The Rule of Law Matters - Kip Howlett

The Rule of Law matters. Economics matters. Fairness matters.

An opinion piece by Kip Howlett

This is the first blog in a 3 part series that addresses the countervailing duty and antidumping case filed by 6 of the largest U.S hardwood and decorative plywood manufacturers against Chinese manufactured hardwood plywood imports into the U.S. market.

The Rule of Law Matters -

When Moses came off the mountain, he carried 10 commandments, rather brief laws, which were added to the other 603 in his faith. Jesus added the Golden Rule. As a country founded on the English common law system, these Judeo-Christian principles are deeply rooted in what is now called the “Rule of Law”. If you break the law, then there are consequences. Laws keep us a civil society.

In international trade, we have laws to enhance free trade, protect fair trade, and guard theft of your property from use to the thief’s advantage. We even have a global trade traffic cop, the World Trade Organization, to keep the system and those who choose to play in it honest. Both China and U.S. have to play by the WTO’s rules and their laws have to be consistent with the global rules of fair trade.

In the U.S. we have laws that define how subsidies in a country exporting into the U.S. constitute unfair trade. If you can prove that subsidies are occurring and the domestic industry is damaged from imports of those subsidized products, then import duties can be imposed equal to the amount of those subsidies. It’s not fair trade and the laws provide relief. The law levels the playing field. Remember an “eye for an eye”, “tit for tat”, or “equal justice under the law”. It is not a punishment. It is a remedy for playing unfairly. Think of a 15 yard penalty rather than ejection from the game.

What is dumping? If I sell something for less than it costs me to make it, then that can be dumping. A onetime sale is different than a consistent and persistent pattern of selling below cost. For example, selling winter sweaters left in inventory before the start of the summer season is a sale. Doing it in a consistent pattern is dumping.

Why would a company engage in dumping? Why consistently “lose” money? There can be many reasons. In a society that demands order to keep its population submissive, keeping people at work keeps them off the street, prevents social unrest, may be less costly than direct welfare payments, or a myriad of other reasons. With its huge population, China has to have social and political order.

Having built the world’s largest manufacturing base, idle hands cannot be allowed to become the devil’s political unrest workshop. China has to make stuff. If it can’t sell it in its domestic markets, then dump it in the global economy. An industrial policy predicated on building modern manufacturing capacity to meet its domestic economic needs and export the excess to world markets is helped when the industry is a government enterprise. Japan, Australia, the Philippines, the EU, Argentina and the U.S. have found dumping of these and similar products and taken action under their laws. China recently started its own antidumping investigation against imports of cellulose pulp from several countries, including the U.S. In recent years, China has become one of the most frequent users of antidumping laws.

The Chinese government’s stake in its industries means the government takes their loss. Similar to an on-going bailout.

How do you know how much someone is underselling? In a free market economy, there are price indexes. We know the price of just about everything from housing, to pork bellies, to gasoline. See craigslist and eBay. Even in a free market economy, if the government owns the raw material that goes into the product, then how do you know how much economic value may be being dumped? For example, Canada owns practically all of the trees in that country, but there are enough private forests that when trees are sold by the government, a fair market value can be determined. If the government sells its timber “well below” that price, it’s subsidizing its industry. There is a trade case that addressed just that practice. (See - http://www1.american.edu/ted/USCANADA.HTM)

Determining the factories’ costs is critical to assess if dumping is occurring. China is not a market economy. In a free market economy it’s easier to find the price of anything compared to a non-market economy where real prices and costs are not transparent. If countries make similar products with the same kinds of raw materials and they are comparable in development, then a determination can be made what the costs of the inputs are and the fair price to cover those costs and get a fair return on the sale. You can determine what a Chinese manufacturer would pay for raw material inputs and what would be a fair selling price. The countries mentioned above who have imposed duties on Chinese imports did just that.

Getting addicted to cheap – you know, “I never pay retail for anything”. If everyone did that, would there be retail stores anymore? Why would a rational seller do that? Short term you get rid of your stuff, middle term you drive out the “retailers”, and then in the long term without retailers, you have monopoly power. Monopoly pricing opens up a whole new set of anticompetitive practices laws.

Think of antidumping and countervailing laws as a prophylactic to prevent the creation of an international monopoly or cartel.

If you are pulled over for speeding 80 mph in a 60 mph zone and the cop has you on a radar gun, do your protestations get you off the hook? If others are speeding all around you and you are the one pulled over, does saying “everyone’s speeding” then send you on your way without a ticket? If you have great excuse (“Officer, I’m late for work” or “Late for my kid’s play”), will you get a police escort to your destination? No to all the above. You get a ticket and pay it. Rule of law and enforcement.

We prohibit imports of products made with child labor even though they are cheaper because the rule of law in most of the world’s developed countries have decided that the exploitation of child labor is inherently bad, even if it could result in access to cheaper goods for those country’s consumers. The rule of law trumps cheap! To a large degree, that is one of the signal characteristics of economic development.

If you buy a stolen Rolex watch for 90% off its retail price, do you feel bad since you got such a good deal? Does the seller feel bad since he stole it (violated the law) in the first place? Who feels bad in this transaction? The guy who had the watch stolen in the first place?

Which one are you?

Next: Economics matters – whose job really got gored?

Hardwood Plywood and Veneer Association. © 2013.

In 2011, the U.S. imported $707.3 million of hardwood plywood from China up from $617.9 million in 2009. Its share of U.S. HWPW imports increased from 50% to 53% in 2011. The unit value of Chinese imported HWPW dropped from $0.57 sq. ft. to $0.46 sq. ft. in 2011.

U.S. HWPW production increased from $617.1 million in 2009 to $673.6 million in 2011.

The U.S. apparent market for HWPW grew from $1.843 billion in 2009 to $2.014 billion in 2011 as U.S. housing starts went from about 580,000 in 2009 to 630,000 in 2011.

Sources:

US International Trade Commission Publication 4361, Nov.2012 and National Association of Home Builders