Executive Briefings

How U.S.-China Trade Tensions Escalated Into a Global Trade War

A tit-for-tat battle among nominal trade partners goes global, and there's no sign of a peace treaty on the horizon.

How U.S.-China Trade Tensions Escalated Into a Global Trade War

The ongoing controversy over U.S. trade policy has largely focused on the nation's relationship with China. The offshoring of American manufacturing to that country, coupled with a flow of cheap imports from China, has fueled tensions at home that might well have been the deciding factor in the 2016 presidential election. Even now, accusations of unfair trade practices and retaliatory measures on both sides show no sign of abating. In this conversation, excerpted from an episode of The SupplyChainBrain Podcast, William Perry, international trade specialist and attorney with the law firm of Harris Moure, explains how the global trade war got out of control. He offers a glimpse behind the scenes of U.S. policymaking on trade, and details how well-meaning actions to protect the jobs of American workers can have unforeseen consequences.

Q: You recently returned from a visit to China. What did you learn there?

Perry: The most important thing I learned is that a U.S.-China trade war has now become a universal trade war. I believe in the next year that there will be a huge uptick in unfair-trade cases.

Q: Why do you think that is so?

Perry: There are two reasons. The first and most prominent is the U.S. presidential election, in which both Donald Trump and Hillary Clinton became very protectionist. Also, in talking to the Ministry of Commerce, Chinese companies and Chinese trade lawyers, it was obvious that the Chinese government is going to significantly increase the number of dumping and countervailing duty cases against the United States and other countries. Just recently they issued a preliminary determination on distiller grains. It’s basically used in animal feed, but [accounts for] $1.6bn of U.S. exports to China. They’ve levied a 33-percent dumping duty on that, which will probably have a significant impact on imports into China. There are also rumors now that the Chinese government may bring an antidumping and countervailing duty case targeting $15bn in exports of U.S. soybeans to China. The Chinese have a public interest test, so if their industry is injured, and it’s in their public interest to bring a case, they’ll do so. Especially in light of all the cases the United States brings against China, there’s a real public interest in China to bring cases against the U.S., and they are doing so.

Also while in China, I learned about all the other countries that are bringing cases — South Africa, India, Malaysia, Indonesia. Taiwan is suing China for steel. We created a Frankenstein monster through our U.S. dumping law. Now the whole world has adopted it.

Q: Is this happening now, or you expect such cases to start coming up with the new administration?

Perry: Some of them are happening now. The distiller grains case has already happened. There are a number of cases ongoing against China and the U.S. They just initiated a new case on sugar from Brazil, Australia and a number of other countries. But the soybeans case is the one that’s potentially in the future. There was an article in the U.S. press about a potential dumping case against China on aluminum foil. We’re seeing a huge number of cases that are starting to rise.

Q: What’s the political motivation? Is there a sense of revenge on the part of China and other countries, motivated by our own policies on filing antidumping and countervailing duty suits? Are they now just turning the tables on us?

Perry: Partly turning the tables, but it’s not really revenge. The United States is one the few countries in the world that doesn’t have a public-interest test. So when petitions are filed at Mofcom [the Chinese Ministry of Commerce], they will often not release them to the world and not initiate them until they believe it’s in their public interest to go forward and bring the case. Europe has a public-interest test. Canada has one. We don’t. We think it’s a right to file a dumping and countervailing duty case. And this is why the issue of retaliation comes up.

A good example of this was when the solar cells case was brought against China in the United States, nobody realized that there was $2bn of U.S.-produced polysilicon being exported to China. As you would expect, an antidumping and countervailing duty case was filed by Chinese polysilicon producers against U.S. producers. They were being hurt by imports from the U.S. But Mofcom held on to the petition, and didn’t initiate it until it became very clear that the Commerce Department was going to go full force against Chinese solar cells. By the way, that polysilicon case resulted in REC Silicon, which is the largest producer in the United States, deferring a $1bn investment in Moses Lake, Wash., where its factory is located, then closing the factory. Now it’s setting up a joint venture in China.

