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Trump Unlikely To Use Section 301 Against China

Commentary on how Trump will deal with disputes with China over shipments of export cargo and import cargo in international trade.

Trump Unlikely To Use Section 301 Against China

With the advent of Trump administration, the long standing rhetoric surrounding US-China trade disputes has not only become more ominous but also, threateningly, real. Especially the Chinese exporters to US market are petrified that as soon as the senior and middle ranks in the US trade administration are cemented, a barrage of concerted trade actions might be launched against them.

One of the available legal instruments in Trump’s tool kit that is being frequently discussed in this discourse is the dreaded Section 301 action. This article explains the investigation and enforcement mechanism contained in Sections 301-310 of US Trade Act of 1974, which should, to a large extent, help allay the fears of Chinese exporters. The first part of the article focuses on the substantive and procedural aspects of Section 301 that the United States Trade Representative (USTR) is required to follow while investigating allegedly unfair foreign trade laws or practices. The second part describes the solitary Chinese case investigated in recent years under Section 301.

Section 301 provides for the authority and procedures to enforce US rights under international trade agreements and to respond to certain unfair foreign trade practices. It enables the United States to investigate and impose trade sanctions on foreign countries that violate bilateral or multilateral trade agreements by denying rights of US persons and interests.

Importantly, Section 301 may also be used to respond to unreasonable, unjustifiable, or discriminatory foreign government acts, policies, or practices that burden or restrict US commerce even if those acts, policies or practices do not violate the explicit terms of an international agreement. As such, Section 301 may be used to address any unfair trade practice, including issues such as restrictions on foreign market access for US goods and services.

The USTR may initiate a Section 301 investigation upon a petition by any interested person or on its own initiative. The USTR is required to review the allegations presented and determine whether to initiate a formal investigation not later than 45 days after a petition is received. In general, upon initiation of a Section 301 investigation, the USTR is required to immediately request consultations with the foreign country concerned; however, the law does permit the USTR, after consulting with the petitioner, to delay such a request for 90 days in order to verify and/or improve the petition to ensure an adequate basis for consultation.

Section 301 can be considered a domestic counterpart of the WTO consultation and dispute settlement procedures. If USTR initiates a Section 301 investigation, it must first seek consultations with the foreign government to negotiate a settlement in the form of compensation or elimination of the trade barrier.

If the consultations do not result in a settlement of the matter, the US can take a range of remedial enforcement actions. It can suspend concessions given under trade agreements; impose duties in excess of the rate negotiated in the WTO or the bound rate or other import restrictions (in the same amount as damages suffered by US industry); impose fees or restrictions on services; enter into agreements with the subject country to eliminate the offending practice or to provide compensatory benefits for the United States; and/or restrict service sector authorizations.

The USTR may terminate a Section 301 case if the dispute is settled, but, under section 306 of the Act, the USTR must monitor foreign compliance and may take further retaliatory action if compliance measures are unsatisfactory.

The USTR administers the statutory procedures through an interagency committee made up of several senior-level officials from various executive agencies, including Agriculture, State, Treasury, Commerce, and Justice.

When a Section 301 investigation involves an alleged violation of a trade agreement, such as agreements under the World Trade Organization (WTO) or the North American Free Trade Agreement (NAFTA), the USTR must follow the consultation and dispute settlement procedures set out in that agreement.

While US law does not require that the US government wait until it receives authorization from the WTO to take any of these types of enforcement actions, the WTO has ruled that taking any such actions against other WTO member countries without first securing approval under the WTO Understanding on Rules and Procedures Governing the Settlement of Disputes is, itself, a violation of the WTO Agreement.

Thus, the US government is legally bound to secure approval under the WTO Dispute Settlement Mechanism prior to enforcing any action against another WTO Member, like China. Such approval normally would require that a WTO panel review the matter and rule whether the measures that are the subject of the dispute violate a member country’s rights or obligations under the WTO. If, after reviewing the measures in question and the proposed US enforcement actions, the WTO approves an enforcement action, the action is, of course, no longer inconsistent with US WTO obligations.

Because China is a WTO Member, any Section 301 investigation, absent a quick settlement, must be followed by procedures prescribed under established WTO protocol. As such, Section 301 can be said to simply afford an advance notice to China to adjust its acts, policies or practices without having to undergo a costly WTO dispute settlement proceeding. In other words, Section 301 facilitates the chances of a quick settlement.

