Christopher Lingle’s article in the South China Post, “China must stop its destructive market interventions while it can,” (September 27 2016), highlights the damage caused by the Chinese government’s continuing interventions in renminbi exchange markets. Lingle says:

China’s authorities can promote the health of its own economy by abandoning an exchange-rate obsession over the value of the renminbi against the dollar and intervening less, not more. It turns out the primary villain in the tale is China’s dependence on export-led development that is the basis for continuing controls over exchange rates and capital flows.

Lingle disagrees with the claim that government interventions in industry, banking and exchange rates contribute to China’s economic development:

It turns out that China’s self-proclaimed “market socialism” is in fact a poisonous cocktail of neo-mercantilism (that is, export-led growth) and Keynesian stimulus policies. Alas, the resulting hangover is set to bring a painful end to the “Beijing consensus” as well as President Xi Jinping’s (習近平) “Chinese Dream”.

For a background on International Finance, floating exchange rates, and China’s currency manipulation, both Khan Academy anscreen-shot-2016-09-30-at-9-56-55-amd Marginal Revolution University offer a series of video lectures.

Khan Academy’s Review of China US Currency Situation is here.

Marginal Revolution University’s Chinese Currency Manipulation video is here.

screen-shot-2016-09-30-at-10-00-40-amMRU’s Tyler Cowen has a separate recent video, The Rise and Fall of the Chinese Economy, here.  Text on page with video notes:

A turning point for the Chinese economy came in 2009. With the recession affecting many other countries, China’s government took steps to avoid the recession and keep the economy afloat, but at a cost. Debt skyrocketed during the period, which is proving less sustainable as China’s rate of growth declines. 

Who cares whether the United States federal government substantially increases its economic and/or diplomatic engagement with the People’s Republic of China? Well, NSDA policy debaters do, or will, as they research and debate proposed policy reforms. But most people are less interested. People have limited time and lots to do, and realize time spent researching trade policy likely won’t be rewarded. Most people have little influence on public policy, and without reforms they will be stuck under whatever trade regulations are in the status quo

The people and organizations who do care enough to be active are those who benefit from current trade regulations, or expect to benefit from new regulations. So U.S. Furniture manufacturers lobby for and file “dumping” charges with the Commerce Department against Chinese furniture companies. U.S. shrimpers lobby to restrictions on frozen shrimp imported from China (and Chinese shrimp industry fights back). U.S. Steel companies care, and lobby to restrict steel imports from China (though higher steel prices raise costs for most U.S. manufacturers, whose products become competitive on world markets).

Jeff Henderson, president of the Aluminum Extruders Council cared enough to charter a plane to investigate transshipped aluminum stockpiles in Mexico (see September 9, 2016 front page WSJ  story).

Union leadership lobbies for trade barriers they believe will protect union jobs here. Environmental groups concerned about CO2 emissions from China’s heavy use of coal in manufacturing look for ways to add a carbon-tax to imports from China.

Each trade barrier increases the prices U.S. consumers pay for imported goods. These price increases are rarely enough for most consumers to notice, much less spur them to protest. But the gains from protectionism to U.S. producers can be substantial, and through trade associations they invest millions of dollars to advocate new and protect existing trade restrictions.

The benefits of trade restrictions are concentrated to a handful of producers, but the costs are diffused across thousands of companies and consumers. (Over half of goods imported from China are in supply chains and integrated into U.S. manufactured goods, often for export. Raw and extruded steel and aluminum parts, for example.)

NSDA (and NCFCA) debaters will stand almost alone as motivated enough to research, sort through, and speak out on the various claims, regulations, trade agreements, and protectionist arguments.

Brink Lindsey’s Low-Hanging Fruit Guarded by Dragons: Reforming Regressive Regulation to Boost U.S. Economic Growth makes the case for first repealing “regressive regulations” in the U.S.

However, Lindsey’ Low-Hanging Fruit study focuses on domestic regulations rather than U.S./China engagement.

