Driving Over The Brink
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Two years ago, we reported that China was initiating an investigation, based on dumping and subsidy allegations, into imports of U.S. automobiles. We warned that the published petition was more a political than a legal document, telling a peculiar and nationalistic version of industrial history and concentrating on alleged subsidies, particularly for the development of electric cars, that had nothing to do with the subject merchandise. The petition was a political statement about a rising China and a declining United States.
Although the implementation of the WTO trade obligations into Chinese law sets schedules for antidumping and countervailing duty proceedings, China’s Ministry of Commerce (“MOFCOM”) is not slave to the prescribed deadlines. It does not publish petitions upon receipt, nor even generally make their existence known (although it often leaks information about them to favored Chinese lawyers). It may decide, based on its own judgment of the public interest, whether to initiate an investigation, regardless of a petition’s worthiness. It does not adhere to deadlines to initiate investigations following the receipt of petitions it accepts, nor does it adhere to deadlines to announce results. Consequently, when investigations are initiated, and when results are announced, inevitably arouse suspicions as to whether timing has been political and reactive, and whether outcomes adverse to foreign interests may be retaliatory.
China’s December 14, 2011 announcement that it was imposing antidumping and countervailing duties on certain automobiles from the United States, culminating an investigation begun conspicuously in November 2009 on the eve of President Obama’s arrival in Beijing for a state visit and just after he had imposed safeguard duties on Chinese tires, was equally conspicuous in its timing because it followed almost immediately upon the initiation of American investigations into Chinese solar cells and after China’s appeal of the tires safeguard at the WTO had been denied. According to MOFCOM’s internal schedule, the imposition of duties followed a final determination by more than seven months.
The imported cars subject to duties do not boast green technology, but the petition had complained at length about green subsidies, especially for the development of electric cars that China and the United States had pledged, at the time of the announced initiation of the investigation, to develop together. The cases on cars and solar cells, as they refer and relate to green technologies, are linked, at least as much as the cases on cars and tires. China may have decided to impose duties on the American cars most any time during the last seven months or more (regardless of the “official” date now displayed on the record of the case), but it is reasonable to interpret the timing of the announcement, if not of the decision, as retaliatory, whether because of China’s failed appeal on tires, or because of the American investigation into solar cells.
The December 14 announcement is notable in several respects. There is consensus that the duties will have little or no effect on trade in automobiles. The decision has aroused almost universal agreement that it is retaliatory, and many Chinese (experts and former officials) have asserted as much. The Obama Administration and Congress have expressed dismay if not outrage. Although the decision required an injury determination, the paltry importation of cars from the United States, particularly in market niches not served by domestic manufacture in China, could inflict no discernible injury on a Chinese industry. It is the injury determination, above all, that makes the action almost purely political, albeit the subsidy judgment, in particular, is well-founded.
Retaliation
Chinese themselves seem to boast that trade remedy actions against products from the United States are retaliatory. Zhou Shijian, cited as a “senior expert on China-US trade” from Tsinghua University, has been quoted as calling the duty on American cars “proper and equal,” a “counterattack to US trade investigations aimed at China.” Li Zhongzhou, identified as “a former official from the Ministry of Commerce and a WTO expert from the EU-China Trade Project,” has been quoted saying, “China should strike back in its own good time as the US always stirs up investigations targeting China by routinely using trade remedy measures.” China Daily has quoted Zhou Shijian saying, “It’s reasonable self-defense for China. An eye for an eye is a sound way for China to face trade disputes with the US under WTO regulations.”
The South China Morning Post immediately labeled the announcement of duties on American cars as “Beijing’s retaliation after China lost its final appeal to the WTO in September against a 2009 US move to impose anti-dumping duties on tyres imported from China.” Of course, the United States did not impose anti-dumping duties on imported tires, instead relying on the safeguard provisions of China’s accession protocol to the WTO, and China’s WTO appeal never stood any chance of success because it was wrong on the law. The automobiles investigation launched in November 2009 resulted in duties in December 2011 just as the tires safeguard decided by Obama in November 2009 resulted in a WTO appellate decision in September 2011. The initiation dates made the outcome dates linked; there was no need for a calculated retaliation.
Timing, however coincidental, is at the heart of the conspiracy theories about retaliation. “Experts” in both countries assume that officials in the other country control timing. That China does not disclose the receipt and consideration of petitions contributes to the suspicions, and Chinese make assumptions about U.S. control notwithstanding the legal and practical impediments.
The Chinese declarations of retaliation are unfortunate because they assume that the United States orchestrates trade attacks against China. The U.S. Department of Commerce and the U.S. International Trade Commission do not solicit trade remedy petitions, and are bound by law, with minimal discretion, to initiate investigations when petitions satisfy legal requirements. Chinese experts may be skeptical given their experience in China, but trade remedies in the United States reflect a free market for petitioners within a law that has no public interest exceptions: the government must investigate when an identifiable industry files a qualifying petition.
