Congratulations, Non-US Corporations!

Starting tomorrow (and it's already "tomorrow" in most of the world), the United States will have earned a rather dubious distinction:

[A]s of April 1, the U.S. now has the highest corporate tax rate in the developed world.

Our high corporate tax rate has long made the U.S. an uncompetitive place for new investment. This has driven new jobs to other, more competitive nations and meant fewer jobs and lower wages for all Americans.

Other developed nations have been cutting their rates for over 20 years. The U.S. did nothing....

Japan’s rate was 39.5 percent. That was just barely ahead of the U.S. rate of 39.2 percent (this includes the 35 percent federal rate plus the average rate the states add on). Japan’s rate now stands at 36.8 percent after its recent cut.

The U.S. rate is well above the 25 percent average of other developed nations in the Organization for Economic Cooperation and Development (OECD). In fact, the U.S. rate is almost 15 percentage points higher than the OECD average. This gaping disparity means every other country that we compete with for new investment is better situated to land that new investment and the jobs that come with it, because the after-tax return from that investment promises to be higher in those lower-taxed nations.

Our high rate also makes our businesses prime targets for takeovers by businesses headquartered in foreign countries, because their worldwide profits are no longer subject to the highest-in-the-world U.S. corporate tax rate. Until Congress cuts the rate, more and more iconic U.S. businesses such as Anheuser-Busch (which was bought by its Belgian competitor InBev in 2008) will be bought by their foreign competitors.

And if you think that 15 percentage-point disparity is bad, IBD explains that it's actually much, much worse when you look at some of the United States' peers:

Great Britain was to cut its corporate tax rate on April 1 to 24% from 26% and will cut the rate again to 23% in 2013.

On Jan. 1 of this year, Canada cut its federal corporate tax rate to 15% from 16.5%.

Canada's combined rate is 26% when the average rate of the Canadian provinces is added to the federal rate. Coupled with an unfettered energy development policy, Canada's tax policy creates a low-cost, business-friendly environment....

It was the final link in Canadian Prime Minister Stephen Harper's pro-growth Economic Action Plan. There is no railing against corporate greed and oil companies north of the border.

I guess it's appropriate that the United States becomes the world's worst corporate taxer on April Fools Day.  The chart above makes abundantly clear that American companies and workers have been played for fools by our elected officials.

What on earth are we thinking?

Cool/Scary Graphic: The Increasing Insanity of the "Smartphone Patent Wars"

I haven't reported much on the "Smartphone Patent Wars" over the last couple years, not because it isn't an important and newsworthy development in international trade but instead simply because patent/trade law is highly arcane (yes, even more arcane than trade remedies) and there are so many different disputes that it's really, really difficult to keep track of the issue.  The WSJ's Holman Jenkins has done some great reporting on the issue, so if you want a good place to start, look no further than his work.  However, a new infographic from Businessweek provides an great visual summary of just how insane the Patent Wars have become (click to enlarge):

So, to recap, arcane law and enough disputes to make your head spin. (See?  This is why I haven't blogged on it!)

Of course, all of this craziness has serious implications for global trade in one of the most important and in-demand consumer product categories on the planet.  I don't know of a good study summarizing these implications, so feel free to point me to one in the comments.  If there aren't any such studies out there, hopefully some enterprising wonk will get with the program and publish one soon.

UPDATE: Right on cue, Businessweek published a lengthy new report on the Smartphone Patent Wars.  It has great background on the genesis of the legal fights (hint: Eden is somewhere in Cupertino, CA), but still has very little on the large and obvious trade implications.  Still worth a read, however.

A Quick Reminder re Trade Diversion and the Folly of Bilateral Protectionism

I've frequently cautioned that a big flaw in U.S. restrictions on trade with single countries like China is the fact that such bilateral protectionism typically doesn't lead to increased domestic production or employment and instead simply shifts production to other low-cost countries.  From Mark Perry's great Twitter feed comes yet another example of the obvious reality that is trade diversion:

Chinese bike manufacturers are beginning to look at expanding into new markets in Southeast Asia in the face of rising labor costs and restrictive export duties to Europe, said Xiao Yun Huo, vice secretary general of the China Bicycle Association.

The CBA is researching regulations, tariffs, government policies and market information in countries like Malaysia, Indonesia and Vietnam to determine whether it makes sense to shift some production there to remain competitive in today’s fast-changing world, Huo said through a translator during an interview on Thursday in Shanghai.

China is the industry’s leading bike exporter with 55.72 million units shipped outside the country last year at a value of $2.9 billion, according to the CBA. Exports fell 4.2 percent last year. China produced 83.45 million bikes last year, an increase of 2.3 percent.

Manufacturing has already begun shifting inland from China’s coastal cities as labor costs have risen, and now producers are beginning to look overseas to keep prices competitive on low-end mass production.

Although China far dominates other export countries, factories in lower cost locales like India are starting to pick up more business. India’s Hero Cycles recently announced a deal with Wal-mart to produce bikes for the retail giant, and opened a U.S. office to support its expansion. China producers have also been hurt by steep anti-dumping duties to Europe, Huo said. The 48.5 percent duties were extended until 2016 last year, although the EU Commission is reviewing that ruling.

The CBA is also looking to emerging markets in India, Indonesia and Dubai to market China-made bicycles. CBA, which hosts the China Cycle show in Shanghai, organized a new show in Vietnam called Intercycle last year, and is looking at a possible new exhibition in Indonesia, Huo said.

The article above makes clear that the European tariffs and other factors raising Chinese bike manufacturers' costs are causing a shift in production not to Europe but to other low-cost destinations like Vietnam and India.  The lesson, as always, is that for many labor-intensive goods, US efforts to raise costs in China (e.g., demanding a stronger Yuan) or to impose tariffs on Chinese imports will do nothing to increase US jobs.  It will, however, raise prices for those goods in the United States (to the benefit of a few discrete producers and at the expense of all US consumers) and increase production and jobs in Vietnam, India, Indonesia and elsewhere.

Somehow I doubt that's what our protectionist politicians had in mind.

Opposition to CVD/NME Law Tips Its Hand re: a Constitutional Challenge

As I've repeatedly mentioned over the last several weeks, one of the biggest concerns surrounding the recently enacted law allowing the Commerce Department to impose countervailing duties on imports from countries deemed to be "non-market economies" under the US anti-dumping law was the law's retroactive application to the 24 completed CVD/NME investigations (and the collection of duties pursuant to those cases) that Commerce completed without proper legal authority.  That retroactivity raises several possible constitutional issues under, for example, the Due Process Clause and the Takings Clause of the Fifth Amendment and the ban on Ex Post Facto laws under Article I.  Those claims, however, are murky, although it's pretty likely that some US importer or other party harmed by the new CVD/NME law will formally lodge a constitutional challenge to it.

We haven't yet seen such a challenge, but the folks at Law360 report that a party to the original court case which led to the new CVD/NME law, GPX Int'l Tire Corp v. United States, has given us a little taste of at least one legal argument that we might see in any future constitutional challenge:

A new law allowing the U.S. government to apply countervailing duties to imports from nonmarket economies should be found unconstitutional because it applies retroactively, the Chinese tire company at the center of the case that prompted Congress to act told the Federal Circuit on Friday....

Tianjin United Tire & Rubber International Co., the government and the United Steelworkers union responded to a request by the Federal Circuit for briefs about how the legislation enacted March 13 would impact the case over duties on Tianjin's tires.