Q: Tell me more about the public-interest test. It seems very abstract. What exactly are countries with this standard looking for, when they declare that there is or is not a public interest at stake, prior to deciding to file such motions?

Perry: It’s not so much about filing it. In Europe and Canada, the public interest test comes up at the end of the case. In Europe, it’s whether a majority of the E.C. [European Community] countries agree to go forward with the case. Why? Impact on downstream production is one reason. It’s almost impossible to settle a dumping case in the U.S. But in Europe, it’s much easier. They have price undertakings. When the solar cells case was filed in Europe against China, it was targeting $20bn in Chinese exports to Europe. German Chancellor Angela Merkel happened to be in Beijing when they filed the case, and she announced that it should be settled. So there was tremendous pressure on the E.C. dumping authority to come up with a price undertaking agreement, which they did.

I’ll give you another example. In the U.S., where it would make a huge difference, we have had for almost ten years an antidumping order in place against Chinese magnesium. That’s a raw material input. There are over 130 antidumping and countervailing duty orders against China, but more than 80 of them are [for] raw materials — chemicals, metals and steel that go into downstream U.S. production. In the case of magnesium, what happened was they put the dumping order in place, to protect 200-400 workers in Utah. The downstream workers were magnesium die casters. And basically the entire magnesium die casting industry shut down, with the loss of thousands of jobs, as a result of this order on magnesium from China. I’ve been told that the entire lightweight auto parts production has moved to Canada from the U.S. In that case, if there were a public-interest case, and standing was given to downstream producers, it would be their right to come in and protest either at Commerce or the International Trade Commission. They would say, “to put this order and price in place to protect a few workers in Utah, you’ve lost tens of thousands of jobs in the downstream market. It is not in the public interest of the United States to keep this order in place.” But there is no public-interest test in the U.S.

Q: When we last spoke three years ago, we talked about the criteria that the U.S. deploys in order to determine whether China is actually dumping. You said at the time that the U.S. refused to use actual pricing [as a benchmark], because it did not consider China to be a market economy. But by late 2016, it was supposed to begin classifying China as a market economy for that purpose. Has that happened?

Perry: No. The specific date was December 11, 2016. The reason is that China entered into the WTO [World Trade Organization] agreement on December 11, 2001. And pursuant to that agreement, it was to remain a non-market economy for fifteen years. Basically, Commerce is saying that they’re not going to change anything. In light of this political climate, nothing’s going to be done. The issue is in front of the European antidumping authority, and they’re indicating a little bit more willingness to look at it. The European Parliament has come out against making China a market economy country, but the head of the European antidumping authority says they’re “studying it.” If Europe were to make China a market economy, which is highly unlikely, or least relax the criteria a little, that might have an effect on the U.S. But there was no way that anything was going to change on December 11, 2016.

Q: What if China were to be declared a market economy? How would that change U.S. conclusions over whether China was indeed dumping product in this country?

Perry: Hillary Clinton came out and said that making China a market economy would “defang” the U.S. antidumping law. That’s absolutely incorrect. What would happen is that Commerce would have to use actual prices and costs in China. They could, and have even done so in market economy cases, find a price or cost that’s truly distorted. They could go and find some other cost if they wanted to. But generally, they have to use actual prices and costs in China.

The antidumping law is not a penal statute. It’s a remedial statute. It’s supposed to remedy the unfair act. So if China were to become a market economy country, antidumping consultants such as myself and others could go in and work with the Chinese companies and run computer programs, and make sure that the companies were not dumping. I remember talking to a congressional trade staffer, who said, “They’re gaming the system.” They’re not gaming the system. When companies run computer programs to make sure they’re not dumping, they’re doing exactly what the dumping law tells them to do, which is to remedy the unfair act — to make sure they’re not selling below prices in the home market, or below their fully allocated cost of production. When you run computer programs, that doesn’t mean that you necessarily come up with a zero. But it does mean that you can reduce dumping margins significantly. I should mention that with the United States refusing on December 11, 2016 to give China market economy status, I believe firmly, and most experts do as well, that China will go to the WTO and argue that this is a violation of the WTO agreement. And many experts expect that in four or five years, the WTO will rule for China and against the United States.

