GPX Update: The Fake Pressure to Pass a Bad Bill (UPDATED)

With the House and Senate furiously trying to pass the CVD/NME "fix" legislation (H.R. 4105) that was formally introduced this morning, now's a perfect time to examine the bill and ask one simple question:  Why the heck is everybody on the Hill and in the White House in such a rush to sign this puppy into law without formal analysis and consideration of its substantial weaknesses? 

Such a question might seem obvious to most lay people, but it's particularly important in this case.  You see, a quick review of the bill's text reveals quite plainly that, despite congressional claims otherwise, it is extremely biased agains US importers and consumers and doesn't solve any of the serious problems - including "retroactivity" and "double counting" - that the CVD/NME issue raises. 

Since 2007, these US importers have paid millions of dollars in duties that, according to the Court of Appeals for the Federal Circuit, the US government had no legal authority to collect.  Thus, right now, those companies (particularly the plaintiffs in the original GPX case) have a very legitimate and hard-fought right to compensation from the government (e.g., refunds of all those illegal duties paid).  Such compensation could keep their businesses afloat or even fund expansion (and jobs!).  Yet congressional legislation could invalidate their legitimate legal claims (and the millions they're owed), and cost them millions more in duties and legal fees.  Maybe I'm crazy, but I think a proper analysis is in order, don't you?

So let's get started.

Retroactivity

As mentioned last night, the proposed legislation would be "retroactive" to November 2006 - the date of DOC's first initiation of a CVD case against NME imports (Coated Paper from China). In particular, the bill states:

(b) EFFECTIVE DATE.—Subsection (f) of section 701 of the Tariff Act of 1930, as added by subsection (a) of this section, applies to— (1) all proceedings initiated under subtitle A of title VII of that Act (19 U.S.C. 1671 et seq.) on or after November 20, 2006; all resulting actions by U.S. Customs and Border Protection; and (3) all civil actions, criminal proceedings, and other proceedings before a Federal court relating to proceedings referred to in paragraph (1) or actions referred to in paragraph (2).

As I've repeatedly noted, this means that all existing CVD orders and pending investigations related to imports from China and Vietnam - totalling billions of dollars in annual trade - would continue, even though the federal government had no lawful authority at the time to initiate the investigations, impose the measures or collect the duties.  As a result, it is all but certain that foreign exporters, US importers and the Chinese and Vietnamese governments will challenge the "newly-legal" measures in US courts and the WTO (and they might have a decent shot at prevailing).  US importers will have particular motivation to sue: they've paid millions of dollars in duties that, prior to this year, should never have been collected.  (Remember, kids, American companies, not the Chinese government, pay duties on imports.  And in these cases they often have no control over the amount owed.)

Another thing worth noting is section (3) above, which makes clear that the legislation will invalidate any legal challenges to the previous (and formerly illegal) CVD-NME policy.  Thus, foreign exporters, and US importers/consumers will have spent five years and millions of dollars on lawyers pressing - and winning! - legal complaints against the US government related to the abject illegality of the 2007-2012 CVD-NME policy, but now - and maybe in the absence of formal House/Senate consideration - Congress intends to simply decree that all of their time and expense is worthless.  Ouch.

Double Counting

If you were to listen to certain members of Congress, you'd think that the legislation introduced today totally resolves the "double counting" problem that exists with respect to the concurrent anti-dumping and countervailing duties on NME imports.  (The U.S. Court of International Trade and the WTO’s Appellate Body have ruled that combined duties on NME products are artificially high because alleged subsidies are offset twice — once in the CVD calculation and again in the dumping calculation.)  And while it's true that the legislation references double counting, such language hardly resolves the issue (and may even raise new problems).

First, the legislation's double counting provisions only apply prospectively from the date that the bill becomes law.  This means that the provisions won't apply to all of the old cases in which anti-dumping and countervailing duties included double counting, and that Commerce will not go back and recalculate any of those duties, even though the bill's general CVD/NME provisions apply retroactively to them.  (This retroactive/prospective discrepancy is a prime indicator of just how biased against US importers/consumers the bill is.)  The only exception to this rule are the four cases (of 24 total) on which China challenged and won at the WTO.  Thus, there are 20 other cases and many duties that will remain artificially (illegally) high via double counting, and that could be - and very likely will be - challenged at the WTO.

Second, the bill doesn't necessarily correct for double counting on a prospective basis either.  It only authorizes DOC to try to fix the double counting problem - a solution that DOC has repeatedly admitted could be impossible.  Here's the bill language:

(1) IN GENERAL.—If the administering authority determines, with respect to a class or kind of merchandise from a nonmarket economy country for which an antidumping duty is determined using normal value pursuant to section 773(c), that—

(A) pursuant to section 701(a)(1), a countervailable subsidy (other than an export subsidy referred to in section 772(c)(1)(C)) has been provided with respect to the class or kind of merchandise,

(B) such countervailable subsidy has been demonstrated to have reduced the average price of imports of the class or kind of merchandise during the relevant period, and

(C) the administering authority can reasonably estimate the extent to which the countervailable subsidy referred to in subparagraph (B), in combination with the use of normal value determined pursuant to section 773(c), has increased the weighted average dumping margin for the class or kind of merchandise, the administering authority shall, except as provided in paragraph (2), reduce the antidumping duty by the amount of the increase in the weighted average dumping margin estimated by the administering authority under subparagraph (C).

To translate this into human English: under the law, DOC must address double counting where (i) it has been demonstrated by a foreign exporter (according to the bill's summary) that the subsidies at issue have lowered its U.S. import prices; and (ii) DOC has determined that it can "reasonably estimate" the extent to which those subsidies have affected the anti-dumping duty on the same imports.  This raises two obvious problems:

• First, it could be impossible for a foreign exporter to prove that a tax break (for example) it received has affected its US import prices. (Seriously, how on earth does a big manufacturing company with tons of costs and revenues prove that a little tax break affected import prices?)  And if this burden is found to be unreasonable, it might be illegal. [UPDATE: Recall that the WTO Appellate Body ruled that DOC and other national authorities have an affirmative obligation to ensure that double counting does not take place in AD/CVD investigations; by placing part of the burden to establish and then remedy double counting on foreign exporters (indiead of on DOC alone), this provision would seem to directly contradict the Appellate Body's ruling.];
• Second, as noted above, Commerce has repeatedly stated that it has no idea how to "reasonably estimate the extent to which the countervailable subsidy... has increased the weighted average duty margin."  And even if Commerce does figure something out, nobody has any idea whether the WTO or the courts would find Commerce's methodology to be legal.

Thus, all this legislation really does is authorize Commerce to (maybe - if exporters meet their burden) try to address double counting, and it does so for only new cases.  It provides no guarantee that foreign exporters or Commerce will be able to do any of this, and it certainly doesn't address the myriad past instances of illegal double counting. [UPDATE: The bill also doesn't ensure that Commerce's new methodology, assuming the agency determines that it actually can develop one, will address the full extent of double counting, instead of a small fraction of it.]

Quite the "fix," eh?

So, given these problems and many others (some of which are noted by Cato's Dan Ikenson in this great new blog post), why on earth is Congress trying to "fast-track" this legislation through both chambers and onto the President's desk?  Well, if you listen to the administration and certain members of the House and Senate, it's because Congress supposedly has only a few days before the CAFC ruling invalidating the current CVD/NME policy becomes "final" and thus forces the administration to terminate all of the existing CVD orders and pending investigations.

But that's just not true.

