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Trade Tension

June 15, 2010
As the volume of world trade grows, trade disagreements also are growing in complexity and number. Here are some key trade disputes that manufacturers should have on their radar.

The same can be said of trade as is said of the tango: it takes two.

In today's global economy, the numbers of companies and countries involved in international trade far exceed such a simple equation, however, and thus arises complications. Indeed, who would expect otherwise, when the value of world merchandise exports traversing the globe reaches heights of $12.15 trillion, as it did in 2009.

Helping to smooth the international movement of goods and services are organizations such as the Geneva-based World Trade Organization, an international membership organization whose purpose is to promote a strong, open international trading system. Nevertheless, trade disagreements among countries are inevitable, as countries and manufacturers try both to protect their own turf and expand into new markets. While multiple organizations work diligently to keep such disputes at a minimum, it's in U.S. manufacturers' best interests to stay attuned to trade actions that could hurt or help their business operations. An examination of significant trade actions reveals:

Movement in the Doha Round?

U.S. manufacturers should become aware of the Doha Development Agenda (or Round), if they are not already, suggests Stephen A. Jones, chair of the international trade practice group at law firm King & Spalding. The Doha Development Agenda is a round of WTO trade negotiations aimed at liberalizing trade in a range of areas and begun in Doha, Qatar, in November 2001. Currently well past the first deadline to conclude the Doha round, talks largely have been stalled since 2008 over disagreements in several areas of agricultural and non-agricultural market access, as well as differences among the major developed nations and advanced developing countries, such as Brazil, China and India.

Evidence suggests there may be movement in the Doha talks, helped in part by the recent appointment of Michael Punke as deputy U.S. trade representative. He also serves as U.S. ambassador and permanent representative to the WTO, a position that had been vacant since September 2009. "He is a strong voice for U.S. manufacturing in the WTO," Jones says. "He will take positions that protect the interests of U.S. manufacturers."

A strong voice for U.S. manufacturers will be important as -- and if -- Doha talks move forward because the current provisional texts from previous Doha meetings "would be very, very bad for U.S. manufacturers," the lawyer says.

Frank Vargo, vice president of international economic affairs at the National Association of Manufacturers, shares similar sentiments, both about Punke and the content of the provisional texts. What's lacking in the Doha talks as they currently stand is real market access to the advanced developing countries, he says. "We want a deal that gives us market access."

The China Challenge

China arguably is the country raising the most hackles and emotion among U.S. manufacturers, and the reasons are myriad. They include charges of currency manipulation.

Depending upon whom you talk to and when about this long-standing dispute, China's currency is undervalued by anywhere from 25% to 40%, which gives Chinese producers an unfair advantage in pricing, the argument goes. "It really is a violation of WTO principles," argues Thomas Duesterberg, president and chief executive officer of the Manufacturers Alliance/MAPI, an Arlington, Va.-based executive development and business research organization. In terms of total impact, it's also the biggest issue impacting manufacturers, he suggests. "It's the No. 1 issue on the trade front," echoes Jones.

In April, U.S. Treasury Secretary Tim Geithner delayed the release of a report that some hoped would publicly identify China as a currency manipulator, stating that he would pursue diplomatic measures at forthcoming meetings to make progress on the currency front. "I believe these meetings are the best avenue for advancing U.S. interests at this time," he said in a statement. More recently, several U.S. legislators have vowed legislative action that would penalize countries that deliberately undervalue their currency.

Absent a macro solution to addressing the exchange rate controversy, Jones said he is taking a "more surgical" approach to the currency issue on behalf of a coalition from the aluminum extrusion industry. In short, he has asked the U.S. Commerce Department to initiate an investigation into whether the China currency "misalignment" constitutes an illegal subsidy under countervailing laws.

And while alleged currency manipulation is the most prominent dispute with China, several other thorny issues also are in play. Many were spelled out in the United States' response to the WTO's trade policy review of China, which occurred in late May. The review itself noted that China remains the most frequent target of anti-dumping measures.

In a statement at the trade policy review, Punke took issue with the WTO's assertion that China "has continued the gradual liberalization of its international trade and investment regime." Indeed, in written comments he noted that the United States has seen "increasing evidence" of new restrictions on market access since the WTO's 2008 China trade policy review.

