Congress to Obama: “No you can’t” on China

By Phil Levy

When the Obama administration rethought its China currency policy last month, we seemed to have dodged a bullet. China stopped giving speeches bemoaning the failings of the dollar, the administration bought time to select an ambassador to Beijing, and we assumed we could all turn to other preoccupations for a while. Not so fast. Serious trouble is still brewing in the more obscure reaches of U.S. commercial policy, and it will be tough for the administration to head it off.

For practical purposes, there are two parts to U.S. trade policy: a deliberate part and a part on autopilot. The deliberate part is much better known to non-trade economists. It involves free trade agreements, Buy America measures, and opportunities to denounce trading partners. Then there is the part on autopilot. This is the part that can sound like a seating chart at a large stadium — Section 421, Section 301, Section 337. Each refers to a part of U.S. trade law that a business or individual can invoke. In the same vein, you’ll hear talk of anti-dumping measures and countervailing duty investigations — all part of "administered protection." Does all this make your head ache and remind you why you always avoided economics and trade law? If so, the autopilot part is having its desired effect.

Beyond their stated purposes, there are two features of these "administrative remedies" that users find attractive. First, they are opaque. That tends to shield them from the backlash we saw when more transparently protectionist measures were put forward.  Second, they limit policymakers’ discretion. Industries seeking relief from imports, and their supporters in Congress, have long complained that the executive branch tends to go soft on trade. Presidents often have a broader perspective on trade than congressmen. They look at the national economic impact of trade measures and at the foreign policy repercussions.

To avoid this sort of second-guessing, Congress has written laws that limit the president’s role in the process. In two looming China cases, Obama does not have the authority to block a filing in either one. In each case, the industry had the right to start an investigation with the International Trade Commission (ITC). If the ITC finds that the industry has been hurt, the investigation continues. In one case (Sec. 421), the Obama administration would have an interagency review and a chance to stop short of trade barriers. In the other cases (antidumping), there is no such policy review, only technical judgments at the Department of Commerce.

This poses a foreign policy challenge. Will our trading partners understand when the president’s hands are tied? They likely would in democracies where there is strong separation of powers. But what about in China, the target of these investigations? Will they misperceive this as a deliberate act?

The early signs are not good. The People’s Daily reported that China summoned the U.S. Chargé d’Affaires, Dan Piccuta, last week and objected. Vice Minister of Commerce Zhong Shan reportedly told the chargé:

US industries have recently filed for trade remedy investigations into Chinese-made oil well tubing and tire products. China is paying close attention to the matter, as the cases involved a large sum of money and affected numerous Chinese enterprises.

The story continued:

Zhong stressed that in the current situation in which efforts are being made around the globe to cope with the financial crisis, it is inappropriate to put forward the two applications. If they were improperly handled, serious problems could occur, which would not only be harmful to the settlement of bilateral economic and trade issues between China and the US, but also generate a negative impact on the recovery and development of the global economy.

And just in case the State Department’s lines of communication are not fully functioning yet, the Minister of Commerce, Chen Deming, wrote in the Wall Street Journal Asia last week:

Regrettably, however, trade measures by the U.S. against China are on the rise. Recently, American industries have petitioned the U.S. government for antidumping investigations, and for investigations under the World Trade Organization’s "special safeguard provision," which could restrict imports of Chinese products. This will seriously test China-U.S. economic and trade relations.

To connect the dots, the special safeguard investigation, a.k.a. Sec. 421, deals with imports of Chinese tires. This is the one the administration could block, if it so chooses. The problem will be political. There is a very low hurdle for the ITC to find injury in a 421 investigation. The ITC did so in a number of cases during the Bush administration, all of which died after executive branch review. Obama’s supporters in the manufacturing sector are clearly hoping for change. In an interview with Inside U.S. Trade, Alliance for American Manufacturing Executive Director Scott Paul said:

Since [the Obama team] made such an emphasis [during the campaign] on trade enforcement, it would be a real surprise to me if — should the ITC find injury on 421 — the President does not accept the finding…. Then you would have a much stronger case that the Obama administration is not living up to its commitment than the first currency finding or the NAFTA piece.

Battle lines drawn. Warning shots fired. 

On oil well tubing, the antidumping case, the administration will have no such chance for review. Once launched, the investigations proceed according to a set timetable. The ITC checks for injury, Commerce checks to see how far the price was below "fair value," and if everything checks out then tariffs are applied. The administration can try to tell the Chinese it had no choice in the matter, but will China accept "No, we can’t!" for an answer?