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.

Senators Blindly Promising to "Get Tough" on China's Currency

The US Senate is poised to take up the issue of China's currency policies, and nothing - certainly not some measly little facts that totally undermine the issue's relevance - is going to slow the legislation down.  You see, in today's Senate - one that hasn't passed a budget in almost 900 days - politics trumps reality.  Every single time.

Last Thursday, a bi-partisan group of Senators, led by Sens. Chuck Schumer (D-NY) and Sherrod Brown (D-OH) announced their much-anticipated legislation targeting China's currency policies:

Senators Charles Schumer of New York and Sherrod Brown of Ohio, both Democrats, urged support for legislation pushing China to raise the value of its currency as a way to stem U.S. job losses.

China’s currency policies cost more than 2.8 million U.S. jobs since 2001, the lawmakers said today at a Washington news conference. The legislation would let U.S. companies seek duties on imports from China to compensate for the effect of a weak yuan, which lawmakers said gives Chinese companies an unfair advantage against U.S. manufacturers.

“They get away with economic murder,” Schumer told reporters. “We are fed up; we are not going to take it anymore.” 

Schumer proposed similar measures in each of the past six years. None has received a Senate vote. The bill also is supported by Democratic Senators Robert Casey of Pennsylvania and Debbie Stabenow of Michigan, and Republicans Lindsey Graham of South Carolina, Richard Burr of North Carolina and Jeff Sessions of Alabama.

So to recap the Senators' argument: China's undervalued currency has eliminated 2.8 million US jobs, and these brave Senators want to empower US companies to seek new tariffs on Chinese imports in order to force China's hand.  Sounds almost plausible, but there's one big problem: every single "fact" in that previous sentence is dubious.

At best.

First, the employment study that the Senators cited - by the union-run and union-funded Economic Policy Institute - is total economic bunk.  I've already been over this fact several times, citing to myriad economists who have explained that EPI's methodology, which simply ties the US trade deficit to American job losses, is utter poppycock.  Cato's Dan Ikenson elaborated on this little fact last week, showing how EPI's so-called "findings" fly in the face of both economic theory and reality:

As the chart below (which is based on easily verifiable figures published in the Economic Report of the President) reveals, the trade deficit and job creation appear to be positively correlated. When the deficit rises, employment increases; when the deficit shrinks, employment declines. So, right off the bat, a central premise of [EPI's Robert] Scott’s analysis is in doubt.... 

Last month, the U.S. International Trade Commission published its seventh update to the “The Economic Effects of Significant U.S. Import Restraints” study, which contains a special section on global supply chains. On page xv of the executive summary is a table that not only raises more serious doubts about EPI’s methodology, but should put to rest once and for all the hyperbole employed and anxiety caused by alarmist public relations campaigns and the politicians they serve.

Table ES.4 of that study indicates that there is more U.S. valued added (U.S. labor, material, and overhead) in U.S. imports than there is Chinese valued added in U.S. imports. Specifically, 8.3 percent of the value of U.S. imports (about $160 billion last year) is U.S. value, while 7.7 percent of the value of U.S. imports is Chinese value added. EPI’s methodology does not account for the U.S. jobs associated with the U.S. value added in U.S. imports.

Furthermore, that same table reveals that U.S. value added accounts for 89 percent of total U.S. consumption (a figure that confirms the findings in a recent San Francisco Federal Reserve study), which means that foreign value-added accounts for just 11 percent of U.S. consumption, making the United States a fairly closed economy—or at least, a relatively non-integrated economy. And China? Well, China only accounts for a measly 0.9 percent of the goods and services consumed in the United States. So, if 2.8 million U.S. jobs were lost to a country that produces less than one percent of what Americans consume, I say its about time we shed those highly inefficient jobs that have been a drag on the U.S. economy. The fact is, however, that 2.8 million is a fiction....

Yes, the 2.8 million job loss figure is a fiction, concocted to support political talking points and a narrow agenda that distract the public from the real problems that ail our economy. Some Chinese government policies are genuine causes for concern, worthy of efforts to resolve, but we limit our capacity to address the real problems effectively when every last gripe becomes a call to arms.

In short, the EPI study is totally worthless for anything other than shameless political demagoguery.  Fortunately for EPI, that just happens to be a certain New York Senator's specialty!  Unfortunately for the rest of us, most reporters hired to cover that Senator's currency shenanigans don't do their homework and instead treat the "study" cited by Schumer (and others) as gospel.

Shame on them.

The second problem with the Senator's argument is that most US companies aren't begging for relief from China's currency policies.  Indeed, a lot of them are literally begging the Senate to back off the currency issue and focus on other, real bilateral trade issues.  For example, just last week over 50 trade associations, representing hundreds (if not more) US companies, sent a letter to Senate leaders asking them to drop the tough currency talk.  The full letter is available online and definitely worth reading, but here are some key excerpts:

We agree with many in Congress and the Administration that China needs a yuan exchange rate that responds to trade flows and that China should move steadily towards a market-determined exchange rate.

However, unilateral legislation on this issue would be counterproductive not only to the goals related to China’s exchange rate that we all share, but also to our nation’s broader objectives of addressing the many and growing challenges that we face in China.

Legislation that would increase tariffs on imports from China is unlikely to create any incentive for China to move expeditiously to modify its exchange policies. Rather, it would likely have the opposite effect and result in retaliation against U.S. exports into China – currently the fastest-growing market for U.S. exports.

