The Anatomy of a §421 Investigation
through the International Trade Commission
“Certain Passenger Vehicle and Light Truck Tires from China”
Nicholas Baker *
Introduction
In a receding and uncertain economy, domestic production and protection are on the forefront of world leaders’ agenda. The United States is seeing a reemergence of national pride similar to the “Made in America” campaigns of decades past. Statutory remedies that help protect domestic industry from unfair foreign competition are becoming more relevant and also more heavily scrutinized.
On September 11, 2009, President Obama took action against the import of certain passenger vehicle and light truck tires from China (“Chinese Tires”) imposing an additional import duty for three years. The President’s power to make this adjustment comes from an October 10, 2000 amendment to the Trade Act of 1974 (“Trade Act”). The Trade Act was designed to allow the United States to become more competitive with global industries by “provid[ing] adequate procedures to safeguard American industry and labor against unfair or injurious import competition protecting domestic industries from unfair foreign trade practices.”[1] Section 421 of the Trade Act, added in 2000 as a condition of the People’s Republic of China’s membership in the World Trade Organization (“WTO”), specifically addresses imports from China and outlines the procedure for investigating and providing remedy for unfair Chinese imports. The President has broad power to assess additional tariffs or impose other import restrictions on Chinese imported products when an unfair import is determined to exist.[2]
Initiation of an Investigation
A decision to act against Chinese imports is not made without forethought; the procedure for complaint, investigation, determination, and remedy is provided for in § 421 of the Trade Act. An investigation is initiated by the filing of a petition by “a trade association, firm, certified or recognized union, or group of workers, which is representative of an industry,” the President, or the United States Trade Representative.[3][4] Petitions, filed with the United States International Trade Commission (“ITC”), are reviewed and voted on by the Commissioners of the ITC with a majority vote deciding whether or not to initiate an investigation. An affirmative vote begins the investigation process and the ITC files a “notice of investigation” with the President and publishes a notice in the Federal Register.[5]
In this investigation involving Chinese Tires, the petition was filed by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union[6] (“USW”) on April 20, 2009. A petition is only required to allege a market disruption or threat of disruption caused by the suspected imports but should also include evidence to persuade the ITC to initiate a detailed investigation.[7] Since the USW represents the labor arm of many domestic tire production facilities, the evidence in the petition focused on the reduction of domestic production, facility closures, and the resulting loss of jobs.[8]
The statute provides for relief when “products of the People’s Republic of China are being imported into the United States in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of like or directly competitive products.”[9] It is important to note that the statute allows protection against potential market disruptions as well and is not limited to current market conditions.
Investigation and Hearing
An investigation begins by sending questionnaires to applicable parties who may have an interest in the suspect product.[10] U.S. producers, U.S. importers, U.S. purchasers, and foreign producers are among the list of entities that typically receive these questionnaires. Anyone may, however, request to be included as either a petitioner or respondent and provide information through a questionnaire or request to appear at the hearing held before the ITC. Through the questionnaire, an entity is asked to provide general production data, labor data, import and trade data, pricing, and financial information.[11] Parties involved in the investigation are also invited, but not required, to attend a public hearing before the Commissioners at the ITC to present testimony concerning the domestic industry and the effect of the imported Chinese products. Investigators, economists, and attorneys from the ITC staff also attend the hearing as impartial third parties to help the Commissioners form their final determination.
In addition to responses to the questionnaires, respondents file a pre-hearing brief outlining their position on the investigation and providing supporting evidence.[12] The briefs help the Commissioners better understand the facts of the investigation and formulate questions or issues to be resolved at the hearing. An open hearing is held before the Commissioners of the ITC and any party that has been invited or had a request for attendance granted may appear and present witness testimony.[13] The sole petitioner in Chinese Tires was the USW whose witnesses included several current and former members of the USW as well as supporting testimony from members of the United States Congress.[14] Respondents who attended the hearing included a range of domestic and foreign producers and importers as well as free trade advocates.
