China CVD, ctd: The Wasted Opportunity

Yesterday, I took the first of what will likely be many looks at the Appellate Body's new "US-China CVD" decision and concluded that, from a legal perspective, the decision would have pretty significant (and likely adverse) implications for the United States Government.  From a policy perspective, however, it appears that Friday's ruling has cost the US as much, if not more, and the Obama administration only has itself to blame.

I stated yesterday that the Appellate Body's decision could have the following effects on the United States' current policy with respect to simultaneously imposing anti-dumping (AD) duties and countervailing duties (CVDs) on imports from "non-market economies" (NMEs) from China:

Finally, the AB's ruling could - could - effectively end [the Department of Commerce's] messy 5-year "CVD NME" experiment altogether. As you'll recall, the US Court of International Trade (CIT) has already ruled that DOC's CVD NME methodology, as applied in a case against Chinese offroad tires (which was also one of the cases at issue in the WTO dispute), violated US law. That case is currently under appeal at the Court of Appeals for the Federal Circuit, and if the CAFC upholds the CIT's very aggressive decision, you'll now have both the US courts and the WTO's Appellate Body finding major problems with DOC's current CVD NME policy (which, again, has been followed in many completed and pending AD/CVD investigations against China and other NMEs like Vietnam). The result of all of these adverse rulings could be one of three things: (i) DOC adopts a new CVD NME methodology that dramatically limits (or offsets altogether) the concurrent application of anti-dumping and countervailing duties against Chinese and other NME imports (although the CIT seemed to preclude this option); (ii) DOC no longer allows for concurrent AD/CVD investigations of NME imports; or (iii) DOC deems China to be a "market economy" and thus uses standard AD/CVD methodologies in all future cases. This last option seems pretty unlikely because domestic petitioners just love the NME methodology, but it's actually the simplest and most reasonable solution (especially when you consider the silly fact that Russia is a "market economy," while China isn't).  Regardless of the (hypothetical) option chosen, however, the end result would be pretty much the same: the diminished (or eliminated) value of petitioners' shiny new CVD NME weapon against Chinese imports.

The effects of this diminished (or eliminated) CVD NME tool are not just limited to petitioners in trade remedies cases; they also affect the broader trade negotiating positions of the US and Chinese governments when it comes to the NME issue altogether.  Before Friday, all of those existing AD/CVD orders against China as an NME, as well as the threat of future cases, were a very big pain for China and a very big weapon for the United States (especially considering that it had an extremely favorable WTO panel ruling in its back pocket).  Thus, the removal of China's NME designation (thereby "graduating" it to "market economy" status for anti-dumping cases) was a very big carrot that the United States could have used to negotiate Chinese concessions on important market access issues like China's indigenous innovation policies, its problematic stance on intellectual property rights, or its reluctance in the Doha Round.

Now, the Appellate Body's ruling will force major changes to the United States CVD NME policy and has totally flipped-the-script (as the kids say) on the US-China negotiating dynamic.  As I noted yesterday, there is no easy fix for the United States to comply with the AB's decision - there are dozens of AD/CVD determinations that will need to be re-done; USTR and the Commerce Department are going to have to do some serious legal gymnastics to develop and defend any new CVD NME methodology; and full compliance might even require an act of Congress (which should just go swimmingly).  So now, China's graduation to a market economy is in both its own and the United States' interest.  China would benefit by ditching the "non-market economy" stigma, and its exporters (and US consumers, natch) would benefit from the predictability of the market economy methodology for AD/CVD investigations and reviews.  But the United States also will benefit by forgoing all of the pain that will inevitably accompany its WTO compliance efforts.

Put simply, United States held on to its NME negotiating stock too long, and it just crashed.  It's certainly not worthless, but it'll never again be as valuable as it was last week.  Never.

And, not to rub any salt in the Obama administration's wounds with yet another I-told-you-so, but here's what Dan Ikenson and I tried to advise them on this issue back in 2009:

The time has come to seriously consider carrots and not just sticks—particularly since the pain from the sticks is not limited to its intended targets, but is felt in the United States and in other countries, given the transnational nature of supply chains. President Obama would invigorate the relationship if he were to grant China “market economy” treatment in anti-dumping cases.While such a reform would take very little out of petitioning industries’ hides, the gesture would win vast sums of goodwill from the Chinese—goodwill needed to resolve more important issues going forward. Indeed, repeal of the non-market economy (NME) designation presents a “win-win” scenario for several reasons. 

First, graduation from NME status is one of the Chinese government’s top international trade priorities. China wants to be treated like all other major economies, and accordingly, the Chinese government is likely willing to make important concessions in other contested areas of trade policy to achieve market economy status.  But the longer we wait to grant market economy status to China, the less valuable that concession becomes. Under the rules governing China’s accession to the WTO, the United States must repeal China’s NME designation by 2016. Thus, the value of that “concession” will be greater in 2009—seven years early—than it will be in 2010 or 2012. Much beyond 2012, and the concession looks a bit like Confederate money.

Second, China’s NME designation has drawn intense criticism from domestic consuming industries, trade policy experts, and U.S. trade partners because of its incongruous application (for example, Russia was deemed a “market economy” in 2002, yet still is not a WTO member, while China became a WTO member in 2001) and the latitude for abuse of administrative discretion it affords. Also, the relatively recent change in policy that opened the door to countervailing duty cases against China has sparked controversy about whether NME treatment in anti-dumping cases should still be permissible. U.S. revocation of China’s NME status would alleviate many of those domestic concerns at virtually no cost to domestic petitioning industries, but petitioners value NME because of the trade-suppressing uncertainty the process
engenders.

It is important that President Obama understand that our trade relationship with China has been mutually beneficial, that the rhetoric about the impact of unfair Chinese practices has been highly exaggerated, and that unnecessary provocation could open a Pandora’s Box of economic problems.

Alas.