Tianjin told the court that the legislation should have no effect on the case because it unconstitutionally purports to apply to all proceedings initiated after November 2006. There is no practical reason for such a lengthy period of retroactivity, the company argued....

Tianjin also argued that the law's double counting provisions will be "wholly ineffective," and that the original decision of the Federal Circuit - overturned by the new CVD/NME law - should still stand because it is "unreasonable and unlawful" to concurrently apply antidumping duties and CVDs on non-market economy imports.  Those arguments are interesting and, in my opinion, have merit, but for now I'd like to focus on Tianjin's constitutional argument.

According to their recent response to the CAFC, Tianjin argued that the new CVD/NME law violated the Due Process Clause:

At the outset, we note the retroactivity provisions of Section 1 (b) are unconstitutional. Any retroactivity is "generally disfavored," as at odds "with 'fundamental notions of justice' that have been recognized throughout history." See Eastern Enterprises v. Apfel, 524 U. S. 498, 532 (1998)(citations omitted). Moreover, the severe period of retroactivity here - more than five years - magnifies the grave constitutional concerns as it departs from "customary congressional practice" to confine retroactivity "to short and limited periods required by the practicalities of producing national legislation." US. v. Carlton, 512 U.S. 26,33 (1993) (citations omitted). There are no practicalities inherent in the production of this legislation that warrant so lengthy a retroactive application.

Moreover, the asymmetrical periods of retroactivity in the new legislation are logically incoherent. Section 1 (b) extends the scope of the CVD law to include NNIE countries going far back in time. In contrast, Section 2(b) applies the legislative fix for the "double counting" that results from such extension of the CVD law only prospectively. This inconsistency makes no logical sense. If the application of the CVD law to NME countries requires a fix for double countingas Congress seems to think by passing Section 2(a) - there is no reason to apply that fix only prospectively. This inconsistency cannot reflect any legitimate legislative purpose. For that reason, the retroactivity provisions of Section l(b) must be severed from the new legislation as an unconstitutional violation of due process. A five-year retroactive period that is logically inconsistent with the remainder of the legislation "is far outside the bounds of retroactivity permissible under our law." Eastern Enterprises, 524 U.S. at 550 (Kennedy, J., concurring).

That's the entirety of Tianjin's constitutional argument (appropriate considering that the CVD/NME law itself is not being challenged in these proceedings), and, despite seeming like quite a reasonable claim, it's unlikely that the CAFC will act on it (for the same reasons).  However, the excerpt above provides a nice little glimpse of any future litigation where, unlike here, the new law would be directly challenged and far more robust arguments would be made.  Given my very public feelings about the law - some of which are echoed above - I certainly hope that someone throws down the real gauntlet soon.

So stay tuned.

In US-China Solar Panels Fight, China Wins Round 1

Last Tuesday, the US Department of Commerce announced its preliminary determination in the anti-subsidy ("countervailing duty") investigation of solar panels from China.  DOC's preliminary findings were pretty surprising because the agency found that the Chinese government had provided extremely low levels of subsidies to its booming solar industry:

The United States dealt a blow to U.S. solar panel manufacturers and boosted shares in Chinese rivals when it imposed unexpectedly low duties on imports from China, though the move still drew fire from China industry representatives.

The action, made public late on Tuesday, adds to trade tension between the world's two largest economies and threatens cooperation in the burgeoning clean-energy sector, which both say they want to promote.

Energy analysts had expected Chinese imports of solar panels to be hit with preliminary duties of 20 percent to 30 percent, but the rates announced on Tuesday ranged from just 2.90 percent to 4.73 percent - although these could be raised in future.

DOC's fact sheet for the preliminary determination is here, and the determination itself is here.  As you can see, the two investigated Chinese companies received CVD rates of 2.90% and 4.73% and "all other" Chinese importers received 3.61% (essentially the average of the two investigated rates).  The US industry tried to put some lipstick on these piggish results by "welcoming" the fact that DOC had "noticed" China's "unfair trading practices," but let's get serious here: 3.6% is an extremely low subsidy margin for a case involving China.  Indeed, if you look through all of the completed anti-subsidy investigations of Chinese goods over the last few years, you'll have a tough time finding preliminary CVD rates - particularly "all others" rates - that are lower than the ones found here.  (Most are above 20% and can go above 100% in some cases - ouch.)  Even though these investigations involve many different products, petitioners (and their lawyers) typically allege the same subsidy programs in each investigation involving a certain country.  Thus, previous investigations of Chinese imports typically give you a rough idea of the level of subsidization that you're going to find in future investigations of Chinese imports, even though the imports differ.

Given the pretty long history of US CVD investigations of Chinese imports (and the pretty high preliminary CVD margins found in those cases), there can be little doubt that the petitioning US solar industry was none-too-pleased with last Tuesday's surprising determination. (FYI: I gave Reuters a few guesses as to why the rates were so low.)  Meanwhile, US solar panels consumers were thrilled (as were Chinese solar investors), and, although the Chinese government grumbled a bit, it didn't retaliate against US exports as it repeatedly has done in the past.  And because CVD rates tend to decline between the preliminary and final determinations, there's a chance that the final US countervailing duties on Chinese solar panels could be even lower. (If the rates went below 1.0%, they'd be de minimis and thus no duties would be applied at all.  That seems unlikely, but it's still worth noting.)

That said, US solar consumers shouldn't get too excited here.  First, DOC's preliminary determination makes clear that the agency has begun investigating a few newly-alleged subsidy programs that weren't included in the preliminary findings.  If DOC finds that the Chinese government provided its domestic solar industry with huge subsidies via these programs, the final CVD rates could go up, not down.  Second, and far more importantly, DOC has not yet announced preliminary anti-dumping duties for the same Chinese imports.  That determination is due in mid-May, and the rates there are expected to be very, very high because (a) DOC is still using the dubious "non-market economy" methodology for calculating anti-dumping duties on Chinese goods, and it tends to produce much higher dumping margins (hence why petitioners and their political friends have strenuously resisted any attempts to deem China a "market economy," regardless of how rational and equitable such a move would be); and (b) according to the industry experts I've spoken to, the global solar panels market (and prices) absolutely collapsed in 2009-2010, leaving pretty much everyone on the planet with excess inventory that they desperately tried to shed, usually at rock-bottom prices.

Assuming that the preliminary and final anti-dumping rates are as high as they're expected to be, then the low prelim/final CVD rates won't matter (even if DOC somehow accounts for "double counting" based on the new CVD/NME law - something it didn't mention in the CVD prelim).  This is why the US solar industry and their congressional benefactors expressed confidence that they'd get the sweet, sweet protection from Chinese imports that they desperately crave.  That said, the high combined duties will still be instructive, as they'll clearly demonstrate (a) why certain protectionist US industries and politicians fight so hard for the NME methodology; and (b) that the US anti-dumping law penalizes foreign companies' routine, market-based pricing decisions rather than the "predatory pricing" that it's supposed to counteract. (According to the aforementioned industry experts, everyone in the world "dumped" solar panels when the market/prices collapsed because they were forced to shed high-cost inventory in order to stay afloat.  Nothing "predatory" about that.)

Now, even though the final duties on Chinese solar panels could be - and probably will be - high enough to keep most of those imports out of the US market (sorry, solar panel consumers!), DOC's preliminary CVD announcement remains important from a political and policy perspective.  As you may recall, much of the US solar industry and its political champions in the Obama administration and Congress have loudly blamed (over and over and over) massive, "illegal" Chinese subsidies for the dismal performance of both the industry and the numerous US subsidy programs supporting it (totaling billions of taxpayer dollars).  Yet the US Department of Commerce - hardly an, ahem, unsympathetic ear to US companies - just found that those "massive" Chinese subsidies topped out at - that's right - a whopping 4.73 percent.