This October 2013 article in The Diplomat, American Protectionism Threatens US-China Trade looks at current “bilateral” U.S./China protectionist policies.

The United States and China have one of the largest trading relationships in the world, at over $550 billion per year. U.S. policymakers are right to cry foul when the Chinese government distorts that trade to protect domestic interests. Unfortunately, U.S. policymakers do the same thing and, in the process, harm the U.S.-China relationship.

One example is Washington’s continued use of so-called “non-market economy methodology” when deciding whether Chinese goods are being “dumped” into the U.S. market at unfairly low prices.  The designation is a holdover from the Cold War that exists today only because its mystical formula enables U.S. officials to impose higher punitive tariffs to protect inefficient domestic industries.

The practice is actually illegal under World Trade Organization rules. But when China joined the organization in 2001, the United States insisted that an exception be created, allowing it to continue discriminating against Chinese imports for 15 years. Time has passed, and unless the United States government changes its practice by the end of 2016, it will be in flagrant violation of U.S. trade obligations.

A key inherency point for debaters looking at “non-market economy methodology”:

Unfortunately, the United States is almost certainly not going to comply. There is a shameful history of law-breaking by U.S. trade officials abusing the non-market economy methodology. Both U.S. law and international trade rules have been consistently stretched or outright ignored for decades, and there is little indication that this trend will change. 

Commerce, enterprise and voluntary exchange help make the world a more peaceful and prosperous place. Trade and trade policy are at the center of economic theory and political economy. As consumers we benefit from exchange, from trade. As producers we benefit when people in other places purchase the goods and services we produce. But local producers don’t benefit at first from foreign producers offering competitive goods and services here.

Foreign competition can stimulate local producers to innovate and improve their offerings, drawing from better knowledge of local markets and opportunities. Background article by Alan Blinder on “Free Trade.”

On international trade policy, Douglas Irwin writes (from EconLib article A Brief History of International Trade Policy):

The theory of international trade and commercial policy is one of the oldest branches of economic thought. From the ancient Greeks to the present, government officials, intellectuals, and economists have pondered the determinants of trade between countries, have asked whether trade bring benefits or harms the nation, and, more importantly, have tried to determine what trade policy is best for any particular country.

On Amazon.com debaters can “Look Inside” Douglas Irwin’s 2015 book Free Trade Under Fire.

America’s founders tried to limit Congressional and Executive power to intervene in the economy. Modest tariffs on imported goods were for decades the federal government’s major source of revenue, along with land sales. America’s founders believed economic interventions would excite factions, that is, special interest groups who gain from economic legislation. Trade policy through American history has been just that. Domestic producers, from farmers to manufacturers, lobby each generation for new or continued restrictions on imported agricultural and manufactured goods.

Here is a Princeton University discussion of interest groups and “The Problem of Factions.” (pdf)

An earlier Debate Central post, China Trade: Hollowing Out or Filling In the U.S. Economy? discussed this ongoing free trade /managed trade/protectionism debate over U.S. China policy, linking to various recent studies and articles.

 

Current U.S. trade regulations include antidumping and countervailing duty regulations that are abused by special interests. These arbitrary and bureaucratic processes disrupt trade and sometimes cost U.S. importers millions of dollars in retroactive fines.

U.S. federal government engagement with the People’s Republic of China (PRC) mostly involves trade and investment. People and firms in the U.S. contract with people and firms in China to import or export goods and services, or to invest in the production of goods and services. The U.S. Department of Commerce makes rules and regulations regarding commerce between Chinese and U.S. firms.

Trade agreements restrict as well as promote trade and investment in various ways, and are influenced by special interests to advance the agendas of businesses, unions, and environmental groups.

Current and proposed bilateral and multilateral trade and investment agreements are complex and confusing and critics claim the interests of both China and the U.S. would be advanced by reforming or abolishing U.S.Antidumping and Countervailing Duty regulations.