Earlier this week I explained why the immediate termination of all of these duties/investigations would not cause serious and irreparable harm to the US companies and unions who had petitioned for the imposition of CVDs on NME imports. (In short, the products are also covered by very high anti-dumping duties.)  But even if the termination of all CVD orders and investigations actually would lead to a flood of subsidized Chinese and Vietnamese imports (and, again, it won't), that "disaster" wouldn't actually happen for a long, long time.  There are two basic reasons why:

First, and as I've already explained, DOC and the Customs Department wouldn't have to act until the CAFC's ruling became "final," and because the Obama administration plans to appeal, the ruling won't become final for months (as late as October 2012).  Some have tried to argue that, even if the US government appeals, the deadline for congressional action is much sooner because the CAFC might not grant a "stay" of its ruling pending the outcome of a Supreme Court appeal.  This idea, however, appears to be incorrect because a CAFC ruling in Fujitsu v. United States, 283 F.3d 1364 (Mar. 20, 2002) makes clear that any trade-related court ruling appealed to the Supreme Court will not become "final" until the Supreme Court appeal process is complete (emphasis mine):

[W]e agree with the Court of International Trade that the suspension of liquidation was removed on October 1, 1996, when the time for petitioning the Supreme Court for a writ of certiorari expired.  In Timken, 893 F.2d 337, we addressed the question of whether a decision of the Court of International Trade that was on appeal to the Federal Circuit was “final” for purposes of 19 U.S.C. § 1516a(e).  Answering the question we stated: “We are of the opinion that an appealed CIT decision is not a ‘final court decision’ within the plain meaning of § 1516a(e).” Id. at 339. We explained that, in section 1516a(e), the term “final court decision” must be read together with the words that follow it: “in the action.” We reasoned that “[a]n ‘action’ does not end when one court renders a decision but continues through the appeal process.” Id. We see no reason not to extend the logic of Timken to the question before us in this case. FN12 We do not think that, for present purposes, the “appeal process” in a case is completed until all possible appeals are exhausted. Thus, there is not a “final court decision” in an action that originates in the Court of International Trade and in which there is an appeal to the Federal Circuit until, following the decision of the Federal Circuit, the time for petitioning the Supreme Court for certiorari expires without the filing of a petition.

As I've mentioned, it's highly unlikely that the Supreme Court will agree to hear the appeal, but its rejection wouldn't occur for several months.  Thus, the the CAFC's decision won't become a "final court decision" - and Congress won't have to act - until then.

Second, even when the CAFC ruling becomes final, it very likely will only apply to the case at bar (related to Chinese tires).  Assuming Commerce doesn't just voluntarily terminate all of the other CVD orders and investigations (and it never, ever volunteers for stuff like that), foreign exporters and/or US importers will have to ask the courts to mandate such termination.  Given all of the legal wrangling that's possible here, that means that the total revocation of all CVD orders and investigations could take years, not days.

Given these facts, the serious weaknesses in the current legislation and the other, better options that exist on the CVD/NME issue, one must again wonder why the Obama administration and Congress (especially free trade Republicans) are so desperate to eschew debate and pass the current bill.

Maybe they just think we should pass the bill in order to find out what's in it?

New Op-Ed: "How our 'do nothing' Congress can help US-China trade relations' (and quick analysis of the new CVD-NME bill)

The Daily Caller published a new op-ed of mine on the "CVD-NME" issue that I've been discussing over the last few weeks.  The op-ed is essentially the Cliff's Notes version of my many previous blog posts explaining why legislation amending the US countervailing duty law to expressly apply to non-market economies (and to retroactively apply to existing CVD orders and investigations of NME imports) is a truly horrendous idea and not nearly as urgent or necessary as the White House would have us believe.

A draft of that legislation and a summary of it were released today, and it's just as bad as expected.  (I particularly like the typos and mangled grammar in the summary.)  I plan to blog more on the bill later, but for now I'll just say that it appears to go out of its way to stick it to the foreign exporters and US companies who are caught up in this huge mess.  For example, the bill applies retroactively to all CVD investigations/orders that were conducted without lawful authority, but only prospectively allows Commerce to consider "double counting."  And on the latter issue, the legislation places a likely-impossible burden on foreign exporters to prove that double counting exists, and provides no direction as to how Commerce would re-calculate duties - a task that Commerce has repeatedly admitted could be downright impossible.  In short, the bill is the absolute worst of all worlds, and Commerce doesn't have to lift a finger as a result, even though multiple US courts and the WTO have ruled that the agency's actions were blatantly illegal.  (Gee, it's almost as if the domestic petitioners who benefit from CVDs and double counting wrote the bill or something.)

So let's hear it for the Rule of Law!  Sigh.

But regardless of how awful the draft bill is (and trust me, it is awful), its release means that my new op-ed couldn't be more timely, especially because I basically predicted the legislation's awfulness.  Here's a snippet:

Congress will soon consider legislation to fix a pillar of the president’s China trade policy that has been ruled illegal by federal courts and the World Trade Organization. The bill’s passage will please the White House and the domestic industries and unions that have used the policy to deter foreign competition, but it will do little to solve the underlying flaws in the administration’s approach to China trade. Fortunately, there is a better way forward, and it simply requires Congress to do what it does best: nothing....

Congress is expected to rescue the president, but the “fix” will create far more problems than it solves. First, retroactive application of the revised CVD law to existing orders will cause a legal firestorm, as aggrieved parties sue to recover the millions of dollars in duties that, prior to 2012, the U.S. government had no lawful authority to collect.

Second, the legislative fix will do nothing to resolve the underlying problems with the administration’s current policy. The U.S. Court of International Trade and the WTO’s Appellate Body have ruled that combined duties on NME products are artificially high because alleged subsidies are offset twice — once in the CVD calculation and again in the dumping calculation. Legislation will not solve this “double counting” problem, and Commerce itself has admitted that a proper solution could be impossible. Chinese and Vietnamese imports will thus continue to be unfairly penalized, leading to more disputes and exposing U.S. exports to WTO-sanctioned retaliation.

Third, the policy will irritate U.S.-China trade relations and keep the United States on the defensive in bilateral negotiations. The administration has many legitimate complaints against distortive Chinese trade practices, but the CVD/NME issue — and the United States’ refusal to comply with adverse court and WTO rulings — undermines those concerns.

Congress should not help President Obama continue down this tortuous road. By doing nothing, it can force the administration to make the choice that should have been made years ago: either stop imposing CVDs on NME imports and thus return to the previous policy of addressing Chinese and Vietnamese subsidies through anti-dumping measures, or designate both countries “market economies” and address their subsidies via the normal CVD process.

I then go on to explain why both of these options are better than the administration's chosen approach.  Be sure to read the whole thing here and then go share it with your local congressman or senator (if, you know, they'd ever return your phone calls).

And stay tuned.  More to come.

GPX Update: The Real Pain Imposed by the Administration's Current Policy

Last night, I detailed the holes in the Obama administration's breathless prediction that congressional failure to quickly pass a law expressly applying the US countervailing duty law to "non-market economies" would cause subsidized Chinese (and to a lesser extent Vietnamese) imports to flood into the United States and drown myriad US companies and workers .  In short, we saw that the vast majority of the immediate pain that the White House forecast would actually be neither immediate nor painful.

By contrast, the administration's current CVD/NME policy is currently inflicting real and immediate pain on US companies and workers.

I documented some of these harms when I published an unsolicited email from Robert Sherkin, a founder of the now-bankrupt GPX International Tire Corp (the named Plaintiff in the big US court case on the CVD/NME issue).  Mr. Sherkin described how the now-illegal AD/CVD orders on Chinese tires had bankrupted his company, imperiled the jobs of 200 US workers and cost him personally $20 million. And all the while the Obama administration remained steadfastly committed to its current (and painful/illegal) approach.

