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!

Factor	NME Memorandum (Aug. 30, 2006)	Georgetown Steel Memorandum (Mar. 29, 2007)	Comparison
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.

Plaintiffs in GPX Case Argue CVD/NME Law's Unconstitutionality

On Friday, Plaintiffs in the long-running court drama GPX Int'l Tire Corp. v. United States filed with the US Court of International Trade case briefs arguing that the March 2012 law revising US countervailing duty (CVD) law to apply to imports from "non-market economies" like China and Vietnam was unconstitutional.  (The details of the GPX case are far too numerous for tonight, but you can go here for a lot of the backstory.)

The plaintiffs briefs are available here (GPX International Tire Corp.) and here (Tianjin United Tire & Rubber International Co.) if you'd like to read them.  They're actually pretty entertaining, as far as trade court briefs go (hey, stop laughing), but the introductions to each brief lay out the plaintiffs' basic legal arguments and some helpful background, so I'll just quote from them for now.

Tianjin highlights one constitutional violation related to equal protection and the Fifth Amendment and argues that the law's retroactive application to all past CVD investigations of NME imports (dating back to 2006) is not severable from the rest of the law (essentially killing the law and reinstating the Court of Appeals for the Federal Circuit's 2011 ruling in GPX that CVDs cannot be applied to NME imports):

The issue before this Court is whether the New Law is made unconstitutional by the two effective dates in the New Law – one which retroactively applies the countervailing duty (“CVD”) law to non-market-economy (“NME”) countries, and the other which only prospectively applies protections from excessive duties. The New Law violates the equal protection guarantees of the Fifth Amendment because it creates two classifications of companies without a rational relationship to a legitimate governmental purpose. All companies are made subject to the CVD law. But only one classification of companies receives protection from excessive duties resulting from the double-counting inherent in the concurrent application of CVD law and the NME methodology for calculating antidumping duties (“AD”). The other classification of companies is denied equal protection of the law.

This classification distinction is not rationally related to a legitimate governmental purpose for three reasons. First, Congress’s stated intent to “avoid future adverse results” in actions brought before the World Trade Organization (“WTO”) is invalid because the WTO has no statute of limitations. Second, an excessive remedy is contrary to the limited intent of the AD and CVD law to offset unfair competitive advantage. Third, there is no other plausible policy reason for the discriminatory classification.

The offending provision of the New Law cannot be removed without affecting the remainder of the law. Any attempt to do so would be insufficient to result in the application of the New Law to this case. Because the law cannot be construed to avoid constitutional infirmities in this case, this Court must apply the Federal Circuit’s initial opinion barring application of the CVD law to NME countries.

GPX, on the other hand, finds three constitutional violations - a similar equal protection claim, an ex post facto claim and a due process claim - and, contrary to Tianjin, argues in favor of severing the retroactive provisions with the rest of the law (essentially leaving the new law's "double counting" provision in place):

From the moment the U.S. Department of Commerce asserted the right to conduct CVD investigations against China, various parties (including the Plaintiffs in this case) have strenuously and repeatedly argued that Commerce had no such right and that those investigations were unlawful. After almost five years of protracted and costly litigation, the courts finally confirmed that those investigations were in fact beyond Commerce’s authority under the law in effect at that time. The unlawful CVD orders should be terminated.

But instead, Plaintiffs find themselves back in court. Congress decided to change the law. Although Congress can change the law prospectively, Plaintiffs strongly disagree with the way in which Congress has applied parts of its new law retroactively. This selective retroactivity violates three fundamental principles of justice enshrined in the Constitution. First, the retroactivity provision singles out a particular group, and then condemns and punishes conduct by that group not illegal or punishable at the time it was committed, and in doing so violates the Ex Post Facto Clause of Article I. Second, even if the new law is not so punitive as to trigger the Ex Post Facto Clause, the retroactivity provision imposes wholly new taxes that dramatically burden importers with no notice, going back far beyond the limited period of retroactivity typically allowed with or without notice, and in doing so violates due process rights under the Fifth Amendment. Third, the retroactivity provision irrationally discriminates against past importers, refusing to give them the same rights and opportunities given to future importers, and in doing so denies equal protection of the laws also guaranteed by the Fifth Amendment.

Congressional discretion does not justify violations of the Constitution. The effort to impose wholly new and discriminatory penalties going back more than five years to November 2006 must be struck down as unconstitutional.

Although these legal arguments (obviously) will form the basis for the CIT's eventual ruling, I especially enjoyed GPX's reiteration of the facts surrounding the CVD/NME law's passage - facts that highlight not only how Kafka-esque the entire process was/is, but also the immense lengths to which the US government has willfully and repeatedly gone - in the face of multiple adverse US court and WTO rulings - to impose additional taxes on US consumers of imports from NME countries like China and Vietnam.  This distressing fact is briefly referenced in the summary, but the following excerpt from GPX's brief really hits it home (citations omitted):

Other than letters and press releases, there is virtually no other legislative history for this new law. There were no House or Senate hearings. There were no House or Senate reports. Other than a CBO analysis that the new law would increase revenues by $160 million over the 2013-2022 period, there was no other formal analysis of the new law. S. 2153 passed the Senate by unanimous consent. H.R. 4105 passed the House under suspension of the rules. The Senate then passed H.R. 4150 by unanimous consent.

There was no debate at all in the Senate and only very limited debate in the House. During a brief 32 minute period before the vote, several House Members offered brief floor statements on the legislation. These statements criticized the CAFC decision, and repeatedly singled out China. Representative Camp stressed that “China distorts the free market.” Representative Levin emphasized the need “to hold China and other nations accountable” and “to rein in China’s abusive trade practices.” Representative Rohrabacher elaborated that China “supports every rogue enemy of the United States.” Beyond this focus on China, there was also repeated condemnation of illegal subsidies by Representative Pascrell, Representative Michaud, and Representative Slaughter. There was much discussion of the need to apply the CVD law to China to address these “illegal” subsidies, and occasional acknowledgement of the need to make adjustments for double-counting to comply with the WTO, but no discussion or acknowledgement of the asymmetrical provisions on retroactivity.