As one example, Punke pointed to China's so-called "indigenous innovation" policies, about which he said, "Over time, it has become evident that many of these programs contain elements that could discriminate against foreign products, foreign investors, foreign technology and/or foreign intellectual property." That said, the ambassador also noted progress in addressing the concerns was made during bilateral meetings in Beijing.

Meanwhile, multiple trade disputes involving the United States and China remain to be resolved. For example, the United States has asked the WTO to examine measures through which it claims China allegedly imposes illegal restraints on the exports of various forms of raw materials, including bauxite, coke, manganese and yellow phosphorus. This complaint, filed in June 2009, was the first filed by the Obama administration against China. By unfairly restricting the export of these raw materials, says Ron Kirk, U.S. trade representative, China hurts U.S. manufacturers in the steel, aluminum and other industries while giving Chinese manufacturers unfair preferences.

Suspension of IP Rights

A long-running trade dispute between the United States and Brazil regarding U.S. cotton subsidies recently reached its conclusion in the WTO, with Brazil prevailing. The sanctions authorized against the United States include the suspension of intellectual property rights, a precedent-setting move that has tremendous ramifications for U.S. manufacturers, some experts say.

The dispute dates back to 2002 when Brazil went to the WTO regarding certain domestic support programs for U.S. cotton that Brazil claimed constituted illegal subsidies under WTO obligations. The WTO found in Brazil's favor on several occasions, and -- although the U.S. made some changes to bring its cotton support program into compliance with WTO treaty terms -- it failed to fully meet its obligations, the WTO ruled.

As of press time, the final leg of this dispute had yet to unfold. In November 2009, Brazil received authorization from the WTO to impose sanctions against the United States. (The current total of authorized countermeasures is approximately $829 million, which is among the highest amounts ever authorized.) In March, Brazil announced a list of more than 100 U.S. products that would face higher tariffs as of April 7, including automobiles, pharmaceuticals, medical equipment and electronics. In addition, the country received authorization to "cross-retaliate" by suspending certain U.S. intellectual property rights and services.

"What is especially precedent-setting about it and what is especially unnerving about it is the inclusion of intellectual property," notes James Bacchus, chair of the global practice at Greenberg Traurig law firm and former chair of the WTO appellate body. "Intellectual property is an intangible right. It's not a good, per se; it's not a service that's provided. It's unique."

Last-minute negotiations between the United States and Brazil put the trade sanctions on hold the day before they were to take effect. Brazil agreed to stay the sanctions for 60 days in return for several near-term concessions, including modifying a U.S. export credit guarantee program and establishing a fund for technical assistance and capacity building related to Brazil's cotton industry. During that 60-day window, "the United States and Brazil will continue their work by negotiating a framework to reach a mutually agreed-upon solution to resolve the dispute," according to the Office of the United States Trade Representative.

The Impact of Zeroing

Another long-running dispute appears to be nearing its conclusion. This dispute, initiated by the then-European Communities in 2003, takes aim at the United States' use of "zeroing" as a method to calculate penalties on goods that have been "dumped," or brought into the country and sold at too low a cost.

The European Union has prevailed in this dispute, with the WTO finding that the United States' use of the zeroing methodology is inconsistent with its obligations under WTO treaties. The outcome of the disagreement now rests in the hands of a WTO arbitration panel, which met in May. The case was referred to arbitration in January when the United States objected to the level of sanctions requested by the EU. The request amounts to several hundreds of millions of dollars of retaliatory measures.

Changing Face of Trade Disputes

The nature of trade and trade disagreements is changing. "Trade disputes are becoming more diverse because there are two dozen agreements that are part of the WTO treaty, and they involve a whole array of matters of world commerce other than just garden-variety tariffs: intellectual property, services, food safety measures, and a whole lot more," Bacchus says. "WTO rules now cover about 95% of all world commerce. It's only to be expected that there will be more disputes that will come before the WTO, and that's what's happening."

Nevertheless, the WTO dispute resolution process has worked "reasonably well," says Manufacturers Alliance/MAPI's Duesterberg. Most disputes are settled before they reach the high profile achieved by a few, he notes, and this despite the fact that the number of WTO members continues to increase. (GATT, the predecessor to the WTO, began in 1947 with 23 countries. It now numbers 153.)

"Most countries have come to realize that reasonable open trade is good," Duesterberg says.

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