The Truth About China’s ‘Dumping’ Practices

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January 31, 2011
SupplyChainBrain
By: Robert Bowman

If you’re like me, your eyes tend to glaze over while reading stories about dumping disputes between trading partners.  Sure, you know what dumping is – the practice of selling raw materials or finished goods overseas at prices below one’s production costs, or what’s being charged at home.  But what are the calculations used to determine whether a country is dumping?  And what are the underlying numbers of any particular case?  The newspaper articles never say.  You just take it on faith that the exporting country is engaged in predatory pricing, or that the target country is playing political football.  Let the World Trade Organization sort it out.

A peek behind the scenes, however, yields some surprising facts about the way that dumping cases are litigated.  Turns out the U.S. Commerce Department finds instances of dumping about as often as the orthodontist says your kid needs braces – 95 percent of the time.  And the consequences can be severe, both for seller and buyer.  Antidumping penalties can remain in place for years, even decades.  In one case, the U.S. has blocked imports of potassium permanganate from China and other countries for 30 years.  The chemical compound is used by virtually every city and town in the U.S. to purify the water supply.  (Oddly enough, it’s also employed in the aging of movie and theatrical props).  The world market price for potassium permanganate: about $900 per metric ton.  U.S. domestic price: up to $2,500.  No wonder movies cost so much to make.

China is a favorite target of the Commerce Department, which is egged on by U.S. domestic producers who claim their very existence is threatened by a flood of cheap foreign goods and materials.  Fair enough, if China really is selling below cost in an effort to gin up its export markets.  But we need to take another look at the way the U.S. makes that determination.  According to one international trade lawyer, William Perry of Dorsey & Whitney LLP, there’s something fishy about the numbers.

For most exporting countries, the Commerce Department makes an effort to determine the market price of goods at home, as well as the economics of producing them.  Not so with China.  Because it’s considered a non-market economy that doesn’t play by the rules of capitalism, Commerce doesn’t look at the country’s actual prices and costs.  Instead, it constructs the numbers based on factors such as China’s cost of raw materials, labor and energy, coupled with the market price charged in a third country like India or Indonesia.

The results can be unusual, to say the least.  In the late 1990s, Perry was attempting to pry open a dumping order against silicomanganese from China.  Electricity is a key element in the production of that alloy.  At the time, Perry says, users were paying 6 cents per kilowatt hour in the U.S. and 3 cents in China.  But in determining China’s cost of electricity, Commerce used the figure of 12 cents per kilowatt hour, which it derived from India.  That decision greatly inflated estimates of China’s overall cost of producing silicomanganese, and guaranteed that the U.S. would find evidence of dumping.  “It happens all the time,” says Perry.

The real victims of the charade aren’t the Chinese, who can find alternative markets for their products.  (“There are dozens of other countries with lower costs than the U.S.,” says Perry).  It’s independent U.S. importers and distributors, who can’t compete under Commerce’s draconian rules.  Domestic producers are determined to drive foreign competitors out of the market, Perry claims, and in many cases they’re succeeding.  What’s the recourse for an importer of Chinese-made wooden bedroom furniture when Commerce slaps a duty rate of 198.08 percent on its product?

Making matters worse is Commerce’s practice of levying antidumping duties retroactively.  Other countries apply the penalties going forward from the time of determination.  In the wooden furniture bedroom case, Perry has heard estimates that U.S. importers could be liable for between $500m and $1bn in retroactive duties – never mind the legal and administrative cost of defending such cases.  That’s more than enough to put a small or medium-sized company out of business.

The situation shades into the comical.  Commerce imposed countervailing duties on coated paper from China, under the argument that because the Chinese government owns the country’s banks, their loans constituted unfair subsidies.  When the U.S. bought into private banks in 2008, using Troubled Asset Relief Program (TARP) funds, China made the identical argument about their loans to American exporters.  Touche.  “The U.S. government has been using this as a sword to attack countries,” says Perry.  “Now others are going to use it as a sword against us.”

Let’s be clear about something: China’s hands are anything but clean.  The country’s manufacturers pay outrageously low wages in order to compete in overseas markets.  And China is all too ready to file spurious dumping complaints against its many trading partners.  But we’re not hearing the whole story, when we read about China’s alleged dumping of goods and Commerce’s acts of righteous retaliation.

So what’s to be done?  Commerce could define China as a market economy for purposes of determining actual production costs – treat the nation as it does, say, Iran.  And it could make future dumping duties prospective instead of retroactive.  Barring those moves – unlikely in the short term, given the political power of certain U.S. industries – American importers and distributors need alternative strategies for survival.  Perry backs government aid for domestic companies that are injured by cheaper imports.  As a template, he cites the work of the Northwest Trade Adjustment Assistance Center.  The Seattle-based body provides federal grants, technical expertise and planning assistance to endangered businesses.  Perry notes the case of a U.S. maker of ceramic pots, whose livelihood was being threatened by imports from Mexico.  Today, having worked out a new business plan with the assistance center’s help, that same company makes ceramic molds for titanium parts for The Boeing Co.  In its 25 years of existence, Perry says, the center has saved 80 percent of the companies that entered the program.  And the price tag?  A measly $16m a year.

We’re paying a lot more than that to have the opposite impact on American business.  “Dumping cases,” declares Perry, “are destroying U.S. companies.”

Reprinted with permission from SupplyChainBrain