Although several Members suggested that should existing CVD orders be terminated because of the CAFC decision, U.S. industries would be vulnerable to imports from China none of these statements mentioned the parallel antidumping orders against these same imports. Each of the 23 then outstanding CVD orders against China had and still have a companion AD order. For 96 of the 114 calculated AD rates in these orders, the AD rate imposed was higher than 15 percent, resulting in a practical exclusion of those Chinese suppliers from the U.S. market. In this particular case, the AD order against plaintiffs GPX and Starbright imposes duties of 19.15 percent – market preclusive duties that have virtually eliminated plaintiffs’ exports to the United States. In short, since imports from China were already subject to high AD duties, termination of the CVD orders would have very little if any effect on the imposition of relief for U.S. industries. There is not even a hint of this issue in the limited House debate.

It thus took Congress just nine days to introduce, pass, and present the legislation to the President for his signature on March 8, 2012. The President signed the new legislation into law on March 13, 2012.

Pretty ridiculous when you lay it all out like that, eh?  It would be funny if it weren't so sad: this ridiculousness has not only maintained hefty, punitive (and formerly illegal) duties on billions of dollars worth of Chinese and Vietnamese imports, but also bred more litigation, undermined US-China trade relations, and, of course, denied the "victorious" plaintiffs in GPX a small fortune in refunded duties that they rightly won after years of hard-fought legal battles.

Talk about a due process violation.

But I digress.  If you're at all interested in US trade remedies or want to better understand one of the bigger thorns in the US-China trade relationship, I highly recommend skimming both briefs.  They really are quite interesting (and frustrating!).  The US government has until October to file its brief, but there's no time frame for the CIT's final ruling.  And, because this is a very novel issue of law, there's really no way of knowing who will ultimately prevail in the case.  So stay tuned.

That said, there is one thing in this process that does appear certain: if the plaintiffs win, you can pretty much guarantee that the US government will again appeal its loss to the CAFC.  And if the government again loses there, well, there's always the Supreme Court. And, hey, if all else fails they could just quietly and quickly pass another bad law denying plaintiffs another victory and again kicking the can further down the road.

I mean, China will stop being an NME in 2016, so at some point this stuff has to end, right?

Right?

A Welcome Transparency Improvement for US Trade Remedies

There is little doubt that I've been a rather vocal critic of the Commerce Department's treatment of various methodological and policy issues that arise in the US trade remedies (i.e., antidumping and countervailing duty) cases that the agency administers.  So let me take a moment to applaud an impressive improvement in the Department's online filing system and documents library, IA Access, that was unveiled yesterday.  Previously, only interested parties to specific trade remedy litigation could use IA Access and review public documents - e.g., case briefs and Department memos detailing its policy decisions and/or calculations - that are filed in a particular case.  This high wall made it virtually impossible for "normal people" (including journalists, policy wonks and, ahem, pesky trade bloggers) to review these documents and report on their details without trucking on down to the DOC Reading Room in Washington, DC and scouring hardcopies in the public files.  Moreover, the website's functionality was limited, so even if you were one of the "privileged few," serious research was extremely difficult.

Although this impediment sounds like a minor thing, it isn't: DOC makes significant policy and methodological decisions in the course of trade litigation, but only publishes a relatively vague overview of such moves in the Federal Register and on its general website.  These "devilish details" can allow various myths about US trade remedy proceedings to persist, and they can play a very significant role in determining the duties that US consumers must pay as a result of these investigations - duties affecting billions of dollars in annual trade and totaling hundreds of millions of dollars.  As noted in a Cato Institute report on the US antidumping law:

The U.S. antidumping law enjoys broad political support in part because so few people understand how the law actually works. Its rhetoric of "fairness" and "level playing fields" sounds appealing, and its convoluted technical complexities prevent all but a few insiders and experts from understanding the reality that underlies that rhetoric.

In this study we seek to penetrate the fog of complexity that shields the antidumping law from the scrutiny it deserves. Here we offer a detailed, step-by-step guide to how dumping is defined and measured under current rules. In addition, we identify the many methodological quirks and biases that allow normal, healthy competition to be stigmatized as "unfair" and punished with often cripplingly high antidumping duties. The inescapable conclusion that follows from this analysis is that the antidumping law, as it currently stands, has nothing to do with maintaining a "level playing field." Instead, antidumping's primary function is to provide an elaborate excuse for old-fashioned protectionism.

In short, even though the livelihoods many American companies and consumers - and millions of dollars - are at stake, the trade remedies game is won and lost in the deep weeds of specific AD/CVD proceedings, and only a few folks had the ability to spot and report on these important developments.  Now, however, IA Access' improved access and functionality means that anyone with a computer, internet access and email address can register with DOC and begin to scour the agency's records to find the important "methodological quirks" buried therein.  Now, I'm well aware that there aren't a lot of wonks, bloggers and journalists doing this right now, but maybe that'll change now that IA Access lets them actually do it from the comfort of their offices or homes.

Lord knows I'd certainly welcome the company.

The Bare Minimum: DOC Announces Double Counting "Fix"

When Congress passed legislation in March to apply countervailing duties on imports from China and other countries deemed "non-market economies" under the US anti-dumping law, proponents like House Ways & Means Committee staff promised us that the bill would solve, once and for all, the problem of "double counting," and that we critics were peddling "myths" when we claimed that the law in no way ensured that the illegal practice would end.  The CVD/NME law's "solution" to the double counting problem appeared to be tying the US Commerce Department - tasked with implementing the new law - in knots as it tried to complete its "Section 129" determination to bring the four AD/CVD determinations ruled illegal by the WTO Appellate Body (because of double counting and a few other issues) into compliance.  Well, last Thursday Commerce finally announced its preliminary work on double counting as part of the Section 129 process, and I think it's pretty safe to say that the double counting saga is nowhere near over, despite what much of Congress and the Obama administration would have you believe.

As you may recall, "double counting" occurs when duties intended to offset a subsidy on an imported NME product are imposed twice on that product as a result of concurrent AD/CVD investigations - a practice ruled illegal by both the US Court of International Trade and the WTO Appellate Body.  Because the NME methodology in anti-dumping cases already offsets any and all subsidies received by a Chinese exporter, duties resulting from a CVD (anti-subsidy) investigation of the same product inevitably offset the same subsidies twice - a punitive result that is inconsistent with WTO rules and US law.  So when the WTO Appellate Body ruled that four AD/CVD investigations violated WTO rules because, among other things, Commerce failed to account for double-counting, the US government set out - albeit glacially - to bring the decisions into conformity.