It is not as if the U.S. agencies are taken by surprise by petitions, nor unable to encourage or discourage them. Both trade agencies assist prospective petitioners with drafts so that, when actually filed, a petition is likely to succeed in launching investigations. In the process of providing such assistance, which is undertaken in confidence (thereby preserving a petitioner’s advantage of surprise), the agencies can signal whether a petition is likely to succeed and whether it appears well-founded. Nonetheless, any industry determined to file can do so, whenever it wants. And when it files, its non-confidential version instantly becomes a public document.
In theory, the same rules apply in China. Any industry can file a trade remedy petition whenever it likes. However, MOFCOM does not reveal when it has received a petition, can decide whether to initiate an investigation without explanation, and can decide when to act because no one knows when a petition has been filed. Moreover, MOFCOM does not release full information about a petition and thereby arouses suspicion that MOFCOM itself might sometimes be the author. The petition against American automobiles could have been a MOFCOM document because it could not have been prepared by a private petitioner in the very short interval between the Obama safeguard decision on Chinese tires and MOFCOM’s initiation of the investigation.
Inside U.S. Trade quotes “a U.S. business source” in its December 16, 2011 edition complaining about Chinese “tit-for-tat” because the results on American automobiles were released “just days after the Office of the U.S.Trade Representative announced it would pursue a legal challenge at the World Trade Organization against Chinese AD/CVD on chicken ‘broiler products’ from the U.S.” The same “source” complained about China’s initiation of an investigation of U.S. shipments of polysilicon (essential for solar cell manufacture) right after the U.S. opened its investigation of Chinese solar panels and cells. In the normal course of business, such investigations, which must be based on petitions satisfying WTO rules, could not be launched instantly, but in an environment of mutual suspicion the normal course of business is regarded as captive to government control, and MOFCOM can act on petitions without warning and whenever it likes.
Subsidies
The United States is accustomed to accusing other governments of subsidizing industries exporting to the United States in violation of world trade rules. Not all subsidies contravene the rules of the World Trade Organization, but subsidies deliberately in support of exporting industries usually are. The routine American complaint is that American companies are the best in the world, able to compete with anyone, but not able to compete with foreign governments.
Because Communist countries made state enterprises their global competitors, the United States passed special laws to deal with them. For all that China has done to make itself a capitalist competitor, it does not deny Communist Party control and does not hide state enterprises behind private cloaks. The United States insists, therefore, that China is a non-market economy and that all of its state enterprises are effectively subsidized by the state.
The dilemma for the United States, amplified in the most recent decision of the U.S. Court of Appeals for the Federal Circuit, is that petitioners cannot challenge subsidies in non-market economies because subsidies are countervailable (contrary to international trade rules) only when they distort markets. Non-market economies have no markets to distort. The Court of Appeals therefore has ruled that countervailing duty cases cannot be brought against non-market economies, while state control of the economy implies that almost everything is unfairly subsidized.
Americans have grown so accustomed to perceiving foreign governments as subsidizing industry that they have become close to unconscious about the manifold subsidies in the U.S. economy. What they often see as illegal in other countries, such as European or Canadian farm subsidies, they see as innocently in the public interest in the United States. For many years, for example,the United States imposed countervailing duties on Canadian provincial crop insurance even as American crop insurance was more extensive and generous. The only difference was that Canadian agriculture was exported to the United States while little American agriculture made its way into Canada. No one seemed to observe that foreign agriculture would have difficulty competing in the United States against the heavily subsidized domestic product.
Americans became especially unaccustomed to foreign governments challenging American subsidies, but the Chinese challenge in 2009 was made inevitable by the American Recovery and Reinvestment Act. The United States had begun countervailing alleged Chinese subsidies in 2006, targeting especially Chinese bank loans because of state ownership of the banks. All Chinese state enterprises became targets because they were state enterprises. Now, the U.S. Government had acquired majority shares in many U.S. banks and in much of the automobile industry. The United States insisted this state ownership was temporary, but in no other significant way was there a distinction between Chinese and American ownership. If the United States were to countervail Chinese state ownership and bank loans and guarantees, China (and other countries) inevitably would begin to countervail American government ownership.
The solution to this escalation in world trade antagonism and protectionism, triggered by global recession and government rescues,was to reconsider the countervailing duty regime and what was to be considered an illegal subsidy. Instead, the United States was introduced to countervailing duties from the other side, at the very moment, albeit coincidentally, when it learned that this weapon was no longer available to the United States in its trade contests with China.
