China - Law Firms U.S. Trade Regulations And Retaliation Against Chinese Origin Goods - Part I

Thursday, December 1, 2005 - 01:00

Editor: Please tell our readers a little about your background.

Schroth: I received my B.A. from Tulane University and my J.D. from Vanderbilt University, with an L.L.M from the London School of Economics. I joined the international trade practice of Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt in 1989. We are perhaps the largest U.S. law firm specializing exclusively in international trade and customs matters.

I represent foreign and U.S. manufacturers, exporters and importers in proceedings brought under various U.S. trade statutes, in particular U.S. antidumping and countervailing duty laws administered by the U.S. Department of Commerce (DOC) and the U.S. International Trade Commission (ITC). I also handle matters related to unfair competition, U.S. trade adjustment assistance, trade legislation and special §201 & §301 actions administered by the U.S. Trade Representative.

I have represented companies in trade matters involving exports from most major countries in Asia, Europe and the Americas. However, over the past five years my practice has shifted more towards China where I represent Chinese and U.S. interests in U.S. antidumping and related trade actions. The practice has become so focused on China that in January I will be relocating to Hong Kong to administer this expanding area of our international trade practice.

Editor: How is your firm situated to serve U.S. and Chinese clients?

Schroth: Over the past several years our firm has grown to become perhaps the largest U.S. law firm representing Chinese and American interests in U.S. trade actions against China. We employ local Chinese lawyers and accountants to assist us on-site with these increasingly complex trade cases (principally antidumping actions). In addition, we are affiliated with a large Beijing law firm, the Jincheng-Tongda law firm, and we maintain affiliated offices in Beijing, Shanghai, Shenzhen and Xian. In addition to the many private Chinese clients we represent, we counsel numerous Chinese export chambers and government agencies, including the Chinese Ministry of Commerce (MOC). With the opening of our Hong Kong branch office in January, we will have U.S. trade attorneys in the arena full time to serve clients and government agencies in these trade matters.

Editor: What are the latest developments regarding U.S. trade with China?

Schroth: Faced with a $20 billion trade deficit and a flood of Chinese origin imports, the U.S. is playing every political and economic card it can to force China to raise the value of its currency, the RMB, and realign the deficit while reducing Chinese products' competitiveness in the U.S. market. This, coupled with the real and perceived loss of U.S. jobs - and capital - due to outsourcing to China, has resulted in a spate of retaliatory measures in both the private and public sectors in the U.S.

In the public sector, Congress has floated several bills that would impose onerous burdens on Chinese producers and U.S. importers. One bill, sponsored by Senators Schumer and Graham, proposes a flat 27.5% duty rate on any products imported from China. Another bill, The U.S. Trade Rights Enforcement Act, has passed the House of Representatives. It provides for a comprehensive monitoring system over China's compliance with its trade obligations on intellectual property rights and market access for U.S. goods, services and agricultural products. It would also apply the U.S. countervailing duty (CVD) laws to China (i.e., the assessment of duties equal to the various government benefits and subsidies received by Chinese companies.)

And, of course, there is the ongoing saga over the year-old Safeguards regime applied against Chinese textile and apparel products coming off quota restrictions. The uncertainty and unmanagebility of Safeguards has been somewhat tempered by the new U.S.-China Quota Agreement, just inked on November 8.

In the private sector, the most potent weapon in the U.S. trade protectionist arsenal is the antidumping law. In various forms since 1916, this law has evolved into an ominous and extremely complex mechanism to stifle foreign imports and revive flagging U.S. industries. The law attempts to "even the playing field" by imposing dumping duties on foreign exports equal to the difference between the net U.S. price and the net foreign price ("normal value") of the goods targeted in a dumping investigation. These cases have been filed against a wide variety of Chinese products in the agricultural, consumer electronic, automotive, steel and housewares sectors, to name a few. Dumping duty rates of well over 100% have been levied against Chinese products as a result of these cases.

While the public sector efforts to manhandle Chinese trade will possibly not get past Congressional chambers - or a White House veto - the private sector efforts, principally in the form of antidumping actions, are thriving, producing a cottage industry of legal, accounting and computer service providers to assist in unraveling the many complexities of this law.