The hearing process is unlike a traditional trial where an attorney questions the witness and responses are limited to answers; witnesses in an ITC hearing provide sworn statements endorsing their position. Members of the Commission may interject with questions or ask for clarification from the witness, but the majority of testimony is oratorical. Attorneys for each party may give a brief opening and closing statement in support of their clients’ position, but mostly remain as observers.
Post-Hearing and Determination
At the conclusion of the public hearing, the parties file post-hearing briefs providing more support for their position and rebutting the opposition’s hearing witnesses. The post-hearing briefs are the final chance for the petitioner and respondent to advocate their position to the Commissioners before a final vote decides whether or not an injury exists. In addition to the briefs submitted by the parties, the ITC staff submits a brief and recommendation to the Commissioners based on the pre-hearing briefs and testimony from the hearing.
Commissioners weigh the positions presented in the brief and testimony, and give special consideration to the recommendation from the ITC staff. A round of voting determines whether a market disruption exists and what remedies or recommendations the ITC will present to the President and United States Trade Representative. The Commissioners’ final determination is drafted and presented to the parties giving each party one final chance to weigh in on the proposed remedy.
The Commission’s final determination in Chinese Tires was an affirmative market disruption and a recommendation for additional duty on the subject products for three years: an ad valorem increase of 55% for the first year, 45% for the second year, and 35% for the third year. A vote of 4-2 in the affirmative completed the investigation and initiated the ITC final determination.[15] The Commissioners mostly adopted the Staff’s final report as their final determination in this case but did not apply the Staff’s recommendation of imposing an import quota on the suspect product imports.[16]
Final Determination and Presidential Action
A complete report including the ITC final determination and recommendation on the remedy for the market disruption is presented to the President and the U.S. Trade Representative.[17] The President may choose to deny the relief, act in full accordance with the ITC recommendation, or take any position in between to enact restrictions on the subject products or industry. Since the addition of § 421 to the Trade Act in 2000, there have been only seven investigations into Chinese subject products, Chinese Tires being the seventh.[18] Four out of the first six investigations produced an affirmative finding of market disruption and presented potential remedies to President George W. Bush while the remaining two investigations yielded no disruption and therefore no presidential recommendation.[19] President Bush chose not to adopt the ITC’s recommendation in the four affirmative investigations and did not impose any duty or restriction on the Chinese subject products.
Analysis & Opinion
Sections 421 and 201 of the Trade Act are considered “global trade safeguards,” investigations that differ from antidumping and countervailing duty issues but result in the similar types of market protection. Antidumping focuses on the value of the imported product while the safeguard provisions focus on quantity of the imports.[20] Unlike antidumping orders, the President has full discretion to act or refuse to act on the recommendation in a safeguard investigation,[21] so political discretion is more likely to play a role in the final determination and resulting remedy.
The language in the safeguard statutes clearly intends a lesser evidentiary burden when Chinese imported products are suspect as opposed to imported products from the rest of the world.[22] Neither statute, however, addresses the quality, safety, or suitability of the imported product; but merely the quantity of the imports and the effect on the domestic industry. Section 421 provides specific statutory relief beyond the general § 201 safeguard and requires a lower threshold of disruption.[23] The statute defines a market disruption as a situation where “imports of an article like or directly competitive with an article produced by a domestic industry are increasing rapidly, either absolutely or relatively, so as to be a significant cause of material injury, or threat of material injury, to the domestic industry.”[24] Whereas, in contrast, Section 201 requires “that an article is being imported into the United States in such increased quantities as to be a substantial cause of serious injury, or the threat thereof, to the domestic industry producing an article like or directly competitive with the imported article…”[25]
Evidence presented in support of a Section 421 action is essentially a numbers game where the change in imported quantity over time is the main focus. Data presented by the petitioner included job loss figures, production facility closures, and statistics representing an overall decrease in tire production.[26] The USW did not provide specific evidence that the decrease in domestic production or resulting job losses were directly related to an increase in Chinese imports, but were able to establish an increase in import quantity during the same time period domestic production slowed and jobs were lost.[27] Petitioner argues that an increase in lower-cost, Chinese products have forced domestic producers to eliminate production of economy tires, close facilities, and lay off employees. While the job, facility, and production figures were provided by most major U.S. tire companies, none of those companies chose to join the investigation as a petitioner or openly support the investigation.
