Rubber Industry Association, said his group will appeal against the U.S. decision and "propose the government needs to adopt mandatory retaliatory measures against U.S. agricultural products and motor vehicles," the China News Service reported.

Fan said the U.S. duties could affect many thousands of Chinese workers. Last year, China exported 46 million tires, worth a total of $2 billion, to the United States, making up a third of total Chinese tire exports, he said.

The commerce minister Chen did not mention any such retaliatory steps, but he said his government "retains the right to further respond and adopt corresponding measures."

Yao said Beijing could complain to the World Trade Organization about the duties. ...

Because the Section 421 tariffs are explicitly sanctioned under Article 16 of China's WTO Accession Protocol and the President has total discretion about the type and level of protection granted, I'm not quite sure what China would challenge at the WTO - probably the substance of the ITC's "market disruption" decision, but we're in very uncharted territory here because Section 421 protection has never been imposed, so who really knows for sure.

That said, other forms of retaliation are far more certain. As I've noted previously, Chinese government and industry representatives had publicly warned of (and lobbied for) unilateral retaliation against US exports of goods and services in response to Section 421 protectionism, and Chinese news sources reported this morning that the Chinese government is initiatiting antidumping and countervailing duty actions against US imports of chicken and automobiles. Let the trade war begin!

Reports had been circulating that US chicken exports were being targeted for new antidumping duties (and perhaps as a potential response to the Section 421 decision). American chicken exports are 89% (584,300 tons) all Chinese imports, and they represent about 20% of all US chicken exports. So this case alone is going to be a very painful counterpunch by the Chinese, and the automobiles case could cripple GM's big hopes in China. Considering that GM is essentially a union-owned company these days, I sure hope the USW's tires victory was worth it.

Furthermore, all of this nastiness could be small potatoes compared to (i) what China does behind closed doors re: US investments, stealth regulatory controls or non-trade issues (e.g., regional security issues), or (ii) what could happen if the bilateral conflicts further escalate if/when the US responds to the Chinese retaliation or more Section 421 cases are filed.

Which brings us to...

(2) Why this decision will dramatically benefit US labor unions.

Two related reasons, really. The obvious one is the simple fact that unions now have a cheap and easy way to block Chinese imports, given their super-cozy relationship with a President that favors Section 421 protectionism. As I've already written:

First, unlike anti-dumping or countervailing duty (CVD) cases, Section 421 cases don't involve allegations of unfair trade or an independent determination of dumping/subsidization by the Department of Commerce. This makes them cheaper and faster (only about 6 months, compared to a year or more) than AD/CVD cases. Second, unlike "normal" safeguards cases ("Section 201" actions) that have a "serious injury" threshold, 421's standard of "market disruption" is lower and thus easier for petitioners to prove. Third, normal safeguards cases by law must apply to all importing countries, while 421 only targets China - thus it's politically easier to demagogue the issue, and (non-China) foreign resistance is minimal. Given these facts, the President's discretion in 421 cases is the biggest impediment to a "successful" result for petitioners. Bush opposed any protection in all four ITC affirmative 421 decisions, causing domestics to just stop trying. But if Obama sides with the USW, it's game on for the unions, and they don't even need industry support. (And simply the filing of a few more petitions will affect tradeflows as the Chinese pull back.)

So now that President Obama has decided to impose prohibitive tariffs on Chinese tires, the unions know that they have a shiny new weapon to restrict trade with what they believe is their biggest trade adversary. Thus, we should expect a lot of new Section 421 cases over the next few months. And again, as the tires case taught us, the fact that domestic industries could completely oppose the unions' and the President's protectionist efforts won't matter at all.

Which leads us to the second reason why the unions are just loving the Section 421 decision: the President's action provides them with a fantastic new bargaining chip in negotiations with management. Consider the example of a US company that (i) currently purchases Chinese inputs for its US manufacturing, (ii) has certain products manufactured in China and sold in the US, or (iii) is contemplating offshoring some of its production to China because, for example, its US-based manufacturing of certain product segments has become increasingly unprofitable. With Friday's decision, that company's union now can use Section 421 to threaten to destroy the company's current or future Chinese exports - or even threaten to have a "sister" union eliminate imports of the company's Chinese inputs. And it all could be done in about 6 months! The result, of course, is a newly-titled playing field in union-management negotiations which will lead to less efficient production, higher prices for US consumers and, in the worst cases, the company's ultimate bankruptcy (or complete departure from the US market).

Frightening, huh?

(3) Tire producers and other exporters are rejoicing in Mexico, South Korea, Indonesia and elsewhere.

