News and Analysis • Volume 14 • Number 1 • February 2010

11. Combative China Protests Trade Defence Measures

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Just three days after President Obama’s 11 September announcement of a 35-percent safeguard duty on tyre imports from China, Beijing requested WTO consultations on the move. The duties entered into force on 26 September and will last for three years. They will be reduced to 30 percent in the second year and to 25 percent in the third.

Although China alleges violations of WTO rules on emergency action under GATT Article XIX and the Agreement on Safeguards, the case will hinge on whether the duties can be justified under the ‘transitional product-specific safeguard mechanism’ that China agreed to in its WTO accession protocol. A dispute settlement panel was established on 19 January.

US Safeguard Requires Lower Standard of Proof

The United States implements the mechanism through Section 421 of the US Trade Act. Under the statute, the US International Trade Commission (ITC) may recommend safeguard action if it finds that imports of a product from China are causing ‘market disruption’, defined to exist whenever imports that compete directly with domestically produced goods are “increasing rapidly [...] so as to be a significant cause of material injury, or threat of material injury, to the domestic industry.” In turn, ‘significant cause’ is loosely defined as “a cause which contributes significantly to the material injury of the domestic industry, but need not be equal to or greater than any other cause.”

The commission must consider the volume imports, the imports’ effects on US prices of directly competitive articles, and the effects of the imports on US industry producing directly competitive articles. However, the presence or absence of any of these three factors “is not necessarily dispositive of whether market disruption exists.”

Despite dissenting opinions of some of its members, the commission determined that the conditions for safeguard action were met. It noted that Section 421 “does not require a weighing of causes, but only that we find that rapidly increasing imports, in and of themselves, are a significant cause of material injury of the threat thereof.” The ITC recommended a 55-percent duty over three years, to be decreased by 10 percent in the second and third years, but President Obama decided that an initial duty of 35 percent would suffice.

China Responds

In its WTO challenge, China asserted that the US definition of ‘significant cause’ was ‘impermissibly narrow’. The consultation request went on to refute the ITC’s claims that Chinese imports were rising rapidly, or were a significant cause of material injury to US producers. China also argued that the duties were ‘not necessary at all’ and were being imposed ‘beyond the extent necessary to prevent any alleged market disruption’.

China has also launched an anti-dumping and countervailing investigation on cars made by Chrysler, General Motors and Ford, which could lead to tariff hikes on vehicles manufactured by the Big Three if price-distorting subsidisation is found. The first two have received nearly US$65 billion in public bailout money and bankruptcy financing. Ford has benefited from government loans worth US$5.9 billion for the development of more fuel efficient cars.

Reactions

United Steel Workers, the labour union that petitioned for the duties, praised President Obama’s courage in enforcing US trade law and accused those worrying about potential retaliation of ‘shameless fear-mongering’. The group claimed that imports of Chinese tyres more than tripled between 2004 and 2008 and that US tyre production declined by 25 percent over the same period, triggering plant closures and the loss of more than 4,400 jobs. President Bush had rejected four previous ITC recommendations for safeguard action.

In contrast, China’s Commerce Minister Chen Deming called the decision a ‘grave act of protectionism’ and a ‘misuse’ of the special safeguard mechanism. China claims that its tyre exports to the US dropped by 16 percent in the first half of this year compared to 2008 levels, and had only increased by 2.2 percent in 2007.

Chinese officials, as well as many trade analysts, have noted that a number of US producers no longer manufacture the lower-priced goods that form the bulk of China’s tyre exports. While the ITC reasoned that this was due to the surge in Chinese imports, many predict that the new duties will lead to an increase in imports from other developing countries rather than induce US companies to re-establish terminated production lines. Some view the safeguard tariffs more as a reward for the union’s political support than a measure that is necessary to help US manufacturers.

Friction Grows with EU

On 23 October, Beijing obtained a WTO dispute settlement panel on the European Union’s anti-dumping duties on imports of Chinese screws and bolts. The duties - imposed for five years in January 2009 - reach up to 85 percent.

China’s lengthy panel request alleges, inter alia, several errors in the calculation of the duties, and failure to comply with provisions pertaining to the determination of individual dumping margins for specific exporters. The request also claims that the EU based its injury determination on a sample of only 17.5 percent of domestic producers.

Although the European Commission has called China’s allegations ‘unfounded’, it agreed to China’s first panel request as it had “no reason to be hopeful that a mutually agreed solution can still be found.” Nevertheless, the EU remains confident that the decision to impose the duties “was taken on the basis of clear evidence that dumping of Chinese products has taken place and that this dumping is harming otherwise competitive EU industry.”