Bellwether

Major decision alert:  The United Steel Workers (who also represent tire workers) have filed an unfair trade case against China under Section 421 of US trade law.  “Section 421” in US law is the implementation of a “general safeguard” that China agreed to when it joined the WTO (here’s a Reuters piece (via Yahoo): http://news.yahoo.com/s/nm/20090420/pl_nm/us_usa_china_trade_2 

In layman’s terms (i.e., the way I understand it), if the case is ultimately upheld, the US can restrict imports of the offending products.  Most significant, the threshold for finding market disruption due to the imports (and imposing restrictions) is lower than for dumping or subsidies cases.  In other words, under Section 421 it is easier in theory for US industries to get protection from Chinese imports.

There is a three step process involved:  The US International Trade Commission (ITC) first has to decide if there is market disruption.  If the decision is affirmative, the US Trade Representative’s Office (with input from other agencies) has to make a recommendation to the President on whether or not to take action and if so, what action to take.  Finally, the President needs to respond to the USTR recommendation by making a final decision.

Several Section 421 cases were filed by US industries during the Bush Administration (5 or 6 as I recall).  A few failed because the ITC did not find market disruption.  President Bush rejected the remainder when they reached him, primarily under the section of the law which allows him to decline to take action if the cost to the US economy of taking the action would be greater than the relief it granted to the US industry.

For example, the first Section 421 petition involved “pedestal actuators” which are used to control electric wheelchairs.  In his January, 2003 decision, President Bush said that providing import relief for the US pedestal actuator industry would not be in the “national economic interest”.  The statement stressed that providing import relief would not likely benefit the domestic industry substantially, but that it would hurt the downstream industries purchasing pedestal actuators and the disabled and elderly users of the finished products. Bush stressed, “I find that the import relief would have an adverse impact on the US economy clearly greater than the benefits of such action”.  Similar reasoning was used in subsequent cases.

So:  the Obama Administration now has its first Section 421 case.  This will be a significant decision.  If the Administration approves the petition and grants relief it will face a torrent of such cases from other industries and will be hard pressed to justify not approving those too.

On the other hand, I assume the timing of this petition by the steelworkers union was not a coincidence.  Coming right after the Treasury Department’s report declining to cite China as a currency manipulator puts the administration on the spot.  Two decisions in a row that could anger organized labor and the democratic base is not something the Administration would relish.  (Note:  though given the timelines built into the law, a final decision would not come until September).

Even a casual reader of the blog can guess where I come out on this issue:  the Bush Administration was right to decline to take action on the petitions it received.  We have elaborate statutes to protect against dumping of foreign products.  In addition, beginning in the Bush Administration, the Commerce Department began to apply our law against subsidized imports to China.  These remain available for industries that can show these very specific unfair practices by Chinese exporters.

Protection under the lower threshold of Section 421 in my view will not be in the “national economic interest” (the language of the law), especially now.  In part this is because the first action taken under Section 421 will create a slippery slope that will move us inexorably toward expansive new barriers to Chinese products.  This would have been bad in the Bush Administration.  But to start heading down this slope at a time of fragility in the global economy would be crazy.

Leaders of the G-20 have pledged to combat protectionism, which is held back by a dyke already showing cracks.  Action under Section 421 now would apply some sledgehammer blows to that dyke.  Seems like the last thing we need.

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