Ground Zero In The Trade Wars

Tuesday, May 1, 2007 - 01:00

Geneva, Switzerland - In great news for drivers, the World Trade Organization has ruled that police cannot ticket you for driving 65 miles per hour in a 55 mph zone as long as you drive below the limit long enough to offset your speeding. You can even do 90 mph, as long as on average you drive 55.

Fortunately for you responsible drivers, the World Trade Organization's reach does not extend to traffic laws, and the WTO really hasn't ruled on the subject of speed limits. But, in rulings that threaten the ability of U.S. manufacturers to protect their workers and their investments against the pernicious effects of dumping, a panel of seven citizens, including one from the United States, has ruled that the U.S. government cannot penalize foreign manufacturers who use unfairly low prices to deprive American companies of sales as long as other sales are priced fairly. These rulings, involving the little understood rules against dumping, not only threaten U.S. jobs but the Administration's efforts to expand free trade through the Doha Round of international trade negotiations as well.

U.S. Antidumping Law

The U.S. has had rules against dumping since 1921. These rules prohibit foreign manufacturers from offering products in the U.S. market for less than a fair price and injuring domestic industries and their workers. Many economists and editorialists dislike the antidumping laws because they interfere with the marketplace and deprive consumers of the lowest possible prices. But the U.S. Congress is not alone in its desire to protect workers against price discrimination that costs jobs. Since 1947, the international community, through the GATT, has proscribed dumping. And, during the international negotiations that led to the creation of the WTO in 1994, the negotiators continued the provisions that would allow countries to impose duties against companies found to dump their products in the markets of their trading partners.

Zeroing

Both before and after the WTO was created, the U.S. Commerce Department, which administers the dumping law, has taken a sensible approach to enforcement. If a foreign producer dumps 10 percent of its sales, the Commerce Department will calculate the amount of dumping duties on those sales. The Department will not ignore the other 90 percent of sales, however. It will simply calculate a zero dumping duty on those 90 percent of sales. Hence, the practice has become known as "zeroing." In calculating the average dumping margin over all sales, the agency will take the dumping margins found on the 10 percent of sales and average them over all sales, including the 90 percent of non-dumped sales, so the "good behavior" of the foreign manufacturer is taken into account-but not considered exculpatory.

WTO Ruling Sets Off Firestorm

Sounds fair enough, but not for the WTO. The panel of arbitrators, called the Appellate Body, has ruled that the Commerce Department cannot simply set to zero the non-dumped sales; it must use those sales to offset the amount of dumping found. These rulings have set off a firestorm among domestic manufacturers and members of Congress who care about fair trade. It is, in fact, difficult to overstate the significance of the issue of zeroing. There are at least two basic reasons for the uproar over the WTO's zeroing decision: sense and sensibility.

The Appellate Body's ruling defies common sense. The traffic laws of all countries don't allow speeders to offset their speeding by the time or amount that the drivers drive below the speed limit. Similarly, pickpockets aren't excused for their larceny by taking into account all of the wallets they passed up.

The U.S. Commerce Department recognizes what the Appellate Body does not: that companies that dump their products tend to do so selectively. Dumpers don't lower their prices unless they have to; they dump to secure particular sales. It is those dumped sales that hurt U.S. companies and need to be addressed. Ignoring or offsetting those dumped sales by the non-dumped sales displays a complete ignorance of the marketplace as well as the dumping law.

The U.S. Did Not Agree To Forgo Zeroing In GATT & WTO Negotiations

Of course, the Appellate Body didn't just make up this interpretation. Or did it? During the course of the years of the negotiations on antidumping, not once did the U.S. or any other country agree to give up the practice of zeroing. After all, that practice made sense and had been followed by the U.S. and other countries for decades. When the Appellate Body ruled against zeroing, it did not refer to any provision in the antidumping code that prohibited the practice. Nor did it point to the negotiating history for support. In fact, there was no support in either the text or the negotiating history. Instead, the Appellate Body based its conclusions on the requirements in the antidumping code for agencies to make "a fair comparison" of the foreign and U.S. prices. Of course, this judicial interpretation of what is a "fair comparison" has created new law, a law that the U.S. never agreed to accept. Consequently, this decision raises the issue of whether the Appellate Body has wrongly exceeded its role of interpreting the Member States' negotiated agreements by legislating new rights and obligations to which the Member States have not consented.

The Bush Administration's Response

The Bush Administration had this to say about the ruling: "It is troubling that even supporters of the outcome in this dispute thus perceive that it did not result from the negotiated text of the agreement, nor could it be expected to result from subsequent negotiation among the Members. The perception that the dispute settlement system is operating so as to add to or diminish rights and obligations actually agreed to by Members . . . is highly corrosive to the credibility that the dispute settlement system has accumulated over the past 11 years."

The Administration is now in an exceedingly difficult situation. While recognizing the ruling is wrong and "corrosive," the Administration also does not want to offend our trading partners. Indeed, the Commerce Department recently proposed that it would accept the WTO's ruling and change its practice on zeroing. That has created a new problem.

Difficult Environment For Trade

Eliminating zeroing will undermine the effectiveness of the antidumping laws, which have strong support in a Congress already vitally concerned about the trade deficit and the loss of American jobs. The Administration wants Congress to renew trade promotion authority, which will allow the Executive Branch to negotiate free trade agreements. The Administration is also trying to conclude the Doha Round of international trade negotiations, which will have to be presented to Congress.

The WTO's zeroing decision will make both of those initiatives a hard sell. Why bother to negotiate an agreement if the benefits of the negotiations can be undermined years later by a group of individuals who neither negotiated the text nor bothered to adhere to it? Indeed, why negotiate agreements at all when the United States cannot be assured that it will get the benefits of its bargain?

Thirty-nine of the 42 freshman Democratic members of the House have gone on record expressing their skepticism of free trade agreements and asking to play a role in trade legislation. These members may not yet understand the arcane rules of dumping, but they know when their pockets are being picked - and are unlikely to forgive the pickpockets for their good behavior.

The Chairmen of the House Ways and Means and Senate Finance Committees announced their desires to provide trade negotiating authority to the Administration. They have also urged the Administration not to implement the WTO's zeroing decision. Those two experienced legislators know that if the Appellate Body's decision is implemented in a way that undermines protections for U.S. manufacturers, the chances of getting trade promotion authority and a Doha Round approved by Congress are exactly zero.

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Zeroing Explained

Zeroing is the U.S. Commerce Department's methodological practice of not offsetting a foreign producer's positive dumping margins on some U.S. sales with negative dumping margins on others of its U.S. sales. Zeroing is a short-hand way of describing this approach. The negative dumping margins are valued at zero (hence the term, "zeroing"), so that no offsetting of the positive dumping margins occurs in the numerator of the fraction that yields the foreign producer's overall, weighted-average dumping margin expressed as a percentage. The denominator of that fraction reflects the total value of all of the foreign producer's U.S. sales. The offsetting of positive dumping margins with negative dumping margins (that is, not allowing zeroing), of course, makes all the more difficult the capturing of any dumping by the foreign producer, because rarely does a foreign producer dump all of its product. The different results of the two methodologies (stemming from precisely the same underlying facts) is shown at the bottom of the page.

Paul Rosenthal is Managing Partner of the Washington, DC office of Kelley Drye Collier Shannon. He practices in the International Trade and Customs Group and chairs the Government Relations and Public Policy Group. He was formerly counsel to the Senate Committee on Governmental Affairs.

Please email the author at prosenthal@kelleydrye.com with questions about this article.