Thursday, March 29, 2018

Trade Retaliation - Beanball Style

It’s MLB Opening Day 2018, and that means it’s time to take stock of America’s favorite pastime: imposing trade sanctions. Between its steel and aluminum tariffs, a WTO complaint and more tariffs against China for IP violations, and the possibility of ending NAFTA, the Trump Administration is playing hardball with longtime trade friends as well as foes. But beanball goes both ways. U.S. trade partners have already begun to retaliate through massive WTO complaints that could hit U.S. industry right in the wallet, while other countries threaten complaints and retaliatory tariffs on U.S. products entering their markets. Here’s an overview of the state of play.

Bob Gibson tops most people’s lists as the most feared pitcher of all time. Gibson was known for never smiling on the mound, and for owning the inside half of the plate. In his autobiography, Gibson said he threw nine pitches: “two different fastballs, two sliders, a curve, a change-up, knockdown, brushback, and hit-batsman.”

During the 2017 season, I predicted here that the Trump Administration’s strong-arm tactics with trade partners might be an invitation to a dangerous game of beanball – the baseball term for the battle that ensues when two team’s pitchers take turns hitting each other’s batters with selectively-placed fastballs.

On December 20, Canada took the bait, answering the United States’ intimidation tactics with a brushback pitch of its own: a lengthy complaint in the WTO challenging six aspects of the United States’ conduct of antidumping and countervailing duty investigations. Canadian Foreign Minister Chrystia Freeland told Reuters that the action was part of Canada’s response to U.S. penalties on Canadian softwood lumber and an attempt to defend Canadian forestry jobs.

South Korea has also joined in the brawl, filing a complaint with the WTO on February 14 that challenged the way the U.S. calculates antidumping duties and countervailing duties.

And now China, in response to Trump’s announcement this week, has threatened $3 billion in retaliatory tariffs as well as a WTO complaint of its own.

What’s making these countries so mad they’re ready to send a warning shot whizzing past the chin of the U.S.? Here’s an overview of the pending legal claims in the Canadian and South Korean WTO complaints.

Canada Gets Mad (No, That’s Not a Joke)

Canada’s request for consultations – the first step in initiating a grievance under WTO procedures – complains that the United States violates various WTO agreements in the way it handles unfair trade remedies.

A little background: The WTO Agreements allow all member states to investigate and penalize practices that were traditionally considered unreasonable manipulations of international trade. But while the WTO Agreements may allow these unilateral sanctions by member states, they also define disciplines on how such investigations will be conducted and sanctions will be administered.

For example, the Antidumping Agreement (“AD Agreement”) allows countries to impose only “definitive” anti-dumping duties, not provisional ones, except in limited circumstances; duties collected must be in the “appropriate amounts”; and duties can remain in effect “only as long as and to the extent necessary” to counteract the injury. The Agreement on Subsidies and Countervailing Measures (“SCM Agreement”) allows countries to impose duties only where there has been a “financial contribution” by a government. Both agreements require that parties be given “ample opportunity” to defend their interests, and a separate agreement, the Understanding on Rules and Procedures Governing the Settlement of Disputes (“DSU”), requires “prompt compliance” with a WTO decision that any provision of the WTO Agreements has been violated.

The Canadian complaint challenges six U.S. practices (and seven individual “measures,” the WTO catch-all term for laws and policies):