While Section 301 was a powerful, unilateral US trade policy weapon prior to the establishment of the WTO dispute settlement mechanism under GATT 1994, it has rarely been invoked since then and has not produced any US-sanctions or WTO cases.

There has been only one recent instance of USTR applying Section 301, when an investigation was instituted on October 15, 2010, in response to a petition filed by the United Steel Workers Union (“USW”) on September 9, 2010. The USW petition contended that certain policies and practices adopted by China to stimulate and protect its clean energy industry were inconsistent with its WTO obligations, and that these policies and practices had enabled China to emerge as a dominant supplier of wind and solar energy products, advanced batteries, and energy-efficient vehicles.

The USW petition asserted that China had violated its WTO commitments by restricting access to critical raw materials (i.e., “rare earth” minerals); granting subsidies to Chinese manufacturers that were WTO-inconsistent; granting other trade-distorting subsidies to Chinese manufacturers that injured foreign competitors; imposing regulations that discriminated against imported goods and foreign investors; and imposing technology transfer requirements on foreign investors.

The USW claimed that these Chinese practices had injured American workers in the green technology sector and had caused “serious prejudice to US interests.”

The USTR initiated its investigation to consider whether acts, policies, and practices of the Chinese government had denied US rights or benefits under the GATT 1994, under the Subsidies and Countervailing Measures Agreement (SCM Agreement), and/or under China’s Protocol of Accession to the WTO. Since the Section 301 investigation revealed practices allegedly inconsistent with a trade agreement, the USTR sought formal consultations with the Chinese government to address those practices. It is notable, however, that beyond the initial Section 301 investigation, all subsequent actions occurred under the aegis of the WTO.

On December 22, 2010, the United States filed a request at the WTO for consultations with China, challenging China’s Special Fund for Wind Power Equipment Manufacturing, alleging that under the Special Fund China provided monetary grants and other benefits to its domestic wind power manufacturing industry. The Special Fund program allegedly provided subsidies and other support contingent on the use of domestic Chinese components in violation of the SCM Agreement. The United States also claimed that China failed to notify the WTO of its wind power program, as required under the SCM Agreement. Thereafter, the United States and China held consultations on February 16, 2011.

Subsequently, in a June 7, 2011 announcement, USTR Ron Kirk stated that the United States had successfully challenged China’s Special Fund subsidy program and secured China’s agreement to end the program.

Because China is a Member of WTO, United States is mandated to settle any trade dispute with China solely in accordance with provisions and procedures outlined in GATT 1994, other agreements executed pursuant to GATT 1994, such as the SCM agreement, and China’s WTO Accession Protocol of 2001. As such, any Section 301 Investigation launched by USTR serves no purpose other than affording an advance warning or opportunity to settle the dispute without having to undergo the costly and time taking litigation at WTO.

That said, the USTR under the incoming Trump administration could possibly initiate a Section 301 investigation, regarding either the alleged provision of state subsidies to Chinese industry or the alleged denial of market access to various US industries, in violation of China’s WTO obligations.

The key point to watch is whether following a USTR investigation, the Trump administration would decide to impose tariff or non-tariff barriers on Chinese imports without following the WTO dispute settlement mechanism. If that were to happen, it would almost certainly be held to be inconsistent with the United States’ WTO obligations. Consequently, China could obtain permission from the WTO to retaliate against the United States, which would be detrimental to US trade. While an unlawful use of Section 301 against China is unlikely, it cannot be totally discounted. A lot will depend on how the chemistry between the two leaders is established during the reported upcoming visit of President Xi Jinping to USA in the first week of April 2017.

Dharmendra N. Choudhary is a Washington, DC-based international trade attorney with GDLSK LLP, the largest US law firm focused on Customs and international trade issues. He has been a longstanding counsel to several Chinese and other foreign exporters in US anti-dumping proceedings.

In anti-dumping cases, DOC dtermines fair value of Chinese shipments of export cargo and import cargo in international trade.

Myth Versus Reality: Dumping of Imported Chinese Goods

With the new administration in place, anti-trade rhetoric has reached an alarming crescendo with imported Chinese goods squarely positioned in the bullseye. There appears to be a settled presumption that the Chinese goods are being dumped, i.e. deliberately pushed into the US market at artificially low prices in order to out-price the domestically produced goods, and that these goods are the main cause for the sputtering performance of the US domestic manufacturing industries and accompanying job losses.