Mr. Sherkin, unfortunately, is not alone. Now, we discover that the tiny offshoot of now-bankrupt GPX - Maine Industrial Tire in Red Lion, PA - is also suffering the ravages of the administration's CVD/NME policy, even though they no longer make the tires at issue in the original case.  As a result, the business and about 40 new jobs have been put on hold indefinitely:

The shiny, rust-free glimmer slaps Troy Kline dead in the face as he paces the gritty floors of his 120,000-square-foot tire factory in Red Lion.  The CEO at Maine Industrial Tire shakes his head, watching the $100,000 tire mill sit idle - but not for the reason you might think.  It's not the decline in U.S. manufacturing, an epidemic that recently claimed nearby Yorktowne Cabinetry's decades-old site across Redco Avenue. It's not lagging demand for the company's inventory, either. In fact, Maine Industrial Tire's 50 employees can't keep up with contracts from big names like John Deere, Bobcat, and Caterpillar, clamoring for the company's solid rubber products used on forklifts and construction equipment.

For most manufacturers, it's the stuff of dreams. For Kline and the company's Chairman Bryan Ganz, it's just a long story - one colored by a 5-year-old court battle with the U.S. government over an international trade regulation designed to stop foreign firms from undercutting American manufacturers. They say it's left them waiting on $1.5 million - money granted by a 2010 court decision.  That's money to hire about 40 more employees in Red Lion - money to invest in company infrastructure.

"The issue is," Kline said, "how many more customers are we going to lose because we can't keep up with demand?"

The saga begins in 2007. At the time, Maine Industrial's forerunner GPX International Tires employed 2,600 people at manufacturing operations in Red Lion, Maine, Canada, Europe and - as fate would have it - China. That year, Titan Tire Corp., the United Steel Workers International and Bridgestone Americas Inc. filed suit against GPX, accusing the Massachusetts-based company of "dumping" and "countervailing" from their Chinese factory....

Ganz said the suit, filed with the international trade commission, wasn't taken seriously initially. "My head would snap off if I tried to sell something below cost," he said. "We did not need to take additional market share. We weren't a start-up company."

In late 2007, the U.S. Department of Commerce began charging GPX customs duties.... These fees amounted to 44 percent of the cost of each off-the-road tire. For example, if a tire cost $100, GPX paid the U.S. government $44 before the item could touch U.S. soil. Duties aside, that same tire would only garner about $25 in profits for the company, Ganz said.

GPX sued the Department of Commerce in 2008, accusing the imposition of both duties as "double-counting," he added. "At the time, there was tremendous anti-China sentiment - a tremendous push in Congress to restrict trade with China."...

GPX asked a judge to suspend the duties until the case could be heard in court. The request was denied, and GPX filed for bankruptcy in October 2009, citing the continued hefty customs costs for its demise. The blow was devastating for Ganz, whose grandfather started GPX in 1922. He teamed up with Kline and other investors to buy a small piece of the company out of bankruptcy - along with the rights to pursue a lawsuit against the Department of Commerce. The business - which no longer makes the products subject to the customs duties - became Maine Industrial Tire.

In August 2009, Chief Judge Jane Restani of the U.S. Court of International Trade ruled that the Department of Commerce erred in charging GPX the countervailing duties. She re-affirmed her decision a year later, following the department's appeal. On Dec. 19, 2011, the Federal Circuit once again upheld Restani's decision, entitling Maine Industrial Tire to $1.5 million in refunded customs duties.

But it didn't quite happen that way, Ganz said. The money is pending, tangled in the wheels of the justice system after the Department of Commerce appealed the decision to the U.S. Supreme Court. 

Meanwhile, Ganz and his colleagues are tired - no pun intended. They worry Congress might retroactively change the international trade law via an expedited process called "unanimous consent" - a move that might interfere with their settlement. "We're at the mercy of the government. At both ends," Kline said. "Whether it's the Supreme Court or the senators."

U.S. Sen. Bob Casey and U.S. Rep. Todd Platts could not be reached for comment.

In the meantime, Kline said his company doesn't have the money to dump into the company and new molds for updated product lines.  Molds range in price from $7,000 to $30,000 each, he said.  The factory produces about four tons per day of inventory.  Capacity permits three times that amount for the site, which has had to eliminate military contracts with Lockheed Martin, Kline said. And that machine - the one that sits idle - could employ six people alone.

For now, it's just a waiting game. "We have the technology to do so much more," Kline said. "We just don't have the funds to do it."

We so often hear about the exaggerated pains imposed by Chinese imports on American companies and workers.  The stories of GPX and Maine Industrial will hopefully cause a few people to realize that protectionist policies impose real pains too (and, of course, restrict individuals' freedom to buy from and sell to whomever they choose).  And let's not forget that there are 22 other CVD orders in place right now and seven more CVD investigations underway.  Each of those measures - or potential measures - can impose similar harms on the US companies and workers who import, consume or otherwise rely on the imported products at issue.

Yet, even with such documented pain and after multiple court and WTO losses, the White House adamantly refuses to change course - a change that undoubtedly would be for the better.  Instead, they just want Congress to swoop in, paper over their repeated losses, and provide them with the express authority to continue down this tortuous road.

Isn't it about time that Congress took a step back and reconsidered the administration's woefully-flawed master plan?

GPX Update: The Administration's False Predictions of Doom

In the coming days, Congress is expected to consider and pass legislation responding to the ruling of the Court of Appeals for the Federal Circuit in GPX Int'l Tire Corp. v. United States and amending the US countervailing duty law to expressly apply to imports from "non-market economies" like China and Vietnam.  I'm thus going to spend some time this week analyzing at the issue in greater detail.  First up is a look at whether the Obama administration's claims that, without congressional action, subsidized Chinese (and to a lesser extent Vietnamese) imports will flood into the United States and drown myriad US companies and workers.  So is that really correct?

In short, no.  And the reasons might surprise you.

As you may recall, last month USTR Kirk and Commerce Secretary Bryson sent an urgent letter asking them to quickly pass legislation correcting the CAFC's ruling.  Their reasoning was straightforward enough:

This matter is ofthe utmost urgency. Absent legislation, should the decision of the court become final, Commerce will be required to revoke all CVD orders and terminate all CVD proceedings involving non-market economy countries, including 24 existing CVD orders on imports from China and Vietnam, as well as five pending investigations and two recently filed petitions.  This would seriously undennine the ability of the United States to remedy the harmful effects of unfairly subsidized imports, and would impair Commerce's ability to ensure that our nation's manufacturers and workers have the opportunity to compete on a level playing field with our trading partners.

The CVD proceedings placed at risk by the court's decision cover a wide range of products in which U.S. manufacturing is most competitive, including steel, aluminum, paper, chemicals, tires, and other products. The annual value of the subsidized imports covered by these CVD proceedings is $4.7 billion. The U.S. petitioning industries that are competing against these subsidized imports include small and medium-sized enterprises and large corporations; family-owned businesses and Fortlme 500 companies. These petitioning industries - representing more than 80 companies - are spread across 38 states and employ directly tens of thousands of manufacturing workers....

[P]rompt legislative action is necessary to clarify the law and avoid harm from injurious, subsidized goods. We stand ready to work with the Congress to enact specific legislation that would remedy the court's flawed ruling.