We urge you to oppose currency legislation and instead work with and vigorously call on the Administration to develop a robust bilateral and multilateral approach to achieve tangible results, not only on China’s exchange-rate policies, but also on other Chinese policies that are harming American economic interests.

The business group letter also highlights the third problem with Schumer's plan: unilateral US action (i.e., tariffs) against China are unlikely to convince the Chinese government to do anything except resist further Yuan appreciation and retaliate against US exports and companies.  As I said earlier this month about Mitt Romney's misguided plan to aggressively target China's currency via Executive Order:

The idea that the Chinese government would just roll over and concede "defeat" in the face of President Trump[Romney]'s big, macho tariff is absurd.  First, Trump[Romney] fails to grasp that the Chinese government would never, ever do anything that makes it appear weak in the face of American aggression.  Instead, retaliation, not concession, is the far more likely reaction (just as China did when President Obama imposed those tire tariffs), and such sinophobic chest-thumping would likely retard, not quicken, the gradual appreciation of the yuan that China needs to undertake.  Second, China's not nearly as dependent on the US market as Trump[Romney] seems to think.  The EU is now China's biggest export market, and Chinese exports to the US represent under 30% of China's exports to its top 10 export destinations.  So while the US market is big and important, China has other options.  Third, China couldn't rapidly and dramatically appreciate its currency even if it wanted to because any such move would implode the Chinese - and by extension, global - economy.

So the tariffs probably won't change China's behavior, and they definitely will harm US companies and consumers.  Thanks for nothing, Senators.

Finally, it's far from clear that the Yuan remains significantly undervalued against the US dollar.  I've already discussed this inconvenient truth repeatedly, and news last Friday about a massive selloff of Yuan further undermines the conventional wisdom regarding China's currency:

A rush for safe investment havens led to an unexpected drop in the value of the Chinese yuan traded outside the mainland, as global investors eschewed a bet on a currency widely seen as undervalued for the comfort of the U.S. dollar and the Japanese yen. The move will have little effect on yuan as a whole because Beijing still tightly controls the currency. But it offers an example of the uncertainties China could face as it moves in fits and starts to loosen its restrictions on the yuan and give it a more central global role.

The drop took place mostly in Hong Kong, a Chinese city that operates under its own set of laws and the only place where the yuan can be traded outside the Chinese mainland. Chinese officials over the past year have transformed the city into a laboratory for yuan liberalization, allowing everything from the issuance of yuan-denominated bonds to yuan-trade settlement to yuan accounts for individual investors.

Until this week, the Hong Kong-traded yuan had remained broadly in line with the official yuan trading range. But market turmoil Thursday and Friday prompted the Hong Kong price to slump at one point to a discount of as much as 2.5% to the mainland yuan, the biggest gap since China began relaxing its currency restrictions about a year ago. The yuan on the mainland trades in a tight band because of Beijing's restrictions on its currency.

The discrepancy between Hong Kong-traded yuan and mainland yuan, known as of offshore market and the onshore market, respectively, later narrowed somewhat but remained high by historical standards, and late Friday traded at 6.49 yuan to the dollar in Hong Kong, compared with 6.39 yuan in the mainland. The moves fly in the face of currency-market conventional wisdom, which holds that the yuan is set to rise against the U.S. dollar as China soaks up capital and trade flows.

The selling pressure overwhelmed a facility set up by China to sell yuan at the mainland rate, which on Friday was offering investors more dollars for their yuan. Late in the day, Bank of China Ltd.'s Hong Kong arm, the designated clearing bank for the Hong Kong market, said it would temporarily stop buying yuan used for trade settlement as its quarterly quota for such transactions was full....

Market turmoil also roiled the market for yuan nondeliverable forwards, which are offshore derivatives that track the value of the yuan but can't be exchanged for the currency. The dollar one-year forward on Friday was bid as high as 6.47 yuan against the domestic spot rate of 6.39 yuan, implying expectations of a 1.3% yuan fall over the coming months.

Until now, global investors have largely adopted a strategy of shorting the dollar for the yuan on expectations that Beijing would continue to allow its currency to rise. In fact, desire for yuan offshore has caused the Chinese currency traded in Hong Kong to boast a premium over its mainland counterpart at most times.

Now, worries of an economic recession around the globe and a Greek debt default are driving investors back into the relatively safety of the U.S. dollar, leading many investors to sell yuan and other currencies for dollars.

For those of you (like me) who aren't currency experts, investors don't typically flee an "undervalued" Yuan for an "overvalued" Dollar.

So to summarize: the Senators are using a debunked economic study to justify their targeting a problem that might not even exist with a strategy that will never work on behalf of a constituency that doesn't want their help.

But other than that....

Two TAA Thought Experiments

Richard Epstein's typically insightful comments on TAA got me thinking more about the abject irrationality of a special program that compensates workers for economic activity (free trade) that overwhelmingly benefits the nation as a whole.  As you'll recall, Epstein wrote:

So conduct this little thought experiment: what would be the state of play in the United States if every time a new firm opened up in one state it was required to fund trade assistance for workers at other firms who lost their jobs as a result? The need to compensate incumbent workers would drive out all new firms, and thus entrench inefficient firms in a near monopoly position. It is for that reason that the proper response is always to ignore these losses, and to deal with the question of unemployment through a generalized system of unemployment insurance that, of course, has massive difficulties of its own.