  1. When a U.S. policy for imposing antidumping or countervailing duties is found inconsistent with one of the WTO Agreements, the result may be that the duty collected by U.S. customs authorities exceeded what is legally permitted. Rather than immediately refunding any overage and applying the new, reduced duty to any new product shipments, the U.S. continues to collect and hold duties at the rate originally imposed until any administrative, arbitration, or judicial reviews are completed. Canada claims, among other things, that these policies result in collecting duties that exceed the “appropriate amounts” and do not result in “prompt compliance” with the WTO decision.
  1. Usually, antidumping and countervailing duties are imposed by the U.S. after the Secretary of Commerce makes a preliminary determination of dumping, but a regulation allows duties to be imposed retroactively up to 90 days earlier where “critical circumstances” exist – sort of a preliminary injunction for antidumping and countervailing duties. Canada claims that this regulation violates restrictions in the AD and SCM Agreements that allow the imposition of preliminary duties only more than sixty days after the initiation of an investigation.
  1. Countries impose a variety of controls on products being exported from their markets – such as levies, quotas, restraints, and outright bans. Some of these export controls are allowed by the WTO Agreements, some aren’t, but Canada’s complaint is that the United States treats even lawful export controls as “financial contributions” by a government to its domestic industry – an essential element for a finding of a subsidy under Article 1.1 of the SCM Agreement – and relies on them in imposing countervailing duties.
  1. Canada also challenges the U.S. practice of “zeroing” in finding counteravailable subsidies. According to Canada, the U.S. bases countervailing duty calculations only on instances where the government has provided goods to its industry at less than a set benchmark price and ignores (“zeroes”) instances where the government has provided goods to its industry at prices higher than the benchmark price.
  1. Another U.S. regulation requires interested parties in an investigation to file certain factual information at least 30 days before Commerce’s preliminary determination of dumping or subsidy. Although the regulations allow the Secretary to accept such information later under “extraordinary circumstances,” Canada alleges that the Secretary never or almost never does so. Canada alleges that these time limits do not allow interested parties the “ample opportunity” to defend themselves that the AD and SCM Agreements require.
  1. Under the Tariff Act of 1930, the International Trade Commission determines injury from dumped products or products subject to counteravailable subsidies. The Act provides that the ITC will have six Commissioners. The Tariff Act requires that a tie vote on an injury determination be treated as a finding in the affirmative. Canada alleges that this contradicts the obligation of the United States to make an objective determination as to injury from dumping or subsidies.

If these claims sound a little vague – they aren’t. Zeroing has been roundly rejected by the WTO in the antidumping context; although the comparison between antidumping and subsidies is not quite on all fours here, it’s not a flight of fancy either. And the Appellate Body frequently decides cases by giving content to obligations in the agreements that sound vague or even hortatory, such as “appropriate amounts” or “ample opportunity.” The outcome may turn on the panel’s or Appellate Body’s opinion of the commercial reasonableness of the United States measures in context.

Korean Conflict

The complaint filed by South Korea also alleges that the United States violates WTO disciplines on how antidumping and countervailing duties may be calculated. Specifically, the complaint centers upon the United States’ use of adverse factual inferences when calculating an antidumping duty or countervailing duty.

According to the AD and SCM Agreements, when a party being investigated does not cooperate, “preliminary or final determinations, affirmative or negative, may be made on the basis of the facts available.” (It’s the same language in both agreements, Articles 6.8 and 12.7, respectively.)

Korea challenges Commerce’s use of adverse facts available in several ways. First, Korea alleges that the United States unfairly invoked Articles 6.8 and 12.7 against Korean producers and exporters in six listed investigations, although the complaint alleges no facts to support that claim.

The complaint also claims that the Department of Commerce uses this provision improperly when it invokes it: by failing to give notice of the information it requires; by failing to verify that the information supplied by other parties is accurate; by failing to inform the parties of the essential facts it is considering; by failing to determine individual dumping margins for each producer and export; and by requesting information that’s not in the original application being investigated.

The most sweeping complaint is that Section 502 of the Trade Preferences Extension Act of 2015 allows Commerce to use adverse facts available that are not commercially reasonable because it doesn’t require that those inferences be consistent with any verifiable information that was supplied or by other available and relevant commercial information.  

Like the Canadian complaint, the claims in the Korean complaint are not outlandish. The AD and SCM Agreements allow determinations based on “facts available” to give interested parties some incentive to cooperate with the investigation. But the agreements also require that the interested parties have “ample opportunity” to defend themselves, a term that the Appellate Body may flesh out further.

The Hit-Batsman

So it looks like Beanball 2018 is definitely on in the trade realm. Stay tuned for the bottom half the inning (i.e., the next post), in which we’ll review the United States’ complaint against China. And remember, as Bob Gibson said, the brushback is just the first pitch thrown to get a hitter’s attention. After that comes the knockdown, “a brushback pitch with an attitude.” If even that fails to gain respect – look out. We could be in for a bench-clearing brawl.

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