Commerce's preliminary attempts to follow the Appellate Body's double counting ruling are available here, here, here and here.  The memos are very long and very boring, but a quick skim reveals that they're pretty much identical, except for a few details about each case.  Being the nice guy I am, I'll save you the time of reading through the memos, and have pasted the crux of the Department's new double counting "solution" below (emphasis mine):

Given the variable cost-(short-run) price link noted in the Report, the Department considered evidence from the record of the original AD and CVD investigations and found that for the sacks industry, purchases of petrochemicals were booked in the direct raw materials inventory at the cost of acquisition. Since direct raw materials constitute a variable cost of production, the record in this proceeding – which includes the Report and evidence from the original investigations – indicates a subsidy-(variable) cost-price link in the case of input price subsidies. The Department, however, has found no other evidence on the record of the investigations with respect to other subsidies and the cost categories that they may impact. Therefore, for the purposes of this 129 proceeding, estimation of the extent that domestic subsidies to producers in China resulted in lower export prices, i.e. the extent of subsidy pass-through, has been limited to subsidies that are likely to have impacted variable cost, and the extent of cost pass-through has been used as a proxy for the extent of subsidy pass-through.

In order to estimate the extent to which changes in such variable costs were reflected in prices during the POI, as described in the Report, the Department calculated the average ratio of (a) rolling, monthly, year-on-year changes in production input costs to (b) rolling, monthly, year-onyear changes in ex-factory prices, for the POI, using data for the manufacturing sector in China available through Bloomberg’s electronic terminal. As a proxy for the change in input production costs, the Department used changes in an aggregate production input price index. And as proxy for changes in ex-factory prices, the Department used changes in an aggregate producer price index for the manufacturing sector in China. This ratio of price-cost changes (herein referred to as the Ratio Change Test (RCT)) estimates the extent of price responsiveness during the POI to changes in variable cost for producers in China.

We recognize that the extent of input price inflation pass-through is an inexact proxy for the extent of subsidy pass-through, not only because input price inflation and subsidies push cost in opposite directions, but because the impact of input price inflation may be more uniform and systemic in nature. As indicated above, the Department’s administration of the new statutory provision may evolve with the benefit of time and experience. The Department therefore intends in future inquiries, where appropriate and where time permits, to reassess this analytical approach, if merited....

The above-described approach leads us to conclude that approximately 63.07 percent of the value of the subsidies that have impacted variable costs, as identified above, were “passed through” to export prices for the sacks industry during the POI.

To summarize: of all of the countervailable subsidies received by the Chinese exporters under investigation - like low-cost loans or cheap land or tax breaks or simple monetary grants - Commerce determined that it will limit its double counting "fix" to a single type of subsidy: input subsidies (e.g., cheap, government-provided steel used by targeted Chinese exporters).  And, for those input subsidies, Commerce will only reduce the total subsidy rate by 63.07 percent - a value not based on the actual records of an investigated Chinese exporter (e.g., a steel pipe producer) or even the actual industry at issue (e.g., all Chinese steel pipe producers), but instead on general numbers for the entire Chinese manufacturing sector and all industrial inputs pulled from a Bloomberg terminal.

In short, even though Commerce's NME methodology offsets any and all subsidies received by a Chinese exporter, the agency's double counting "solution" addresses only one kind of subsidy, and only offsets a fraction of it.  And that fraction has almost nothing to do with the the actual subsidies, production costs or final prices of the Chinese exporters under investigation.

But other than that...

If you're still confused, I don't blame you, so here's a very simple example.  Let's say Chinese Exporter X participated in AD and CVD investigations of its widgets and originally received a 25% AD duty rate and a  25% CVD rate and, thus, a 50% combined duty on all of X's widget imports into the United States (without any double counting fix).  The CVD rate for X's widgets is the result of the exporter's receipt of five different subsidies, each adding five percentage points to the total CVD rate but only one of which is an input subsidy.  Under such circumstances, Commerce's new "double counting" methodology would address only a fraction of the one input subsidy and would thereby reduce X's 25% CVD rate by a whopping 3.15% (63% of 5%). Thus, Commerce's big double counting solution would cause the total duty applied to X's imports to drop from 50% to... about 47%.  (And, of course, where the input subsidy represents a far smaller share of the total CVD rate - say, 1% of 25% - that glorious reduction would be even smaller.)

Some solution, huh?

On the bright side, I guess things could've been worse: as I noted in March, the CVD/NME law was so poorly loosely-worded that Commerce probably could've done nothing to exporters' final AD/CVD rates and still complied with the letter of the law.  So at least this is a start (I guess).  Moreover, it's clear from the penultimate paragraph quoted above that not even Commerce is too comfortable with its "inexact" methodology, so maybe after a few years, it will have "evolved" to address a tiny bit more of the total, actual instances of double counting. (Dare to dream.)

In the meantime, however, it seems quite likely that the WTO won't be waiting around for Commerce's evolution, and instead will assess this first attempt because I highly doubt that this "inexact" fraction-of-a-fraction methodology is going to satisfy the Chinese government, its exporters or US importers.  I honestly have no idea how that ruling will come out, given the Appellate Body's standard and Commerce's near-term solution.  But one thing continues to be crystal clear: because the US government refused to take one of several simpler solutions to the whole CVD/NME mess, we have more litigation - and uncertainty - to look forward to.

Inevitable: China Files WTO Dispute re: 22 US CVD Cases

As you may recall, when the United States passed a law in March 2012 overruling a couple federal court decisions and retroactively applying US law to scads of completed countervailing duty investigations of Chinese imports, I explained that the law's illogical, biased structure - in particular, not addressing WTO-inconsistent "double counting" in any case completed before the law's enactment - all but guaranteed at least one WTO challenge from the Chinese government because the WTO's Appellate Body (in DS379) had already ruled that a failure to fix the problem in several other cases violated WTO rules.

The first dispute, it appears, arrived today:

China has asked for consultations at the World Trade Organization's Dispute Settlement Body on countervailing duty measures applied by the U.S. against 22 Chinese products, including solar panels, a statement posted on the Commerce Ministry's website said Friday.