The "international-versus-intranational protectionism" thought experiment is a favorite of AEI's Mark Perry (among others), and he frequently applies it, with great effect, to demonstrate that protectionism across national borders is just as harmful and irrational as protectionism across state (or county or city or neighborhood) borders.

So it got me thinking: if TAA is, as its advocates in the White House and Congress routinely claim, an absolutely essential "core value" of American trade and economic policy, then why don't we have state-level TAA when, say, freely traded imports of Florida oranges into New York end up putting the Empire State's nascent orange growers out of work, or when imports of South Carolinian BMWs displace Michigan autoworkers?  I mean, if we need to compensate workers due to import competition across national borders, then why don't we do the same thing across state and local borders?

Because it's clearly a ridiculous policy, that's why.  (I know, I know, I shouldn't give our politicians any ideas.)

Perry often demonstrates this ridiculousness by creatively converting a news story on barriers to international trade into one on barriers to intranational trade.  I haven't seen Perry do one on TAA, so with apologies in advance for stealing his awesome idea, I think a simple example is in order.  Here's a sympathetic article on Sen. Sherrod Brown's (D-OH) fight to extend TAA back in February.  Now let's re-imagine the story with state-level TAA (STAA) based on free trade among the US States:

One Ohio lawmaker plans to make the extension of a program that benefits Ohio workers displaced due to free trade among the American states one of his top priorities during this congressional session, according to The Youngstown Vindicator.

Sen. Sherrod Brown (D-OH) plans to begin lobbying fellow members on an extension of state trade-adjustment assistance benefits, which provides Ohio workers displaced due to trade with other American states with reemployment assistance and training, income support and job search and relocation allowances.

Brown said that STAA benefits are “lifelines for tens of thousands of Americans Ohioans who, through no fault of their own, lost their job or their pensions and health-care benefits due to imports of goods and services from places like New York, Alabama and California.” 

With a new Republican majority in the House, however, Brown acknowledges that it will be an uphill battle....

Passing an extension of STAA benefits would be a good step toward helping those Ohio workers that have fallen on hard times due to America’s failed state-level trade policies. But to continue with those trade policies at a time with unemployment already hovering around 10 percent would be foolish.

“We can’t pass trade agreements allow imports from other US states that undermine Ohio workers, and then turn our backs on those workers when they lose their jobs,” Brown said.

Pretty silly, isn't it?  As Americans, we inherently understand the benefits that state-level import competition and specialization bring our economy, so we naturally reject policies to inhibit such helpful economic activity, despite the fact that it necessarily causes some job losses along the way.  But when we move beyond US borders, our brains shut off and the government meddling and handouts begin.

But, hey, let's not stop there and instead conduct another thought experiment to further reveal the irrationality of both TAA and the Obama administration's current TAA/FTA demands.  As economists like Cafe Hayek's Don Boudreaux frequently note, the beneficial job churn associated with import competition is no different from that associated with technology gains:

Would it have been appropriate, for example, for the White House to prevent Americans from buying iPods and Kindles until and unless Congress funded the retraining of workers who lost their jobs at Tower Records and Border’s? Should government have stopped automakers from improving the quality of their vehicles until and unless the public fisc was tapped for funds to retrain auto mechanics and tow-truck drivers? Ought government restrict consumers’ access to Lasik surgery until and unless taxpayers pay to retrain workers who make eyeglasses, contact lenses, and saline solution?

In short, people lose jobs due to import competition and they lose jobs due to new technologies (a lot more of the latter than the former, by the way), and while those job losses are obviously tough for the affected workers, American society as a whole is clearly better off by letting the free market work.  So why do we treat globalization so differently than mechanization?  Boudreaux reasons that it's because "the only thing unique about international trade is its ability to be demagogued by politicians seeking votes from the economically uninformed," so let's go back to that Sherrod Brown TAA article and help inform the distressingly-large group of uninformed Americans with a little more creative editing:

One Ohio lawmaker plans to make the extension of a program that benefits workers displaced due to free trade robots and other innovations one of his top priorities during this congressional session, according to The Youngstown Vindicator.

Sen. Sherrod Brown (D-OH) plans to begin lobbying fellow members on an extension of robot trade-adjustment assistance benefits, which provides workers displaced due to trade new technologies with reemployment assistance and training, income support and job search and relocation allowances.

Brown said that RTAA benefits are “lifelines for tens of thousands of Americans who, through no fault of their own, lost their job or their pensions and health-care benefits due to robots or other innovations.” 

With a new Republican majority in the House, however, Brown acknowledges that it will be an uphill battle....

Passing an extension of RTAA benefits would be a good step toward helping those that have fallen on hard times due to America’s failed mechanization trade policies. But to continue with those trade policies innovating and modernizing at a time with unemployment already hovering around 10 percent would be foolish.

“We can’t pass trade agreements create new technologies that undermine Ohio workers, and then turn our backs on those workers when they lose their jobs,” Brown said.

Hopefully after we've conducted these thought experiments it's easier to see why the White House stance on TAA - i.e., it is the multi-billion dollar price that America must pay to get new, economically-beneficial trade agreements with Panama, Korea and Colombia - is so distressing.  It would be patently offensive and irrational for the President to block intrastate trade or to prohibit further technological advances until Congress agreed to fund workers allegedly displaced by that trade/mechanization, and it's just as offensive and absurd for the White House to do it for international trade and TAA.

Yet here we are.

Monday Quick Hits

The eastern seaboard is clearly under attack from global cooling.  Here are some interesting links to get you through these dark and cold "spring" days.