Taste the subsidy pain, America!

[Note: DOC's preliminary determination makes clear that the investigation does not cover the type of solar panels ("thin film") made by the poster-child for US "green subsidy" failures - Solyndra.  While that little fact might matter for the ITC's injury determination in the solar panels case, it changes absolutely nothing here -Chinese "thin film" manufacturers undoubtedly received the same types and amounts of subsidies from the Chinese government.]

Thus, the Obama administration's primary scapegoat for the abject failure that is its "green energy" subsidy programs has just turned out to be a relatively insignificant factor in the US market - so insignificant, in fact, that even those directly harmed by any new CVDs (i.e., US consumers and investors in Chinese solar producers) openly celebrated DOC's big anti-subsidy announcement!

So even though the United States' preliminary CVD determination in the solar panels case could end up being pretty insignificant from a legal and practical perspective, it's pretty powerful evidence that the Obama administration's green energy policies have bigger problems than Chinese subsidies.  Much, much bigger.

Time to get a new scapegoat, I'd say.

Attention DC Trade Nerds: Have Lunch with WTO Services Chair Amb. Joakim Reiter

The good, liberty-loving folks at FreedomWorks are hosting a great (and free!) luncheon next Friday with H.E. Ambassador Joakim Reiter, Permanent Representative of Sweden to the WTO and Chair of the WTO's Council for Trade in Services.  My Geneva colleagues get to do stuff like this all the time, but it's pretty rare to see big WTO honchos outside of their natural habitat.  The invite is below, and all are welcome (as long as they RSVP). Enjoy!

Umm, Yeah, About that "Made in China" iPad

Apple's iProducts continue to not only break sales records but also provide invaluable lessons on modern global supply chains and the pointlessness of bilateral trade deficit figures.  The WSJ's report on iFixit's teardown of the iPad3 the "new iPad" explains again why the back of the device should read "made on Earth":

The new iPad sports a speedier Apple-designed processor, a sharper screen and next-generation wireless Internet connections, known as 4G LTE.

Broadcom, a communications-chip specialist in Irvine, Calif., made the chips used for Bluetooth and wireless Internet access, iFixit said after posting a so-called teardown report from Australia. Chips from San Diego-based Qualcomm are used by the iPad to connect to cellular networks, including 4G services using a technology called LTE.

Elpida, a Japanese company that has filed bankruptcy proceedings, supplied dynamic-random access memory chips for the iPad, the site added. IFixit also identified other memory chips from Toshiba Corp., also based in Japan.

Other chips identified by iFixit came from companies that include Texas Instruments Inc., Fairchild Semiconductor International and TriQuint Semiconductor Inc....

One of the highest-profile suppliers to the iPad is Samsung, whose display had earlier been reported to be the only one that met Apple’s specifications for the high-resolution screen and was being used in the device. Competing displays from Sharp Corp. and LG Display Co. recently met Apple’s requirements, according to people familiar with the matter, and Sharp’s components are expected to begin shipping soon.

Samsung, which is currently locked in patent litigation with Apple, also the manufacturer of Apple’s third-generation processor, the A5X, according to iFixit. (The Korean company has built prior Apple-designed chips used in mobile devices). The firm said it found markings on the chip that said it was manufactured by Samsung in the first week of this year.

The iFixit breakdown makes clear that most of the iPad's components aren't made in China, but instead in Japan, Taiwan and, yes, even the United States.  Those parts are then shipped to China for final assembly.  Thus, the actual value accruing to Chinese iPad "manufacturers" is pretty low, while the suppliers all over the world reap much larger shares of the assembly costs.

The WSJ goes on to explain that the total component costs for the new iPad are $309, while the retail price for the 16GB model is $629.  Assuming that a new iPad imported into the United States registers as a $309 import from China (even though, again, little of that $309 cost is actually created in China), that means that over half of the iPad's final sales price is profit - profit going straight to Apple's employees and shareholders.

Impressive.

Given these facts, it's clear that anyone - like this guy - lamenting that a "made in China" iPad or the US-China trade deficit is somehow indicative of the "death of US manufacturing" (or the need to "get tough" on Chinese trade practices) simply has no idea how the global economy actually works or how modern global supply chains have rendered many trade statistics completely worthless.

As I've repeatedly stated, many campaigning politicians continue to cite the US-China trade deficit as some sort of "proof" that China is eating our trade lunch, even though the iPod/iPhone/iPad examples and global supply chains more broadly have been widely reported for years now.  So, once again, either these politicians are utterly clueless or they're being completely disingenuous.

I guess it could be both.

The Potential Downside of Chinese "Re-balancing": US Inflation

With China recording an unexpectedly huge trade deficit in February 2012, the punditocracy has rushed to opine on the potential effects of Chinese "re-balancing" - i.e., a shift away from economic growth driven by exports and foreign investment (due mainly to relatively cheap labor and currency) to growth driven more by domestic consumption.  Most of the commentary has looked at a "re-balanced" China's potential problems for Chinese exporters and potential gains for US exporters, but I'd like to look at another possible effect of Chinese re-balancing: the loss of two significant, longstanding brakes on harmful inflation in the United States.

Before I get to that, let's dig into China's surprising trade data, courtesy of the WSJ:

A trade deficit of $31.5 billion in February is the largest on record for the world's second-largest economy....

With the lunar holiday for Chinese New Year playing havoc with the data, it makes sense to look at January and February's trade numbers together. On this basis the trade deficit is a less-alarming $4.1 billion-because of a substantial surplus in January-but remains the largest for the first two months of the year since 2004.

Exports grew just 6.8% compared with the first two months of 2011, down from 14.2% growth in the final quarter of 2011. No prizes for guessing the main reason for the fall: exports to Europe contracted 1.1%....

Qu Hongbin, Asia economist for HSBC, notes that growth in processing trade imports fell to 2.4% compared with a year earlier, down from 8.6% in the fourth quarter of 2011. Those imports are the inputs to make China's own exports. Such a low growth rate suggests factories are anticipating weak demand for their products down the line, and going slow on accumulating stock.

Another WSJ article gives us the money graphic:

The article added that "[l]ooking at January and February together, exports rose 6.9%, while imports gained 7.7%, far slower than the double-digit gains China usually chalks up."

So what's causing the sudden shift in China's trade balance?  Well, some of the change is clearly due to falling demand abroad, particularly in crisis-torn Europe (as the WSJ notes), but a broader look at China's exports (courtesy of Michael McDonough) indicates that there may be something bigger and more systemic going on here:

The chart above makes clear that Chinese exports have steadily declined over the last 2 years across the globe, not just in Europe.  I have no idea if this means that China actually has begun to "re-balance," but if China's growth model really is moving towards domestic consumption and away from export-dependence, domestic factors like rising living standards and a stronger currency are likely at play.  If so, that's good news for Chinese consumers and certain US manufacturers that compete directly with China and other low-cost Asian manufacturers.  Unfortunately, there's a downside to these re-balancing factors: they should make it increasingly difficult for the United States to keep inflation at bay.

First, rising labor and other costs in China have made Chinese exports more expensive. This well-documented trend will affect not only China's trade balance, but also US inflation:

Since the 1990s, Chinese imports have helped cool inflation in the U.S. That allowed the Federal Reserve to keep interest rates a bit lower, allowing the economy to grow at a quicker pace.