In short, if Congress doesn't pass legislation amending the CVD law to expressly apply to NME imports, two horrible things will happen: (1) Commerce won't be able to address unfairly subsidized imports from China and Vietname; and (2) the revocation of those 24 CVD orders and 7 pending investigations will obliterate 80 US companies and "tens of thousands" of American workers.

Yet when we dig a little deeper, we realize that both of these claims are, well, incorrect.

First, Congress' refusal to fix the administration's big CVD/NME mess would not prevent Commerce from addressing subsidized imports from NME countries.  It would merely force the administration to (i) stop imposing countervailing duties on NME imports and thus return to DOC's previous policy of addressing Chinese and Vietnamese subsidies through anti-dumping measures; or (ii) designate China and Vietnam “market economies” and address such subsidies via the normal CVD process.

I've discussed my preference for the latter approach and will get more into that in a few days.  For now, I'll just say that designating a country a "market economy" under the US anti-dumping law is entirely at the President’s discretion, so Commerce could basically do it at any time (and then attack Chinese subsidies with CVDs).  But if the administration doesn't want to start using the normal, "market economy" methodology in AD investigations of Chinese/Vietnamese imports, it can still attack subsidies received by the foreign exporters at issue by using the NME methodology in AD cases.

To fully understand this fact, it's important to first lay out the basics.  The NME methodology is a holdover from the bygone days of command-and-control, Soviet-style economies.  Dumping is typically calculated by comparing a foreign exporter’s home market prices with the prices of the same product imported into the United States. Where the former prices are higher than the latter, anti-dumping duties are imposed on the subject imports in the amount of the difference.

However, for countries designated as NMEs, domestic prices or costs cannot be used to determine dumping because pervasive government intervention – particularly state subsidies – supposedly makes them unreliable.  Thus, Commerce calculates dumping margins by comparing US import prices with a “price” that has actually been constructed from subsidy-free input costs, expenses and profits from a comparable producer in a comparable “market economy” country like India or Thailand.  As a result, the anti-dumping duty rate on a NME import has nothing to do with an investigated exporter’s actual prices or costs and has, more importantly for our purposes, already eliminated any possible subsidies that the company received.

Indeed, this fact is exactly what creates the "double counting" problem ruled illegal by both the Court of International Trade and the WTO's Appellate Body.  Both bodies found that the simultaneous application of anti-dumping and countervailing duties on NME imports violated US law and WTO rules because the concurrent measures offset the subsidies received by investigated exporters twice (and thus lead to extra, punitive duties on their goods).  As CIT Chief Judge Restani explained in an earlier GPX ruling:

Although the court recognizes that “the exact effect of subsidies on price is difficult to measure,” it also acknowledges that “[t]here is an assumption that CVD remedies equalize the competitive playing field, by raising the price of the good when it is exported into this country.” In NME-designated countries, however, Commerce also “compares a subsidy-free constructed normal value (essentially using information from surrogate countries) with the original subsidized export price to calculate the AD margin.” Thus, any resulting NME AD margin in theory also captures the competitive advantage that subsidies may provide because the constructed NV is subsidy-free, and presumably higher than a subsidized NV, while the U.S. price presumably reflects in some way the price-lowering benefits of the subsidies. Thus, the margin is greater than it would be if subsidies were reflected on both sides of the comparison. These methodologies, therefore, when used concurrently, result in a high likelihood of double counting because they effectively counteract the same behavior twice.

So if Congress doesn't pass a legislative fix in the next few weeks and the Obama administration just can't bear to designate China and Vietnam "market economies," Commerce can still address Chinese and Vietnamese subsidies via its NME anti-dumping measures.  (This was basically what Commerce proposed - and the CIT rejected - when the court first ruled against double counting.)

You'd think that Ambassador Kirk and Secretary Bryson would know this.  But I digress.

Second, the termination of all those CVD orders and investigations would likely have little or no effect on the companies that are currently "protected" by them because every single Chinese and Vietnamese product at issue is subject to a corresponding anti-dumping order or investigation.  The homemade chart below makes this clear (showing the AD and CVD investigation number assigned by DOC to each investigated product):

Every anti-dumping case above utilized (or will utilize) the NME methodology.  And because that methodology (as noted above) already counters subsidies received by the targeted foreign exporters, there is literally no chance that, as Kirk and Bryson claim, congressional inaction will cause "harm from injurious, subsidized goods."  In fact, a quick skim of the final AD duty rates in the completed investigations cited above shows that anti-dumping duties for a lot of the listed Chinese and Vietnamese exporters are around 50% or more - essentially shutting the subject goods out of the US market altogether.  Those prohibitive duties aren't going anywhere, no matter what Congress does (or doesn't do) to the US CVD law.

Congress probably will end up amending the US CVD law to apply to NME imports.  But let's not kid ourselves here, folks.  Failure to do so would not be the end of the world for Commerce or "tens of thousands of manufacturing workers."  

Far from it.

Zeroing's Zombies, ctd.

When the United States first announced that it had settled WTO disputes with the EU and Japan about the Commerce Department's use of "zeroing" in anti-dumping administrative reviews, I noted that, while the policy might be "dead," its zombies would be roaming the earth for quite a while:

[I]t looks like (i) all of the pending WTO disputes unrelated to the EU/Japan agreements will continue unabated; and (ii) foreign exporters, US importers and/or foreign governments will have to bring additional WTO challenges in order to force USTR to recalculate all the duties that were illegally calculated and collected pursuant to the zeroing methodology. And, even though WTO rules (or at least the Appellate Body's interpretation of them) are abundantly clear on the illegality of zeroing, point (ii) could, of course, cost plenty of time and money before it actually produces results. (Sorry, poor developing countries with tiny trade budgets, but you're gonna have to pay a lot and threaten us before we correct our errors!)

Since that time, DOC issued its Final Rule on zeroing.  It has confirmed my initial concerns... and raised a few more, as noted in a recent Law360[$] article on the subject:

Despite a recent announcement by the U.S. Department of Commerce that it will stop using zeroing in administrative reviews of anti-dumping duties, the years-long battle over the controversial methodology is far from over, attorneys say....

[T]he notice by Commerce leaves several issues unresolved and does not completely foreclose the use of zeroing in all future cases, meaning that litigation and acrimony over the practice will continue for the foreseeable future, attorneys said.

So what are those "unresolved issues"?  Well, first, the new Commerce zeroing rule only applies on a prospective basis:

[T]he announcement by Commerce to exclude zeroing in administrative cases applied only on a prospective basis, meaning it would have no effect on duties that have already been collected based on the zeroing methodology.

“There's no possibility via the Department of Commerce for a recalculation or a refund of those duties, despite the fact that this is an admission by Commerce that what they've been doing for years and years is inconsistent with [WTO] Appellate Body decisions”....

Second, the rule doesn't actually kill off zeroing entirely because it leaves open the possibility Commerce applying the methodology in an investigation where "targeted dumping" is alleged:

Despite what the announcement says, it's also quite possible that Commerce will continue to use zeroing in some cases, attorneys said, because the U.S. has taken the position that the use of zeroing is acceptable in cases of so-called “targeted dumping.”

Targeted dumping is when a company is not dumping its products in the U.S. overall, but is instead dumping its products in a specific region or during specific time periods. For instance, if a company were selling its products at less than fair value in the southwest U.S., but at more than fair value in the northeast, it would be engaged in targeted dumping....