• Chevy Volt: the car from Atlas Shrugged Motors.

• Sore losers implore the US to take their ball and go home.  I like to call this the "Cartman strategy."

• New 2004 UCLA study: FDR's statist policies prolonged the Great Depression by seven(!) years.

• Sarah Palin advocates import liberalization in India, further solidifying her free trade bona fides: "[I]n the early 1990′s, due to clear, commonsense, pro free-market reforms, India’s economy took off! [It] abolished import licenses; cut import duties; removed investment caps & broke the union’s grip on industry."

• The United States has the most progressive tax system in the industrialized world.  Key graf: "[T]he top 10 percent of households in the U.S. pays 45.1 percent of all income taxes (both personal income and payroll taxes combined) in the country. Italy is the only other country in which the top 10 percent of households pays more than 40 percent of the income tax burden (42.2%). Meanwhile, the average tax burden for the top decile of households in OECD countries is 31.6 percent."

• A fascinating study (and a related WSJ op-ed) from the UK think tank Policy Exchange on the impact of global trade on the effectiveness (or, more accurately, the impotence) of the EU's climate change regulations has me wondering whether our policymakers will (i) learn the right lesson from the EU's experience - and the one advocated by Policy Exchange ("to accelerate the development of technologies that will be genuinely competitive with fossil fuels" rather than "browbeat[ing] developing countries into going green") or (ii) use the study to justify their calls for eco-protectionism.  I'm hoping the former but cynically expecting the latter.

• US steelmaking giant Nucor recently broke ground on a new iron making facility in Louisiana that would employ hundreds.  The same site is also permitted for another iron facility, and many are guessing that a steel mill will also show up down there in the next few years.  Oddly, ABC News isn't doing a week's worth of news stories on the Nucor plant(s) or any of the many other industrial expansion efforts across the country.

• Why won't Sen. Sherrod Brown (D-OH) debate GMU's Don Boudreaux on the merits of free trade?  (Yes, that's a rhetorical question.  *cluck cluck*)

• Cato's Dan Griswold points out that the easiest way to decrease American income inequality appears to be destroying the US economy.  (Obvious response: Shh, dude, don't give anyone any bright ideas.)

• So much for the silly myth of "McJobs" in the service industry.  According to this handy primer from the National Retail Federation, the import-dependent retail industry in 2009 employed 330,000 managers who earned an average annual salary of $91,650.  And there are another 300,000 or so well-paid folks in other positions.  (This isn't new, but it's worth mentioning here anyway.)

• Finally, Jonah Goldberg at AEI points us to an awesome video from Hans Rosling about the amazing improvements in global wealth and health over the last few decades.  All of it is cool and worth watching, but for our purposes, the most relevant point is around the 10:00 mark when Rosling unequivocally credits the dramatic, disproportionate (relative to other African nations) improvement of Mauritius on the country's embrace of free trade.

 Enjoy!

KORUS Afterthoughts

With a KORUS deal in the bag and both Presidents signaling strong support, here are a few more things - some big, some little - to consider since last Friday's original post on the new agreement.

• It turns out that the agreement included more new protectionism than I originally noted.  In particular, Korea now gets to maintain its tariffs on US pork until 2016, instead of 2014 as originally agreed in 2007.  (The Korea Times has a nice rundown here.)  Market access for American pork was one of the big achievements of the original 2007 agreement, so this is a little more serious than it sounds.  That said, this bad change, like those on autos, won't override the agreement's overwhelming economic benefits, but it still stinks that our administration is bragging about "improving" a free trade agreement by increasing trade barriers, not lowering them. 

• Thinking more broadly about last week's deal, it becomes pretty clear to me that the Koreans really caved.  Not only does the laundry-list of achievements/concessions appear to favor US negotiators (Nice work, team! Way to keep the US market closed! Grumble grumble), but the re-opening of the agreement necessary to complete last week's deal is also a dramatic shift from Korea's consistently firm stance on the FTA that, for economic, strategic and political reasons, they would not agree to substantive, textual changes.  So why the complete reversal, especially when, armed with the Korea-EU FTA and similar trade agreements with other US competitors, the Koreans had the upper hand?  I can only think of one thing, and it actually has very little to do with the FTA: North Korea.  It seems to me that the only thing that changed between last month's embarrassing meeting and non-agreement between Presidents Obama and Lee and last Friday's deal was the unprovoked attack on South Korea (and murder of several of its citizens) by a certain psychopathic dictator and his babyfaced dictator-in-training to the North.  After those Nork missiles were fired, I think completion of these distracting trade negotiations got a lot more urgent, and the South Koreans decided that the long-term bilateral relationship was a lot more important than a few million dollars in automobiles nonsense (and the UAW had no counterbalancing concerns, of course).  So in the end, it could be that the most effective KORUS negotiator wasn't an American or a South Korean but instead a stumpy, murderous jerk who likes to look at things.

• Not everything about the KORUS deal surprised me.  For example, we got to watch our Mercantilist-in-Chief go through some typical contortions to avoid mentioning the economic benefits that Korean imports would provide American consumers (including many businesses).  In his remarks heralding last week's agreement, Obama stated that KORUS will benefit American exporters ("For our farmers and ranchers, it will increase exports of American agricultural products. From aerospace to electronics, it will increase our manufacturing exports to Korea, which already support some 200,000 American jobs and many small businesses."); he stated that it will benefit Korean exporters and consumers ("They will gain greater access to our markets and make American products more affordable for Korean households and businesses -- resulting in more choices for Korean consumers and more jobs for Americans."); but he didn't say anything about American consumers and the (very significant) benefits they'd derive from the FTA.  I guess American imports into Korea benefit Korean households and businesses, but Korean imports to the US?  Not so much.  And once again, when faced with a very public opportunity to educate the public on all of trade's benefits, President Obama whiffed.  Shocking, I know. 

