How our ‘do nothing’ Congress can help US-China trade relations

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

In December the U.S. Court of Appeals for the Federal Circuit (CAFC) ruled that the Department of Commerce has no authority under existing law to impose anti-subsidy or “countervailing” duties (CVDs) on imports from China, Vietnam and other countries deemed “non-market economies” (NMEs) under the U.S. anti-dumping law. Commerce’s longstanding policy was not to apply CVDs to such imports and instead remedy unfair subsidization by state-directed economies through anti-dumping measures. Commerce reversed course in 2007, but after years of litigation the court ruled that Congress had ratified the agency’s previous policy, and thus that countervailing duties cannot apply to NME imports until the law is amended.

The court’s ruling rocked the White House because it invalidated the president’s primary approach to countering allegedly “unfair” Chinese subsidies. In a January letter, U.S. Trade Representative Ron Kirk and Commerce Secretary John Bryson pleaded with Congress to quickly pass legislation applying the CVD law to NME imports and salvaging the 24 final CVD orders and seven pending investigations that had been unlawfully instituted since 2007. Unless Congress does so before the court’s ruling becomes final, they argued, the existing duties and pending investigations will have to be terminated, and myriad American companies and workers will suffer an onslaught of unfairly subsidized imports.

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

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

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

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

The former option would likely lead to the termination of the CVD orders and pending investigations, but, contrary to the administration’s breathless claims, it would not put U.S. companies at grave and immediate risk. Total revocation of all CVD orders could take years, not days. Even then, every product at issue is also subject to an anti-dumping order or investigation, and the NME methodology already negates subsidies received by the targeted foreign exporters. Indeed, Commerce’s initial solution to the “double counting” problem was to apply only the anti-dumping duty in concurrent AD/CVD investigations of Chinese imports.

The latter option is even better. Formally designating China and Vietnam “market economies” is entirely at the president’s discretion, and would solve the immediate legal concerns surrounding the current policy. It also would let Commerce use CVD proceedings to address Chinese subsidies — an Obama administration priority — without the constant threat of litigation.

Moreover, market economy designation would eliminate the well-documented problems with the opaque, uncertain NME methodology in dumping cases, but it would have no broader economic or policy ramifications. (Russia, which still is not a full WTO member, was deemed a “market economy” in 2002.) Nevertheless, Beijing dislikes the NME label, and might be willing to make additional trade concessions to get rid of it. This “carrot,” however, is rapidly losing value because, pursuant to China’s WTO accession protocol, the United States must stop applying the NME methodology to Chinese imports in 2016.

In short, market economy designation provides a simple way to avoid the economic, legal and political problems caused by the administration’s current policy, and to reap several other benefits. Yet the president refuses to even consider this logical, lawful and economically beneficial approach, and instead remains committed to fighting a losing battle that diminishes U.S. influence, breeds litigation and harms American exporters and consumers.

Congress shouldn’t join that fight. Victory lies in doing nothing.

Scott Lincicome is an international trade attorney with White & Case LLP and litigated the first CVD investigation of Chinese imports in 2007. The views expressed are his own.