But with wages rising, the cost of China-made goods has begun to go up. That is bound to continue, and as it does the U.S. economy will look a little more inflation-prone. The Fed's job is going to get more complicated.

The U.S. imported $399 billion in Chinese goods last year, according to the Commerce Department. That was quadruple the $100 billion imported in 2000, the year prior to China joining the World Trade Organization, and ten times the $39 billion imported in 1994.

The jump in Chinese imports has coincided with a period in which inflation has been remarkably quiescent. Over the past 15 years, the core consumer-price index, which excludes food and energy, has risen at an average annual rate of 2.1%, according to the Labor Department, compared with 4% in the 15 years previous.

Much of that downshift owes to a cooling in prices for goods—that is, prices for stuff like t-shirts, which can easily be imported, rather than services like haircuts, which can't. Core consumer-goods prices have increased at an average annual rate of 0.2% over the past 15 years, compared with 2.9% in the 15 years before that.

The Chinese import prices have lately been increasing, however, rising 3.9% last month from a year earlier, according to the Labor Department. Some of that owes to higher commodity costs, but rising Chinese wages and an appreciating yuan also seem to be playing a role. One indication of that: Prices for footwear imports—labor-intensive goods that use a minimal amount of raw material and are mainly made in China—have risen 5.5% over the past year.

While a cooling Chinese economy could offer some temporary respite, China has reached a point in its development where it will be difficult to keep labor costs in check. Some manufacturers are shifting operations to other low-wage Asian countries, but the scope for doing that is limited—there are only 90 million people living in Vietnam compared with China's 1.3 billion.

This isn't to say that rising prices in China will be pushing prices higher in the U.S. Rather, they won't be pulling them down. So the U.S. economy will look a little more inflationary, and a little less productive—a little more like it looked before China entered the scene.

A brand new report from the WSJ indicates that rising Chinese labor costs are having a "ripple effect" on labor costs in other developing Asian economies like Malaysia, Thailand, Indonesia and Vietnam. Thus, the prices of these countries' exports are also on the rise:

More Asian governments are pressing businesses to hike wages as a way to prevent outbreaks of labor unrest, raising the specter of higher manufacturing costs for global companies—and the products they sell world-wide....

Global companies already have been facing higher labor prices in China over the past year, despite a weak global economy, as workers demand a greater share of the country's economic boom. In recent months, the pressure also has intensified in countries across Southeast Asia that have marketed themselves as alternatives for companies seeking to escape China's rising costs, leaving those companies now with fewer places to move....

Asian governments, in some cases, are embracing the call for higher salaries, in part to head off the spread of the kind of unrest that has toppled Middle Eastern regimes recently—and to calm rising labor actions in their countries.

They also are hoping the higher wages will help consumers boost spending, providing a new engine of growth at a time when slack demand for exports in the West and higher oil prices are worrying policy makers across the region.....

The spread of higher wages is likely to present challenges for the companies that have long relied on Asian manufacturing operations to keep their costs low, potentially including multinationals, such as Nike Inc., Adidas AG, Dell Inc. or their suppliers....

Boosting minimum wages risks setting off more inflation at a time when central bankers are worried about increased oil prices. Such a scenario could put the price of ordinary goods out of reach of the people the higher wages are intended to help.

Garment, footwear and electronics manufacturers operating in Indonesia from South Korea, Taiwan and Japan say they are now thinking of taking their factories elsewhere. Some said they fear more wage increases as local politicians try to win votes in elections scheduled over the next two years....

But with wages now rising in so many places at once, unhappy companies may have few places to escape.

If rising Chinese import prices are removing a brake on US inflation, then rising prices of other Asian imports   should have a similar and supplemental effect.

Second, in real terms, the Yuan has appreciated significantly against the US dollar over the last several years.  This appreciation will undoubtedly decrease some Chinese exports and increase domestic import consumption, but it might also have a significant effect on US inflation because of how China manages the value of the Yuan.  As I've repeatedly noted, much of the Yuan's relative appreciation is due to significant Chinese inflation (caused by, among other things, economic growth, rising labor costs and Chinese monetary policy), but some of it is due to a noticeable shift in China's monetary policy, in particular its "managed peg" of the Yuan against the US dollar.  Until last week's trade surprising trade deficit, this change allowed (or forced) the Yuan to appreciate against the Dollar in nominal terms over the last year or so (chart again courtesy of Mr. McDonough):

So why did the Yuan's nominal value appreciate so much last year?  Well, one possible reason is that China stopped buying US government debt.  China helps control the nominal value of the Yuan by purchasing that debt, but the government's purchases slowed dramatically last year:

China's holdings of U.S. Treasuries accounted for 54% of its foreign-exchange reserves as of June 30, according to a U.S. Treasury survey released this week. That's down from 65% in 2010 and a record 74% in 2006....

Beijing continues to buy loads of U.S. debt. As of June 30 it held $1.73 trillion in U.S. securities, up 7% from June 30, 2010.

Still, other federal data show it was a net seller of U.S. treasuries in the second half of 2011.

Bank of America predicts that China will continue to diversify its debt holdings away from US Treasuries in 2012, even though most people expect the Yuan's nominal appreciation to slow this year.  Because global turmoil has made the United States the "debt of last resort," most experts note that China's diversification shouldn't have a huge affect on interest rates (and thus inflation) in the United States right now.  However, China's reduced foreign purchases of US Treasury Bills could eventually bite, as this new report from the Federal Reserve makes clear:

Foreign offi cial holdings of U.S. Treasuries increased from $400 billion in January 1994 to about $3 trillion in June 2010. Most of this growth is accounted for by a handful of emerging market economies that have been running large current account surpluses. These countries are channeling their savings through the offi cial sector, which is then acquiring foreign exchange reserves. Any shift in policy to reduce their current account surpluses or dampen the rate of reserves accumulation would likely slow the pace of foreign offi cial purchases of U.S. Treasuries. Would such a slowing of foreign o cial purchases of Treasury notes and bonds a ect long-term Treasury yields? Most likely yes, and the eff ects appear to be large.

The aforementioned Bank of America report echoes these concerns.  So, in short, should the Chinese government stop buying US debt in order to allow (or force) the Yuan to appreciate, an unfortunate - but totally expected - byproduct could be higher interest rates and increased inflation in the United States.

There are growing concerns from several reputable, non-partisan sources that inflation could become a real problem in the United States over the next year or so.  (Sky-high energy costs and ridiculously easy money can do that to a country.)  At the same time, President Obama and his administration are relentlessly pushing China to re-balance its export-dependent economy.  As noted above, part of that re-balancing process will undoubtedly involve more expensive Chinese (and other Asian) imports into the United States and also could involve fewer Chinese government purchases of US debt.  But given the potential adverse effects of such events on the inflation-prone US economy, advocates of Chinese re-balancing in the administration and elsewhere may want to recall an old bit of wisdom:

Be careful what you wish for.

A Trade-related Warning for "Kony2012" Advocates

Since the world remains enraptured by the disturbing Kony2012 video and global reaction to it, it's probably a good idea for me to find some sort of trade-related angle in order to siphon off a few cheap Google hits.  Fortunately, Reason's recent recap of the video provides the perfect one, and it's a great warning to anyone hoping to help Kony's victims via trade sanctions or other forms of well-intentioned regulatory protectionism:

While Invisible Children has noble intentions to bring justice and closure for those victimized by the L.R.A., Kony 2012 could have a similar fate to another botched advocacy campaign in eastern Africa. In 2010, Congress passed the Dodd-Frank financial regulation act. Thanks to activists, the law included a provision that forces companies in the United States to disclose where they obtained their metals and minerals in the Congo. The Economist explains the motivation:

The intention behind the law was good. Congolese militias and rogue army units, whose members rape and murder with abandon, finance themselves through mining and extortion from miners. The law tries to shame big buyers, such as Apple and Motorola, who use Congolese coltan, into dealing only with bona fide suppliers. But the effect has been to frighten them away from Congo altogether.