Ok, maybe not publicly, but they've gotta be quietly dancing in their offices because China - their main competitor for US market share - is now hobbled. As I noted a while ago regarding the tires case (quoting Greg Rushford): "Knock out imports of tires from China, and other suppliers in places like Canada, Japan, Korea, Indonesia, Brazil, Mexico, Poland, and Indonesia will be more than happy to grab the business." This "trade diversion" phenomenon is not isolated to tires alone. For example, it occurred when the US imposed steep duties on Chinese imports of certain low-end furniture (Vietnam took up the slack, while US production continued to fall). It's also part of a broader economic issue that's supported by empirical evidence: Chinese imports have not been taking US market share from American companies; they've been replacing other imports, particularly those from other Asian countries. Dan Ikenson and I explained this very important issue in our recent Cato Institute policy analysis:

Over the past couple of decades, China has become a prime destination for investment in low-to-medium-value manufacturing operations and final assembly processing. Many companies around the world that used to produce entirely in one locale—typically in the companies’ home countries—have adopted transnational production processes, and China often features prominently in their supply chains. Thus, a good portion of what used to show up on U.S. trade statistics as imports from Japan or Korea or Taiwan or Thailand, now register as imports from China simply because of China’s usual position at the end of the production supply chain. Because China is the final country from which these transnationally produced goods are shipped to the United States, the value of the cargo is registered as an import from China.

This change in production processes is made evident by a review of the trade data, which reveals that imports from east Asia (as a percent of total U.S. import value) have been remarkably steady over the past 15 years. In 1995, imports from east Asia accounted for 30 percent of all U.S. imports of goods and services. In 2001, the relative value from east Asia fell to 26 percent before rising slightly to 28 percent in 2007. However, China’s share of the east Asian total has grown considerably—from 20 percent in 1995 to 34 percent in 2001, and to 58 percent in 2007.

So, although a significantly larger percentage of imports comes to the United States directly from China, the overall value of imports from the region, as a percentage of all U.S. imports, has been steady (and, in fact, declined slightly). Japan’s, Taiwan’s, and South Korea’s share of U.S. import value declined over the period, while China’s grew considerably. There has simply been a shift in production processes—which speaks to the internationalization of supply chains more than anything else—with China featuring prominently as the final assembly point for goods destined for the United States. These data also strongly support the argument that Chinese exports to the United States have not come at the expense of U.S. workers, but rather at the expense of workers in other Asian countries that used to perform these relatively low-skilled functions before transnational production became so common.

Pretty interesting, wouldn't you say? With fairly-traded Chinese imports under attack in the US, this trend should start working in reverse, with South Korea, Indonesia, Vietnam, Mexico and others regaining the market share that they've lost over the last decade.

Something to keep an eye on, especially re: tire imports, over the next several months.

UPDATE: Per Reuters, China has also formally requested WTO dispute settlement consultations (the necessary precursor to a full-blown WTO dispute). The request is available here (subscription required), and it appears that the Chinese will challenge, among other things, Section 421 of US law as inconsistent with the section of China's WTO accession protocol (Art. 16) upon which Section 421 that allows WTO Members to impose China-specific safeguards. In layman's terms, the Chinese are claiming that US law itself violates the WTO "rule" upon which that law (Section 421) is based. Should be interesting.

UPDATE2: Surprise, surprise: the US Steel Industry - or at least one big member of it - applauds the President's 421 decision. The supportive comments from Nucor's President are here. I wonder how long it'll be until we see the first 421 petition on Chinese steel imports?

UPDATE3: The US poultry industry is pretty upset with the Chinese decision to investigate US Chicken imports. Here's the full statement by the National Chicken Council:

China's announcement is obviously in direct retaliation for the U.S. action in putting tariffs on tires made in China. Charges of dumping of poultry products are completely unjustified. Our companies engage in normal trade with China, not dumping. We believe chicken is being targeted by the Chinese because of the concerns they have expressed over the provision in the U.S. appropriations act that prohibits the U.S. Department of Agriculture from determining China's ability to ship fully cooked poultry products to the United States.

So the Chicken folks believe they're being targeted not only because of the tire tariffs, but also because of another little protectionist policy passed on Obama's watch: the 2009 Omnibus Bill's restrictions on Chinese chicken imports into the US. I wrote on that under-reported problem here and here.

The USA Poultry & Egg Export Council also expressed extreme displeasure with China’s chicken investigation, blaming "bad U.S. trade policies" for the problem. Reports Bloomberg:

“Our own government is creating these problems more so than the Chinese,” James Sumner, president of the group representing producers of 90 percent of U.S. chicken and egg exports, said in an interview yesterday. “We are upset with the way this has been handled by the administration.”

Me too, guys. Me too.