Editor: How does the antidumping process work against China?

Schroth: The cases begin on the domestic side when an aggrieved U.S. industry (representing a certain percentage of U.S. producers) files an antidumping duty petition alleging material injury due to unfairly priced foreign exports. The case proceeds on two tracks, one before the ITC to determine whether the U.S. industry has in fact been injured by the targeted imports, and one before the DOC to determine what that level of injury is, i.e., the actual level of dumping. In cases against China, which is treated as a "non market economy" (NME), dumping rates are based on the difference between the net U.S. price and the net foreign (or Chinese) price. The latter is based on a company's "factors of production" (i.e., the amount of labor hours and material inputs required to produce one unit of the product). These usage factors are then "valued" using "surrogate values" of similar inputs and labor in a market economy at a similar stage of development as China (e.g., India).

Cases move quickly through both agencies, with preliminary dumping duties imposed on U.S. importers as early as 160 days after the petition is filed. These duties can also be retroactively imposed up to 90 days prior to the preliminary determination if the DOC (and ITC) find that "critical circumstances" exist (i.e., whether there is a massive surge of imports between the petition and the preliminary determination.) A final dumping duty determination can come as early as 235 days after the petition and a dumping order imposed shortly thereafter (assuming the ITC finds material injury or threat of injury). Once the order is published, the tariffs are final and cash deposits are required at the final duty rates until a company can participate in an annual review of its own particular dumping situation. These dumping orders can be reviewed each year thereafter for a minimum of five years.

A Chinese producer with a grievance over a particular DOC calculation (or an ITC injury finding) can appeal the issue to the U.S. Court of International Trade and, if necessary, to the U.S. Court of Appeals for the Federal Circuit.

Editor: How do you protect Chinese clients from U.S. antidumping actions?

Schroth: Dumping cases are complex, costly, time consuming and conducted on a very fast track. Targeted Chinese companies should take a proactive approach to prepare their sales, production and accounting systems to survive an investigation and minimize or eliminate dumping duties. Early preparation is the key.

Our firm has had considerable success in preparing Chinese industries for dumping cases (and other trade actions) before they are filed. We conduct a "pre-investigation audit" and analyze a company's exposure to dumping duties based on current DOC methodologies and using the DOC's actual computerized margin calculation program. The audit involves an in-depth and comprehensive review of the company's corporate structure, sales and distribution practices, prices and factors of production.

Often Chinese companies are not savvy in keeping accurate or sophisticated accounting and production records. We work with them to make them "dumping proof" on the pricing side and "verification proof" on the documentation and accounting side. We also gather preliminary surrogate country information to perform the same calculation of "normal value" used by the DOC. At the same time, we prepare our economic defense for the ITC's preliminary injury phase. We can hire expert economists to prepare an econometric analysis of market conditions to develop our defense. We identify and work with potential witnesses for the preliminary ITC hearing (which is only 21 days after the case is filed) and put together ITC injury data for the Chinese industry. If a case has already been filed, we perform a similar audit prior to each annual administrative review.

Assuming the case goes to a dumping order, the case will last for a minimum of 5 years, but often for much longer. Long-term planning and oversight of production and pricing in or to the U.S. market is critical. By creating an internal system of price controls and solid accounting practices and systems, we have been able to reduce Chinese producers' dumping duty margins to low or de minimis levels. We implement structural and organizational changes that improve chances of success in these cases. We solidify relationships with U.S. buyers/importers and develop a strategic plan to determine what products are to be targeted and the impact of sourcing inputs from market economies. We rework subcontractor and supplier relationships, consolidate production to only a few factories, create vertical integration where appropriate and implement production efficiencies. We also look at shifting the origin of the finished goods under U.S. Customs origin rules and work with companies to redesign their products to possibly exclude them from the scope of the case.

Part II of this article will discuss other laws and government actions impacting Chinese-U.S. trade relations.

Please email the interviewee at aschroth@gdlsk.com with questions about this interview.