The measures also were related to paper and steel products and affected $7.29 billion of Chinese exports to the U.S., Commerce Ministry spokesman Shen Danyang said in the statement.

U.S. actions on subsidy calculations and in determining that China's export restrictions were "effectively a subsidy" are violations of WTO rules, Mr. Shen added....

"The U.S. practices are an abuse of the trade remedy mechanisms and have damaged the legitimate interests of Chinese companies," Mr. Shen said. "We are greatly dissatisfied with this."

Mr. Shen said China has reiterated its stance on many occasions, but the U.S. has ignored China's concerns and "repeated its improper methods in the recent solar panel case."...

"China is hoping that the U.S. will correct its mistaken actions in anti-subsidy investigations," Mr. Shen said, adding that Beijing also hopes the U.S. "will use positive talks and communication under the WTO dispute-resolution mechanism to return to practices that are in line with WTO rules."

If consultations fail to produce a solution, China may request a ruling by a WTO panel.

China's formal request for consultations isn't yet available on the WTO's website, but the WSJ article makes clear that China is challenging several issues in these investigations.  BNA[$] adds that, according to the Chinese mission in Geneva, one of those issues is the US Commerce Department's treatment of Chinese state-owned enterprises as "public bodies" (i.e., as the Chinese government itself) in order to determine whether their sales of goods and services to targeted exporters constitute subsidies.  As you may recall, the public body issue also was addressed in DS379, and the United States just informed the WTO that it published on May 18 a preliminary determination on public bodies in the "Section 129" determination that the Commerce Department is (delinquently) completing to comply with the Appellate Body's DS379 report.

I guess Commerce's May 18 determination wasn't what the Chinese Government was hoping for, eh?

Anyway, today's WTO dispute adds to the long string of litigation surrounding the United States' application of CVDs on imports from China and other "non-market economies."  The US government recently had the opportunity to end much of this litigation, but instead doubled-down on the messy status quo when it passed the CVD/NME law in March and in the subsequent Section 129 proceedings.  Since then, we've seen the law's constitutionality challenged in US court, and now China's back at the WTO complaining about, among other things, what the law didn't fix in 20-plus CVD investigations.  Both of these legal reactions were completely expected, and pretty much ensure that US-China trade policy will be marred by an issue that (a) was easily solvable via one of several rational policy options; (b) keeps the US on the defensive in bilateral trade talks; and (c) increasingly looks to be putting American exports at risk via China's imposition of WTO-sanctioned retaliatory tariffs due to continued US malfeasance.

But other than that...

More on the "Predictable" Solar Panels Decision and Trade Diversion

When I first wrote about last week's preliminary decision by the US Department of Commerce to impose big anti-dumping duties on imports of Chinese solar panels, I noted (among other things) that any final duties probably wouldn't lead to a long-term increase in US solar manufacturing but instead would simply cause Chinese production to move to other low-cost destinations (and, of course, raise US prices).  I reported on one Chinese manufacturer - JinkoSolar - publicly announcing its intentions to increase production at one of its Canadian affiliates in order to avoid the solar tariffs, and a new report from Platts makes clear that JinkoSolar is definitely not alone:

[D]espite prophecies of doom and gloom on both sides of the case leading up to that decision, the ultimate outcome of the ruling may have a smaller impact on the US photovoltaic market than advocates predicted.

US manufacturers, led by Oregon-based SolarWorld (a unit of the German solar giant), accused Chinese firms of illegally dumping panels in the US at prices far below what is possible in the US. Without US government action, they argued Chinese PV producers would solidify their domination of the global solar panel market and quickly eliminate the US solar panel manufacturing industry.

And US solar developers said tariffs would make it more expensive to build new solar power projects here, potentially smothering US PV development.

But after the DOC decision, [two] of the largest Chinese PV manufacturers--Suntech and Yingli Green Energy--said they are already prepared to shift their production and use their global supply chains to sell the US panels that will not be subject to tariffs, and with only a small increase in prices.

"We're fully prepared to handle this situation and we believe that we can continue to supply the US market" without paying tariffs, said Helena Kimball, head of marketing for Yingli, in an interview. "The requirement to source third party cells will have a slight impact on costs since we will need to outsource what we currently produce efficiently in-house. However, we believe that this will minimally impact market prices."

Andrew Beebe, Suntech's Chief Commercial Officer said Suntech has similar plans.

"As a global company with global supply chains and manufacturing facilities in three countries, including the United States, we are providing our U.S. customers with hundreds of megawatts of quality solar products that are not subject to these tariffs," Beebe said in a statement... 

GTM Research Solar Analyst Shyam Mehta said Chinese companies will likely use one of two strategies to avoid US tariffs: either shift production outside of China, as Suntech's Beebe described, or use Taiwanese suppliers to make cells, which would be assembled into modules in China through a process called "tolling." 

"We estimate that tolling cells to Taiwanese firms would increase Chinese costs by 6-12%, which is meaningful but manageable," Mehta said.

As I mentioned last week (and in the Platts piece), neither of these strategies is illegal, and the only thing domestic producers can do to stop it is to file a new AD/CVD petition targeting the countries to which Chinese production was diverted.  Given these facts, the Platts article concludes that any final AD/CVD order should have few, if any, long-term benefits for US solar manufacturers:

Some Chinese suppliers will likely shift a portion of their operations to the US as a result of the tariff decision, Mehta said, but in the long term, other countries with lower production costs will likely benefit.

"We see the impact of this decision on US manufacturing as positive, but spurring limited investment in the future and likely only temporary relief for existing U.S.-based suppliers," Mehta said.

So, think of these tariffs as a sort of "sugar high" for petitioner SolarWorld and other US manufacturers - they'll get a little bump in terms of (consumer-hurting) prices and production, but it won't last.  However, the pain felt by US consumers will continue, as they're forced to pay above-market prices for their solar panels.

According to the Wall Street Journal, it seems that the markets have caught on quickly to these realities:

U.S. solar stocks such as First SolarFSLR +0.91% enjoyed a brief burst of jingoism last Thursday, when the Commerce Department announced antidumping tariffs on Chinese photovoltaic-equipment makers. As of Monday, though, trade-war fever had subsided: First Solar hit a fresh 52-week low of $13.37, down from almost $128 a year ago.

