Protection Racket

By David H Feldman

The Baltimore Sun, July 12, 2004

President Bush now has another trade controversy on his hands. The Commerce Department has imposed stiff anti-dumping tariffs on $1.2 billion in imports of Chinese made wooden bedroom furniture. Since China now plays the bad guy role once filled by Japan, most Americans won’t be inclined to protest. They should.

Like the steel tariffs of two years ago, these import taxes – ranging from 4.9 percent to 198 percent – are designed to preserve a few thousand jobs in a threatened industry. If they succeed, it will be because they have imperiled thousands of jobs in other industries and have soaked the purchasing power of mostly lower income furniture buyers.

This case was initiated by a group of twenty-seven US furniture manufacturers located mostly in North Carolina and southern Virginia. Yet the industry itself is split. One of the original plaintiffs – Hooker Furniture – pulled its name off the petition citing negative effects on its customers and international suppliers. And the case was vigorously opposed by a consortium of over sixty major furniture retailers and catalogue companies whose employment base far exceeds that of the furniture makers.

The International Trade Commission (ITC) decides whether there is merit in an anti-dumping petition. To succeed, the petition must convince the ITC that foreign pricing practices are illegal and create harm. Believe it or not, if low import prices squeeze the petitioners’ profit margins, the ITC will conclude that harm has occurred. Any benefit of lower prices does not count, and damage that the tariff remedy does to other American firms or to consumers does not matter under current US trade law.

The US firms charge that Chinese manufacturers price their goods at less than cost, but since foreign firms rarely open their internal books to the ITC the commissioners make guesses about costs, often using data supplied by the aggrieved American firms. Profit information supplied by Chinese firms was not accepted by the ITC, despite the fact that many of China’s exporters are small private companies or joint ventures with foreign investors.

Any benefits the anti-dumping duties might provide for US workers likely will be short lived. Although thirteen percent of the US retail market for wooden bedroom furniture currently is supplied from China, US retailers source their purchases throughout Asia. Since one of the twenty-seven American plaintiffs – Stickley, Inc. – is opening a factory in next-door Vietnam, there is more than a whiff of hypocrisy in the air when American firms talk about saving jobs.

Saving these jobs would require a much more thoroughgoing assault on wooden furniture imports from around the world. Since places like Vietnam and Indonesia can supply bedroom sets at roughly Chinese quality and price, they may be next on the hit list. Successful efforts to protect manufacturers of wooden furniture also set an unfortunate example for other parts of the industry. If wood gets special treatment, why not sofas as well? Filing a petition with the ITC is easy, and the Byrd Amendment – which funnels tariff revenues directly to the plaintiffs – is an added inducement as long as it remains law.

There is one perversely hopeful sign on the horizon. Since joining the World Trade Organization in 2001, China has faced twenty-four anti-dumping cases initiated by the United States. In that time, China itself has discovered how to misuse the same legal techniques on behalf of its own squeaky local wheels. Twenty-five dumping actions have worked their way through China’s legal system.

This kind of tit-for-tat protection is a form of arms race. That’s why China’s behavior offers a ray of hope. Competitive arms races often lead to negotiated control agreements if all sides understand the counterproductive nature of the race.

Anti-dumping actions by China and others affect real US firms. In a high profile action this month, China’s Ministry of Commerce informed Corning that its sales of fiber-optics at unfairly low prices constitute dumping. Corning was ordered to post a 16 percent deposit on sales pending a final resolution of the issue. Although legal cases in different countries are supposed to be unconnected, the penalties soon to be assessed on firms like Corning likely will be affected by the outcome of the furniture case.

China’s growing domestic market makes it a magnet for US exporters. If they have to fear capricious Chinese trade policy they may become a potent political force for reforming American trade law as part of an international compromise.

Mr. Feldman is a professor of economics at the College of William & Mary in Virginia.