As a result, the disclosure requirement became a de facto embargo on Congolese mining. This has been disastrous for that nation's already troubled economy. Some Congolese mines have seen output plummet by 95 percent, while anywhere from tens of thousands to upwards of two million Congolese miners have lost their jobs. Meanwhile, militia leaders have formed smuggling networks and bribed officials to bypass the disclosure requirement. In addition, since American demand has dropped, morally flexible Chinese firms have invested heavily in these mines, obtaining commodities at huge discounts.

I've commented before on the misguided and painful effects of Dodd-Frank's protectionist conflict minerals provisions, noting that "a little-know provision of a national financial reform law has caused imports of African minerals to collapse. Meanwhile, this regulatory protectionism, and the carnage in Congo that it was intended to prevent, continues." Since that time, more bad news has emerged, including new estimates on the huge compliance costs imposed by the regulation on many US companies:

Some expected that the big new SEC regulations on industrial users of tin, tungsten, tantalum and gold would mostly affect electronics and jewelry makers, but the actual net being cast is far wider. Manufacturers in general must investigate the supply chains of their products in order to comply with the disclosure requirements, no small matter at a firm like Kraft with 40,000 products and 100,000 suppliers. (Kraft found that the minerals may turn up in pouch packaging of juice products.) No wonder the SEC’s absurd initial estimates of a mere $70 million economy-wide compliance cost have given way to estimates a hundred times higher or more. In an echo of the infamous CPSIA statute, “the rule provides no de minimis exemption for trace amounts.”

Yet the SEC still hasn't issued its "final rule" on conflict minerals and Dodd-Frank, even though the law was effectuated in mid-2010:

A recent letter from Senator Patrick Leahy (D-VT) created expectations that the U.S. Securities and Exchange Commission (“SEC”) had drafted and circulated its long-awaited final rule on conflict minerals. These expectations now seem to have been premature.

In mid-February, Senator Leahy and other co-sponsors of the conflict minerals provision -- Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act -- sent a letter to the SEC that was interpreted to imply that the SEC had drafted a final rule and shared it with lawmakers, which caused a flurry of speculation regarding the content and timing of the final rule....

The SEC has since stated that it has not produced a final conflict minerals regulation, nor has it shared such a document with any lawmakers.

Without the final rule, uncertainty continues to prevail, much to the detriment of African miners and US businesses.  The lesson for supporters of aggressive US action in response to the Kony2012 video is, as Reason concludes, straightforward:

"Sometimes, doing nothing is better than doing something."

And Now for a Much-Needed Dose of US-China Trade Optimism

After today's lopsided vote on whether to maintain the United States' antagonistic countervailing duty policy against China and other "non-market economies," it's easy to get depressed about the state of US-China trade relations.  Fortunately, a brand new paper from Cato's Dan Ikenson gives us a much-needed dose optimism, and some solid guiding principles for the future of US-China trade relations.  The paper opens with the pretty dismal state of finger-pointing bilateral affairs:

An emerging narrative in 2012 is that a proliferation of protectionist, treaty-violating, or otherwise illiberal Chinese policies is to blame for worsening U.S.-China relations. China trade experts from across the ideological and political spectra have lent credibility to that story. Business groups that once counseled against U.S. government actions that might be perceived by the Chinese as provocative have changed their tunes. The term "trade war" is no longer taboo.

The media have portrayed the United States as a victim of underhanded Chinese practices, including currency manipulation, dumping, subsidization, intellectual property theft, forced technology transfer, discriminatory "indigenous innovation" policies, export restrictions, industrial espionage, and other ad hoc impediments to U.S. investment and exports.

Indeed, it is beyond doubt that certain Chinese policies have been provocative, discriminatory, protectionist, and, in some cases, violative of the agreed rules of international trade. But there is more to the story than that. U.S. policies, politics, and attitudes have contributed to rising tensions, as have rabble-rousing politicians and a confrontation-thirsty media. If the public's passions are going to be inflamed with talk of a trade war, prudence demands that the war's nature be properly characterized and its causes identified and accurately depicted.

Those agitating for tough policy actions should put down their battle bugles and consider that trade wars are never won. Instead, such wars claim victims indiscriminately and leave significant damage in their wake. Even if one concludes that China's list of offenses is collectively more egregious than that of the United States, the most sensible course of action — for the American public (if not campaigning politicians) — is one that avoids mutually destructive actions and finds measures to reduce frictions with China.

Ikenson proceeds to systematically make his case, noting the recent outbreak of tit-for-tat US-China protectionism and the recent CVD/NME debate.  He then concludes:

The most significant determinant of the quality and direction of the U.S.-China relationship is American self-confidence. In other words, U.S.-China relations will be driven more by actions in Washington than by actions in Beijing. If the U.S. economy starts to grow at a stronger pace and businesses begin to invest and hire more rigorously, the temptation of politicians and the media to scapegoat China for self-induced, domestic woes will diminish.

Even though China-bashing polls well, responsible policymakers should be looking beyond the politics to find bridges, olive branches, and solutions that remind people in both countries of the importance and mutual benefits of the relationship. Gestures of goodwill could go a long way toward stopping and reversing the recent deterioration of relations.

Good stuff.  I particularly liked this additional commentary from Ikenson on Cato's blog:

But before getting all righteous and patriotic and demanding that China be deemed an economic pariah worthy of exceptionally harsh treatment, keep in mind that the U.S. government has been found out of compliance with its WTO obligations more than any other WTO member, and it remains out of compliance on a few issues to this very day.

In some respects, the Chinese are emulating the tack taken by U.S. policymakers during the past three presidential administrations and ten congresses by presuming there is no policy or practice that violates WTO rules unless and until that policy or practice has been determined by the WTO Appellate Body to be out of conformity, and sometimes not until after retaliation has been authorized, and sometimes not even then.

The CVD/NME issue is a perfect example of the United States' problematic "do-as-I-do-not-as-I-say" trade policies.  USTR has repeatedly complained about China's opaque and WTO-inconsistent imposition of trade remedies on US exports, yet at the very same time it vigorously defends the United States' own opaque and WTO-inconsistent AD/CVD policy on Chinese (and other NME) imports.  That's not really the way to ensure better Chinese behavior on the global trade front, now is it?

It would, however, make an awesome 1980s public service announcement:



Be sure to read Ikenson's new paper here.

Your Official Guide to the Real Free Traders in Congress

I know that Cato has an indispensable scorecard on the free traders in Congress, but that usually isn't released until several months after a congressional session ends.  In the meantime, let today's roll call vote on the CVD/NME bill (H.R. 4105) be your guide.  According to today's vote, there are exactly 39 principled free traders in the US House of Representatives, all of whom are Republicans and many of whom are "Tea Party" freshmen (further destroying that ridiculous "Tea Partiers are ignorant protectionists" meme):

• Amash
• Bachmann
• Broun (GA)
• Burgess
• Canseco
• Chaffetz
• Duncan (SC)
• Fincher
• Flake
• Fleming
• Flores
• Franks (AZ)
• Gardner
• Garrett
• Gosar
• Graves (GA)
• Hall
• Harris
• Hensarling
• Huelskamp
• Jordan
• Kingston
• Lamborn
• Lance
• Mack
• McClintock
• Mulvaney
• Nugent
• Pearce
• Pompeo
• Quayle
• Scalise
• Schmidt
• Schweikert
• Scott (SC)
• Southerland
• Stearns
• Walsh (IL)
• Yoder

Kudos to these Members.  Today's vote makes clear (a) just how far the Democratic Party has fallen with respect to trade; and (b) just how difficult trade remedies reform is in the United States, despite multiple court and WTO rulings in support of reform and control of the House by the supposedly "free market" Party.