The initial bounce reflected hope that tariffs would shield U.S. solar profit margins against the price deflation brought on by rampant Chinese investment in manufacturing capacity.

But protectionism is just another form of subsidy, which has defined solar power's boom and bust. Generous subsidies generated artificial demand in such tropical paradises as, er, Germany. Their sudden curtailment, as governments tightened belts, then battered growth forecasts—although not before they had helped encourage all that Chinese investment. Last year, global capacity to manufacture solar cells was more than twice the level of demand.

If the U.S. were the world's biggest solar market, a tariff might offer its domestic manufacturers more than a fleeting hope. But Pavel Molchanov of Raymond James expects the U.S. to account for just 11% of demand this year, against Europe's 53%. Updating analysts earlier this month, First Solar mentioned Brazil, India, Australia and, yes, China as growth opportunities.

If the Commerce Department's action is merely the opening salvo of a trade war, it could ultimately damage the overseas ambitions of the remaining U.S. manufacturers as other countries enact similar measures. Above all, the ultimate objective in the solar-power industry is to reduce its costs so that it can eventually compete with other forms of power without the aid of subsidies. This latest one works in precisely the opposite direction.

SolarWorld's stock witnessed a similar collapse today, losing much of the gains that it made on Friday following Commerce's big announcement.  Apparently it took Wall Street all of one day to figure out that last week's preliminary determination has done nothing to dramatically alter the future of the American and global solar markets.  Of course, had these companies' shareholders just read this blog, they could've avoided the financial pain of today's big crash.  Now, they're forced to stick with these stocks until the next sugar high comes along.

But, hey, at least these folks had the opportunity to get out early and avoid the inevitable result of yesterday's preliminary duties.  US solar panels consumers have no such luxury.

Sens. Brown, Schumer Wade Into US-China Solar Panels Fight, Reveal Stunning Ignorance of (or Disdain for) Global Trade Rules

Tomorrow, the US Department of Commerce is expected to announce preliminary anti-dumping duties on Chinese solar panels in the latest chapter of the US-China dispute over trade in "green" goods.  (As you may recall, China won Round 1 of the solar panels skirmish when Commerce announced "surprisingly low" preliminary countervailing (anti-subsidy) duties on Chinese imports, but tomorrow's preliminary AD duties will likely be quite large.)  Perhaps sensing an opportunity to steal a little of the limelight from tomorrow's big announcement, sinophobic Senate protectionists Sherrod Brown (D-Steelworkers Union) and Chuck Schumer (D-Himself) announced their own master plan to stick it to China:

Senators Charles Schumer and Sherrod Brown introduced legislation that would allow only US-made solar panels to qualify for the 30% solar tax credit individuals and businesses receive when they install solar systems.

70% of the parts for qualifying solar panels would have to be made in the US. If the solar panels are manufactured here, 50% of parts must be US-made.

The vast majority of solar panels used for US systems are now made in China. The legislation would encourage those manufacturers to locate in the US....

Sherrod Brown says, "We can't trade our dependence on foreign oil for dependence on Chinese-made solar panels. We went from a solar trade surplus with China to a solar trade deficit in a matter of years. Ohio workers can compete with anyone in the world, but they deserve access to a level playing field. When the Chinese government provides direct export subsidies to its solar manufacturers, that's not competing - it's cheating. And it's costing American jobs in solar manufacturing. The American tax code should not make matters worse by encouraging the purchase of Chinese-made solar panels. Our plan will ensure that American tax incentives support American solar panel manufacturers."

The summary of the new legislation is here, and Senator Brown's statement above makes clear that the bill is intended to counter unfair Chinese trade policies that violate global trade rules and thereby promote Chinese solar panels at the expense of those from other countries like the United States.  Now, leaving aside the fact that the industry-friendly Commerce Department just found those Chinese "export subsidies" to be relatively tiny, there's one big problem with Brown and Schumer's big plan: it's a blatant violation of WTO rules too.

As I noted a few months ago with respect to another hair-brained tax plan, tax breaks or credits that are conditional on the recipient's use of "local content" are expressly prohibited by the WTO Agreements:

First, Article III of the General Agreement on Tariffs and Trade (GATT) contains the National Treatment rule, which requires Members to treat imported goods the same as or no less favorably than domestically-produced goods so as to ensure that discriminatory internal taxes are not used to afford protection to domestic industry.

Second, the WTO Agreement on Trade-Related Investment Measures (TRIMs Agreement) essentially interprets and clarifies the provisions of GATT Article III (and Article XI) where measures are linked to "investment rights." The Agreement disciplines the use of investment measures by prohibiting things like local content requirements and trade-balancing requirements. Both types of measures discriminate against imported products by subjecting their “purchase or use” by an enterprise to less favorable conditions than the purchase or use of domestic products. In particular, a "local content requirement" is a law which mandates the purchase/use - or gives businesses and/or individuals an incentive to purchase/use - domestically-made goods over their imported counterparts. And it's prohibited by the TRIMs Agreement.

TRIMs are not limited to laws/regulations that deal with investment; instead, WTO jurisprudence interpreting the TRIMs Agreement has broadly construed it as covering any "advantage" under domestic law. For example, the WTO Panel in Indonesia – Autos rejected the argument that the TRIMs Agreement had to be limited in application only to foreign investment laws, and instead found that the Agreement prohibits "local content requirements, compliance with which may be encouraged through providing any type of advantage.”

Thus, any law which conditions access to a government-provided "advantage" (such as a tax break or deduction) on the purchase/use of domestic goods (or goods from a domestic supplier) will run afoul of the TRIMs Agreement. For example, that WTO Panel in Indonesia – Autos found that Indonesian programs providing tax advantages to cars that were manufactured using a certain percentage of local content violated the TRIMs Agreement.