This article seeks to demystify certain esoteric facts surrounding the alleged dumping of Chinese goods into the US market. Under US trade law, the US Department of Commerce applies a fundamentally different methodology for determining the dumping margin of goods exported from China than those being followed for most other countries. This is because pursuant to its World Trade Organization Accession Protocol signed in 2001, China agreed to be treated as a non-market economy (NME) for a limited period of 15 years (which expired on December 10, 2016). Notwithstanding, Commerce continues to treat China as a NME, against which China has recently filed a complaint at WTO.

Dumping margin is calculated based on the difference between the US sale price and the fair (or reasonable) market value of goods. In case of market economy (ME) countries like France, fair value of goods is the price at which the exported goods are sold in the French marketplace. As such, in ME Anti-dumping (AD) cases, the dumping margin is based on an objective criteria, and the exporter can exercise reasonable care while negotiating the export price to ensure that he is not later found culpable of dumping.

In contrast, due to China’s NME status, Commerce determines the fair value of export goods by applying a hypothetical two-step method. First, Commerce holds that the sale price of goods in the Chinese marketplace cannot represent fair value since they presume that these prices are not determined by free-market principles. As such, Commerce determines the fair value of goods in an economically comparable third country, called a surrogate country. Commerce has wide discretion to select a surrogate country. In recent Chinese AD proceedings, Commerce has chosen a variety of surrogate countries, including Thailand, for passenger tires; South Africa, for geogrids; Bulgaria, for decorative hardwood and plywood; Romania, for garlic; and Mexico, for hydrofluorocarbon gases.

Second, unlike ME cases, Commerce does not value the finished goods itself in the surrogate country; instead, it breaks down the finished goods into its (often) hundreds of components – material and non-material – values all of such components individually, and then aggregates them to arrive at a hypothetical fair value of finished export goods.

The resulting dumping margin arising from this hypothetical two-step methodology is unpredictable even for seasoned lawyers. Clearly therefore, unless a Chinese exporter is blessed with divine revelation, he can never envision, while setting his US export price, whether he’d later be ensnared in a US anti-dumping proceeding.

The situation is further complicated in case a Chinese exporter is engaged in exporting goods to several countries, in which case he must reckon with disparate rules being followed in different countries for establishing a fair market value of goods. For instance, different surrogate countries could be selected by the investigating authorities in different jurisdictions. Another important point of distinction to note is that in European Union countries, although the fair value is determined in a surrogate country, it is based on the price of finished goods as such, instead of an aggregation of input prices.

To sum up, on account of China’s theoretical NME status, the dumping margins established for Chinese exporters are nothing more than a hypothetical construct. At the least, it is unfair to charge Chinese exporters with an intent to dump goods in the US market, when the methodology used for computing dumping margins is based on a set of hypotheses.

This explains why Chinese exporters were so keenly awaiting the expiration of the transitional 15-year time period on December 10, 2016, when they would have had the first opportunity to stake a claim to be treated as a market economy country in AD proceedings, entitling them for application of objective instead of hypothetical rules and achieving a more predictable outcome. As noted above, China’s future NME status is in the hands of WTO.

Dharmendra N. Choudhary is a foreign trade counsel at the Washington, DC, office of international trade law firm, Grunfeld Desiderio et al. His practice area is focused on defending foreign exporters in US antidumping and countervailing duty cases.

recent changes to US law affect shipments of export cargo and import cargo in international trade.

Foreign Exporters: Beware of Recent Amendments to U.S. Trade and Customs Laws

Significant amendments in U.S. laws through the Trade Preferences Extension Act of June 2015 (Trade Remedies Act) and Trade Facilitation and Trade Enforcement Act of February 2016 (Customs Enforcement Act), afford the U.S. Department of Commerce (Commerce), International Trade Commission (ITC), and Customs and Border Protection (Customs) new tools to counter alleged dumping and subsidies. The new laws are in response to U.S. domestic industry’s lobbying, alleging that the prior laws were insufficient in content, lacked effective enforcement, and had failed to curb imports of dumped and subsidized goods.

Given the severity and wide scope of these changes, all foreign exporters to the U.S. market need to be vigilant about the new legal requirements and constraints.

Dumping and Subsidies

Anti-dumping (AD) duty is levied on goods that are allegedly exported at prices lower than their fair value. Countervailing duty (CVD) seeks to neutralize the amount of government subsidy benefits conferred on exported goods.