Q: It will take that long?

Perry: It probably will. It takes a long time to get a decision out of the WTO. And then, once you get it out of a panel, it then has to go up to an appellate panel. The United States will drag the whole thing all the way through, before it will actually make a change. But I think the WTO will rule for China.

Q: The language is pretty clear, isn’t it?

Perry: It is, but there’s a little waffle language in there, and that’s what the argument is going to be. The point is that the provision specifically provides that you’re not going to use actual prices and costs in China, and that was supposed to stop as of December 11, 2016. Commerce doesn’t care. I’ve actually talked to a congressman here in Washington State, and he said, “The United States has won every case it’s brought in the WTO.” That’s not true. In fact, the United States has lost many cases in the WTO. China brought a case against 20 countervailing duty orders in the U.S., and the WTO overturned all 20. Does that mean the U.S. Commerce Department lifted the orders? Of course not. It made small changes in the countervailing duty rates as a result of the WTO’s determination. By the way, when the WTO ruled against China in cases like chicken, which has blocked $1bn in exports from the U.S., the Chinese government mirrored the Commerce Department and made small changes to their dumping and countervailing duty rates. Of course the United States was outraged, but the Chinese were just doing what the Commerce Department does.

Q: It leads one to wonder whether the WTO is still relevant, powerful or effective.

Perry: I think it’s very effective in some ways. What happens is, if you go all the way in a panel proceeding, and finally the WTO rules against the United States or another country, and the U.S. refuses to change its law or do anything, then the countries have a right to retaliation. One of the most famous cases, called the Byrd Amendment, was passed by [former Democratic senator from West Virginia] Robert Byrd and attached to the agricultural bill in the early 2000s. It provided that U.S. domestic industries that brought dumping and countervailing duty cases could get the duties that are actually collected by the Treasury Department. The problem is that under the WTO antidumping agreement, there’s only one remedy for a dumping and countervailing duty case, and that’s duties. The industry doesn’t get the money back. When Japan, Canada and many countries lined up to file a case in the WTO against the United States, the WTO ruled against the U.S. The United States kept delaying, delaying, delaying. Finally the complaining countries began drawing up retaliation lists. “OK, we’ve been wiped out to the tune of $1bn,” Japan was saying, “because of this Byrd Amendment. We’ve got a right to take $1bn and raise tariffs on your exports coming into our country. We can come up with these numbers [showing] how much you’ve hurt us.” All of a sudden the U.S. Congress realized it was in trouble, and had to do something. They removed the Byrd Amendment on a 51-50 vote in the U.S. Senate, with Vice President Cheney breaking the tie. But they only did it because of enormous pressure on the U.S. from the WTO and all these countries to change the law.

Q: Given the existence of certain controversial sections within the Trans-Pacific Partnership (TPP) agreement, such as the investor-state dispute settlement language, I wonder whether giving the President fast-track negotiating authority will turn out to have been a mistake, making it impossible for Congress to look at it in a more detailed way. Now that they’re forced to vote up or down on the whole agreement, maybe that killed its chances for ratification.

Perry: That’s part of it. The other problem is that trade promotion authority (TPA) didn’t come up until Republicans won the Congress. Senator Harry Reid, who headed the Democrats in the Senate, made it very clear that he wasn’t even bringing fast-track authority to the floor. He stalled for five or six years. Why that’s important is that without TPA in place, countries wouldn’t come forward with their best offers. I truly believe that if Harry Reid had brought it up, and TPA had passed four or five years earlier, that would have given Congress and the Administration more flexibility. They would have [the advantage] of watching over the shoulders of the negotiators. I can tell you, though, that the deal the Administration had with Congress was that any congressman or senator could go to the negotiations and watch them in person, and kibitz on the side. There were a lot of congressional staffers going to the negotiations for the TPP. So Congress was involved, very much so.