If that's not clear enough for you, the "Illustrative List" of WTO-inconsistent measures that is annexed to the TRIMs Agreement should do the trick (emphasis mine):

TRIMs that are inconsistent with the obligation of national treatment provided for in paragraph 4 of Article III of GATT 1994 include those which are mandatory or enforceable under domestic law or under administrative rulings, or compliance with which is necessary to obtain an advantage, and which require:  

(a) the purchase or use by an enterprise of products of domestic origin or from any domestic source, whether specified in terms of particular products, in terms of volume or value of products, or in terms of a proportion of volume or value of its local production; or

I'd say that pretty neatly sums up the Brown/Schumer solar tax bill, wouldn't you?  So, in sum, the Senators are seeking to counteract the Chinese government's trade "cheating" with... that's right... some of their very own trade cheating!

Nice.

Now, it's pretty clear that this new proposal isn't going anywhere, and that the Senators are probably just looking for a little attention. (Brown is running for re-election afterall, and we all know that classic joke about ol' Chuck Schumer.)  So, you might ask, why bring the bill up?  Well, other than to poke a little fun at two of the Senate's biggest protectionists, I actually think there are two broader points to be made here.  First, with the US economy still struggling and millions of Americans still out of work (or too discouraged to even try), are meaningless publicity stunts like this bill really what our elected officials should be devoting their time to?  The answer there, it seems, is a pretty resounding "no."

Second, and more importantly for my purposes, this bill provides excellent evidence that neither of these Senators - who routinely chastise China and other countries for violating global trade rules and push protectionist policies seeking to counter this "cheating" - actually gives a lick about (or understands) global trade rules.  If they did, they wouldn't be pushing garbage like this.

So, the next time that you hear Senators Brown or Schumer berating China or some other country for its pernicious trade cheating, please be sure to remember that these guys (a) don't know what the heck they're talking about; or (b) are just jealous that they can't cheat too.

Either way, it's not a very flattering conclusion.

Game On: New CVD/NME Law Faces Early Constitutional Challenge

When we last checked in on the fate of the new US law applying countervailing duties to imports from "non-market economies" like China and Vietnam, the plaintiffs in the court case that started the whole legislative scramble (GPX Int'l Tire Corp v. United States) had filed a brief constitutional challenge to the new law before the Court of Appeals for the Federal Circuit.  The CAFC had requested a response from the parties to the case as to the effects that the new law would have on the proceedings, and the plaintiffs - GPX and Tianjin United Tire & Rubber International Co. - argued, among other things, that the new law's retroactive application to (in some cases) five year-old CVD proceedings violated the Constitution's due process protections.

Even though I expressed extreme sympathy with the plaintiffs' concerns regarding the new CVD/NME law and also have questioned its constitutionality, I noted at the time that it seemed unlikely that the CAFC would actually rule on their claims.  It turns out that I was right on that score, but what I didn't expect was that, instead of dismissing the case outright, the CAFC would remand the case to the lower court that first decided the GPX case - the US Court of International Trade - to hear plaintiffs' constitutional challenge.

But that's just what the CAFC did last week.

The court's ruling is here, if you're interested.  After summarizing the CVD/NME law's scope (overruling the court's decision in GPX and prospectively applying a new "prohibition" against double-counting), the court addressed the plaintiffs' constitutional challenge, which it said had two parts:

(1) it attempts to prescribe a rule of decision for this case after our decision in GPX was rendered; and (2) it improperly creates a special rule applicable only to this case (or perhaps a few others) due to the different effective dates in the two provisions; it thus creates a situation in which both antidumping and countervailing duties may be imposed, without providing a mechanism to account for potential double counting.

The court quickly dismissed the first argument as "without merit," but not the second:

The second issue, however, is a question of first impression as to which we have received only cursory briefing. The government urges that “[t]o the extent that appellees . . . argue that the new law is unconstitutional, such an argument should be decided by the trial court in the first instance.” ... We agree that this issue should be considered by the Trade Court in the first instance.

The CAFC thus ordered that the case be "remanded to the [CIT] for a determination of the constitutionality of the new legislation and for other appropriate proceedings."  In short, the CAFC refused to do what the US government wanted (vacate its earlier decision and effectively end the GPX case), and instead sent the case back to the CIT for a full constitutional hearing.

Fun.

There are some other interesting things going on in this ruling (for example, the CAFC rules in footnote 3 that the CIT's theory that Commerce's "double counting" in prior AD/CVD cases violated US law was "not correct" - oops), but the constitutional remand is, in my opinion, the biggest deal.  I honestly have no idea what the CIT will decide, but assuming the same judge (Restani) who heard GPX's earlier iterations - and expressed extreme skepticism of (and frustration with) Commerce's CVD/NME actions - hears the constitutional challenge, we could be in for a very, very interesting decision.  It'll be several months before that ruling is issued, but, in the meantime, one thing is abundantly clear:

The new CVD/NME law has done very little to clean-up the mess that is the United States' trade remedies policies toward China and other non-market economies.

But I guess we already knew that, now didn't we?

Is Commerce Delaying DS379 Implementation Because of Struggles with CVD/NME and "Double Counting"?

Quick answer: it sure looks like it.

With absolutely no fanfare, the United States missed the April 25 deadline for implementing the WTO Appellate Body's decision in US-Anti-Dumping and Countervailing Duties (China) (aka DS379) which held, among other things, that the Department of Commerce's concurrent application of anti-dumping (AD) duties and countervailing duties (CVDs) on imports from China and other "non-market economies" violated WTO rules. (Lots more on the WTO's DS379 decision here if you're interested.)  According to several reports[$] (and the US statement) coming out of the WTO's Dispute Settlement Body's April 24 meeting, the Obama administration admitted that it would not be meeting the already-extended deadline (the original deadline was mid-February, but the US and China had agreed to a two-month extension), and China was none-too-pleased about it.

China's angst is totally unsurprising and (in my humble opinion) warranted, given two key facts: (1) the United States has now had over a year to implement the Appellate Body's decision and only started working on the "Section 129" compliance determination in the Fall of 2011; and (2) Congress and the President just implemented a law overturning a big US court case (GPX Int'l Tire Corp. v. United States) which held that Commerce's CVD/NME methodology violated US law.  In short, China was playing nice with the United States on DS379, but after the recent passage of the CVD/NME law, it's patience has worn very, very thin.  Like I said, unsurprising.