In AD proceedings, the rate of AD duties is crucially dependent on a “fair value” determination, over which Commerce has vast discretion. For countries designated as market economies (ME), the law requires Commerce to calculate fair value based preferably on an exporter’s home market sale prices or alternatively, exporter’s third country selling price or using a cost construction method, utilizing the exporter’s price and consumption data.

Conversely, for determining the fair value of goods from non-market economy (NME) countries, Commerce rejects the actual cost/price data and applies a hypothetical cost-build up method by aggregating cost of all inputs, valuing such inputs based on price or surrogate value data from a third country (called the surrogate country), unless a significant portion of any particular input is purchased from an ME country. This methodology unsurprisingly yields an unpredictable and, in practice, unreasonably higher fair value.

Mischief of a Particular Market Situation

Amendments to the Trade Remedies Act enable Commerce to reject all three prices based simply on an alleged presence of a “particular market situation” in an ME country. Since “particular market situation” is not defined anywhere, Commerce could conveniently elevate routine government subsidy programs into the mischief of a “particular market situation”, and reject all the three established metrics used for determination of fair value. Countries designated as generally subsidized countries (presuming pervasive government subsidy programs) are especially vulnerable to this mischief.

Pursuant to invoking a “particular market situation” in ME countries, Commerce could proceed to determine fair value using the surrogate country methodology, otherwise reserved for NME AD cases. As such, all technically designated ME countries potentially face an uncertain specter in future US AD proceedings.

This provision also does not portend well for NME countries since it could potentially be used to deny the de facto benefits of an ME country to China and Vietnam whenever these countries are de jure regarded as an ME country. That is potentially the case for China on December 11, 2016 and on January 1, 2019 for Vietnam, pursuant to Article 15 of their World Trade Organization Accession Protocol.

Mandatory Submission of Cost of Production data

In determining fair value, Commerce is permitted to reject home market price if it is less than the cost of production of goods. Prior to the amendment, a specific allegation was required from U.S. domestic industries to trigger a cost of production inquiry. Now, Commerce is mandated to call for cost of production data in all AD investigations and reviews. This requirement adds an avoidable burden on exporters undergoing AD proceedings.

Rejecting Price data of ME Inputs Subject to Subsidies and AD Order

In NME AD proceedings, Commerce can reject cost/prices of an input purchased from ME countries if such input is subject to subsidies or AD duty order. This could be used to reject a bonafide import price paid by Chinese or Vietnamese producers by showing even a tenuous connection with some subsidy benefits or AD order. As such, this change renders the fair value determination in NME cases even more uncertain.

Punitive Adverse Facts Available Rate

Commerce is vested with vast discretionary powers in drawing adverse inference and consequently, applying adverse facts available (AFA) information when an exporter fails to provide information in an AD/CVD proceeding. Earlier on, Commerce had to justify the selected AFA rate by corroborating it with other record information. Now, Commerce can select the most punitive AFA rates, disregarding the commercial reality. There are several pieces of information, such as those in possession of tollers—manufacturing jobbers, usually small firms—over which the exporter has no direct control. Under the new law, the exporters would need to exercise a much higher degree of planning and control over their supply chains.

Material Injury Definition Liberalized

The new law also amends the definition of “material injury” and the factors the ITC examines when evaluating material injury. The ITC is prohibited from giving a no injury finding merely because the U.S. domestic industry was profitable or its performance had recently improved. This change is favorable to U.S. domestic industries and unfairly deprives foreign exporters of a genuine defense from false injury claims.

Finally, the Customs Enforcement Act provides that an importer could be held guilty of “evasion” of duties on imported merchandise subject to an AD/CVD order, even in situations of non-deliberate acts of omissions and commissions. Unlike the past, when it had to refer scope issues related to AD/CVD cases to Commerce, Customs can now conduct a full blown investigation. This expansion portends avoidable duplication and contradictory orders from two agencies on the same subject matter, which is a real concern for bona fide exporters.

All foreign exporters to the U.S. market need to carefully analyze the ramifications of these new requirements and strategize accordingly.

Dharmendra N. Choudhary is a Foreign Trade Counsel at the Washington D.C. office of International Trade Law firm, Grunfeld Desiderio et al. His practice area is highly focused on defending foreign exporters in U.S. antidumping and countervailing duty cases.