Worse Than Zero-Sum Trading: How U.S. Discretionary Administration Of The Dumping Laws Takes Away The Benefits Of Free Trade Agreements

Monday, November 1, 2004 - 01:00

The Bush Administration has been engaged in a substantial campaign to negotiate new agreements that are intended to liberalize global trade. While multilateral negotiations in the Doha Round that would affect trade among all nations are bogged down in disputes over agricultural subsidies and other problems, and negotiations on a Free Trade Agreement of the Americas have made little progress, much has been accomplished on the bilateral level over the past several years. In addition to the North American Free Trade Agreement ("NAFTA"), which has streamlined the massive trade flows between the United States, Canada, and Mexico, the United States has reached or is negotiating Free Trade Agreements ("FTAs") with countries like Israel, Jordan, Australia, Morocco, Singapore, Chile, Thailand, and Central American nations. The U.S. is actively pursuing FTAs in Southern Africa and the Middle East. These agreements reduce or eliminate tariffs and non-tariff barriers to trade, and hold out the potential for significant trade opportunities for both sides.

Moreover, pursuant to the provisions of the Uruguay Round Agreements from the last round of global trade negotiations, all quota restrictions on trade in textiles and apparel will end on January 1, 2005. This will mean that this sector should largely be free of trade restrictions for the first time in decades, to the immense benefit of American retailers and consumers, who have lost billions of dollars in profits and spending power because of artificially high prices for clothing.

The progressive removal of trade barriers promises economic benefit to the United States and our trading partners, but unfortunately that benefit is threatened by one of the most egregious, but legal, avenues of trade restriction, still in existence - the antidumping laws, a code name for regressive taxation of the U.S. economy. Antidumping tariffs have become the last resort of U.S. protectionism for those industries that are not yet, or never will be, ready to compete in a global marketplace. Dumping cases are basically administrative adjudications that often result in tariffs so high that they effectively prohibit imports into the United States. These punitive tariffs are imposed without the express approval of Congress or the President, and can be in place for decades.

The dumping laws ostensibly seek to "level the playing field" by punishing exports to the United States that are priced below home market or foreign market prices, or costs of production plus a profit margin, resulting in injury to the U.S. industry. Dumping is remedied by imposing a duty that is supposed to be calculated based on the average of such non-U.S. prices or costs as compared to average U.S. prices. This duty is calculated by the U.S. Commerce Department. Advocates of the dumping laws claim that the Commerce Department's calculations are governed by detailed statutory and regulatory requirements such that Commerce acts as little more than the "bookkeeper" for gathering the required sales data and making the necessary computations.

However, in the bizarre world of dumping law and practice, things are almost never as they seem. In fact, the law grants the Commerce Department wide discretion to make many major and minor methodological decisions that can dramatically affect the level of dumping "margins" assessed against imports. The result often is an ad hoc tax system. The only checks on this discretion are judicial review and ultimately the World Trade Organization's Antidumping Agreement. In both cases, however, the importer has no realistic ability to stop the imposition of duties while an appeal or a WTO case is pending. Judicial reviews can take years, and often affirm the fact that the law gives the Commerce Department wide leeway to set and change the rules of the game. WTO cases also last years, and while they can result in authorized trade retaliation by affected countries, a loss at the WTO does not require the United States or any other country to actually change its laws or practices. A most disturbing trend is that the U.S. government is regularly failing to abide by its WTO obligations and bring America's antidumping law into compliance with WTO rulings. This is to the detriment of the U.S. economy and America's WTO leadership and leverage in the ongoing multilateral Doha Round negotiations.

With dumping having become the trade remedy of choice as other trade barriers are eliminated, it is worthwhile to examine one noteworthy example of just how unfair and economically illogical the process for calculating dumping margins can be. This is the Commerce Department's discretionary practice of "zeroing." As noted, Commerce Department antidumping investigations are supposed to determine whether, on average, an exporter's U.S. sales were made at prices lower than non-U.S. sales or below cost plus a profit. A true average must, of course, include all U.S. sales of the targeted product, not just an isolated set of lower-priced sales. Otherwise it is not an average, but simply a calculation that virtually assures antidumping margins. Unfortunately, this is just how the Commerce Department determines such margins. This device, zeroing, almost always increases antidumping taxes and can never reduce them. Although U.S. courts have said the Commerce Department can practice zeroing, it is not required by U.S. law or regulation. It is, in essence, a discretionary U.S. trade policy choice.

The WTO has twice ruled that zeroing is illegal, first with respect to the European Union ("EU") and most recently in a case against the United States. In August of this year, in a case involving softwood lumber from Canada, the WTO Appellate Body decided that Commerce's use of zeroing in an antidumping investigation violates U.S. WTO obligations, based on the plain meaning of the WTO Antidumping Agreement. The unanimous three-member Appellate Body (including an American) wrote:

Zeroing, therefore, does not take into account the entirety of the prices of some export transactions, namely the prices of export transactions in those sub-groups in which the weighted average normal value is less than the weighted average export price. Zeroing thus inflates the margin of dumping for the product as a whole.

In fact, zeroing often creates dumping where otherwise none would be found. When it lost at the WTO, the EU eliminated its zeroing practices across the board. The EU has now launched a broad-based challenge to zeroing by the United States, and several countries have joined in this case. As the U.S. uses zeroing to create margins in future cases, more WTO challenges are sure to follow because they are certain to be won. Under WTO rules, if the United States refuses to comply with these rulings and allows Commerce to continue its illegal practice of zeroing, the remedy will be sanctioned retaliation against U.S. exports. So, U.S. administration of our own dumping laws would put U.S. exports at risk. The U.S. has brought many successful WTO cases resulting in other countries' reduced restrictions on U.S. exports. One must ask how the U.S. can legitimately expect other nations to comply with WTO rulings we win, if the Commerce Department is allowed to flout the WTO and continue its discretionary practice of zeroing in antidumping investigations?

The practice of zeroing is creating or inflating margins in a number of active cases including the ongoing case involving nearly $3 billion in imports of shrimp from Thailand, India, Brazil, Ecuador, Vietnam, and China. It seriously increases concerns about fairness in the cases expected to be brought against textile and apparel imports once quotas are removed in January 2005. Those cases alone could affect tens of billions of dollars of imports. Companies that use or sell imported products have reason to be concerned both about the prospect of future dumping cases and the continuing practice of zeroing in those cases.

The United States is the principal leader of the WTO. This is with good reason, since restraints on trade, particularly tariffs on imports or exports, cost U.S. jobs - far more than they are said to protect, and cause net national economic harm. The benefits of imports and exports, and of U.S. leadership in the WTO will be jeopardized if the United States remains unwilling to undertake a general reassessment and reform of its dumping laws, and reverse the particularly objectionable practice of zeroing.

Kenneth J. Pierce is a Partner in the International Trade Department and Russell L. Smith is Special Counsel- Government Relations in the Washington D.C. office of Willkie Farr & Gallagher LLP.

Please email the authors at kpierce@willkie.com or rsmith@willkie.com with questions about this article.