Bill Perry, a Seattle-based trade lawyer explains problems with antidumping and countervailing duty regulations in a August 13, 2016 US/China Trade War post. The Department of Commerce treats China as a NME (nonmarket economy):

Under US Antidumping, Countervailing Duty and Customs laws, the Importer of Record must exercise reasonable care in importing products and in filling out Customs forms. The Importer of Record must correctly state the products’ country of origin and also whether Antidumping and Countervailing duties apply to the imported products. A knowingly false statement on a Customs form constitutes criminal fraud.

If AD or CVD rates go up in a subsequent review investigation, the Importer of Record is retroactively liable for the difference, plus interest. Retroactive liability for AD and CVD cases is a particular problem involving goods imported from China, because the Commerce Department treats China as a nonmarket economy (“NME”) country. Dumping is generally defined as selling products in the United States below their normal value, which generally means selling products in the United States below their prices in the home market or below the fully allocated cost of production.

Since China is a NME, Commerce refuses to use actual China prices and costs to determine whether a company is dumping. It instead uses complicated consumption factors for raw materials and other inputs and multiplies the factors by surrogate values from five to ten constantly changing countries to calculate a cost of production for the Chinese company. All this makes it impossible for the Chinese manufacturer/exporter to know whether it is dumping, never mind the US importer.

Perry then looks at two AD/CVD cases, one involving wooden furniture imported from China and the other involving Chinese mushrooms (along with Columbian straw and cow manure!):

In the Mushrooms from China antidumping case, from the time the antidumping order was issued in 1999 through numerous subsequent yearly review investigations, many antidumping rates were in the single digits because Commerce used India as the surrogate country. But when in 2012 Commerce switched from India to Columbia as the surrogate country, the Antidumping rates went from less than 10% to more than 200% because of surrogate values for straw and cow manure in Columbian import statistics. The Importers of Record then became liable for the difference in the duty rates, plus interest.

The furniture case is similarly bizarre (AD is “Anti-Dumping”):

In the Wooden Bedroom Furniture from China initial investigation… In the initial investigation, the Chinese furniture company received an AD rate of 16%. In the first review investigation, however, Commerce determined that the questionnaire data did not verify and issued the Chinese furniture company an AD rate of 216%.

The US company estimated that the Chinese producer exported $100 million, which created $200 million in retroactive liability for US importers. The Chinese company then decided not to do the second review investigation creating another $200 million in retroactive liability for a total of $400 million in retroactive liability created by just one Chinese company.

Perry notes that Anti-Dumping and Countervailing Duty cases even more financially dangerous when the “False Claim Act” is added to the trade policy mix:

The real hammer against evasion of US AD and CVD orders, however, is the False Claims Act (“FCA”). The FCA ( 31 U.S.C. § 3729) allows people or companies, designated a “Relator”, to file what are termed “qui tam” lawsuits against individuals or companies that directly or indirectly defrauded the Federal government. Through qui tam lawsuits, the informants or “whistleblowers” may recover triple damages on the government’s behalf. Anyone who knows of the fraud, including a competitor company, may file a qui tam lawsuit, and they do.

And:

The most likely to file these lawsuits are your foreign competitors, Chinese competitor, U.S. competitors, U.S. importers, your employee at your Chinese exporting company, your employee at your U.S. importing company. But sometimes they are brought by someone who simply learned of what you are doing. Because the person or company that brings such an action can be awarded millions and even tens of millions of dollars, the incentive to file is huge. If you want to get a better idea of just how lucrative these lawsuits can be, do a Google search for lawyers looking to take on qui tam lawsuits. There are hundreds, if not thousands of lawyers, willing and eager to take such suits. Reportedly the most lucrative Google keyword search is “qui tam”.