Word on the street is that, as of about a week ago, the US and China still hadn't agreed on another extension for the Section 129 determination (the WTO website also has nothing new to report), so it's actually a little unclear how this legal mess will proceed.  My guess (and it's only a guess) is that Commerce's repeated tardiness here will not result in any sort of formal WTO actions, and instead the agency will issue its Section 129 determinations in the next couple months, quickly followed by a formal complaint from the Chinese government against those determinations.

This all won't stop China, however, from immediately and repeatedly screaming to the high heavens about the CVD/NME issue and the United States' DS379 malfeasance.  Indeed, prior to last week's high-level Strategic and Economic Dialogue meetings, experts in China noted that the Chinese government was planning to complain vociferously about US trade remedies "misuse" - no doubt alluding to the CVD/NME issue.  And the official joint readout from the S&ED does address trade remedies and the WTO:

The two sides are committed to building a more open global trade system and jointly resisting trade protectionism. The United States and China recognize that it is critical to follow WTO rules when initiating trade remedy investigations and imposing trade remedy measures, to prevent their abuse, and commit to refrain from using such measures for purposes other than trade remedies themselves, including to achieve industrial policy objectives. The two sides commit to respect the decisions of the WTO dispute settlement mechanism. Both sides commit to handle anti-dumping and countervailing duty investigations in a fair, objective, and transparent manner.

That's typically-ambiguous diplo-speak, but I think it's pretty safe to assume that the CVD/NME issue did come up, and that US complaints (many justified) about Chinese trade remedy actions against US exports were countered with - and thus diluted by - Chinese complaints about the CVD/NME issue and DS379.

So, what, pray tell, is the big holdup with the DS379 implementation?  What's causing US stammering before the WTO's DSB and taking up precious negotiating time at the S&ED?  Well, if the recent questionnaires issued by Commerce in the Section 129 proceedings are any indication, it's because the agency still hasn't quite figured out how to handle the "double counting" issue and comply with both the new CVD/NME law and the Appellate Body's ruling.  (This gets a little complicated, so stick with me.)

On March 28, 2012 Commerce issued Section 129 questionnaires in the four AD/CVD cases involving Chinese imports that were the subject of the AB's ruling in DS379.  I've uploaded one of the public questionnaires here, and, as you can see, the questionnaires appear to be an attempt by Commerce align the Section 129 determinations with the new CVD/NME law's provisions on - you guessed it - double counting.  As you'll recall, Section 2 of the law states that, in the event a countervailable subsidy has been ascribed to an NME import for which Commerce has already made an AD determination, Commerce must reduce the AD duty (thus mitigating the risk of double remedies) where two conditions are met: (i) it has been demonstrated that such a countervailable subsidy has reduced the average price of its US imports of the subject merchandise; and (ii) DOC determines that it can “reasonably estimate” the extent to which the countervailable subsidy has increased the dumping margin for the merchandise.

As I noted at the time the CVD/NME bill was being debated, the drafters of the new law made clear that part (i) of Section 2 imposes on NME exporters the burden of demonstrating that any subsidies conferred have lowered the NME exporter’s US import prices.  Although the questions posed in the four questionnaires do not specifically reference double counting or this burden, they appear to seek information from NME exporters on how, and to what extent, any government subsidies affected the exporters' US import prices (Section 2(i) of the new CVD/NME law). On April 11, 2012, China’s Ministry of Commerce (MOFCOM) politely and fully responded to Commerce’s March 28 questionnaires.

Those responses, however, apparently were not sufficient to enable Commerce to solve the double counting conundrum and, in line with the new law, to "reasonably estimate" double counting.  On April 19 - only 6 days before the DS379 deadline - Commerce issued another set of questionnaires on double counting-related issues.  Humorously, the deadline for responses to the supplemental questionnaires was set for April 30, 2012 – five days after the DS379 deadline would have passed (so Commerce obviously knew that they weren't making that deadline) - but MOFCOM just-so-happened to respond early on April 25.  Early responses from the Chinese government are not a normal occurrence, so it's pretty clear that this was a very passive aggressive signal from the Chinese government that they were no longer playing around here.

And, to my knowledge, it's been radio silence from Commerce ever since.

So to recap: DS379 still isn't implemented; that delay appears to be due to the controversial double counting issue, which appears to be tying the Commerce Department in knots; and this mess appears be affecting important US negotiating positions in bilateral trade negotiations.  Great.  Just great.

Tell me again why Congress (including a lot of "free trader" Republicans), President Obama and much of the US business community decided to go down this road and ram through the CVD/NME law, instead of taking one of several, more logical, lawful and strategic policy positions?

Oh, right.

With Russia Poised to Enter the WTO, Will Congress Really Deny Permanent Normal Trade Relations?

Reuters reported over the weekend that several US auto parts manufacturers will travel to Russia with the US Department of Commerce to seek new customers in Russia, which was approved to join the World Trade Organization in December 2011.  The trip itself is pretty unremarkable - Russia has a big, untapped auto parts market, and DOC organizes these kinds of trade promotion trips all the time.  One passage, however, warrants further discussion (emphasis mine):

With Russia on the verge of joining the World Trade Organization in July, the White House is also trying to persuade a skeptical Congress to repeal a Cold War-era trade measure known as the Jackson-Vanik amendment in order to establish "permanent normal trade relations" (PNTR).

The vote is important because unless Congress takes that step Moscow could deny U.S. exporters the market opening-benefits of Russia's accession to the WTO, while granting them to U.S. competitors around the world.

Russia's fast-growing auto market is certainly "a great example of why we need to go ahead with terminating Jackson-Vanik and granting PNTR," [Commerce Deputy Under Secretary Michelle] O'Neill said.

That's expected to be difficult because of concerns in Congress about Moscow's record on human rights and its foreign policy, which is often at odds with the United States.

In addition, some lawmakers are unhappy with the automotive terms of Russia's entry into the WTO, even though Detroit's Big Three automakers have endorsed the pact.

Reuters certainly isn't wrong to note recent congressional grumbling about the impending vote on Russia trade relations.  At a key Senate hearing last month, the GOP's number 2 Senator, John Kyl, joined several of his Republican colleagues in expressing concerns about Russia's human rights record and support for Syria.  And, some protectionist lawmakers will certainly oppose PNTR, regardless of what Russia does on human rights.