Symbolic Results And Injury
China assesses a 25 percent tariff on all imported automobiles, a price that has been very effective in persuading foreign manufacturers to produce in China. Consequently, only the most expensive cars for which buyers are relatively price-insensitive are manufactured elsewhere and imported into China. Manufacturers cannot afford to export to China cars that need to compete on price.
The additional tariffs China is now imposing on automobiles manufactured in the United States will have little practical effect. Chinese buyers interested in BMW sport utility vehicles from South Carolina that already cost upwards of $70,000 in China will not be deterred by a 2 percent surcharge, nor will buyers of Mercedes M-Class, R-Class, and GL-Class SUVs choose something else because of a 2.7 percent surcharge. Besides, only about 29,000 BMW and16,000 Mercedes in these classes were exported to China last year.
General Motors will have shipped in 2011 only around 11,000 SUVs and large vehicles, particularly the Buick Enclave, the Cadillac STS and the Cadillac Escalade. Even with a 21.8 percent duty the impact on sales probably will be negligible. Honda, selling 362 TL Model Acuras in China into December 2011, can hardly be concerned about a 4.1 percent antidumping duty. Only Chrysler, perhaps, needs to be concerned, with a 15 percent overall surcharge and substantial exporting ambitions, but for now the only vehicles it is shipping that are affected include the Jeep Grand Cherokee and, in future, its 300 Model large sedan. In the first ten months of 2011, Chrysler sold 13,686 Jeeps in China.
BMW, Mercedes, and Honda were all found free of countervailable subsidies, presumably because they were not part of the Obama bailout. The likelihood that they are dumping these large and expensive vehicles in China is small. The message of the Chinese decision, then, is that foreign manufacturers wishing to sell cars in China should manufacture them in China, not in the United States, because they could face harassment, if not legitimate duties, coming from the United States. China apparently wants to make the likes of BMW and Mercedes and Honda think again before they expand manufacturing in the United States. They should prefer, China seems to be telling them, to create manufacturing jobs in China.
For the American companies, the message was also indirect. Ford was investigated even though it does not export U.S.-made vehicles to China at all. The point seems to have been that Ford turned down federal rescue funds in 2009 and so was found in the investigation to be free of countervailable subsidies – even though there was no product to countervail. Investigating Ford was another way of sending a message to General Motors and Chrysler, who were found with countervailing duty rates of 12.9 percent and 6.2 percent respectively.
In order to impose antidumping and countervailing duties, China had to find that the American imports caused injury to a Chinese industry. MOFCOM raised the standard, dutifully declaring that the dumped and subsidized imports “substantially damaged China’s auto industry,” even though China’s auto industry does not manufacture any vehicles of the size, style, or price range of the subject merchandise and the number of imports is almost negligible. The injury determination thus was not credible, seeming to confirm MOFCOM’s political intent.
The U.S. Reaction
The American reaction to the new Chinese tariffs was predictably as exaggerated as China’s triumphalism about finding countervailable subsidies and dumping. U.S. Trade Representative Ron Kirk called China’s decision part of a “disturbing trend.” In a joint, bipartisan statement (nothing rallies congressional unity like China), House Ways & Means Committee Chairman Dave Camp (R-MI), Ranking Committee Member Sander Levin (D-MI), Trade Subcommittee Chairman Kevin Brady (R-TX), and Trade Subcommittee Ranking Member Jim McDermott (D-WA), saying they were “extremely concerned,” declared, “China’s actions are unjustifiable, and unfortunately, this appears to be just one more instance of impermissible Chinese retaliation against the United States and other trading partners.” They added, “This action appears to violate China’s WTO commitments, and we urge the Administration to exercise all available options to enforce U.S. rights, including, as appropriate, enforcing U.S. rights at the World Trade Organization.” Fortunately, Ambassador Kirk refrained from claiming the Chinese action violative of WTO obligations, and new Commerce Secretary John Bryson, in a coincidental speech criticizing China, said nothing about the automotive tariffs.
Policies to save the American automobile industry from extinction in the recession exposed exported vehicles to unfair subsidy claims. China was entirely justified in challenging those subsidies. China probably was less justified, however, in finding dumping of a handful of third country luxury vehicles, and arguably not justified at all in finding “serious damage” to a Chinese industry in the absence of a like competitive product. Yet, the specifics of this case are not what the case is about. Instead, the case appears to be about messages, subliminal and blunt, about state aid for green technologies and about domestic and foreign manufacture, affecting trade policy more than trade, and sales attitudes more than sales.
The House of Representatives leaders who issued the joint statement probably should be “extremely concerned,” but more by the competitive messaging than by competition, and more by outspoken boasting about retaliation than about the effectiveness of the WTO. The cars case is troubling, not because it will impede trade in cars, but because it threatens to impact trade relations and competition more generally and in the long term.