In a separate August 12, 2016 post, Bill Perry reports the Department of Commerce seems to rubber-stamp nearly all Anti-Dumping charges:

Commerce finds dumping in 95% of the cases, and the ITC extends antidumping and countervailing duty orders for 20 to 30 years to protect one company US industries. Those policies dramatically increase the perception of international trade victimhood—we US companies cannot compete because all imports are unfairly traded, a perception that is simply false.

The final article in my next blog post will be about the only trade program that works and saves the companies and the jobs that go with them—The Trade Adjustment Assistance for Firms/Companies program. The Article will describe the attempts by both Congress and the Obama Administration to kill the program, which may, in fact, have resulted in the sharp rise in protectionism in the US.

Congress must again restore the trade safety net so that Congress can again vote for free trade agreements and the United States can return to its leadership in the Free Trade area. The Congress has to fix the trade situation now before the US and the World return to the Smoot Hawley protectionism of the 1930s.

Alden Abbott’s Heritage Foundation Backgrounder #3030 on Trade, U.S. Antidumping Law Needs a Dose of Free-Market Competition (July 17, 2015) explains:

Perhaps the best-known category of special tariff is an “antidumping duty,” assessed to counteract export prices that allegedly are set at “unfairly lower” rates than the prices for the same products sold in their domestic market. Thus, for example, dumping of steel bars would occur if Korean steel producers set “unfairly lower” prices for their steel bar exports to the U.S. than they did for steel bars sold in Korea, and an antidumping duty would be assessed on each imported steel bar to raise the import sales prices and counteract the alleged unfairness.

Economists define dumping as international “price discrimination”—the charging of lower prices (net of selling expenses and transportation) in a foreign market than in a domestic market for the same product.[5] Despite its bad-sounding label, price discrimination, whether foreign or domestic, is typically a perfectly legitimate profitable business practice that benefits many consumers.[6]

The fear is of foreign firms that might try to drive U.S. competitors out of business with low prices, then later raise prices dramatically to make up for their earlier losses. Abbott explains:

In reality, harmful “predatory” dumping occurs seldom if ever. In the words of one leading commentator, although “U.S. antidumping law is ostensibly concerned with the kind of international price discrimination that stems from” predation, “one would be hard-pressed to find any real-world example of dumping causing competitive markets to become monopolistic.”[7] Despite this fact, however, antidumping law is a widely invoked staple of U.S. trade policy because it is based on legal standards that have nothing to do with true economic predation. Rather, dumping reflects a set of arcane rules, unmoored from free-market principles, that are designed to shield domestic producers from competitive forces at the expense of American consumers rather than promote competition on the merits.

Antidumping is in fact a form of special-interest cronyism that imposes high costs on Americans and thwarts beneficial competition.

Appendix I of the Backgrounder provides a helpful “Summary of U.S. Antidumping Procedures.

See also Don’t Get Crushed When You Import (August 22, 2016) on the Above the Law blog.

Mark J. Perry, in his May 25, 2011 post Do Anti-Dumping Tariffs on Furniture from China Create U.S. Jobs? Only for Washington Lawyers, notes that U.S. anti-dumping charges against Chinese furniture companies let many to relocate operations to Vietnam.

In Why Antidumping Duties On Chinese Furniture Don’t Save U.S. Jobs in Forbes (May 15, 2011), Cato Institute’s Dan Ikenson provides some background to the expansion of Chinese furniture manufacturing

At the time this case was initiated, the same U.S. furniture producers who were petitioning for relief from imports from China were investing in furniture operations in other countries. There’s nothing illegal or objectionable about investing in foreign production, but the assertions of the petitioning U.S. producers that their aim was to restore U.S. production and U.S. jobs were clearly false. It is testament to the laughably modest standards for finding a domestic industry injured by reason of dumped imports that duties were ever imposed in the furniture case.

Of course nowhere in all the regulation of furniture imports and concern over U.S. furniture jobs and companies is there recognition that the great majority of Americans are consumers rather than producers of furniture. Lower cost furniture means, for millions of Americans, that they can purchase new rather than used furniture, and can afford high quality and enjoy wider choices.

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