Tougher trade enforcement means what, exactly?

The United States continues to make trade policy interesting on a near-daily basis.  Some of the highlights from this week include the announcement that President Trump is apparently considering issuing simultaneous orders to renegotiate NAFTA and to withdraw from NAFTA.  This way, he thinks he can leverage his bargaining power, as he will have already issued the notification on withdrawal and started a ticking clock.  If negotiations fail to produce satisfactory results, the US can instantly walk away. 

[As we are discovering in many settings, the withdrawal provisions for many institutions are not drafted well.  NAFTA requires 6 months notice before departure.  That’s about all the agreement says about what would be a terribly wrenching procedure, akin to pulling California out of the United States economically.]

In other news, US Commerce Secretary Wilbur Ross suggested that Section 232 that was used for steel could be extended to aluminum, shipbuilding, and semiconductors.  These industries, Ross said, are critically important for national security and form part of the six “core” sectors of primary importance along with vehicles and aircraft. 

It remains to be seen how effectively the Section 232 argument can be used.  A short report out of the Congressional Research Service dryly noted that past attempts to use similar tools have rarely met with success. 

Just as problematic, of course, is how other countries will respond.  It is not just that other nations are likely to take a dim view of becoming a target of a wide range of US actions.  Section 232 applies to all imported products and not just a subset coming from firms or even countries that are supposedly practicing “unfair” trade. 

Hence even firms that have been doing everything that the United States finds unobjectionable will suddenly find themselves locked out of the American market.  This situation is going to raise calls for a response even in countries that are not otherwise known for hyperventilation on trade.

Equally concerning, of course, is that other countries will turn around and start using the same arguments as grounds for blocking trade with one another.  If the “national security” card is now back in play, it can be used for all sorts of products in all sorts of places.

It is a measure of how much trade news is getting produced out of the United States at the moment that neither NAFTA nor the 232 announcements were meant to be the point of this Talking Trade post.  I have not even discussed the upcoming TPP11 talks in Canada next week, or the ASEAN ministers heading to DC for May 4th talks.  

The topic of this week's post is actually the imposition of duties on Canadian softwood lumber.  This is an issue that typically puts people to sleep, but it is worth understanding because it sheds light on what is meant by “tougher trade enforcement.” 

The Trump team has a particular obsession with trade remedies, although it should be noted at the outset that the use of trade remedies has also been rising elsewhere.  Developed and developing countries alike use these trade tools.  There are several broad categories of trade remedies, although this post has only the space to briefly review two: anti-dumping (AD) and countervailing subsidies (CVD). 

Let’s look at the US claims about Canadian lumber to understand trade remedies.  The Americans argue that specific Canadian firms have been unfairly trading lumber.  They have been engaged in practices that have made it impossible for American companies to compete in the marketplace in the United States for softwood lumber.

How have they done this?  By selling wood at less than the cost of producing it.  How have Canadian companies been able to sustain this practice?  In the case of Canadian lumber, the Commerce Department is alleging that wood is grown on public lands and this constitutes a subsidy that US wood growers do not receive.  Hence Canadian lumber products can be sold more cheaply than American lumber products.  Absent some sort of price adjustment, Canadian lumber will always appear cheaper to American consumers than American-made products.  This is unfair and must be stopped.

To solve this problem, Commerce has slapped duties averaging 20% on specific Canadian lumber firms.  These duties were applied retroactively for 90 days and will remain in place while the investigation continues. 

In general, CVD cases are more rarely filed.  The more common trade remedy is anti-dumping (AD).  The basic argument is the same—a firm is selling goods at less than the cost of production.  They do this to gain market share and drive local firms out of business.  Absent some sort of intervention, local companies cannot fairly compete.

The difference between CVD and AD is whether or not there is a subsidy involved.  In the former, the reason costs are lower is because there is a subsidy (public lands making wood potentially cheaper) involved.  In the latter, there is no subsidy.

When I present trade remedies to audiences, many people are often puzzled.  First, they often ask what is so wrong about dumping.  After all, it means that cheaper products are available in the marketplace.  If a firm is dumb enough to sell something at less than the cost of making it, they argue, what’s wrong with taking advantage of it?  The big picture answer is that once a firm captures a market, they can raise prices.  Of course, this answer rarely satisfies the person asking the question. 

Second, many ask what is the difference between dumping and a sale?  Firms have sales all the time.  Surely many of the sales in a store result in things being sold at less than the cost of production?   Yes, but a sale is time-limited and the scale is quite different. 

In Asia, especially, many people are also puzzled about how dumping is determined.  After all, costs in this region are much lower than costs in North America.  If you are just comparing costs of production, Asia could be found “guilty” all the time of dumping.  Ah—this gets to an interesting problem with trade remedies.  The methods used for determining “guilt” are, indeed, a major issue.

When the US argues that it will engage in tougher enforcement, part of what it means is that it will more aggressively pursue trade remedies.  Officials will crack down on firms assumed to be dumping stuff into the American market.  Expect to hear a lot more about AD and CVD in the coming weeks and months, including more new and novel ways to interpret trade remedies with potentially serious implications for firms.  Stay tuned.