The tire industry references three tiers of product; tier-one tires are the top brands’ flagship products which tend to be the focus of heavy marketing campaigns, tier-two tires are the tires produced by name-brand manufacturers but not the most well-known national brands, and tier-three are the economy products manufactured under a generic or discount label and often come from overseas production facilities.[28] Both petitioner and respondent agree that the majority of suspect products fall into the tier-three economy tire category and the Chinese tires comply with all U.S. safety and quality standards.[29] There is no question as to the quality of the products imported, only the increasing quantity of imports and the corresponding behavior of the domestic market.
Respondents’ evidence references pre-existing market conditions, general economic downturn, and an overall opinion of the tire industry to reduce domestic production of lower-end tires and focus more on high-value top-tier products.[30] U.S. importers claim the decision by major tire manufacturers to close domestic facilities producing economy tires is responsible for facility closures and resulted in the increased Chinese imports as domestic production was phased out. As domestic production of economy tires diminished, foreign imports from China and other countries have increased to support demand for the lower cost replacement tires.[31]
U.S. tire producers may have found themselves in a lose-lose situation; capable of supporting either side of this investigation but neither position representing a clear advantage. A large percentage of the labor force is aligned with the petitioner, yet most domestic producers also operate large production facilities in China. Producers rely on low-cost, Chinese facilities to manufacture their economy products while maintaining a competitive profit margin.[32] Higher import duties will directly and immediately cut into producers’ profits, raise consumer prices, and cause U.S. tire companies to look to other foreign manufacturing alternatives. The likelihood of U.S. production facilities being reopened or current facilities adjusting product output to match consumer demand is very low.[33] The temporary relief imposed by this Presidential order will expire after three years; presumably enough time for the industry to react and adjust.[34] Industries surely maintain a more long-term strategy and may have difficulty modifying their business practices in such a short timeframe. Overall, jobs that have been lost are likely to remain lost while jobs in jeopardy prior to this investigation are no more likely saved by temporary action. Action resulting from a §421 investigation should not be viewed as the ultimate savior, but as a starting point for industry reform both in the U.S. and abroad.
[1]* Law Clerk to the Law Office of Lawrence W. Hanson, P.C. Anticipated J.D. May, 2010.
19 U.S.C. §2102(4).
[2] 19 U.S.C. §2451(a).
[3] The current United States Trade Representative is Ambassador Ron Kirk.
[4] 19 U.S.C. §2252(a); 2451(b)(1).
[5] 19 U.S.C. §2451(b)(5).
[6] The USW represents 47% of domestic tire production workers according to the ITC complaint.
[7] 19 U.S.C. §2252.
[8] “Petition for Relief from Market Disruption Pursuant to Section 421(b) of the Trade Act of 1974,” ITC Investigation TA-421-7, Document ID 401304, available through ITC EDIS.
[9] 19 U.S.C. §2451(b)(1).
[10] 19 C.F.R. §206.44.
[11] ITC “Producers’/Exporters’ Questionnaire” available at http://www.usitc.gov/trade_remedy/documents/Foreign_Producer_Questionnaire.pdf
[12] 19 C.F.R. §210.13.
[13] 19 C.F.R. §206.5.
[14] Senator Arlen Specter (D-PA), Senator Blanche Lambert Lincoln (D-AR), Senator Evan Bayh (D-IN), Senator Sherrod C. Brown (D-OH), Senator Robert P. Casey (D-PA), Congresswoman Louise M. Slaughter (D-NY-28), Congressman Robert B. Aderholt (R-AL-4), Congressman Tom Cole (R-OK-4), Congressman Timothy J. Ryan (D-OH-17), and Congresswoman Carolyn Kilpatrick (D-MI-13) testified at the Chinese Tires hearing before the ITC; all in support of the USW’s petition and requested relief. No members of Congress testified in opposition of the petition.