Unruly Trade

Dec. 21, 2004
As the global economy grows, the rules of international trade take on greater significance. Not every nation plays by the rules -- nor sees them the same way. And that makes a world of strategic difference for U.S. manufacturers.
Editor's Note: This is the second installment of a seven-part series that details the strategic and often gut-wrenching shifts taking place in manufacturing. It appears in the July 2003 issue of IndustryWeek. IW will introduce a new installment each month throughout the remainder of 2003. When Blossburg, Pa.-based Ward Manufacturing, operator of one of the two remaining foundries in the United States that produce malleable and non-malleable iron pipe fittings, filed anti-dumping cases against Chinese foundries, it figured it had an open-and-shut case. Just before the complaints were filed, both Mexico and the European Union had found dumping margins against malleable iron pipe fittings from China of 42% and 48% respectively. Ward was wrong. Despite unanimous preliminary and final injury determinations from the U.S. International Trade Commission (ITC), final dumping margins against two Chinese companies were in single digits. "How can our [government] find single-digit margins when these other countries find margins in the 40%-to-50% range on the same products?" asked an incredulous Thomas Gleason, Ward's vice president of sales and marketing, at a Capitol Hill hearing in May. Thomas Fish, president of Anvil International in Portsmouth, N.H., is asking a similar question. A maker of malleable and non-malleable iron pipe fittings, as well as ductile pipe fittings and steel pipe nipples, hangers and couplings, Anvil sought anti-dumping relief from Chinese pipe nipples. The duties ultimately imposed by the U.S. were a disappointing 13%. Even worse, adds Fish, about the same time that Anvil learned of the disappointing outcome of its anti-dumping case, the Bush Administration implemented selective steel import tariffs, and Anvil took another hit. "Our costs of raw materials increased by 30%," Fish says. Throughout the U.S., manufacturers are feeling the effects of the rapidly expanding world of international trade, and for many the feelings are of agony. Manufacturing jobs and entire sectors of industries are being exported to low-cost-labor countries at a seemingly unprecedented rate. However, what's fundamentally different about this shift is that business success and failure oftentimes seem unrelated to production efficiency or management talent. Rather, they sometimes depend more upon a manufacturer's ability to convince the U.S. government to enforce the rules of international trade. "Give us a level playing field," pleads Daniel R. DiMicco, vice chairman, president and CEO of Nucor Corp., Charlotte, N.C. "Make sure people are playing by the rules. Make sure the rules are fair, and we'll do the rest." This call for international trade that is fair and not just free is one that U.S. executives have been making for more than four decades, ever since Congress passed the landmark Trade Expansion Act of 1962 during the Kennedy Administration. But as national economies have grown, as products and services have become more sophisticated, and as the amount of trade has expanded exponentially, there is no denying that the rules of international trade -- themselves increasing in number and scope -- have taken on greater significance. One measure of their importance is the clarion call for corrective action. To ensure fair play for U.S. manufacturers, manufacturing executives want less currency manipulation, more protection for their trademarks and patents, and aggressive enforcement of trade rules against unfair foreign competition, including safeguards against surges of low-cost imports. Why Now? The fact is trade is big business -- even for small and midsize manufacturers -- and it's getting bigger and more complicated every day. In 1960, exports of goods and services accounted for $25.3 billion of a $526.6 billion U.S. economy. Last year, exports were $971.7 billion in a $10 trillion U.S. economy. In 2002, the nations of the world exported an average of $21.8 billion worth of goods and commercial services every single day, according to data from the Geneva, Switzerland-based World Trade Organization (WTO). This has come in a context that includes a decade-long fall of Japan's economy, the dramatic rise of contract manufacturing in Asia and Central Europe, the impact of post-Sept. 11 anti-terrorism measures, the expansion of the European Union, and perhaps most significantly, the proliferation of free-trade areas -- each with its own set of rules and regulations disciplining, and sometimes not disciplining, world trade. Today, there are literally hundreds of thousands of rules governing world trade, including the 1,700 pages of text and tariff tables that make up NAFTA. And more rules are on the way. By Jan. 1, 2005, the U.S. wants to finalize agreement on something grander than NAFTA, a $13 trillion, 24-nation, 800-million-person Free Trade Area of the Americas that, excepting Cuba, would extend from the Arctic to the southern tip of Argentina. Yet the effect of these changes on the U.S. and world manufacturing, as dramatic as they are, pale in comparison to China's official entry onto the world economic stage on Jan. 1, 2001. In the year and a half since it became a member of the