Resource Link:
Harris Bricken

The ongoing controversy over U.S. trade policy has largely focused on the nation's relationship with China. The offshoring of American manufacturing to that country, coupled with a flow of cheap imports from China, has fueled tensions at home that might well have been the deciding factor in the 2016 presidential election. Even now, accusations of unfair trade practices and retaliatory measures on both sides show no sign of abating. In this conversation, excerpted from an episode of The SupplyChainBrain Podcast, William Perry, international trade specialist and attorney with the law firm of Harris Moure, explains how the global trade war got out of control. He offers a glimpse behind the scenes of U.S. policymaking on trade, and details how well-meaning actions to protect the jobs of American workers can have unforeseen consequences.

Q: You recently returned from a visit to China. What did you learn there?

Perry: The most important thing I learned is that a U.S.-China trade war has now become a universal trade war. I believe in the next year that there will be a huge uptick in unfair-trade cases.

Q: Why do you think that is so?

Perry: There are two reasons. The first and most prominent is the U.S. presidential election, in which both Donald Trump and Hillary Clinton became very protectionist. Also, in talking to the Ministry of Commerce, Chinese companies and Chinese trade lawyers, it was obvious that the Chinese government is going to significantly increase the number of dumping and countervailing duty cases against the United States and other countries. Just recently they issued a preliminary determination on distiller grains. It’s basically used in animal feed, but [accounts for] $1.6bn of U.S. exports to China. They’ve levied a 33-percent dumping duty on that, which will probably have a significant impact on imports into China. There are also rumors now that the Chinese government may bring an antidumping and countervailing duty case targeting $15bn in exports of U.S. soybeans to China. The Chinese have a public interest test, so if their industry is injured, and it’s in their public interest to bring a case, they’ll do so. Especially in light of all the cases the United States brings against China, there’s a real public interest in China to bring cases against the U.S., and they are doing so.

Also while in China, I learned about all the other countries that are bringing cases — South Africa, India, Malaysia, Indonesia. Taiwan is suing China for steel. We created a Frankenstein monster through our U.S. dumping law. Now the whole world has adopted it.

Q: Is this happening now, or you expect such cases to start coming up with the new administration?

Perry: Some of them are happening now. The distiller grains case has already happened. There are a number of cases ongoing against China and the U.S. They just initiated a new case on sugar from Brazil, Australia and a number of other countries. But the soybeans case is the one that’s potentially in the future. There was an article in the U.S. press about a potential dumping case against China on aluminum foil. We’re seeing a huge number of cases that are starting to rise.

Q: What’s the political motivation? Is there a sense of revenge on the part of China and other countries, motivated by our own policies on filing antidumping and countervailing duty suits? Are they now just turning the tables on us?

Perry: Partly turning the tables, but it’s not really revenge. The United States is one the few countries in the world that doesn’t have a public-interest test. So when petitions are filed at Mofcom [the Chinese Ministry of Commerce], they will often not release them to the world and not initiate them until they believe it’s in their public interest to go forward and bring the case. Europe has a public-interest test. Canada has one. We don’t. We think it’s a right to file a dumping and countervailing duty case. And this is why the issue of retaliation comes up.

A good example of this was when the solar cells case was brought against China in the United States, nobody realized that there was $2bn of U.S.-produced polysilicon being exported to China. As you would expect, an antidumping and countervailing duty case was filed by Chinese polysilicon producers against U.S. producers. They were being hurt by imports from the U.S. But Mofcom held on to the petition, and didn’t initiate it until it became very clear that the Commerce Department was going to go full force against Chinese solar cells. By the way, that polysilicon case resulted in REC Silicon, which is the largest producer in the United States, deferring a $1bn investment in Moses Lake, Wash., where its factory is located, then closing the factory. Now it’s setting up a joint venture in China.

Q: Tell me more about the public-interest test. It seems very abstract. What exactly are countries with this standard looking for, when they declare that there is or is not a public interest at stake, prior to deciding to file such motions?

