By Phil Eskeland
Last Friday, an appellate body with the World Trade Organization (WTO) authorized South Korea to levy $85 million in tariffs on U.S. products as compensation for the improper way the U.S. calculated higher import duties on Korean-made large residential washing machines. While the sanctioned indemnity is not as large as Korea initially sought, this decision represents the first time that the WTO imposed a penalty on the process by which U.S. anti-dumping (AD) and countervailing duty (CVD) measures are calculated in its 25 year history.
American AD and CVD trade remedies originated as part of the Tariff Act of 1930 and are designed to provide relief to industries and workers who are injured by imports of similar products sold in the U.S. at less than fair market value (AD) or subsidized by a foreign government (CVD). These import relief remedies are part of several long-standing U.S. trade laws designed to deal with unfair competition that is allowed under WTO rules.
However, the debate has evolved in recent years regarding the methodology the U.S. government uses to determine whether or not an imported product is being sold in the U.S. at an “unfair” or non-market price. The washing machine case against three Korean producers was initiated in 2012 and one year later the Department of Commerce decided to impose tariffs as high as 82 percent on products from individual companies. Korea challenged this ruling at the WTO by citing inconsistencies between the methodology employed the U.S. government to calculate the tariff rate and its commitments under WTO agreements.
The Commerce Department utilizes a methodology called “zeroing” as part of its tariff remedy calculation. Broadly speaking, the U.S. government calculates dumping margins by comparing prices charged by a foreign producer in its home market and in the U.S. market. In typical dumping cases, the price charged by a foreign producer in the U.S. market is lower than that in its home market. The price difference is then used to calculate the tariff rate.
However, when the price charged by a foreign producer or importer in the U.S. market is higher than the price of the same product in the home country, the Commerce Department does not subtract the difference when calculating a dumping tariff and simply assigns it a zero value. Foreign producers and importers view this as an unfair trade practice. First, they argue that the “zeroing” methodology artificially inflates the tariff margin. Second, they dispute the U.S. government’s allegation of “dumping” in cases where goods in the U.S. market are being sold at a higher price than in the producer’s home market.
Zeroing methodology has been a sore spot in U.S. dealings with the WTO and other nations because the U.S. has been one of the most prolific users of anti-dumping laws over the years. There have been challenges in the past brought by other nations at the WTO to the methodology the U.S. Department of Commerce used to calculate dumping margins. This resulted in a U.S. regulatory change in 2012 that eliminated two other “zeroing” methodologies before the case reached the final penalty phase in the WTO process.
However, now it has reached a point where the U.S. will face real penalties if it does not change its practice with respect to “weighted average-to-transaction” zeroing methodology when determining a tariff penalty in dealing with alleged “targeted dumping.” This approach is used if the authorities “finds a pattern of export prices which differ significantly among different purchasers, regions or time periods.” The U.S. lost the Korea washing machine case on the appellate level in 2016, and the WTO gave the U.S. until December 2017 to come into compliance. After that deadline expired without any changes to the U.S. methodology or without any modifications of the AD/CVD duties in this case, Korea asked the WTO for authorization to impose penalties on the U.S. for ignoring the appellate ruling of the WTO. This request was granted on Friday.
The WTO’s decision has limited practical effect for Korea’s home appliance manufacturers. Both LG and Samsung built manufacturing facilities in the U.S. last year to supply the American market with large residential washing machines. But the implications of the WTO’s decision goes well beyond this immediate case.
According to the independent U.S. International Trade Commission (USITC), there are still presently 467 AD and CVD orders in place affecting 47 countries. The modified zeroing methodology may have been used by the Commerce Department in many of these cases. Just over half of these AD and CVD cases involve iron and steel products. Nine countries, including the 28 member state European Union (EU), joined South Korea as a third party in the latest WTO challenge. South Korea’s co-complainants in their WTO suit have 156 outstanding American AD and CVD orders against its industries, alongside 32 other AD/CVD orders imposed on Korean companies. China has also filed a similar complaint against the U.S. on its anti-dumping methodology, and awaits a final ruling from the WTO to impose higher tariffs on U.S. products.
In addition to affecting past and on-going AD/CVD cases in the U.S., this ruling has implications for the WTO itself. Last year, a WTO panel report sided with Canada against a U.S. trade remedy on supercalendered paper. In response, U.S. Trade Representative Robert Lighthizer, who is President Trump’s top trade official, said:
the panel report represents the latest example of judicial activism at the WTO seeking to undermine those laws [to combat unfairly subsidized imports] and make it harder for Members to address unfair trade. The United States has long warned that the attack on our trade laws risks undermining the credibility of the WTO…
During his opening statement before the WTO ministerial conference in Argentina in 2017, Ambassador Lighthizer also remarked:
Many are concerned that the WTO is losing its essential focus on negotiation and becoming a litigation-centered organization. Too often members seem to believe they can gain concessions through lawsuits that they could never get at the negotiating table. We have to ask ourselves whether this is good for the institution…
Thus far, there has been no official reaction from the Trump Administration to Friday’s ruling from the WTO, but this may also depend upon the nature of South Korea’s response to this decision. As a result, South Korea faces interesting choices in the coming weeks.
Fortunately, South Korea successfully concluded negotiations and ratified the amendments to the Korea-U.S. Free Trade Agreement, has come to a resolution on renewing the Special Measures Agreement on defense burden sharing costs for hosting U.S. troops on the Korean Peninsula, and has dramatically lowered its bilateral merchandise trade imbalance with the United States by 54 percent since President Trump’s election. All factors that lessen the risk of this dispute spoiling other issues under discussion between the two allies.
However, in addition to the delicate diplomacy with respect to North Korea, there is still one looming threat on the trade front: the results from the yet-to-be-published Commerce Department’s Section 232 investigation into the national security implications of imported motor vehicle and parts, which is statutorily mandated to be released in the very near future. If the report endorses tariffs on Korean-made auto and parts imports, South Korea could employ the WTO’s recent ruling to persuade the Trump Administration to ignore that recommendation.
Simultaneously, the future of the WTO’s rules-based system could be at risk if the Trump Administration views this case, along with a parallel case brought by China, as the proverbial “straw that breaks the camel’s back” in terms of alleged “judicial activism” by the WTO. This calls for delicate trade diplomacy by South Korea. As Seoul examines its options, it may be wise to hold off on a final decision on imposing tariffs against the United States until the outcomes of the 232 process on autos are known and to avoid unnecessarily provoking the U.S. administration to leave the WTO. Better yet, the Trump Administration should do away with “zeroing” in its entirety when calculating anti-dumping margins. Then, the U.S. can more effectively use its resources to open more overseas markets to U.S. goods and services by lowering barriers to trade.
Phil Eskeland is Executive Director for Operations and Policy at the Korea Economic Institute of America. The views expressed here are his own.
The picture is from the World Trade Organization’s Flickr account