WTO, China has so altered the pattern of production that to many American manufacturers this Asian nation of 1.3 billion people has become the symbol of all that is good and evil along the road to freer markets. Even as China's home market represents one of the biggest business growth opportunities for U.S. manufacturers, China also poses one of the biggest challenges to U.S. manufacturing strength. Even with the scourge of SARS (severe acute respiratory syndrome), China remains among the fastest-growing major economies in the world. But, at the same time, China is the focus of U.S. manufacturers' complaints about unfair trade practices and the flouting of international rules. Principally, manufacturing executives allege that China is violating WTO and International Monetary Fund (IMF) principles of fair exchange among national currencies and the WTO rules on protection of trademarks and other kinds of intellectual property. With its currency, the yuan, pegged unfairly low to the U.S. dollar, China is violating "the spirit and maybe the letter" of WTO and IMF rules against manipulating exchange rates to gain unfair trade advantages, says Franklin J. Vargo, vice president for international economic affairs at the National Association of Manufacturers, Washington, D.C. "The Chinese government has accumulated $300 billion in foreign exchange reserves -- $100 billion alone last year," says Vargo. "By some estimates, the yuan is 40% undervalued. If this estimate is correct, then the Chinese currency is a major factor in our rising trade imbalance [with China]." The consequences are serious and could include, suggests Nucor's DiMicco, the demise of the U.S. steel industry. If a majority of the U.S. industry's customers forsake America and move their manufacturing to China to capitalize on a currency-driven cost advantage, "eventually our customer base disappears -- and the [U.S.] steel industry that needs that customer base disappears," DiMicco warns. Yorgos Papatheodorou, a Spartanburg, S.C.-based economist at Lockwood Greene, an engineering and construction company, says, "What's happening in China, I suspect, is that the Chinese government has decided it is going to follow a massive, export-led growth effort. And that growth effort is driven to a large extent by an undervalued currency. At some point, the Chinese are going to realize that they could be getting more for what they produce if their currency were not undervalued." Chinese manufacturers also are flouting the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), in which China pledged to protect and enforce IP rights in China. Trademark infringement, something that affects manufacturers from metal fabricators to makers of consumer products, can cost a company 25% of sales in a market like China, estimates Robert Cassidy, a former assistant U.S. trade representative and now director of international trade and services at Collier Shannon Scott, a Washington, D.C. law firm. What's more, Cassidy says, there are stories of Chinese companies literally stealing equipment from their foreign joint-venture partners and starting up competitive production next door. That kind of environment makes William V. Hickey cautious. As a result, the products his company makes in China aren't necessarily manufactured using the most-current technology, relates Hickey, president and CEO of Sealed Air Corp., a Saddle Brook, N.J.-based maker of packaging products. Nor is everything Sealed Air makes for the Chinese market being manufactured in China. For example, to protect its advanced technology, the company exports from the U.S. polyolefin-based solution bags used in hospitals. To help protect its intellectual property, Cisco Systems Inc. has turned to the courts. On Jan. 23 of this year, the San Jose, Calif.-based maker of computer routers announced it had filed a lawsuit against China's Huawei Technologies Co. Ltd., alleging unlawful copying of software and technical documentation, and infringement on "at least" five patents related to proprietary routing protocols. States Dave Dyer, vice president of operations for Henredon Furniture Industries Inc., Morganton, N.C., "Unless the situation greatly improves, many manufacturers like us will be forced to keep our products and processes out of China, which puts us at a competitive disadvantage against other members of our industry who are actively manufacturing in China and throughout the Pacific Rim." U.S. Indifference Yet, most galling to some U.S. manufacturing executives is what they claim is the U.S. government's unwillingness to enforce WTO agreements and the three safeguard provisions that are supposed to protect them against injurious imports from China. These trade remedy mechanisms were agreed to as a condition of China's entry into the WTO. Executives testifying at May's hearing before the House Appropriations Subcommittee on Commerce, Justice, State, the Judiciary and Related Agencies ticked off several examples of U.S. government indifference. For instance, William G. Walter, chairman, president and CEO of FMC Corp., a diversified chemical company headquartered in Philadelphia, mentioned a dumping case his company brought against Chinese makers of persulfate. FMC is the only U.S. manufacturer of this chemical, which is used in the production of printed circuit boards, water treatment, adhesives, textiles and other goods. The