I first discussed Commerce's newfound love of targeted dumping back in 2010, and attorneys surveyed by Law360 earlier this week (including me) noted that, because this little loophole still exists (and because zeroing leads to higher anti-dumping duties), it's extremely likely that domestic petitioners will allege targeted dumping in most future AD cases.  It's also extremely likely that new domestic and WTO litigation will emerge as US importers and foreign exporters/countries challenge the zeroing methodology in targeted dumping cases (neither a WTO panel nor the Appellate Body has ruled on zeroing and targeted dumping... yet).  The outcome of such challenges isn't clear, but if past WTO rulings on zeroing in other contexts are any indication, the US will likely lose here too.  Eventually.

Third, and as I noted a couple weeks ago, Commerce's Final Rule doesn't end several WTO disputes and US court cases on zeroing that are already in progress, and it also doesn't foreclose additional disputes for anti-dumping reviews not covered by the rule (e.g., reviews just recently concluded or still in progress):

The new rule applies to all future dumping cases, but other countries that have challenged the use of zeroing could still impose retaliatory measures on the U.S. if they prevail at the WTO. While the U.S. has said it hopes the new rule will assuage the concerns those countries have about zeroing, it remains to be seen how they will respond, attorneys said....

The new rule also has no effect on the numerous cases pending in U.S. courts over the use of zeroing in past reviews, [attorney Lew] Leibowitz said.

“There are a lot of cases over duties that are tied up in litigation, and the rule doesn't speak to those,” he said. “It's up to the courts to decide if the U.S. violated U.S. laws.”

Last year, the Federal Circuit ruled in two cases that Commerce had failed to adequately explain its rationale for using zeroing in administrative reviews, but not in original investigations.

Those cases, which are still pending, and others at the U.S. Court of International Trade each apply only to the individual investigation at issue, so litigation over the past use of zeroing is likely to go on for some time.

Well, it no longer "remains to be seen" how countries will respond to the new zeroing rule, as well as the US-Japan and US-EU Agreements.  They are going to fight, despite USTR's "hopes" that they'll just pipe down, accept the fact their companies paid millions of dollars in additional (illegal) anti-dumping duties in "old" reviews where zeroing was used, and be happy about Commerce's much-delayed (and coerced!) change of heart.  (Shocking, I know.)  Two very recent examples make this fact very clear.

First, the WTO announced on Tuesday that its Dispute Settlement Body established a panel to address Korea's January 2012 complaint against the United States' use of zeroing in anti-dumping reviews of certain Korean steel products.  The announcement shows that Commerce's Final Rule was insufficient to address Korea's concerns (emphasis mine):

Korea explained that consultations with the US, requested on 31 January 2011, allowed for a better understanding of the parties’ positions but failed to resolve the dispute. Korea noted that the US announced it would no longer use zeroing in annual reviews and welcomed the US efforts (see also disputes DS322, DS350 and DS294 below). Korea regretted that the US plans did not go far enough to fully address its concerns. Korea noted that zeroing in administrative reviews had repeatedly been found inconsistent with the WTO Anti-dumping Agreement and that the US was expected to amend the methodology accordingly.

The US said that its Department of Commerce published on 14 February 2012 a modification to its procedure regarding the use of zeroing in anti-dumping reviews. The US said that this modification would address the matter covered in Korea’s panel request. The US added that the process of modifying its methodologies to respond to DSB rulings on zeroing had been completed and, therefore, moving forward with this dispute served no purpose.

Right, "no purpose"... other than to push the United States into recalculating "zeroed" anti-dumping duties on Korean imports that would not otherwise be recalculated pursuant to Commerce's new rule.  And if you're a Korean exporter or US importer who paid those extra duties, that's a pretty big purpose, I'd say.

(The same WTO announcement also noted that Brazil is still weighing its options with respect to its complaint against the US for zeroing in reviews of Brazilian orange juice imports.  Wanna bet on what they decide to do?)

Second, the WTO separately announced that Vietnam has filed a brand new complaint against the United States related to US anti-dumping reviews of Vietnamese shrimp.  The text of the complaint isn't out yet, but reports indicate that it's a follow-up to Vietnam's successful 2010-2011 complaint against - surprise! - the United States' zeroing methodology.  The timing of Vietnam's new complaint - about a week after the publication of Commerce's Final Rule - makes clear that they, like Korea, are not going to stop litigating past US infractions just because the United States has now promised not to commit new ones.

Well, unless targeted dumping's involved, of course.

NEWSFLASH: Administration Still Clueless About Global Competitiveness

Last week, I detailed why the Obama Administration's fiscal policies were utterly clueless when it came to improving US businesses' global competitiveness.  Those criticisms remain valid, and perhaps even more so, now that the White House has released its big corporate tax "reform" plan (to see why, go here, here, here, here and here - for starters).  Thus, I'm going to ignore the President's campaign talking points tax "plan" and focus on another critical aspect of US companies' international competitiveness that the President and his advisers completely ignore: import liberalization and global supply chains.

Now, this isn't the first time that I've exposed the administration's blind spot when it comes to the clear connection between duty-free access to imports and US companies' ability to compete and "win" in the global economy.  (And I'm certainly not the only one.)  But a new piece by trade gadfly Greg Rushford really hits this point home by repeatedly documenting the abject silliness (and economic ignorance) that is the President's mercantilist obsession with exports (and concomitant disregard for imports).  In the piece, Rushford follows President Obama's recent "Made In America" road trip - in which he trumpets various companies' export successes - and then explains the dirty little secret behind that success: imports and even - gasp! - outsourcing.

First, President Obama on February 15th traveled to a Master Lock factory in Milwaukee to proclaim that "[w]e need an economy that is built to last, that is built on American manufacturing, and American know-how, and American-made energy, and skills for American workers, and the renewal of American values of hard work and fair play and shared responsibility."  What he failed to mention, however, is how Master Lock actually does business:

In Milwaukee, Master Lock now employs more than 400 workers, some 100 of them having been brought back from its Chinese facilities. The company also has about 700 more workers in Nogales, Mexico. Together, the Milwaukee and Nogales plants account for perhaps 55 percent of the company's lock production, with the remainder still in China, according to press reports....

And while praising Master Lock's manufacturing exports, President Obama failed to mention how the company's product is, you know, actually manufactured:

While at first glance, a padlock seems like a pretty simple thing to make, Master Lock's unionized Milwaukee work force has reason to know otherwise. Master Lock's vice president for global supply chains, Bob Rice, wrote a memo to the company's Asian suppliers last year, listing as examples 20 different products the company needed to import from China, each with its own SKU number.

Locks have parts that come from just about anywhere: keys, cylinders assemblies, ball bearings, plated shackle stop pins, anti-saw pins, screws, cylinder external assemblies, cases and cylinder retainer blocks. In 1995, the last year for which publicly available documentation is available for U.S. Customs' records, Master Lock made nine of 11 such components in Milwaukee. But the lock case and cylinder retainer block were needed from Taiwan --- and those two parts represented an estimated 25- 35% of the total cost of the finished padlock.

More recently, in 2010 Master Lock made U.S. Customs officials work a bit to determine where one padlock model was really made. The padlock was made of ten different components from various countries, with the principal components being a lock body made in Milwaukee and a shackle from China. All the components were then assembled in Mexico. Customs determined that the finished padlock should be marketed as a product of Mexico --- but that "Mexican" padlock also employed workers from Milwaukee to the Middle Kingdom.

Sometimes, Master Lock imports parts from Mexico, like unfinished padlock lock bodies and shackle assemblies that are then finished in Milwaukee, where the cylinder locks are attached. Those padlocks are labeled Made in USA --- but again, there's more to the American success story. Workers of the World: you have really become united....

Odd that Obama left these important facts out, huh?  It's almost as if he doesn't care about using the loudest microphone in the world to spread economic ignorance.  But I digress...