Perry: It’s not so much about filing it. In Europe and Canada, the public interest test comes up at the end of the case. In Europe, it’s whether a majority of the E.C. [European Community] countries agree to go forward with the case. Why? Impact on downstream production is one reason. It’s almost impossible to settle a dumping case in the U.S. But in Europe, it’s much easier. They have price undertakings. When the solar cells case was filed in Europe against China, it was targeting $20bn in Chinese exports to Europe. German Chancellor Angela Merkel happened to be in Beijing when they filed the case, and she announced that it should be settled. So there was tremendous pressure on the E.C. dumping authority to come up with a price undertaking agreement, which they did.

I’ll give you another example. In the U.S., where it would make a huge difference, we have had for almost ten years an antidumping order in place against Chinese magnesium. That’s a raw material input. There are over 130 antidumping and countervailing duty orders against China, but more than 80 of them are [for] raw materials — chemicals, metals and steel that go into downstream U.S. production. In the case of magnesium, what happened was they put the dumping order in place, to protect 200-400 workers in Utah. The downstream workers were magnesium die casters. And basically the entire magnesium die casting industry shut down, with the loss of thousands of jobs, as a result of this order on magnesium from China. I’ve been told that the entire lightweight auto parts production has moved to Canada from the U.S. In that case, if there were a public-interest case, and standing was given to downstream producers, it would be their right to come in and protest either at Commerce or the International Trade Commission. They would say, “to put this order and price in place to protect a few workers in Utah, you’ve lost tens of thousands of jobs in the downstream market. It is not in the public interest of the United States to keep this order in place.” But there is no public-interest test in the U.S.

Q: When we last spoke three years ago, we talked about the criteria that the U.S. deploys in order to determine whether China is actually dumping. You said at the time that the U.S. refused to use actual pricing [as a benchmark], because it did not consider China to be a market economy. But by late 2016, it was supposed to begin classifying China as a market economy for that purpose. Has that happened?

Perry: No. The specific date was December 11, 2016. The reason is that China entered into the WTO [World Trade Organization] agreement on December 11, 2001. And pursuant to that agreement, it was to remain a non-market economy for fifteen years. Basically, Commerce is saying that they’re not going to change anything. In light of this political climate, nothing’s going to be done. The issue is in front of the European antidumping authority, and they’re indicating a little bit more willingness to look at it. The European Parliament has come out against making China a market economy country, but the head of the European antidumping authority says they’re “studying it.” If Europe were to make China a market economy, which is highly unlikely, or least relax the criteria a little, that might have an effect on the U.S. But there was no way that anything was going to change on December 11, 2016.

Q: What if China were to be declared a market economy? How would that change U.S. conclusions over whether China was indeed dumping product in this country?

Perry: Hillary Clinton came out and said that making China a market economy would “defang” the U.S. antidumping law. That’s absolutely incorrect. What would happen is that Commerce would have to use actual prices and costs in China. They could, and have even done so in market economy cases, find a price or cost that’s truly distorted. They could go and find some other cost if they wanted to. But generally, they have to use actual prices and costs in China.

The antidumping law is not a penal statute. It’s a remedial statute. It’s supposed to remedy the unfair act. So if China were to become a market economy country, antidumping consultants such as myself and others could go in and work with the Chinese companies and run computer programs, and make sure that the companies were not dumping. I remember talking to a congressional trade staffer, who said, “They’re gaming the system.” They’re not gaming the system. When companies run computer programs to make sure they’re not dumping, they’re doing exactly what the dumping law tells them to do, which is to remedy the unfair act — to make sure they’re not selling below prices in the home market, or below their fully allocated cost of production. When you run computer programs, that doesn’t mean that you necessarily come up with a zero. But it does mean that you can reduce dumping margins significantly. I should mention that with the United States refusing on December 11, 2016 to give China market economy status, I believe firmly, and most experts do as well, that China will go to the WTO and argue that this is a violation of the WTO agreement. And many experts expect that in four or five years, the WTO will rule for China and against the United States.