• Finally, and on a serious note, has anyone given any thought to how this new deal will affect congressional consideration and approval of FTA?  Sure, people are already vote counting, but that's not actually my concern (I think the agreement will pass pretty easily).  Instead, I'm very curious as to whether this "new" agreement will be covered by the now-expired Trade Promotion Authority (aka "fast track"), which subjects trade agreements completed and signed before July 1, 2007 to strict procedural requirements and thus prevents congressional meddling.  A few observers are assuming that TPA will apply because the original agreement was signed on June 30, 2007, but the law on TPA (19 U.S.C. 2191-2194 and 3803-3805) states, inter alia, that it will cover trade agreements "entered into" by the President before July 1, 2007.  Thus, it appears that whether TPA applies to the KORUS will rest entirely on whether the 2010 changes on autos, beef, etc. mean that the agreement wasn't "entered into" until now.  The changes announced to the FTA - especially those affecting the countries' previously-agreed tariff schedules - almost certainly constitute substantive changes to the agreement, so I'm having a very hard time figuring out how someone can seriously argue that TPA will apply - i.e., that the agreement wasn't substantively modified such that it must be re-signed and "entered into" again.  [Note: USTR is calling this a "supplemental agreement," so maybe they're going to spin this as outside the original agreement, but that seems like a pretty hard sell considering that specific tariff lines, present in the original agreement, have been changed by the 2010 pact.] 

• And trust me, this is no small matter - if TPA doesn't apply, then all of its important procedural limitations - short timelines, limited committee consideration, no amendments, etc. - don't apply.  And, as I discussed a few weeks ago, TPA effectively prevents a few powerful congressmen or senators from singlehandedly derailing the deal (through procedural maneuvers, "poison pill" amendments and other nasty things).  Senate Finance Committee chair Max Baucus is apparently spitting mad that last week's deal didn't address Korean restrictions on US beef exports, and while he's powerful enough to scuttle the deal, I doubt he'll do it (although he might use his new power to get Korea to move on beef outside the confines of the FTA).  On the other hand, folks like anti-trade stalwart Sen. Sherrod Brown (D-OH) would probably have no such reservations, particularly if Brown's favorite constituents - the United Steelworkers Union - decide to oppose the deal (as of now, they're still decidingdetermining what goodies they can squeeze out of the White House).  So am I missing something here, or is TPA a bigger issue than most people are considering?  I'd assume that the White House and USTR have already considered this important procedural issue, so maybe I'm worrying about nothing; then again, considering that this is the same team that amateurishly allowed the President to set - and then miss - a very public November 2010 deadline for KORUS' completion, I'm not so sure about that anymore.  I guess we'll find out soon enough.

A little more food for thought.  Your thoughts on the last point would be particularly welcome.

[UPDATE: According to Reuters' Doug Palmer (via Twitter), USTR and the White House say that TPA will apply.  I'd prefer to hear that from the congressional experts - i.e., the House and Senate parliamentarians, and maybe the Ways & Means and Senate Finance trade counsels - not the agreement's salesmen.]

Is Schumer-Graham Consistent with WTO Rules?

When Sens. Chuck Schumer (D-Campaigning) and Lindsay Graham (R-Textile Industry) introduced the Currency Exchange Rate Oversight Reform Act of 2010 (S. 3134), one of the bill's big selling points was that, unlike previous currency bills, this one was, like, totally consistent with WTO rules.  For example, here's the United Steelworkers (USW) touting the bill's provisions which rewrite US law to apply countervailing duties (CVDs) on Chinese imports that allegedly benefit from PRC currency policies:

Significantly, the proposed act requires the U.S. Department of Commerce to investigate currency undervaluation as a countervailable subsidy under U.S. trade remedy laws. The USW believes a countervailing duty remedy is the simplest and most appropriate way to remedy the injurious effects of currency subsidies in a manner consistent with World Trade Organization rules.

While it's certainly true that S. 3134 abandons previous versions' most obvious WTO violation - a 27.5% tariff on all Chinese products that would expressly violate US commitments to apply tariffs in a non-discriminatory manner and below certain "bound" levels - it appears that the USW's statements about the new bill's legality are, to put it kindly, overly optimistic.

[OBVIOUS DISCLAIMER: The following is a quick-n-dirty review and in no way represents legal advice from me or my law firm.  Now back to the show.]

The legislation's new "duty" provisions are in Section 110 ("Currency Undervaluation Under Countervailing Duty Law"), and, even though the 27.5% tariff is gone, at least three immediate WTO problems stick out.  First, the legislation explicitly raises WTO concerns regarding the mandatory initiation by the Department of Commerce (DOC) of an investigation to determine whether a nation's currency policies are providing a countervailable subsidy (and thus potentially subject to remedial tariffs).  Section 110 also raises separate WTO concerns related to (1) whether currency policies are a "financial contribution" or "income or price support" by a government, and (2) the "specificity" of any subsidy conferred through such currency policies.  And here's where things get really interesting: the latter two issues, while essential components of any CVD determination, are actually absent from the legislation itself.  I opine below on why such elements could be missing; regardless of the reason, they raise serious legal questions.

