On August 26, 2010, the Obama Administration announced fourteen proposed measures it said would "help ensure a level playing field for U.S. companies." All of the proposals are regulatory adjustments in the Import Administration at the Department of Commerce with the potential to make the U.S. market harder to penetrate. Half of them are aimed specifically at non-market economies, of which China and Vietnam are the only significant participants in world trade.
There are two opportunities here for firm clients, whether dependent on imports from China or Vietnam, especially, or competing with them. First, the proposed changes will be the subject of public hearings and briefings, beginning sometime in early autumn (no Federal Register notice has yet been published), and offer American manufacturers and importers an opportunity to be heard. Although all of the proposals appear technical, to experienced trade lawyers they all involve well-known issues and could make a very significant difference in the handling of trade disputes. Importers will want to soften the proposed terms; competing manufacturers will want to support and even strengthen them.
The second opportunity arises from the measures themselves. No matter how successful importers may be in limiting the proposals, probably relying principally on demands for strict conformity with WTO obligations, the adoption of any of the proposals will surely make things more difficult for foreign (particularly Chinese and Vietnamese) products to compete in the United States.
Rather than review all fourteen proposals here, we will flag a few as exemplary.
Chinese state-owned enterprises would almost inevitably be subject to countervailing duties. China has challenged repeatedly the U.S. approach to state-owned enterprises ("SOEs"), arguing that the fact of state ownership is not meaningful. To China, the key issues about SOEs concern how they are run and by whom. The state may own them but, according to China, they are run by businessmen for profit. The public, through the state, is the shareholder, with more difference in form than substance from a western publicly traded company.
To the United States, Chinese SOEs are owned and operated by the state and, therefore, are inherently subsidized operations. For a subsidy to be countervailable -- exposed to duties to offset unfair advantages conferred in international trade -- the state must make a financial contribution to the enterprise for the manufacture or export of the good, and the contribution must be "specific" to an enterprise or industry or group of enterprises or industries. Whereas the first test is easy -- an SOE obviously receives financial contributions from the state, by definition, the second test is more complicated, finding the contribution specific to an enterprise or industry or group of enterprises or industries. The Commerce Department proposals would make all SOEs a specific "group," thereby making SOEs satisfy the second test much more easily, and making them especially inviting targets for American competitors.
The consequence for a foreign company being found dumping or being subsidized in an investigation will be greater and more costly. The purpose of the trade law has never been punitive. Instead, it is intended to be corrective, its application designed to persuade companies and industries to change their conduct. When a company is found to be dumping, and the dumped imports are found to be a cause of injury or threat of injury to a domestic industry, the company's merchandise is subject to five years of antidumping duties before the company can obtain a review to eliminate the tariff and terminate the order. However, when a company can demonstrate for three consecutive years that it is not dumping (or, alternatively, is not receiving subsidies in countervailing duty cases), the dumping (or countervailing duty) order may be lifted from that company. Under the proposed change in the rules, there would be no escape from the antidumping order before the WTO-mandated sunset review, after five years. Some foreign companies surely will prefer to give up the market entirely, rather than go to the considerable expense to try to prevail in an investigation and face at least five years of investigative reviews and potentially high tariffs should they fail.
The Department of Commerce would investigate smaller foreign companies, less equipped to oppose the investigation, leading to higher duties for foreign industries. An important objective of a trade action is to arrest the unfair trade of as much of the foreign industry as possible. That objective has been served best, according to the history of the Import Administration, by concentrating investigative resources on the largest foreign producers and exporters. However, the Import Administration has also recognized that larger companies are better equipped to respond to a trade remedy investigation: their books are in better order; information is more easily retrieved; they are more able to afford good legal counsel. The law always has permitted, when many foreign companies are involved in the manufacture and export of merchandise to the United States, a sampling of respondents (because of the Commerce Department's limited resources), but practice has always favored a sampling of the most important companies, and there have been credible challenges to sampling techniques.
The new regulation would mandate sampling of smaller companies. These companies often cannot afford adequate legal counsel; their books often are in disarray. The results of investigating them almost always lead to higher duties, which in turn are imposed on the entire foreign industry because the sampled companies respond, in effect, for the entire foreign industry. Hence, the new regulation will surely make the trade remedy process more onerous for foreign companies, and more likely to produce greater obstacles for the export of their products to the United States. The exposure of entire industries will be much greater when mandatory respondents are comprised of a greater sampling of smaller companies.
These measures, only three of the fourteen proposals, all point in the same direction, as do the other eleven. They represent, collectively, a signal from the Administration: petitions brought to arrest the flow of allegedly unfairly traded foreign merchandise into the United States will be received favorably. Investigations will be more rigorous than in the past. It will be easier for petitioners to obtain favorable judgments. Companies believing they are competing with unfairly traded foreign goods, especially from China and Vietnam, will have a better chance to prevail than ever before, and foreign companies and countries trying to maintain access to the U.S. market will have a need for good counsel, better preparation, and a record of fair trade, like they have never quite needed before.