Q: It will take that long?

Perry: It probably will. It takes a long time to get a decision out of the WTO. And then, once you get it out of a panel, it then has to go up to an appellate panel. The United States will drag the whole thing all the way through, before it will actually make a change. But I think the WTO will rule for China.

Q: The language is pretty clear, isn’t it?

Perry: It is, but there’s a little waffle language in there, and that’s what the argument is going to be. The point is that the provision specifically provides that you’re not going to use actual prices and costs in China, and that was supposed to stop as of December 11, 2016. Commerce doesn’t care. I’ve actually talked to a congressman here in Washington State, and he said, “The United States has won every case it’s brought in the WTO.” That’s not true. In fact, the United States has lost many cases in the WTO. China brought a case against 20 countervailing duty orders in the U.S., and the WTO overturned all 20. Does that mean the U.S. Commerce Department lifted the orders? Of course not. It made small changes in the countervailing duty rates as a result of the WTO’s determination. By the way, when the WTO ruled against China in cases like chicken, which has blocked $1bn in exports from the U.S., the Chinese government mirrored the Commerce Department and made small changes to their dumping and countervailing duty rates. Of course the United States was outraged, but the Chinese were just doing what the Commerce Department does.

Q: It leads one to wonder whether the WTO is still relevant, powerful or effective.

Perry: I think it’s very effective in some ways. What happens is, if you go all the way in a panel proceeding, and finally the WTO rules against the United States or another country, and the U.S. refuses to change its law or do anything, then the countries have a right to retaliation. One of the most famous cases, called the Byrd Amendment, was passed by [former Democratic senator from West Virginia] Robert Byrd and attached to the agricultural bill in the early 2000s. It provided that U.S. domestic industries that brought dumping and countervailing duty cases could get the duties that are actually collected by the Treasury Department. The problem is that under the WTO antidumping agreement, there’s only one remedy for a dumping and countervailing duty case, and that’s duties. The industry doesn’t get the money back. When Japan, Canada and many countries lined up to file a case in the WTO against the United States, the WTO ruled against the U.S. The United States kept delaying, delaying, delaying. Finally the complaining countries began drawing up retaliation lists. “OK, we’ve been wiped out to the tune of $1bn,” Japan was saying, “because of this Byrd Amendment. We’ve got a right to take $1bn and raise tariffs on your exports coming into our country. We can come up with these numbers [showing] how much you’ve hurt us.” All of a sudden the U.S. Congress realized it was in trouble, and had to do something. They removed the Byrd Amendment on a 51-50 vote in the U.S. Senate, with Vice President Cheney breaking the tie. But they only did it because of enormous pressure on the U.S. from the WTO and all these countries to change the law.

Q: Given the existence of certain controversial sections within the Trans-Pacific Partnership (TPP) agreement, such as the investor-state dispute settlement language, I wonder whether giving the President fast-track negotiating authority will turn out to have been a mistake, making it impossible for Congress to look at it in a more detailed way. Now that they’re forced to vote up or down on the whole agreement, maybe that killed its chances for ratification.

Perry: That’s part of it. The other problem is that trade promotion authority (TPA) didn’t come up until Republicans won the Congress. Senator Harry Reid, who headed the Democrats in the Senate, made it very clear that he wasn’t even bringing fast-track authority to the floor. He stalled for five or six years. Why that’s important is that without TPA in place, countries wouldn’t come forward with their best offers. I truly believe that if Harry Reid had brought it up, and TPA had passed four or five years earlier, that would have given Congress and the Administration more flexibility. They would have [the advantage] of watching over the shoulders of the negotiators. I can tell you, though, that the deal the Administration had with Congress was that any congressman or senator could go to the negotiations and watch them in person, and kibitz on the side. There were a lot of congressional staffers going to the negotiations for the TPP. So Congress was involved, very much so.

Resource Link:
Harris Bricken

How U.S.-China Trade Tensions Escalated Into a Global Trade War