Congressional Quarterly Weekly
November 14, 2009 Saturday
Are ITC Rulings on China First Salvos in Trade War?
Finlay Lewis, CQ Staff
The U.S. International Trade Commission, the independent federal agency charged with protecting domestic industries from unfair foreign competition, usually operates in obscurity. But when a president is gearing up to meet the leader of China -- the country that these days attracts the most trade complaints from U.S. businesses -- the ITC's actions move into the spotlight.
In June, as President Obama was preparing for G8 discussions with Chinese President Hu Jintao, the ITC ruled that U.S. tiremakers were being damaged by a surge in imports from China. Then earlier this month, as Obama was gearing up for this week's trip to China, -- his first as president -- the Commerce Department acted on an earlier ITC ruling and imposed an anti-dumping tariff on Chinese steel piping that could top 99 percent.
The two countries now appear locked into a pattern of tit-for-tat trade moves that could sour the commercial relationship. The questions that remain are whether the disputes could escalate into a full-fledged trade war, and what the effect might be on the two nations' larger and more complex political relationship.
Congress is watching the situation, not just for what the trade disputes with China may mean for U.S. jobs, but also for the impact on trade pacts currently in limbo. Many lawmakers, particularly Democrats, say they are reluctant to approve pending new trade agreements with Panama, Colombia and South Korea until the government enforces laws already on the books. "That could increase people's confidence and willingness to move forward,'' said Maryland Democrat Chris Van Hollen, a member of the House Ways and Means Subcommittee on Trade.
Students of trade politics say the ITC enjoys support on Capitol Hill in part because it helps to deflect the anger of constituents adversely affected by foreign trade deals. At an ITC hearing in the Chinese tire case in June, Ohio Democratic Sen. Sherrod Brown lashed out at ITC critics: "They are confusing protectionism with pragmatism,'' he said. Imposing trade restrictions in accord with international law "is not protectionism."
Against the backdrop of total U.S.-China trade, the sums at stake in the ITC's recent decisions amount to pocket change: Imports of the offending Chinese tires, for instance, add up to a mere $1.8 billion out of a trade flow of $408 billion last year. But the domestic political stakes loom larger. With unemployment already reaching 10.2 percent and possibly still climbing, Obama is under pressure to honor his campaign pledge to protect union jobs by vigorously enforcing U.S. trade laws. China's aggressive approach to trade also may make it an appealing target for a broader constituency beyond unions, particularly if sustained pressure leads to settlements involving disputed practices, including currency manipulation.
But there is also the chance that punitive measures could backfire, particularly if China were to retaliate by targeting U.S. products at a time when the United States is hoping to expand exports to help fuel an economic recovery and create new jobs.
There are signs that China is primed to retaliate against any U.S. trade sanctions. In the wake of the ITC's tire ruling in June, the Obama administration imposed a 35 percent duty on the tires. The Chinese government responded by opening an in-vestigation into whether American autos being sold in China were being unfairly subsidized by the administration's bailout of the auto industry. If Beijing follows through on that threat, and if its challenge is upheld at the World Trade Organization, other nations might follow suit, creating a cascading effect that could cripple U.S. auto exports in other markets.
More Tit for Tat
The tire case was not the only anti-China trade action taken in recent months by the ITC and the U.S. Department of Commerce at the behest of the steel industry and the United Steelworkers union. Following a preliminary ITC finding in the spring that China was dumping steel tubing used by the oil and gas industry by selling "at less than fair value," the Commerce Department earlier this month tentatively imposed duties of up to 99.14 percent on Chinese producers. The ball is now in the ITC's court; after a hearing next month, the commission will decide whether to clear the way for further tariffs on Chinese-made steel piping.
Obama appears confident that any damage from the trade disputes can be contained and the broader relationship protected. On the eve of Obama's departure for Beijing, a senior administration official said that both sides typically take a "pragmatic approach to issues like this when they arise." The official's optimism was apparently borne out at the G20 summit in Pittsburgh in September less than two weeks after Obama acted on the ITC findings in the tires case. The Chinese delegation did not raise a ruckus over the duties, which would decline to 30 percent in the second year and then to 25 percent the year after. It may have helped that Obama took a less punitive approach than the one favored by the ITC, which had recommended levies of 55, 45 and 35 percent.