Before we get to these issues, however, here's some necessary (and admittedly boring) background about the initiation of a CVD investigation and what constitutes a "countervailable subsidy" under US law.

• Initiation. Under US law (19 USC 1671a), DOC will initiate an CVD investigation in two circumstances: automatically or by petition. Where initiation is automatic (1671a(a)), DOC will initiate where it "determines, from information available to it, that a formal [CVD] investigation is warranted." For initiation by petition (1671a(b) and (c)), DOC will initiate where: (i) the evidence provided in the petition sufficiently alleges, based on available information, the elements necessary to impose CVDs under US law; and (ii) the petition is filed by or on behalf of the domestic industry. For (ii), "by or on behalf of the domestic industry" means the domestic producers or workers representing (a) 25 percent of the like product's production; or (b) 50 percent of the production of the portion of the industry expressing "support" for the petition.

• "Countervailable subsidy." There are three types of subsidies that may be countervailed under US law (19 USC 1677): (i) domestic subsidies, (ii) export subsidies and (iii) "import substitution" subsidies. A "subsidy" exists where DOC finds a (i) "financial contribution" or "income or price support within the meaning of Article XVI of GATT 1994" (ii) provided by a government (or entrusted/directed private entity) that (iii) confers a benefit upon the recipient.  That subsidy is only countervailable, however, if it is "specific" to an enterprise/industry.  While domestic subsidies require an express DOC finding of specificity, export subsidies ("a subsidy that is, in law or in fact, contingent upon export performance") and import substitution subsidies ("a subsidy that is contingent upon the use of domestic goods over imported goods") are automatically specific under US law (i.e., DOC need not find that the subsidies are specific to an enterprise/industry).   In these latter cases, however, DOC still must show that a subsidy exists, as per the three factors outlined above.

Now on to S. 3134's CVD provisions.  For the sake of brevity (stop laughing), I'm not going to excerpt all of Section 110, but you can read it here if you're a masochist.

The legislation amends Section 1671a(c) ("Petition determination") to force DOC to initiate a CVD investigation of currency "undervaluation" or "fundamental misalignment" where (i) a petition is filed by an "interested party" alleging the the elements necessary to impose CVDs under US law, and (ii) the petition is accompanied by sufficient information reasonably available to petitioner.  The bill does NOT, however, require that the petition be filed "by or on behalf of the domestic industry."  Thus, any interested party (like a union, perhaps?) can file a currency/CVD petition and DOC must initiate a CVD investigation even if the petitioner represents a tiny fraction of the total domestic industry involved.  Yikes.

Now, this change perhaps could have been intended to create a bizarre "hybrid" of the "automatic" and "by petition" methods of initiation, but because the bill amends 1671a(c), it must be read as a type of initiation by petition, not a type of "automatic" initiation (or some zany new form of initiation).  However, WTO rules - particularly Art. 11.4 of the WTO Subsidies (SCM) Agreement - require an examination of "industry support" where a CVD investigation is initiated by petition (using the same 25%/50% thresholds described in US Law).  Thus, it would appear that S. 3134, if enacted, probably violates Art. 11.4 of the SCM Agreement as such.

The legislation also addresses how to calculate the subsidy "benefit" during once DOC initiates a case and undertakes a CVD investigation.  Nothing overtly problematic in the benefit sections jumps out (although in practice there could be lots of problems, as Dan Ikenson notes here).  On the other hand, Section 110 is absolutely silent on (i) whether currency policy is a "financial contribution by the government" (and thus a "subsidy"); or whether (ii) any such subsidy is specific under US Law.  This is really important because S. 3134 fails to address two of the more challengeable aspects of any Law that would apply CVDs based on currency policy.

The reasons why these two aspects are so "challengeable" are very sound.  Let's consider them separately.

(1) Financial contribution or income/price support.  As noted above, US law requires that a subsidy entail an "income or price support under GATT Art. XVI" or "financial contribution."  The latter is defined in 19 USC 1677(5) as:

(i) the direct transfer of funds, such as grants, loans, and equity infusions, or the potential direct transfer of funds or liabilities, such as loan guarantees, (ii) foregoing or not collecting revenue that is otherwise due, such as granting tax credits or deductions from taxable income, (iii) providing goods or services, other than general infrastructure, or (iv) purchasing goods.

WTO rules (Art. 1 SCM) follow this language pretty closely.   GATT Art. XVI:1 includes as a subsidy "any form of price or income support, which operates directly or indirectly to increase exports from ... its territory."  Given these definitions, it is very questionable whether WTO rules would allow a national currency policy to be deemed a "financial contribution" or an "income or price support" because currency policies don't meet any of these key terms' express criteria.  Indeed, most independent analysts - like this recent CRS Report on the issue - believe that it would be a real stretch to deem currency manipulation a financial contribution.

(2) Specificity and prohibited subsidies.  WTO rules take a slightly different approach from US law regarding specificity and export subsidies or import substitution subsidies.  Article 2.1 of the SCM Agreement defines specificity ("specific to an enterprise or industry or group of enterprises or industries") and sets forth guidelines for specificity as a matter of law or fact.  Article 2.3 adds that "Any subsidy falling under the provisions of Article 3 shall be deemed to be specific."  Under Art. 3 of the SCM Agreement, export subsidies and import substitution subsidies are prohibited outright.  Art. 3.1(a) defines export subsidies as "subsidies contingent, in law or in fact, whether solely or as one of several other conditions, upon export performance, including those illustrated in Annex I."  Art. 3.1(b) defines import substitution subsidies as "subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods." Given these definitions, there is clearly a huge question as to how a nation's currency policy is "specific" to an enterprise/industry or a "prohibited subsidy" under WTO rules because a nation's currency is available to all citizens and not contingent upon exportation or import substitution.  (The CRS Report cited above also concurs with this reading.)