Fortunately, we have an election in the House every two years.

GPX Update: Critical "Deadline" Passes, World Doesn't Implode (Plus Comments on Ways & Means "Facts")

As you may recall, today was the big "deadline" for congressional passage of legislation amending the US countervailing duty law to apply to imports from non-market economies like China and Vietnam.  If Congress hadn't acted by today - so we were repeatedly told by the Obama administration and various Members of Congress - myriad US companies and workers would suffer an onslaught of subsidized Chinese and Vietnamese imports as the Commerce Department was forced to immediately terminate the CVD orders that were protecting them from such viciousness.  Well, the Senate "passed" its version of the bill today (by "unanimous consent," meaning no formal consideration, natch), but the House still hasn't acted.  It's expected to vote as soon as tomorrow, but before it does, are US companies or workers going to suffer?

No, of course not.

So why hasn't the world imploded, you ask?  Well, also as predicted, the Obama administration today petitioned (more here) the Court of Appeals for the Federal Circuit - the court responsible for the "bombshell" ruling in GPX Int'l Tire Corp v. United States that the US CVD law didn't apply to NME imports - for a rehearing.  The court will likely reject that petition in a few weeks, but the ruling will only become "final" (and thus binding on DOC) when all appeal avenues are foreclosed.  Because the administration will just-as-certainly appeal the GPX ruling to the Supreme Court, this means that - and, again, as I've repeatedly explained - the GPX ruling won't be final until the Supreme Court denies the appeal request.  This could quite literally take several months, so those poor little US companies and can rest assured that they have nothing to worry about before then.

So given the fact that the big "deadline" urgently pushed by the bill's supporters has come and gone without an ounce of harm to US businesses and workers, one must ask the obvious question:


On what other issues are they misleading us and much of Congress?

Well, if the new release by the House Ways & Means Committee is any indication, the answer to that question is "a whole helluva lot."  That document purports to respond to the many "myths" being circulated about H.R. 4105 by providing the actual "facts."  Yet even a cursory review of the Committee materials reveals that they are about as factual as the aforementioned "deadline" for urgent congressional action (i.e., not very).  Thus, I've decided to quickly respond to each item with the "actual facts" below. 

So let's get started.

"Myth": "H.R. 4105 Applies Punitive Tariffs"

"Fact": Since 2007, the Commerce Department has applied countervailing duties to Chinese products where it determines that China has provided unfair subsidies that violate its WTO obligations. These duties are not punitive; they counter the unfair Chinese subsidies. In fact, in 2005, Club for Growth President Chris Chocola joined 220 Republicans in voting for a bill that would have done exactly the same thing. The last five RSC chairmen all voted for that bill. Currently, 27 RSC Members are co-sponsors of H.R. 4105 and identical legislation passed the Senate with unanimous support.

ACTUAL FACT: Of course the duties imposed since 2007 are punitive.  That's the whole point of all of the domestic litigation and WTO cases that the administration keeps losing: the simultaneous application of CVDs and anti-dumping duties to NME imports currently offsets (via duties) allegedly unfair subsidies twice because the NME methodology in the anti-dumping investigation already corrects for any potential subsidies.  Because our "unfair trade" laws are only supposed to be remedial (i.e., they're only supposed to remedy the alleged dumping or subsidization taking place rather than punish US importers by taxing them above the level of dumping/subsidization), the current policy of double counting is contrary to both US law and WTO rules.  If the duties weren't "punitive," the US courts and the WTO wouldn't have found them to be illegal.  Duh.

And, of course, H.R. 4105 expressly doesn't apply to the many past instances of double counting - and the millions of dollars of punitive duties paid by US importers and consumers - that have occurred since 2007.

"Myth": "These tariffs don't 'level the playing field'"

"Fact": Chinese subsidies massively distort the free market. Countervailing duties re-establish a free, fair, and competitive marketplace. These duties can be applied only to subsidies that the Commerce Department determines violate China's WTO obligations.

ACTUAL FACT: No one is arguing that Chinese subsidies don't distort markets (of course, so do US subsidies, but that's a fight for another time). The argument here is that anti-dumping and countervailing duties applied to imports from China (as an NME) punish US importers and consumers above and beyond the amount allegedly necessary to supposedly "level the playing field."  As such, current practice - which H.R. 4105 totally protects (see below) - ensures a wholly uneven playing field against US consumers and in favor of a few domestic companies who want to be insulated from foreign competition.  (This is why those few companies and their congressional benefactors are lobbying so hard to keep that sweet, sweet import protection.)

So, look, if you want to use the CVD law to address distortive Chinese subsidies, go ahead (I guess).  But until you designate China a market economy and stop addressing subsidies via the non-market economy methodology in dumping cases, the application of CVDs to Chinese imports is punitive and thereby biased against American import consumers, many of whom are US manufacturers who need foreign inputs to remain globally competitive.  Indeed, about 55% of all US imports are inputs used by US manufacturers, and about 80% of all trade remedies duties are applied to such goods.  Talk about an uneven playing field.

"Myth": "It will further escalate a trade war with China"

"Fact": This legislation simply allows the United States to continue applying CVD as it has for the past five-years and it is fully compliant with our WTO obligations.

ACTUAL FACT:  First, by gratuitously protecting the Commerce Department's ability to use both CVDs and anti-dumping duties on Chinese (and other NME) imports in a punitive manner, the United States is making it very, very clear that (a) it intends to vigorously fight for the antagonistic policy in US courts and the WTO; and (b) it has no intention of designating China a "market economy" before 2016 (when it is bound to do so pursuant to China's WTO accession protocol).  There is simply no way that the Chinese Government - which has won a key victory at the WTO on this issue - won't take this as a big slap in the face (and it's already grousing about the CVD/NME issue).

Next, it is utterly disingenuous to state unequivocally that this bill is "fully compliant with our WTO obligations," and it raises some serious red flags.  Most importantly, the bill doesn't prohibit Commerce from double counting, which the WTO has ruled is illegal ("We find instead that the imposition of double remedies, that is, the offsetting of the same subsidization twice by the concurrent imposition of anti-dumping duties calculated on the basis of an NME methodology and countervailing duties, is inconsistent with Article 19.3 of the SCM Agreement.").  Instead, the bill merely requires DOC to address double counting where (i) it has been demonstrated by a foreign exporter 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.  As I noted last week, this raises several obvious problems:

• It could be impossible for a foreign exporter to prove that a tax break (for example) it received has affected its US import prices, and the mere imposition of this burden could violate WTO rules. 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 ("In the same way... as an investigating authority is subject to an affirmative obligation to ascertain the precise amount of the subsidy, so too is it subject to an affirmative obligation to establish the appropriate amount of the duty under Article 19.3."). 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. 

• Commerce has repeatedly stated, for example before the Court of International Trade, 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.

• 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.