Rushford then follows President Obama to a Boeing plant in Everett, Washington to show that the company's production of the new 787 Dreamliner "is a great example of how we can bring jobs and manufacturing back to America."  Obama added that his administration wanted "to make it easier for companies like Boeing to sell their products all over the world, because more exports mean more jobs."  However:

The president didn't admit what every economist would immediately recognize: to export those Dreamliners, Boeing's workers need access to raw materials and components from all over the world.

Dreamliners may be Made in America, but with essential imports sourced from so many other places that it's difficult to know where to begin. There's the Integrated Surveillance System Processor and an Integrated Navigation Radio, from Canada. There's also a Valve Control Unit from Germany --- passengers can thank that for keeping their cabin air pressure within tolerable limits. And there's a turbine engine exhaust nozzle, brought in from Mexico from titanium sheets made in China. Those are just the first three telling examples that show up from a glance through US Customs records --- with each import necessary to the American workers in places like Everton.

That doesn't even get to the big-ticket items: the Rolls-Royce Trent 1000 engine, the testing in wind tunnels in the UK and France; the Mitsubishi Heavy Industries' wing; Italian horizontal stabilizers, doors from France, and other critical components from Sweden, India, South Korea --- it's a very long list. The Dreamliner is as cosmopolitan as the American people. Boeing's American workers should love imports, because their jobs depend upon them.

Finally, Rushford explains that it's not just US manufacturing companies that benefit from import liberalization and global supply chains.  Services firms, like those who helped build Miller Park in Milwaukee, also reap major dividends:

Miller Park was built by American (union) workers, with tons and tons of domestic materials. But that's not the whole story. The subcontractor for the stadium's renowned retractable steel roof was Mitsubishi Heavy Industries, Ltd. Mitsubishi bought high-strength steel from Luxembourg, which was shipped to Mitsubishi fabrication yards in China and Japan. The finished steel components were then shipped to the Port of Los Angeles, where they were unloaded by American longshoremen and then driven by Teamsters to Milwaukee.
Other steel that went into Miller Park came up the Mississippi River from the Port of New Orleans, according to sources at that port. And Haven Steel Products, Inc., headquartered in Kansas City, made the steel for the stadium's bowl that supports the roof. Other key work was done by Wisconsin Electrical Power Co.,not to mention the intrepid workers who put in the all-important beer-supply pipes.

Arup, the United Kingdom's experienced design firm, was responsible for most of the engineering design for Miller Park, working also with design teams from Dallas, Los Angeles, and Milwaukee. Arup, headquartered in London, has sent its consultants and engineers just about everywhere in recent decades: including New York's Tappan Zee Bridge, the 2nd Ave. Subway; Japan's Kansai International Airport, and the Sydney Opera House. Miller Park, like the others, was truly Made in the World....

Back when President Obama announced his National Export Initiative in 2010, I first highlighted the administration's odd habit of trumpeting US exporters who just so happen to rely on imports.  Rushford's piece makes clear that the White House hasn't kicked that habit and remains as economically uninformed as ever (well, at least publicly).

And just in case you think that Rushford and I are cherry-picking, think again.  The 2012 Economic Report of the President - quietly released last week - shows that the Obama administration's complete disregard for import liberalization is very much intentional.  That report's section on International Trade and Finance goes to great lengths to (i) praise goods and services exports (particularly the increase in US exports since their post-crash nadir in 2009); (ii) denigrate goods and services imports (for, example by lamenting the trade deficit and lauding opportunities to decrease exports of services imports); and (iii) not mention - even once! - the demonstrably positive effects of import liberalization on US firms' global competitiveness (despite spending several pages on ways to improve such competitiveness).  This complete disregard for import liberalization is, in my estimation, a new low (previously set by the President's 2010 Trade Policy Agenda) and a serious step backwards from the administration's much-improved 2011 Agenda.

If the President and his economic team can't even mention such an obvious and critical aspect of American businesses' ability to compete in today's global economy, then why on earth should we trust them on related issues like tax reform?


Oh, right, we shouldn't.

"Chinese Labor, Cheap No More" (UPDATED)

Over the last year or so, I've frequently discussed how several economic and demographic factors in China are putting serious upward pressure on labor costs (and, thus, export prices) there.  Michelle Dammon Loyalka continues this discussion with a great new op-ed in yesterday's NYT.  The whole thing is worth reading, but the latest data deserve particular note:

China has experienced sporadic labor shortages, which in turn have driven up its once rock-bottom labor costs. This trend is particularly evident in the weeks following China's Spring Festival, or New Year, when more than 100 million rural migrants return to the countryside to spend the year's biggest holiday with family. Coaxing those same migrants back into the urban work force has proven increasingly difficult.

This year has been no exception. Although nearly two weeks have passed since the Lantern Festival that officially marks the end of the 15-day holiday, cities across China are still facing a serious labor shortfall. In order to lure new workers and retain the old, some companies give employees sizable bonuses just for coming back to work, while others offer cash for every new employee they bring along with them. And in many areas, wage increases ranging from 10 to 30 percent have become the norm.

Despite all this, cities like Beijing, Shenzhen and Guangzhou are still short hundreds of thousands of migrant workers. Shandong Province is missing a full third of its migrant work force, and Hubei Province reports a loss of more than 600,000 workers. Last week, the Chinese government released a report describing this year's post-Spring Festival labor shortage as not only more pronounced than in years past, but also longer-lasting and wider in scope.

The author goes on to document the numerous factors underlying "China's mounting labor woes."  First, there's a shortage in the sheer number of available workers that will only get worse over the next few years.  This shortage is caused by (i) the depletion of the "rural surplus labor pool" (i.e., farmers who could move to industrial jobs); and (ii) a rapidly aging population ("by 2020 the nation will have more than 200 million people over age 60"); and (iii) rising living costs in urban China coupled with improved rural conditions keeping would-be migrant workers closer to home.

Second, China's labor costs are being pushed by a shift in the quality and character of China's work force.  In short, the older generation - who experienced the horrible living and working conditions of the Communist Revolution, collectivization, the disastrous Great Leap Forward and the Cultural Revolution - were willing to put up with low wages, long hours and substandard conditions.  The younger generation ("a full 70 percent of rural migrants are now under 30"), however, never experienced the abject misery of collectivist China and thus is "no longer willing to endure hardship without clear expectations that it is a temporary means to a more comfortable end."  These expectations, of course, have demonstrable effects on many Chinese factories and their comparative advantage in the global market:

In the past, China's migrant workers were just thankful not to go hungry; today they are savvy and secure enough to start being choosy. Higher salaries, basic benefits, better working conditions and less physically taxing jobs are only the beginning of their demands, and for many factories, these are already too costly to be tenable.

For China, having spent the last three decades building the nation on the back of its cheap labor force without having to pay too much attention to its welfare, all this is uncharted territory. It is also a serious blow to the comparative advantage that has helped make its factories an international juggernaut.

In short, basic economics works.  China had a massive comparative advantage in cheap labor; it used that advantage, via low-end manufacturing and international trade, to sell cheap stuff to willing consumers across the globe and thus dramatically improve national living standards; and now those improvements, coupled with certain demographic shifts, are slowly eroding China's labor advantage and thus its dominant role as the World's Factory.

This change, of course, will also have an impact on manufacturing in other countries, including the United States. The only thing it probably won't affect, unfortunately, is US politicians' Sinophobic rhetoric.

(CNBC has more on China's rising labor costs here, if you're interested.)

