International Society of Primerus Law Firms

Consumer Tire Case A Win for Rules-Based Trade

By Eric P. Salonen and Stephen J. Norton

The Law Offices of Stewart & Stewart

Washington, D.C.

On September 11, 2009 President Obama decided to impose tariffs on passenger car and light truck tires made in China, using his authority under Section 421 of the Trade Act of 1974, 19 U.S.C. 2451. Although this was the seventh case to be brought under Section 421 since its implementation in 2001, it was the first time a president had used this special authority to address economic harm to a domestic industry caused by import surges from China.

This high profile case reminds your clients that our nations trade remedy laws are important tools for companies and unions to mitigate against import surges from abroad. Import surges can undermine business models and cripple the long term viability of companies committed to manufacturing in the United States. Our antidumping and countervailing duty laws allow cases to be filed with the U.S. Department of Commerce and the U.S. International Trade Commission against foreign competitors that unfairly dump product into the US market or sell product subsidized by foreign governments. Our general safeguard law (Section 201 of the Trade Act of 1974, as amended) provides an opportunity for industries being seriously injured by increased imports to obtain temporary relief without a demonstration of an unfair trade practice (this was used in 2002 by the steel industry). In addition, Section 337 of the Tariff Act of 1930 allows for investigation of unfair import practices that threaten domestic industries. The bulk of these cases today focus on intellectual property rights.

Section 421 is a country-specific safeguard mechanism created in 2000 as China was vying for entrance into the World Trade Organization. When Congress debated the issue ten years ago, many lawmakers from both parties agreed that it made sense to bring China into the rules-based trading system. But a bipartisan majority also understood that China was unlike any other country seeking to become part of the WTO. Chinas rapid growth as a manufacturing and export power house coupled with the fact that its economy was still largely state directed raised the possibility of economic disaster for domestic manufacturers from sudden import surges caused by massive distortions in Chinas economy. Until China implemented the policy changes necessary to meet its obligations as a WTO Member and become a more market-based economy, Congress and the Clinton Administration agreed a special safeguard mechanism was needed. As other trading nations had similar concerns, the 421 safeguard was effectively multilateralized and China agreed to abide by it as part of its accession to the WTO. This special safeguard expires in 2013, by which time China is supposed to have made the adjustments in its laws so that it is in full compliance with its WTO obligations.

Under Section 421, imports of the product in question from China must be increasing rapidly, whether absolutely or relative to domestic production or consumption. Market disruption is defined as existing if imports from China are a significant cause of material injury, or threat of material injury, to a domestic industry. Significant cause is defined as a cause that contributes significantly to the material injury, but need not be equal to or greater than any other cause. Three factors that the International Trade Commission, an independent agency, must consider are (1) the volume of imports from China; (2) the effect of such imports on prices in the United States; and (3) the effect of such imports on the domestic industry. The ITC typically also considers numerous other economic factors such as production, shipments, net sales, employment, and profitability, among other factors.

The case was brought by the United Steel, Paper And Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (USW), who represent nearly half of the workers in the plants producing passenger car and light truck tires. The USW, together with its outside counsel, had collected data from a variety of public sources which made clear that this particular case was precisely what Congress had in mind when it passed Section 421. Beginning in 2004, imports of consumer tires began flooding into the U.S. market at a remarkable rate. By the end of 2008, imports had swelled to more than three times the pre-surge level. Measured in terms of value, imports shot up by an astounding 295 percent. The results of the sudden wave were catastrophic, as domestic production declined by approximately 25 percent. More than 5,000 domestic workers lost their jobs due to tire plant closures or idled production lines. Based on statements from domestic tire producers regarding planned plant closures for 2009, another 3,000 faced the loss of their jobs if nothing was done. Absent action to address the unyielding surge in Chinese tires, additional plant closures and loss of jobs were a certainty.

Speed is one of the key advantages of Section 421. The ITC has 60 days from the date of the petition filing to make its decision regarding market disruption. If the determination is affirmative, then the ITC has an additional 10 days to make its remedy recommendations. The ITC sends its decision and views to the President within 80 days of the petition filing. Remedies may consist of quotas, tariffs or some combination of the two. Should the ITC find market disruption and recommend a remedy, the President, with input from the U.S. Trade Representative and other government departments, has 70 days to decide whether to grant relief. During that period, USTR provides an opportunity for submission of written comments from interested parties and a public hearing on remedy.

In the consumer tire case, the USW filed its petition on April 20, 2009. A public hearing was held June 2 and post-hearing briefs that responded to Commissioners questions and rebutted arguments made by opposing counsel were submitted June 8. The ITC voted 4-2 on June 18 that Chinese imports were causing market disruption. On June 29, Commissioners who agreed that market disruption had taken place voted in favor of providing temporary relief in the form of additional tariffs of 55 percent in the first year, 45 percent in the second year and 35 percent in the third year. Importantly, this was the first time under Section 421 that all Commissioners who voted in the affirmative unanimously supported the same remedy recommendation.

Following that vote, the ITC sent its recommendation and report to the President on July 9. The ITC recommendation was then considered by Executive Branch agencies and was the subject of an inter-agency hearing on August 18. The final report by USTR is confidential. President Obama announced his decision to impose tariffs over three years – 35 percent the first year, 30 percent the second and 25 percent in the third year – on September 11, nearly a week ahead of the statutory deadline.

President Obamas decision was very significant. Up to that point, industries had filed six petitions to impose safeguards under Section 421. The ITC rejected two on the grounds that there was insufficient evidence of market disruption. In the four cases where ITC found such evidence, former President Bush decided against granting relief to the injured domestic industries. In fact, the consumer tire case is the largest 421 case ever filed in terms of trade volume.

When Congress passed Section 421, it specified that when the ITC makes an affirmative determination, there is a presumption in favor of relief. While the President has discretion to deny relief, he can do so only if he finds that taking action would have an adverse impact on the U.S. economy that is clearly greater than the benefits of such action. At each step in the process in this case, arguments that domestic tires were already ceding this tire market to China, that import relief would destroy more jobs than they would preserve were effectively dismantled by the facts presented by the USW. Thus far, the evidence indicates the tariffs are having the desired effect of encouraging purchases of U.S.-made tires. This will give U.S. companies and workers a chance to recover from the import surge and gear up to compete in the years ahead. The preservation of jobs will be welcome news in communities around the country already hit hard by overseas competition and the recession.

President Obamas decision sends an important signal to our trading partners, namely, that while the U.S. is open to negotiating new trade agreements, it fully intends to enforce existing agreements. Indeed, a policy of rigorous enforcement of existing trade agreements is vital to obtaining support from the American public for more liberalized trade. That was the message conveyed by U.S Trade Representative Ron Kirk in his statement on behalf of the president on September 11. When China came in to the WTO, the U.S. negotiated the ability to impose remedies in situations just like this one,” said Kirk. “This Administration is doing what is necessary to enforce trade agreements on behalf of American workers and manufacturers. Enforcing trade laws is key to maintaining an open and free trading system.

Eric P. Salonen is a partner and Stephen J. Norton is an advisor in the Washington, D.C. law firm of Stewart and Stewart. The firm represented the United Steelworkers, the petitioners in the Section 421 investigation of certain passenger vehicle and light truck tires from China.

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