Because of the obvious concerns surrounding financial contribution and specificity in any CVD/currency legislation, both of these issues have been raised by critics of such bills' previous iterations.  However, the earlier bills (like S. 1027, introduced by Sens. Sherrod Brown (D-USW) and Debbie Stabenow (D-UAW) in May 2009) typically mandated that currency manipulation (or "misalignment" or "undervaluation" or whatever) expressly constituted a financial contribution, and an automatic export subsidy under US law.  The bills thus obviated the question of how DOC would find financial contribution and specificity, but they raised immediate and explicit WTO concerns under Articles 1 through 3 of the SCM Agreement.  S. 3134, on the other hand, does not address these issues at all and instead just punts the controversial issues to DOC.  And, as noted above, supporters of the bill just-so-happen to be publicly selling the new Schumer/Graham as being more WTO-compatible than past versions.  (How conveeenient!)

Given this background, it seems quite possible that S. 3134's significant omissions were expressly intended by the drafters to (i) avoid immediate scrutiny by the bill's opponents of previous CVD bills' most questionable provisions under WTO rules; (ii) provide the bill's co-sponsors with "cover" should any scrutiny arise; (iii) gain support for the bill among Senate colleagues; and (iv) maybe even delay a formal WTO challenge if the bill ever became US law.

Sneaky sneaky!

I should note that point (iv) here is quite arguable, as a WTO Member could still claim that the bill establishes "measure" that has a "prospective effect" which violates WTO rules (See, e.g., US-Continued Zeroing (AB)).  In particular, a WTO Member would argue that no financial contribution or specificity can possibly exist in the case of the countervailing duty investigations of WTO Members' currency policies that the measure (S. 3134) requires.  Such an approach not only is probably ok under WTO rules, but also is just plain ol' common sense: if I pass a law that targets redheads for taxation and mandates what to do with the "redhead revenues," but doesn't expressly direct the government to collect a tax from redheads, that doesn't mean that the law doesn't tax redheads.  Duh.

However, any such WTO challenge could not be based on the simple letter of the law itself, which merely requires DOC to initiate an investigation and provides a benefit methodology for any such investigation. Thus, one could easily see the bill's drafters purposely leaving the offending financial contribution and specificity provisions out of S. 3134 in order to achieve goals (i) through (iv) above.  But our elected representatives would never do something so surreptitious and misleading, right?

Rrrrrrriiiiiiiiiiiiight.

(They're still probably going to run into explicit WTO problems with those mandatory initiation provisions, but those are relatively new additions to the currency bills and definitely not as publicized/scrutinized.)

It is easy to see why the Senators' might want to avoid this scrutiny during debate, and how the lack of express WTO vulnerability on financial contribution and specificity could be a selling point to other Senators. However, shelter from immediate WTO challenge (assuming it happened, which again is far from certain) would also be quite valuable to the S. 3134's supporters, including those unions and domestic companies seeking protection from Chinese imports.  If a WTO Member actually held off on immediately challenging the new law at the WTO, the Member's next "concrete" opportunity would only come after the law is applied - i.e., after DOC had preliminarily determined in a CVD investigation that a countervailable currency subsidy existed by establishing a methodology for financial contribution and specificity.  Given the typical timeframe for drafting a petition and issuing a preliminary determination, DOC's first preliminary determination on currency subsidies could take a year or more from the law's enactment.  In the meantime, the new law's initiation provisions could lead to a flood of new CVD petitions/investigations and thereby immediately affect (read: harm) the commercial behavior of many Chinese exporters.  Thus, domestic petitioners could have a one-year "buffer" between the law's enactment and WTO challenge.  Petitioners would also be able to keep filing petitions for several more years as the original WTO challenge is litigated.  And consumers, of course, would be helpless to stop any of it.  Oh goody.

While this all may sound far-fetched, a very similar scenario actually occurred in the China/CVD/Non-market economy (NME) cases in 2006-07.  Despite the filing of a CVD/NME petition and years of political pressure to begin applying CVDs to "non-market economies," China only brought a formal WTO challenge on the issue after DOC's preliminary determination in the first CVD case (Coated Free Sheet Paper - full disclosure: my firm litigated this case on behalf of the Chinese exporters).  The WTO dispute was dropped when the International Trade Commission issued a negative final determination, but China has since filed another WTO complaint that is currently pending and won't be final (assuming the US appeals) for several more years.  Meanwhile, many other China/CVD petitions have been filed, and many countervailing duties are currently in place against Chinese imports.  Although the China/CVD case differs from the currency matter because US law was totally silent on the matter (as opposed to S. 3134 expressly amending the law), it's possible that the Schumer-Graham drafters were hoping for just such a "delayed" outcome, given (i) the past experience of the bills' drafters with intense criticism about the WTO-inconsistency of their CVD/currency bills; (ii) the S. 3134's blatant omission of any language on financial contribution or specificity; and (iii) the recent experience with the China/CVD cases in the United States.