UPDATE: Lee Miller points me to this fantastic interview with BCG's Hal Sirkin on changes in China and their effects on US manufacturing.

Is The Obama Administration Really This Clueless About US Companies' Global Competitiveness? (UDATED)

In Sunday's Chicago Tribune, Caterpillar CEO Doug Oberhelman explained why his manufacturing powerhouse has no plans to expand business operations in its home state of Illinois.  The whole op-ed is worth reading, but here are the money grafs:

Despite the fact that we announced plans for dozens of new factories in the last few years and our United States workforce increased by more than 14,500 in the past 10 years, we haven't opened a new factory in Illinois in decades. Our Illinois workforce is at the same level it was 10 years ago. Caterpillar recently informed several Illinois communities that they are not in the running for a new factory we will build in the U.S., ultimately adding 1,400 jobs — work that's now done in Japan. In that case, logistics was a key factor, but even if it were not the case, when Caterpillar and most other companies look to locate a new factory in the U.S., Illinois is not in the running.

It doesn't have to be that way.

About 10 months ago I wrote a letter to Illinois political leaders expressing my hope that the state would undertake long-term, fundamental reforms so Illinois could compete for jobs and long-term business investment that drives growth.

To date, we haven't seen much change.

The governor's recent three-year projection of state revenue and spending proves that even with the income tax increase, Illinois has not done what is necessary to balance its budget. Major credit agencies have downgraded the state's bond rating. The state passed some changes to workers' compensation last spring, but it wasn't enough. Illinois will still be among the most expensive states in the nation for workers' compensation insurance. Our own comparison of workers' compensation costs showed Illinois was far more costly than neighboring Indiana, which is consistent with a comparative study by Oregon, which also shows Illinois is much more expensive than Indiana, Iowa and Kansas in workers' compensation insurance rates.

What's the solution? For starters, Illinois needs to adopt a long-term sustainable state budget that relieves pressures on taxpayers. Unlike some, I do not favor an early rollback of the temporary tax increases in Illinois; but they should expire as planned. Keeping the temporary tax increases in place for now gives the state time to develop a multiyear plan that balances the state budget. In addition, the state needs to dramatically lower workers' compensation costs. Some say these changes are not politically possible in Illinois. But if Illinoisans put pressure on both parties to make these types of improvements, I think the state can become a place that can successfully compete for business growth and new jobs.

Let me be clear. Caterpillar is not threatening to leave Illinois. Rather, we want to grow our presence here. For Illinois to really compete for new business investment and growth, the state must address these matters.

In short, high taxes, fiscal profligacy and bad regulation - not the absence of state subsidies or other taxpayer-funded "incentives" - prohibit Caterpillar from both locating new business operations in Illinois and remaining globally competitive (a critical issue for the export-dependent company).  Mr. Oberhelman was speaking about state-level policies, but the principles he describes apply equally to national policy.

Unfortunately, the Obama administration does not appear to understand these principles and is instead cluelessly pursuing the exact opposite course.  I've already explained repeatedly how existing US regulations - and new ones like ObamaCare - are doing a number on American businesses' ability to compete on the global stage, so I won't get into that again tonight. [UPDATE: Brand new - and totally depressing - stuff from The Economist on how the United States "is being suffocated by excessive and badly written regulation."]  Instead, I'd like to review the administration's brand new budget plans and their impact on American corporate competitiveness.

In short, it ain't pretty.

On tax policy, the budget keeps the United States' corporate tax rate at one of the highest levels in the world, even though pretty much every other industrialized economy has lowered their rates (charts courtesy of AEI's Jim Pethokoukis):

Pethokoukis cites to studies showing how high corporate tax rates lead to lower growth, and then explains that President Obama's budget not only retains our sky-high 35% stautory rate but also "raise the corporate tax burden by some $350 billion over ten years."  This insanity includes $30 billion in new taxes on oil & gas companies, even though they are fueling (pun intended) the current economic recovery and already pay a much higher effective tax rate than other US manufacturers:

Smart.  Meanwhile, our northern neighbor (and a major global competitor) Canada lowered its corporate tax rate again to a jealousy-inducing 15% on January 1, 2012, making Canada the #1 country in the world to do business, according to Forbes Magazine.  Congrats, Canada.  You big jerks.  (As I said, I'm jealous.)

Ok, well, sure, that's just tax policy.  I'm sure that those taxes are being well spent in the Obama budget and making sure that the United States house is totally in order, right?  Wrong (again via Pethokoukis, who's clearly been on a roll this week):

Pethokoukis concludes that the President's Budget "makes no effort to deal with Medicare, Medicaid, and Social Security — the long-term drivers of U.S. federal debt. The debt curve never gets bent, as the above White House(!) chart shows. It just goes up and up and up — until the heat death of the universe or the economy is struck by a Greek-style debt crisis."  Holy souvlaki, Jim!

So the Obama budget kills US companies on regulations, taxes and debt, but how does the administration propose to help them?  Targeted subsidies for US manufacturing, of course.  The administration's "Blueprint to Support U.S. Manufacturing Jobs, Discourage Outsourcing, and Encourage Insourcing" pays lip service to broader tax reform, but never once actually provides even a hint as to what such reform would look like. Instead, it just provides a laundry list of new tax subsidies for US manufacturers - including expanding "domestic production incentives," a new "Manufacturing Communities Tax Credit," and temporary tax credits for "domestic clean energy manufacturing."  (The plan also proposes - in tellingly vague fashion - to eliminate tax breaks for "shipping jobs overseas," but we all know what a political joke that is.)

Unfortunately, the administration's manufacturing blueprint - which continues the President's long-held preference for manufacturing - is just as misguided as their broader tax and fiscal plans.  As I've repeatedly noted, the prioritization and subsidization of US manufacturing over other sectors of the domestic economy (like our expanding and globally dominant services sector) is completely misguided, especially as some sort of "plan" to solve the country's high unemployment.

But, hey, don't take my word for it.  The former Chair of President Obama’s Council of Economic Advisers (Christina Romer) thinks the same thing, recently arguing in the New York Times that Obama's "singling out of manufacturing for special tax breaks and support" was wrongheaded because none of the primary rationales for subsidizing the American manufacturing sector - market failures, jobs or income distribution - actually holds any water.  She concludes:

AS an economic historian, I appreciate what manufacturing has contributed to the United States. It was the engine of growth that allowed us to win two world wars and provided millions of families with a ticket to the middle class. But public policy needs to go beyond sentiment and history. It should be based on hard evidence of market failures, and reliable data on the proposals’ impact on jobs and income inequality. So far, a persuasive case for a manufacturing policy remains to be made, while that for many other economic policies is well established.

As I noted when Romer's op-ed first came out, smart people on the right and left might disagree about the solutions to our current mess, but at least we they all can agree that the solutions do not involve targeted subsidies for the US manufacturing sector.  If only Dr. Romer had explained this obvious fact to President Obama when his office was a just few doors down the hall.

When Caterpillar realizes that Illinois' tax, spending and regulatory policies prevent it from competing in the global economy, it can - and often does - choose to simply move its operations to a state with a better business environment.  Indeed, the migration of American companies from poorly-managed, debt-ridden states like Illinois and California to leaner, meaner states like Texas is well-established.  Unfortunately, those migrating businesses won't escape bad federal policies so easily.  And if President Obama and his team don't soon get their fiscal and regulatory acts together quickly, Caterpillar and others might not be moving South to Texas but instead heading North to Canada and thus out of the country altogether.