Even so, Obama sent what could only have been interpreted by the authorities in Beijing as a signal that he intends to take a much tougher line on trade disputes than his predecessor did. On four different occasions, the ITC recommended that President George W. Bush take similar actions in behalf of various domestic in-dustries, but Bush declined. For example, in 2003 Bush refused to impose restrictions on imports of steel wire hangers from China, arguing that such a move would harm the U.S. economy and have an adverse impact on "thousands of small, family-owned dry cleaning businesses across the U.S."
While Bush may have had stronger free-trade leanings than Obama, he was hardly a purist. Under heavy steel industry pressure and at the urging of his political advisers, Bush in March 2002 levied tariffs on steel imports to safeguard the domestic industry -- and to curry political favor in Rust Belt states crucial to his re-election in 2004. He withdrew the tariffs 21 months later, after the WTO ruled they were unfair and opened the door to retaliatory moves by the European Union and Japan. There were also political counterpressures from steel-consuming industries that complained the move had harmed them competitively.
U.S. Interests Favored
The fact that the steel industry and the steelworkers' union are prominent forces in ITC cases is no accident. "Historically, there have been a lot of steel assets that were not internationally competitive,'' explained Thomas J. Prusa, a trade economist at Rutgers University. To maintain market share, U.S. producers have instead pursued an aggressive, protectionist approach toward foreign competition.
Nor is it coincidental that many of the ITC cases pushed by the steel industry and others have targeted China. "The target has varied," said Prusa. "In the 1980s it was Europe and the Japanese. In the 1990s, the Japanese and the Koreans. And now it's China, China, China."
Petitioning the government for relief from foreign competition may not be a sure thing, but the odds favor the complaining U.S. interests.
Originally established by Congress in 1916 as the U.S. Tariff Commission, the ITC serves as a neutral adjudicator of trade complaints, such as unfair government subsidies and dumping -- the practice of selling products in foreign countries below production costs to gain market share by bankrupting foreign competitors. The agency is also charged with protecting vulnerable domestic industries from sudden surges in imports, even if the increase is caused by legal economic comparative advantages, such as low wages.
In most cases, it is the job of the Commerce Department to determine whether foreign industries are using dumping tactics or unfair subsidies to gain entree to the U.S. market, while it is up to the ITC to decide in those cases whether U.S. interests have been damaged -- a finding that clears the way for Commerce to impose a remedy, such as a tariff to protect the U.S. industry.
I.M. Destler, a trade economist at the University of Maryland, did an exhaustive study of trade complaints filed from 1980 to 2003 and concluded that Commerce found evidence of foreign dumping 95 percent of the time, and the ITC found sufficient evidence of injury to domestic interests in 52 percent of cases.
Paula Stern, who earned a reputation as a free trader while serving as an ITC commissioner from 1978 to 1987, says that despite her philosophical leanings she voted consistently with the majority on the six-member bipartisan panel. "The fact is, protection is the ITC's most important product," said Stern. "If the law and the economics line up, then you're supposed to give protection.''
Gary Clyde Hufbauer, an economist with the free-trade-oriented Peterson Institute for International Economics, notes that anti-dumping and improper duty cases tend to mount in a recession and then fall back when a recovery takes hold. And it may often be difficult to pinpoint whether an industry is ailing because of falling demand, labor unrest or mismanagement. "When you have an industry that's sick anyway, it's easier to say, well, maybe imports are a cause of material injury," Hufbauer said.
Critics of the trade laws administered by the ITC and Commerce say the process ignores the interests of U.S. importers and particularly manufacturers, who rely on foreign competition to hold down their costs and assure an adequate supply of inputs. They also argue that protection for individual industries damages the broader economy. In a 2004 study, the ITC concluded that removing trade barriers would increase GDP about $14 billion a year -- a small sum for a $14 trillion economy. But others differ: A 2005 Petersen Institute study concluded that the payoff to the United States from freer trade would be more on the order of $1 trillion a year.
Some economists say the larger issue is China's decision to keep its currency cheap to gain an advantage for its exports on the U.S. and other markets. With China pegging its plans for economic growth to exports, "it's advantageous to have an undervalued currency," said Clyde V. Prestowitz Jr., president of the Economic Strategy Institute, a research organization focused on curbing unfair competition.
In that light, the recent spate of trade actions targeting China may wind up being just skirmishes in a larger economic battle -- and could provide Obama with a tactical advantage on the currency issue in his consultations with the Chinese leadership. James M. DeVault, a trade scholar at Lafayette College, said punitive trade measures are "a way for them to send a message: 'Look, we're serious.'"