case, first brought in 1997, resulted in a 42% penalty duty on dumped Chinese imports. However, by 2002 subsequent administrative reviews had reduced the duty to zero. "What confuses us in this case, is that though the basic facts have not changed, . . . the results in the last two years are dramatically different," said Walter. "Moreover, in the period which paralleled China's accession into the WTO, we would . . . have expected our government to intensify its scrutiny of their trade behavior. This has not been the case." In two other cases -- the only two brought before him under Section 421 of the accession agreement with China -- President George W. Bush overturned rulings by the ITC that called for anti-dumping relief. Recounting rapid declines in several industries for which his company produces capital equipment, William R. Litzler, chairman of Canton, Ohio-based C.A. Litzler Co. Inc., says, "It is almost as if the United States has quietly decided not to do any more manufacturing." On Capitol Hill, U.S. trade officials defended the Bush Administration actions. Peter F. Allgeier, deputy U.S. trade representative, recounted efforts China has made to meet its commitment for WTO accession and described efforts by the Administration to meet shortcomings. He said that President Bush's decision to revoke the ITC's call for relief in the two Section 421 cases was based on the belief that relief would provide no benefit to U.S. manufacturers. Grant D. Aldonas, undersecretary of commerce for international trade, underscored the several steps the department's International Trade Administration (ITA) has taken to help manufacturers redress unfair trade. The ITA, he said, helps business executives to understand U.S. trade law related to anti-dumping and how to document and file effective anti-dumping claims. ITA also helps to ensure access to China's market, he said. Aldonas reported that anti-dumping investigations this year had resulted in an average duty of 83%, up from last year's average of 42% although below 2001's average of 92%. Further, Aldonas asserted that outreach efforts by the ITA staff in China in 2002 had "produced a recorded 217 export successes valued at almost $4 billion." Thus far in fiscal year 2003, he added, they've recorded 183 export successes valued at more than $2.5 billion. If the industry and government trade debate reveals anything, however, it's how the vagaries of interpreting and enforcing international trade rules can help or hurt competitiveness. Government officials walk a tightrope, attempting to balance the needs of buyers and sellers within their own countries with those of suppliers and customers in other countries, even as they are searching for loopholes. Add to that the fact that world trade agreements are negotiated and executed respectively in the thin air of high-wire politics and in the dense, bureaucratic mazes of government, and it's no wonder manufacturers doubt the system. Indeed, the U.S. is not immune to charges of unfair competition. With a tax break for exporters that started with the creation of the DISC (Domestic International Sales Corp.) in 1971, it's the U.S. that's not playing by the rules, says the WTO. Indeed, the WTO on May 7 gave complaining Europeans the go-ahead to retaliate against the U.S. for sanctioning an illegal subsidy. The U.S. export incentive, reconstituted once as the FSC (Foreign Sales Corp.) and most recently as ETI (Extra-Territorial Income) is ostensibly an effort by the U.S. to level the playing field with European exporters who get rebates on value-added taxes paid for goods they sell in foreign markets. "Basically, every other country on earth can border adjust its main taxes, and we can't," says John R. Magnus, a partner in the Washington, D.C. office of the international law firm of Dewey Ballantine LLP. "It's a huge competitiveness issue for U.S. manufacturers," he says. Claims Greg Mastel, chief international trade adviser at Miller & Chevalier, a Washington, D.C., law firm, and until February of this year the top international trade staffer on the Senate Finance Committee, "For companies like Boeing and Caterpillar this literally means billions on their bottom line." Mastel believes Congress may try again this year to make the ETI legislation WTO-friendly. But if that fails, early next year the EU could slap up to $4 billion worth of additional tariffs on a variety of imported U.S. goods. Fairness in trade is clearly in the eye of the beholder, not only for the U.S. steel and foundry industries but for a whole range of other American industries from aerospace to wood. For U.S. manufacturing executives -- those arguably with the most to lose as well as the most to gain from the promise of expanded trade -- how or even whether rules are enforced can mean the difference between unbelievable success and bankruptcy. Now as they move forward, U.S. manufacturing executives are left wondering if they've opened a Pandora's box that might leave them exposed to unfair trade, with no possibility for relief. To them, Nucor's DiMicco offers this bit of advice: To get rules right for U.S. manufacturers and to ensure they are effectively enforced, "it's going to take the CEOs and the leadership in the manufacturing sector to come together in one voice and shout . . . from the rooftops and put pressure on folks."

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