Umm, Yeah, About China's Dangerous Trade Imbalance

Right on the heels of the US visit of Xi Jinping, Chinese Vice President (and likely to replace President Hu Jintao as secretary-general of the Chinese Communist Party), comes news that one of the main indicators of supposed Chinese trade malfeasance - it's global trade surplus - has all but disappeared:

China's current-account surplus for 2011 shrank to $201.1 billion, from $305.4 billion in 2010. More important, as a ratio of gross domestic product, the current-account surplus fell to about 2.7%. That's close to a decade low and below the 4% threshold that suggests an exchange rate out of whack with equilibrium.

The argument in past years has been that the fall in China's surplus is cyclical, the result of the investment-heavy domestic stimulus that led to a surge in commodity imports, and recession in major trade partners that crimped exports.

But the International Monetary Fund seems to think there could be something more at work. The IMF now predicts China's current-account surplus will be 3.8% of GDP in 2013, way down from a forecast of 6.2% last September. Taken together with an unusual fall in the value of China's foreign-exchange reserves in the final quarter of 2011, it's a serious challenge to the argument that the yuan is undervalued....

In an election year, and with unemployment at 8.3%, the U.S. might still ratchet up the rhetoric on the yuan. But investors should prepare for China to start ratcheting down the pace of appreciation.

The IMF is already re-examining whether China's currency remains "substantially undervalued" because (i) "the yuan has appreciated more than 8% in the last year and the fund is developing a new method of assessing global currencies; and (ii) "the real effective exchange rate, based against a basket of currencies and accounting for inflation, is up almost 20% in the last three months on an annual basis and by over 8% in 2011."  I've already noted that the significant increase in the RMB's real effective exchange rate (and decrease in the same metric for the USD), and recently the nominal RMB-USD exchange rate went below 6.3 for the first time since the early 1990s.  Couple these facts with China's disappearing trade surplus, and the IMF's re-evaluation certainly appears warranted.

Meanwhile, the US trade deficit just reached a six-month high.  Hmmm....

Now, I'm certainly not saying that China's trade balance is some sort of magical indicator of the success, failure or legality of Chinese trade policy.  As I've repeatedly explained, trade balances - particularly bilateral ones - are increasingly unimportant in this regard.  However, a lot of "important" people - like a certain New York Times columnist and various campaigning politicians - have relied on China's trade surplus to justify their breathless calls for aggressive US protectionism to counter China's supposedly-pernicious trade practices.  Indeed, in many cases, China's trade balance is the only reason cited for their extremely provocative anti-trade proposals. 

So with this supposedly-critical metric, along with various indicators of the value of China's currency, now arguing against such unilateralism, will these pundits and politicians revise their positions?

Don't hold your breath.

Re: Rick Santorum's Disqualifying "Political Protectionism"

Last month, I wrote an op-ed for Investor's Business Daily detailing why, in my humble opinion, GOP presidential candidate Rick Santorum's long history of "political protectionism" was the exact opposite of "conservative" - the label that he so loudly ascribes to himself - and potentially disqualifying.  Given Santorum's rise in the national polls and the fact that IBD recently placed the full op-ed behind their paywall, I'm reproducing it here in its entirety (as always, the views expressed here are my own).  Enjoy:

Santorum: Can A Protectionist Still Be Conservative?

By SCOTT LINCICOME Posted 01/10/2012 06:43 PM ET


After his surprise showing in the Iowa Caucuses, Sen. Rick Santorum — the latest Not-Romney to climb the polls — is finally receiving some pushback against his claim that he's the one "true conservative" in the 2012 GOP field.

Critics have pilloried Santorum's unabashed love of earmarks and his frequent votes for an expanded welfare state, but a more damning area remains underexplored: Santorum's long embrace of political protectionism.

There is nothing "conservative" about protectionism. To the contrary, trade barriers are little more than hidden forms of wealth redistribution and cronyism. They raise domestic prices for goods and services and thereby force American consumers to subsidize well-connected industries and unions who seek to avoid competition.

Politicians who champion such policies are merely paying off their cronies with everyone else's money. Protectionist policies are akin to earmarks, but their costs come out of the hides of American businesses and families instead of the U.S. Treasury. A vote for protectionism is a vote to raise regressive consumer taxes and to inject government into the business of picking winners and losers. It's a vote against the free market.

Sen. Santorum's record in Congress is replete with such votes, as well as other attempts to line his constituents' pockets at the expense of U.S. taxpayers and consumers. Santorum frequently co-sponsored legislation restricting steel imports to prop up the Pennsylvania steel industry.

Measures such as the Stop Illegal Steel Trade Act of 1999 would have violated the United States' international obligations, encouraged retaliation by U.S. trading partners, forced American consumers to pay higher prices for everyday necessities, and harmed millions of workers in steel-using industries — workers who outnumbered U.S. steelworkers by 40-to-1.

Santorum also fought for the imposition of steel tariffs under "Section 201" of U.S. Trade Law — an inglorious Bush administration decision that contributed to sky-high steel prices and a hobbled downstream industry.

Santorum's protectionism, however, didn't stop with his friends in the steel industry. During his time in Congress, he championed "safeguards" on surging lamb-meat imports, tariffs on imported honey and European pork, and restrictions on Japanese automobiles and auto parts. He also voted against the North American Free Trade Agreement and for an economy-crippling 27.5% tariff on all Chinese goods.

Moreover, Santorum was a leading advocate for amending U.S. trade laws to make it easier for domestic industries and unions to obtain taxes on imports of foreign competitors. By prohibiting consideration of consumer interests and mandating various accounting tricks, these laws have resulted in ad hoc duties on hundreds of products (including many inputs essential to other U.S. companies) at a more-than 60% success rate for domestic petitioners. Yet Santorum often co-sponsored legislation, such as the Fair Trade Law Enforcement Act of 1999, to further rig the game in his team's favor.

He also co-sponsored the highly controversial Continued Dumping and Subsidy Offset Act — also known as the "Byrd Amendment" — which encouraged new trade cases and funneled billions of dollars in duties paid by U.S. importers to the domestic companies who first petitioned for their imposition.

Despite Santorum's strong opposition, the Byrd Amendment was repealed in 2006 after being ruled illegal by the WTO, yet aggrieved nations are still imposing retaliatory tariffs on U.S. exports because Byrd monies continue to be disbursed.

Santorum was not consistently protectionist, however. He voted for most U.S. free trade agreements and to grant the president "fast track" trade negotiating authority. He also sponsored bills to lower tariffs on select imports, including television inputs used by Pennsylvania-based Sony.

Yes, that's right: the same guy who supported consumer-battering import restrictions on steel and other goods fought for their elimination when the direct beneficiaries resided in his state. Such inconsistency reveals a cynical politician who understands the benefits of free trade, yet eschews them when doing so suits his political ambitions.

A candidate's stance on trade is predictive of whether he, once elected, will put facts and principle before politics and self-interest. Politicians who reject protectionism turn down eager corporate and union campaign donations from unseemly rent-seekers trying to thwart international competition at the expense of American families and companies.

They ignore demagogic attacks on their patriotism. And they openly support policies which, despite their overwhelming economic and historical support, are met with public hostility or disinterest and an unethical opposition willing to take full advantage thereof.

On the other hand, politicians who peddle protectionism are either ignorant of history and economics or are willing to discard their conservative ideals and prey on voter fears for short-term political advantage.

Sen. Santorum's record shows that he understands the costs of protectionism but is perfectly willing to impose them when his cronies stand to benefit. Such "political protectionism" not only is not "conservative," but also raises serious — indeed disqualifying — doubts as to the candidate's fitness as a leader and public servant.