So there you go.  Isn't US trade remedies politics fun?  Ok, fine, maybe not, but it's still critically important to recognize how professional protectionists like Schumer, Graham and the AFL-CIO try to game the system in order to quietly push their agendas and to mislead the public about the costs and implications of their suggested policies.

Apparently, Logic Has No Place in the China Currency Debate

It must be a day ending in "Y," because everyone's favorite China sheriff, Sen. Chuck Schumer (D-Campaigning), and his sinophobic Barney Fife, Sen. Lindsay Graham (R-Textile Industry), are yelling about China's currency regime.  This time, they've joined forces with anti-trade crusader Sen. Sherrod Brown (D-USW) to introduce newmostly-recycled legislation (the "Currency Exchange Rate Oversight Reform Act of 2010" - bill number & text currently unavailable) that would, among other things, change US law in order to force the US Department of Commerce and US Treasury Department to aggressively fight China's monetary policy:

[The legislation would c]reate a new approach to identifying currency manipulators by requiring that the Treasury Department base its determination strictly on objective measures related to currency exchange rates. Under current law, Treasury also has to determine that the misalignment is a willful attempt to gain a trade advantage before it can cite the country. The new legislation would eliminate the need to show intent....

The legislation requires Treasury to develop a biannual report to Congress that identifies two categories of currencies: (1) a general category of “fundamentally misaligned currencies” based on observed objective criteria and (2) a select category of “fundamentally misaligned currencies for priority action” that reflects misaligned currencies caused by clear policy actions by the relevant government....

The legislation clarifies that the Commerce Department already has authority under U.S. law to investigate whether currency undervaluation by a government provides a “countervailable subsidy” and must do so if a U.S. industry requests investigation. In recent years, the Commerce Department has been reluctant to exercise its authority under the law. This legislation, therefore, seeks to strengthen and reaffirm existing law and the Commerce Department’s obligations under the law.

The legislation also makes it clear that the Commerce Department is required to investigate currency undervaluation as a “countervailable subsidy” if Treasury designates a “priority” currency and a U.S. industry requests an investigation....

Sigh. I've already spent too much time explaining how the current debate surrounding China's currency policies is just rife with misleading statements from those who, for often unseemly reasons, breathlessly yearn for the United States to "get tough" with China and to "force" the Chinese to "restore fairness" to the bilateral trading relationship.  I've explained how China's currency, the renminbi (RMB), might not actually be as undervalued as the currency hawks claim.  I've provided ample historical and economic evidence demonstrating that a significant RMB appreciation probably won't dramatically affect US-China tradeflows or the US manufacturing sector.  And I've even tried to show how guys like Chuck Schumer love to baselessly demagogue China (or before that, Japan) in election years (and gee, guess who's up for re-election this year?) as an easy way to get free media and literally scare up votes.  On this last point, I'll soon delve deeper into the political pandering/misinformation that Sens. Schumer, Graham and Brown have used to support their new anti-China legislation (as part of my "Protectionist Campaigning for Dummies" series).  So stay tuned for that.

For now, however, I just want to make two quick and easy points.  First, Cato's Dan Ikenson does a great job today summarizing the best economic arguments against doing anything on the China currency issue, especially when your express goal is to affect the US-China trade balance.  I've covered a lot of this before, but this is a really good synopsis, so here you go:

Between July 2005 and July 2008, the Chinese RMB appreciated by 21 percent against the dollar.  But over that 3-year period, the U.S. trade deficit with China increased from $202 to $268 billion.  Why, then, do policymakers think revaluation is the key to reducing the trade deficit?  Why do they even care about the bilateral trade deficit, which is meaningless in the context of our globalized economy.  Only one-third to one-half of U.S. imports from China is Chinese value added.  The rest is Japanese, Taiwanese, Korean, Australian, American and other countries’ value added.  The bilateral figures tell us nothing important.

During the aforementioned period of RMB appreciation, U.S. exports to China increased by $28 billion.  But U.S. imports from China increased by $94 billion.  Americans continued to purchase Chinese imports–despite the currency-induced price increase–for two primary reasons.  First, there aren’t many substitutes for the Chinese products U.S. consumers tend to purchase.  Second, Chinese exporters, by virtue of a stronger RMB, were able to reduce their costs of production because many of those costs are for imported inputs (made cheaper because of the stronger RMB), which subsequently enabled them to lower their prices for export to the United States.

Ikenson's upcoming paper on China should provide a lot of other good data and argument, so be on the lookout for that.

Second, I have just one simple question for all of those protectionists, like a certain New York Times columnist, who are currently demanding that (a) the Treasury Department label China a "currency manipulator" in its semi-annual report on the subject, and/or (b) the Commerce Department reverse years of practice and deem "currency manipulation" to be a countervailable export subsidy under US Trade Law:

If Chuck Schumer, Lindsay Graham and Sherrod Brown - the Senate's most aggressive China currency hawks - believe that they need to change US law in order for Treasury and Commerce to respectively find "manipulation" and "subsidization," then why on earth should anyone believe protectionists' confident assertions that China's actions are patently illegal under existing, un-amended US law?

Seriously, how does this make any sense?  In essence, Schumer and his cronies are saying, "Hey, Geithner and Locke, you better find China's policies illegal under current law, or else we'll change the law so that they're illegal."

What the $#%&*?

Then again, considering how steadfastly and routinely the China demagogues ignore all the, you know, actual facts about China, currency, manufacturing and the bilateral trade deficit, logic obviously has no place in this debate, now does it?