In short, there are plenty of reasons to think that the bill will not resolve the double counting issue at all.  Of course, it could take years for Commerce to develop it's new double counting methodology, and the WTO to rule against it, so we can all pretend that it's WTO-consistent now and flush that idea down the memory hole if/when the WTO rules against it.  So maybe that's what the Committee means by "fully compliant with our WTO obligations."

The bill also raises serious WTO concerns because it applies to the 24 CVD orders and millions of dollars of related duties that the US government imposed and collected without lawful authority to do so.  Although a WTO panel or the Appellate Body hasn't ruled on whether such "retroactivity" is WTO-consistent, a panel has expressed a distaste for it, and there are several WTO provisions that could apply (e.g., GATT Articles X:2 and XXIII:1(b)).

"Myth": "It harms U.S. importers"

"Fact": Current CVD orders affect less than two percent of trade with China - but they provide targeted relief for those industries that are being affected by China's unfair subsidies - subsidies that violate China's WTO obligations. H.R. 4105 maintains the status quo and ensures that the Commerce Department can continue to apply countervailing duties to non-market economies like China. Not acting could invalidate existing orders that impact over 80 American companies and tens of thousands of American workers in 38 states across this country. Job creators including the Chamber of Commerce, the National Association of Manufacturing, and the National Council of Textile Organizations support H.R. 4105.

ACTUAL FACT:  First, I've already refuted the myth (no, seriously, a real myth) that congressional inaction will "impact over 80 American companies and tens of thousands of American workers in 38 states across this country."  That's just not true.  At all.

Second, please notice how the "facts" above never refute the allegation that H.R. 4105, or current Obama administration policy, harms US importers.  Perhaps that's because I've documented several first-hand accounts of the very real pain that these policies impose on American businesses and workers.  Or the fact that the legislation demonstrates a clear anti-importer bias by applying retroactively to existing CVD orders yet only prospectively for double counting (thereby maximizing duties to the fullest extent possible).  And let's not forget the undeniable fact that this legislation will pull the rug out from under the many American companies who have challenged the current policy via the normal legal process:

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. 

Indeed, it's this very real pain that has caused grassroots groups like the National Taxpayers Union and FreedomWorks to join the free market Club for Growth in opposing H.R. 4105.  Meanwhile, the Ways & Means Committee gets its support from the US textile and steel industries: two groups that are notorious users (and abusers) of US trade laws and more blatant forms of protectionism to prevent fair competition and force US consumers to subsidize (via higher prices) their businesses.

And if that little fact in and of itself doesn't tell you everything you need to know about this bad legislation, then nothing will.

Finally, there is one thing in this Ways & Means "fact" that is actually true (crazy, I know):  This bill does only affect "two percent of China trade."  So, please someone tell me, why are the US Trade Representative and Secretary of Commerce publicly claiming that congressional inaction "would have substantial adverse economic implications for our country"?  Something doesn't add up here, huh?

"Myth": "It continues WTO-inconsistent 'Double Counting'"

"Fact": The legislation directly addresses potential double counting. H.R. 4105 brings the United States into compliance with an adverse determination by the WTO Appellate Body about the potential for "double remedy" in applying the antidumping and CVD law at the same time to a non-market economy. The legislation requires Commerce to adjust antidumping duties to address any possible double remedy.

ACTUAL FACT: The bill certainly mentions double counting, but, as noted above, it sure as heck doesn't "require[ ] Commerce to adjust antidumping duties" or ensure that the United States will be in compliance with the Appellate Body's ruling.  It literally only requires Commerce to address double counting if (i) foreign exporters meet an almost-impossible burden and (ii) Commerce decides it has the ability to do so.  Those are two loopholes so big you could drive separate freight trains through 'em.  (And if you've ever actually been involved in an AD/CVD investigation, you know full-well that Commerce is extremely willing to don the engineer's cap and drive those trains.)

The bill also doesn't correct for all of the old CVD orders - ones that most definitely used a WTO-inconsistent AD/CVD methodology.  As I said last week:

[T]he 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.

Oh, and it could raise new WTO challenges on other grounds (like retroactivity).

But other than that....

"Myth": "It harms the U.S. negotiating position on legitimate bilateral trade concerns"

Fact: The legislation is fully consistent with U.S. WTO obligations and should not affect other bilateral trade negotiations. In fact, failing to enact this legislation would be a "give-way" to the Chinese as the U.S. would unilaterally drop an important and legal enforcement tool. The CVD law is an important WTO enforcement tool permitted by the WTO to counteract market-distorting Chinese subsidies. Some of our biggest trading partners, including the European Union, Mexico, and India, also apply the CVD law to China.

ACTUAL FACT: Again, the bill isn't "fully consistent" with US WTO obligations, and Commerce could apply CVDs (or address Chinese subsidies via the NME anti-dumping methodology) without congressional legislation.  The agency simply was barred from applying both CVDs and NME/AD measures and thereby penalizing US importers and consumers (and foreign exporters).  And although several countries like the EU apply CVDs law to imports from China, none (that I know of, at least) have done so with concurrent NME anti-dumping measures.  The EU just announced a new CVD case against China which mirrors an earlier NME/AD case (its first ever concurrent AD/CVD cases against China in the EU), and guess what?  China immediately threatened to bring a WTO challenge.

"Myth": "It lets the Obama Administration 'vote present' ... [and] lets the administration avoid the tough choice on China and the "non-market economy" methodology"

"Fact": China is not a market economy. Arguing that it is ignores the massive intervention of the Chinese government in its economy. The bill addresses any potential double counting that arises from simultaneously applying antidumping and countervailing duties to China and brings the United States fully into compliance with its WTO obligations.

ACTUAL FACT:  Ok, one last time: congressional inaction doesn't require designating China as a "market economy" (even though that's a very good idea), and it certainly doesn't resolve the double counting issue.  As I said in a recent op-ed: "By doing nothing, [Congress] 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."  This legislation allows President Obama to avoid this choice entirely and to maintain the WTO-inconsistent status quo. It also eviscerates several American companies' valid legal challenges to the existing, punitive policy - a policy that harms US consumers and lines the pockets of well-connected domestic industries seeking government protection from import competition.

And that's a fact.

Manufacturing Jobs Won't Save Labor Market Says... US Labor Department?

Reuters published a great analysis last week of the future of the US labor market, and the report's main conclusion shouldn't surprise anyone who's followed this blog for a while: the US manufacturing sector will experience a renaissance of sorts and may even see a near-term uptick in jobs, but longstanding, systemic factors - mainly continuing improvements in productivity - will prevent manufacturing jobs from keying a long-term recovery in the struggling US labor market.  What is surprising, however, is that the latest data come from President Obama's own Department of Labor:

U.S. manufacturers are hiring at the fastest pace in more than a decade to keep up with new orders but sweeping technological advances could cost thousands of factory workers their jobs in years to come.... 

Last year, factories added 237,000 jobs - the most since 1997 - and that burst in hiring is seen stretching into this year as the economy recovers from the 2007-09 recession. 

But a renaissance for industrial employment is unlikely. Over the long term, factory job creation looks destined to stagnate as technology advances, and manufacturers' role in the labor market will likely continue a decades-long decline. 

A Labor Department report published on February 1 projected factory employment will drop to 11.5 million workers by 2020 - down from 11.9 million in January - despite expectations production will increase in coming years....  

Even though the United States remains a pre-eminent manufacturing power, accounting for about a fifth of global factory output, only 9 percent of its workforce is engaged in factory activity, and that percentage is falling. Manufacturers' share of the labor market will likely drop to 7 percent by the end of the decade, according to the government projections, down from nearly a third in the 1950s when unskilled workers played a bigger role....