Nevertheless, I'm willing to go out on a limb and say that the current conventional wisdom that the Russia PNTR vote will be a difficult one is mostly exaggerated for several reasons.

First, as this recent Cato Institute briefing paper makes clear, granting Russia PNTR is an economic no-brainer because it will provide immense new market access opportunities for US companies:

To enjoy the enhanced access to Russia's market, the U.S. government will need to grant permanent normal trade relations (PNTR) to the Russian Federation. Under the 1974 Jackson-Vanik Amendment, Congress is required annually to pass a special exemption for Russia extending it conditional access to the U.S. market. The law was originally intended to withhold normal-trade-relations status from communist countries that did not allow Jewish citizens to freely emigrate. Even after the fall the Berlin Wall in 1989 and the dissolution of the Soviet Union in 1991, the law continued to apply to most former communist countries because of their continued status as "nonmarket economies."

As a condition of membership in the WTO, all members are expected to grant unconditional most-favored nation (MFN) status to all other members. This means each WTO member must offer the same level of market access to other members without attaching special conditions to that access. Continued application of Jackson-Vanik to Russia would be a violation of unconditional MFN status, since it depends on Congress granting renewal each year.

If Congress does not grant PNTR to Russia by repealing Jackson-Vanik, then the enhanced market-access commitments Russia has made in its accession protocol would not apply to exports from the United States. Producers in the other 150-plus members would enjoy those benefits but not producers in the United States.

The Cato paper goes on to note that certain US exporters, most notably in agriculture, civilian aircraft and financial services, stand to benefit greatly from Russia's WTO accession.  For these reasons, and a few others, the U.S. business community overwhelmingly supports PNTR; for example, in March a coalition of 173 US companies and business groups sent a letter to Congress urging lawmakers to support the measure. Thus, congressional opposition to PNTR will face intense scrutiny from the US business community (not to mention free trade advocacy groups who will undoubtedly be scoring the vote).

Second, the Cato paper also makes clear that denying PNTR won't prevent Russia from joining the WTO, and thus that US exporters and consumers, not their Russian counterparts (or the Russian government), would feel the vast majority of the pain from rejecting PNTR:

Under WTO rules, MFN must be applied "unconditionally." However, WTO Article XIII permits the nonapplication of multilateral trade agreements (e.g., MFN) among particular members under predetermined conditions. Specifically, Article XIII states that nonapplication "may be invoked between original Members of the WTO which were contracting parties to GATT 1947 only where Article XXXV of that agreement had been invoked earlier and was effective as between those contracting parties at the time of entry into force for them of this Agreement." In addition, Article XIII states that WTO agreements "shall not apply as between any Member and any other Member if neither of the Members, at the time either becomes a Member, does not consent to such application." Application of Article XIII essentially amounts to an official and legal declaration that any and all WTO privileges, obligations, and mechanisms are nonexistent and inapplicable between the newly acceding WTO member and the member invoking Article XIII. The United States remains the only country to have evoked Article XIII.

When a WTO member thus "determines that it cannot, for political or other reasons, accede to this or any other GATT/WTO principle toward a newly acceding member, it can 'opt-out' of its obligations toward that member by invoking the non-application provision." In this way, a current WTO member such as the United States can legally refrain from granting unconditional MFN to a newly acceding member such as Russia. The catch is that the member opting out of such an obligation is not entitled to benefit from the increased trade liberalization that the new member has agreed to in its accession protocol. So if Congress refuses to pass PNTR, Russia will become a member of the WTO regardless, but U.S. producers will be denied the same full access to the Russian market that will be available to other WTO members.

The US Congress certainly knows these facts, so it seems quite unlikely that most members would vote to deny PNTR on the (clearly incorrect) grounds that doing so will somehow thwart Russia's accession or teach the Russian government a "big lesson."

Third, and on a related note, it's important to understand that the WTO accession process provides ample opportunities for any WTO Member to gain concessions - trade-related or otherwise - from an acceding nation.  Members can join the acceding nation's "working party" and make bilateral (government-to-government) or multilateral (as part of the whole working party) requests to that nation.  If the acceding nation refuses to comply with those requests, then the requesting WTO Member can block the accession.  Thus, if the United States had really serious concerns about automobiles market access (or anything else) prior to Russia's accession, then it shouldn't have signed off on the final deal until the Russian government addressed those concerns.  But now that the United States has approved Russia's WTO accession, it can't use PNTR as some sort of threat to address them now because, as noted above, the primary victim would be the United States, not Russia.  (That type of negotiating move may have worked in Blazing Saddles, but it's probably not gonna work here.)

So, in short: we had our "big chance" to address any and all issues with Russia, and now we'll have to wait to use WTO dispute settlement or other negotiations to address lingering concerns.  And, again, Congress certainly knows this.

Finally, there's an important procedural - and likely political - element at play here.  Procedurally, Russia's not yet a full WTO Member and probably won't be until mid-summer (at the earliest).  By the terms of Russia's accession, the Russian Duma has until July 23, 2012 to ratify the country's accession agreement.  Russia will then become a full WTO member 30 days after its government formally notifies the WTO that it has ratified the deal.  In order to avoid losing out on all that sweet, sweet new access to the Russian market, Congress only needs to pass, and the President only needs to sign, PNTR legislation right before Russia is a full WTO Member (i.e., when those 30 days are up).  Most insiders agree that Russia will wait until the very last minute to ratify its accession agreement.  Thus, Congress will probably have until mid-August 2012 to grant Russia PNTR before the US business community goes nuclear (and the United States' global trade reputation sinks even further into the anti-trade abyss).

So - and this is just a guess here - if you're a Republican politician looking to score some easy political points by tying President Obama to the, ahem, troublesome Russian government, what better way than to express a little "skepticism" about PNTR and force the Obama administration to publicly support the deal?  Then, in a few months (when it really matters to the US business community), you can put together some simple (non-binding) human rights legislation and set up a monitoring program or two and, all of a sudden, change your tune on PNTR.  But in the intervening months, you can sit back and enjoy reading numerous press reports about your ethical (and patriotic!) skepticism and the Obama administration's strong support for Russia.

Cynical?  Sure.  Smart politics?  Probably.  Harmful in the long-term?  Unlikely.

But that doesn't mean that we all have to play along.