Tuesday, September 11, 2012

Documenting DOC's Ample Discretion re the "NME" Designation

As mentioned, I have a new paper coming out soon for the Cato Institute on the problems with American subsidy and anti-subsidy policy and how the United States can lead a much-needed global effort to reform trade-distorting subsidies (catchy title: "Countervailing Calamity: How to Stop the Global Subsidies Race").  The paper is currently in the final stages of copyediting, and I'll be previewing certain subjects here over the next few weeks.

One such subject is something I've repeatedly advocated here and in other papers: why the United States should designate China a "market economy" under the US anti-dumping law.  In making my case, I discuss (among many other things) why China's NME "graduation" is - contrary to popular wisdom - completely within the Department of Commerce's ample discretion to do so.  I provide a lot of evidence supporting this fact, and one pretty cool thing that got left on the cutting room floor is a really, really detailed chart which hits my point home (albeit in an admittedly long-winded manner).

In the paper, I recount how DOC reversed its decades-old policy of refusing to apply the US countervailing duty law to imports from NMEs.  I then state:
DOC’s policy reversal revealed the abundant discretion that it has with respect to NME decisions. In issuing memoranda in two separate investigations only a few months apart—an August 2006 NME memorandum in an anti-dumping investigation of Chinese lined paper and a March 2007 memorandum reversing previous policy (announced in the Georgetown Steel case) in the first CVD investigation of Chinese coated paper —DOC used the same evidence to come to precisely the opposite conclusions about the Chinese economy. In both cases, DOC examined the macroeconomic factors that are required for an NME analysis under U.S. law (currency, wages, investment, state ownership, government control over production and prices, and “other factors”) and... concluded that (i) China is no longer a Soviet-style economy; (ii) prices and costs are too unreliable for the purposes of determining the fair market value of merchandise; but (iii) prices and costs are sufficiently reliable for the identification and quantification of a subsidy benefit.
The following chart details DOC's conclusions on each NME factor and supports the broader conclusions that are excerpted above.  But because we (fortunately?) don't have to deal with word/page limits here on the interwebs, the chart isn't dead and instead you lucky folks get to view it here.  Enjoy!