The Labor Department's new report is available here.  Almost all of the topline conclusions are important, but here are a few of the most telling:

• The health care and social assistance sector is projected to gain the most jobs (5.6 million), followed by professional and business services (3.8 million), and construction (1.8 million).

• About 5.0 million new jobs--25 percent of all new jobs--are expected in the three detailed industries projected to add the most jobs: construction, retail trade, and offices of health practitioners. Seven of the 20 industries gaining the most jobs are in the health care and social assistance sector, and five are in the professional and business services sector.

• The 20 detailed industries projected to lose the largest numbers of jobs are primarily in the manufacturing sector (11 industries) and the federal government (3 industries).

• Of the 22 major occupational groups, employment in healthcare support occupations is expected to grow most rapidly (34.5 percent), followed by personal care and services occupations (26.8 percent), and healthcare practitioners and technical occupations (25.9 percent). However, the office and administrative support occupations group, with projected slower than average growth of 10.3 percent, is expected to add the largest number of new jobs (2.3 million).

• One-third of the projected fastest growing occupations are related to health care, reflecting expected increases in demand as the population ages and the health care and social assistance industry grows.

• Occupations that typically need some type of postsecondary education for entry are projected to grow the fastest during the 2010-20 decade. Occupations classified as needing a master’s degree are projected to grow by 21.7 percent, followed by doctoral or professional degree occupations at 19.9 percent, and associate’s degree occupations at 18.0 percent.

• Of the 30 detailed occupations projected to have the fastest employment growth, 17 typically need some type of postsecondary education for entry into the occupation.

• Two-thirds of the 30 occupations projected to have the largest number of new jobs typically require less than a postsecondary education, no related work experience, and short- or moderate-term on- the-job training.

• Only 3 of the 30 detailed occupations projected to have the largest employment declines are classified as needing postsecondary education for entry.

So what do these numbers tell us?  Well, first and most obviously, manufacturing employment will continue its decades-long decline in the United States, particularly as a share of GDP.  Of course, as I've repeatedly mentioned, the long-term decline is not just an "American" phenomenon - it's happening pretty much everywhere in the world:

And before you ask, yes, it's also happening in China.  For example, Chinese manufacturing giant Foxconn announced recently that it plans to replace 500,000 workers with robots over the next few years.  And it's certainly not alone.

However, the outlook for US manufacturing in every area other than employment is quite good.  Reuters notes that the United States will continue to be a global manufacturing powerhouse, and, interestingly, we have China (in part) to thank for that:

[A]nalysts say much of the recent hiring spurt is just a temporary rebound from the recession, when manufacturing output fell about 20 percent and factories laid off 2 million people. Still, there are factors supporting the sector.... 

After a decade of heightened competition with China, which devastated American industries like clothing makers, the U.S. factories that remain are more high-tech and less likely to be undercut on labor costs. 

Moreover, wages in China are rising much faster than in the United States, reducing the incentive to offshore production, while the recession itself raised pressure on U.S. companies to embrace more cost-saving measures, like automation. 

S & S Hinge Company, for example, has retooled its plant in Bloomingdale, Illinois, since the recession. A pair of computers runs its newest production line, which makes hinges 50 percent faster than older lines. That is helping the firm meet rising orders for parts that go into pickup truck toolboxes while reducing the need for more staff. 

"We've upgraded our factory. We actually put in a new operating system. So it has cut the need for more bodies," said Richard Sade, the company's chief operating officer.

Fascinating stuff.

Second, the Labor Department report shows just how helpful a good education will be for finding and keeping a job in the 21st century American labor market.  Most of the fastest growing job sectors require post-secondary education, while almost none of the shrinking sectors do.  However, all is not lost for less-educated Americans, as the numbers make clear that there will still be plenty of jobs out there for them too (although not in manufacturing, it seems).

And that brings me to the third big takeaway from the DoL report: clearly the most promising sectors for jobs in America are almost all in services, especially health care.  Again, this is not surprising.  Services' share of the US labor force and GDP has been climbing for years now, and it's where the United States is globally dominant.  Reuters again:

As grim as that sounds for many workers, a future with fewer factory jobs isn't necessarily bad for the economy. 

Part of the drive to be more efficient has led factories to outsource more work, contracting services from accounting firms, consultancies and other companies.

Even though the number of workers in U.S. factories today is roughly the same as 70 years ago, jobs in business services, a sector that includes many people working indirectly for manufacturers, have grown eight-fold. The Labor Department expects business services will be one of the top job-creating industries in coming years.

As I noted a couple months ago, the often-maligned services sector has plenty of room for growth and produces tons of high-paying, globally-competitive jobs.

But it's this obvious fact that has me calling the Labor Department report "surprising."  President Obama has spent the last few months touring the US factories and touting a labor market recovery based seemingly on only American manufacturing.  And his budget and tax proposals are all biased in favor of manufacturing (and thus inherently biased against services).  This makes absolutely no sense, as Reuters politely notes:

[The services boom] makes plans by Obama to give manufacturers special treatment - or to penalize them for offshoring jobs - wrongheaded, says Jagdish Bhagwati, an economist at Columbia University.

Obama last week proposed new tax breaks for manufacturers, but many economists view the decline in factory employment as a normal part of the economy's development.

Very normal... and happening here in the United States for a very long time now.  So long that even the US Department of Labor has caught on.

So when it comes to fixing the American jobs market, maybe the President should - and I can't believe I'm about to say this- chat more with the Labor Department and less with his political staff next time.

(Okay, stop laughing.)

CVD/NME Recap

Given all of the information on the CVD/NME issue that I've thrown onto the interwebs over the last several days, now's a good time to recap where things stand.  So here's a summary of my most significant blog posts on the CVD/NME issue and the court case (GPX Int'l Tire Corp. v. United States) that threw everything into flux:

• My summary op-ed of the issue and my reasons for why Congress should just "do nothing."

• The major problems with the current CVD/NME bill (H.R. 4105) and why more deliberation is a very good thing.  In short, the legislation (i) is biased against US importers and consumers and denies them rightful compensation; (ii) will breed a firestorm of new litigation over "retroactivity"; and (iii) doesn't solve the "double counting" problem.

• Why the urgent rush to push H.R. 4105 bill through Congress without real consideration is totally unnecessary. (More detail on that point here.)

• Why congressional inaction will not drown US companies via a flood of subsidized imports from China and Vietnam (and how the current NME methodology already addresses Chinese and Vietnamese subsidies).

• The very real pain imposed on US companies and workers due to the CVD/NME policy. (More on that here and here.)

• Background on (i) the underlying ruling of the Court of International Trade in GPX (including the court's repeated concerns over "couble counting" and DOC's admission that it doesn't know how to address those concerns); (ii) the WTO Appellate Body ruling on the U.S. CVD/NME policy and "double counting"; (iii) the "bombshell" ruling by the Court of Appeals for the Federal Circuit in GPX and its implications; (iv) the joint letter by USTR Kirk and Commerce Secretary Bryson begging Congress to step in and save them (and why their requested solution is the wrong approach).

There's plenty more on CVDs and other subsidy issues here, but these links should cover the main issues and keep you busy for a long while.  Enjoy.

[N.B. Since a few people have asked: I have absolutely no client interest in any of the ongoing litigation - appeals, reviews or investigations - related to the CVD/NME issue.  I helped litigate - and win - the first ever US CVD investigation of NME imports (Coated Free Sheet Paper from China) back in 2006-07, representing the main exporter.  But that's it.]