NME Memorandum
(Aug. 30, 2006)
Georgetown Steel Memorandum
(Mar. 29, 2007)
Overall DOC conclusions
China is no longer a Soviet-style command economy but remains an NME for purposes of the U.S. AD law: “[I]t does not operate on market principles of cost or pricing structures so that sales of merchandise in such country do not reflect the fair value of the merchandise.”
China is “significantly different” and “more flexible” than Soviet-style economy, and thus may be subject to the U.S. CVD law: “[I]t is possible to determine whether the Government has bestowed a benefit upon a Chinese producer (i.e., the subsidy can be identified and measured ) and whether any such benefit is specific.”
DOC concludes that (i) China is no longer a Soviet-style economy; (ii) prices and costs are too unreliable for the purposes of determining the fair market value of merchandise; (iii) prices and costs are sufficiently reliable for the identification and quantification of a benefit.
Factor 1 – the extent to which the currency of the foreign country is convertible into the currency of other countries.
“While China’s reforms cannot ensure that the RMB is market-based, neither is the currency completed insulated from market forces. … [T]he exchange rate is not completely insulated from market forces, as evidenced by the PBOC’s adjustment of the currency peg in July 2005” when it raised the value of the RMB in response to large capital flows.” (pp. 11-12.) 
China’s currency “is freely convertible on the current account today.  Although the convertibility of the renminbi on the capital account is limited, the PRC Government has begun to liberalize capital account transactions…. [W]hile enterprises and citizens generally have access to foreign currency for trade purposes (in contrast with the Soviet-style economies), China’s reforms to date do not ensure that the renminbi is truly market-based.” (p. 6)
Both memoranda allege that the RMB is not fully convertible and that restrictions exist on the FOREX market and on capital account transactions.
Factor 2 - the extent to which wage rates in the foreign country are determined by free bargaining between labor and management.
“Wages between employer and employee appear to be negotiated, as opposed to government-set, as evidenced by the variability in wages across regions, sectors, and enterprise demands. Certain rights, such as the right to compensation and choice of employment, are afforded to workers; employers, while hampered in the ability to reduce staff, are generally free to make independent decisions regarding labor. However, there are a number of important institutional constraints on the extent to which market forces can act upon the formation of wages.” (p. 22)
“[L]abor regulations in the early 1990s abolished central planning for labor allocation.  The current Labor Law grants the right to set wages above the government-set minimum wage to all enterprises, including foreign-invested enterprises….  The fact that enterprises generally are free to set wages and the majority of prices does not ipso facto lead to the conclusion that wages and prices are market-based in all instances.” (p. 5)
Both memoranda’s analyses are essentially the same – both concluded that wage rates are not necessarily freely negotiated, and that institutional constraints limit the influence of market forces on wages. 
Factor 3 - the extent to which joint ventures or other investments by firms of other foreign countries are permitted in the foreign country
China permits all forms of foreign investment, e.g., joint ventures and wholly-owned companies, in most sectors of the economy. Foreign investors are free to repatriate profits and capital and are protected from nationalization or expropriation. Despite being quite open to foreign investment, as shown by large FDI flows over the past decade, China manages foreign investment to a significant extent, guiding foreign investment towards favored export-oriented industries and specific regions, while shielding certain domestic firms from competition.” (p. 33)
“By 1998… the PRC Government had given foreign trading rights to over 200,000 firms.  Although China continues to maintain some import price controls through the use of [state trading enterprises], the PRC Government has dismantled its monopoly over foreign trade and finally extended foreign trading rights to all [foreign invested enterprises] in accordance with its WTO accession obligations….  [State-owned enterprises’] have the legal right and obligation to act as independent economic entities under the 1994 Company Law…, including independent import and export decisions on both amounts and price. However, significant non-market forces may also constrain the actions of SOEs.” (pp. 7-8)
Both memoranda found that, even though China permits the existence of joint ventures and wholly-owned companies, the government continuously directs investments in order to direct the economy. 
Factor 4 - the extent of government ownership or control of the means of production
China has made progress in privatizing SOEs and introducing limited market practices to state-owned firms. The government has made a decision, however, to recede from direct state control over certain parts of the economy (particularly across much of export-oriented manufacturing), but to maintain and bolster state control in other areas…. The result is an economy that features both a certain degree of private initiative as well as a significant degree of state-planned and state-driven development….
China’s land laws, regulations, and statements, although often vague and contradictory, seem to support the provision of secure land-use rights to farmers and an open, transparent system for transferring commercial land-use rights. In practice, however, laws and regulations are regularly violated by individuals and local governments.” (p. 46)
“Starting in the 1990s, the PRC Government began to allow the development of a private industrial sector, which today dominates most of the industries in which the PRC Government has not explicitly preserved a leading role for the SOEs.  Despite continuing limitations on private property rights, the private sector’s limited access to bank credit and a difficult legal environment for business, entrepreneurship is flourishing in China, in stark contrast to the Soviet-style economies in the 1980s. While the PRC Government maintains the stated goal to preserve a leading role for SOEs in the “core industries” of energy, defense, metals, motor vehicles, transport, and telecom, varying degrees of non-state participation is permitted even in these sectors.  The result is an economy that features both a certain degree of private initiative as well as significant government intervention, combining market processes with continued state guidance.” (pp. 6-7)
Both memoranda conclude that, although the government has withdrawn from certain sectors but has maintained its presence in sectors such as finance, energy, and in the “core” or “pillar” industries: a significant degree of state-planned and state-driven development can be found; property rights are poorly enforced; legislation is not respected; and state-owned enterprises often receive land-use rights free of charge.
Factor 5 - the extent of government control over the allocation of resources and over the price and output decisions of enterprises
“The era of China’s command economy has receded and the great majority of prices are liberalized. There is increasing evidence at both the micro-and macro level of some market-based resource allocations. The state-owned sector is shrinking in relative terms, with retrenched labor being absorbed by other sectors. A limited number of SOEs are profitable and competitive. The growing private sector is productive, profitable, and increasingly driving economic growth. Bank lending to the private sector has increased at the margin, growing from nearly zero credit extended to the private sector in the 1980s.
Nevertheless, the PRC government, at all levels, remains deeply entrenched in resource allocation. Importantly, the various levels of government in China, collectively, have not withdrawn from the role of resource allocator in the financial sector.” (p. 77)
“[A]lthough price controls and guidance remain on certain ‘essential’ goods and services in China, the PRC Government has eliminated price controls on most products; ‘market forces now determine the prices of more than 90 percent of products traded in China.’” (p. 5)

“The PRC Government no longer allocates most resources in the economy directly through budgetary outlays, as was the case in these traditional Soviet-style command economies. …. Banks were afforded legal autonomy from the state in most matters, which allowed them to lend, at least in theory, having regard to commercial considerations.
Instead of directly allocating all financial resources in the economy, the PRC central and local government’s primary levers of economic and financial control lie in its use of administrative measures (which allow for ad hoc discretionary policy implementation), five-year plans and industrial policies which may serve as guidance for lending and growth, and decentralized (local) control over the banking sector. The near-complete state ownership of the commercial banking sector enables the government to use non-direct measures to guide the allocation of credit.” (pp. 8-9)
In both memoranda, DOC concluded that most prices in China are liberalized, and that the Chinese government no longer strictly allocates most resources but still acts as a resource allocator in the financial sector.
Factor 6 - such other factors as the administering authority considers appropriate
The memorandum analyzed other “economic reform issues”: trade liberalization; rule of law; property rights and bankruptcy; corruption; and Guanxi, the use of personal connections to circumvent law.
These factors are not addressed.
DOC’s failure to take this information into account in the Georgetown Steel Memorandum indicates a selective use of facts.


Dan Ikenson said...

After editing that unwieldy beast of a rant, I'm now expected to read more...from you? After those Gilligan's Island reruns maybe.

Scott Lincicome said...

You'll read more and like it.