June, 2001: The Yankee Trader

By Greg Rushford
Published in The Rushford Report

Anticipating that a WTO dispute-resolution panel will soon rule (again) that the $4 billion U.S. Foreign Sales Corporation tax subsidy for U.S. exporters is WTO-illegal, U.S. Trade Representative Robert Zoellick tried to do a little advance damage control last month. Speaking in Strasbourg, France, the USTR implicitly recognized the common wisdom on FSC: Congress “fixed” the WTO-offending tax law last year only in a cosmetic way, thus preserving FSC’s underlying incompatibility with U.S. obligations under the WTO. But Zoellick warned — threatened might be more apt — that if the European Union would exercise its legal rights to retaliate by imposing $4 billion in sanctions on American companies, it would be “like using a nuclear weapon on the trading system.”

It is easy to sympathize with Zoellick, who came into office in February with a pile of inherited troubles like the FSC tax subsidy on his desk. Better to negotiate these trade rows than to litigate, Zoellick (rightly) believes. The USTR is fond of pointing out that unlike his predecessor, Charlene Barshefsky, he is no Legal Beagle. Zoellick tells visitors he will exercise more restraint in bringing WTO cases that the U.S. might be able to “win” in a legal sense, only to lose the economics and the politics (for example, the bitter US-EU banana case, which has achieved nothing, as I reported last month). “Many of these things can’t really be litigated,” explains Doral Cooper, a former senior U.S. trade negotiator who is now president of C&M International, the international consulting affiliate of Crowell & Morning. “They have to be negotiated.”

But wait. Not everything is negotiable. The United States worked very hard to make the binding Dispute Settlement Understanding a part of the WTO. And who is the scofflaw in the FSC case? Would the United States really risk bringing down the WTO’s dispute-settlement process over a tax break? When the United States wins a legal dispute with a fellow WTO member country, the United States is offended if the loser doesn’t promptly enact the necessary reforms to bring it into compliance with that country’s legal obligations as a member of the World Trade Organization. When the United States wins a WTO case, we talk about the necessity of enforcing judgments and persuading other countries to respect the rule of law.

Zoellick’s got a Catch 22 problem. He wants very much to launch a new round of trade liberalizing negotiations when the WTO’s ministers meet in Qatar in November. The prospects of launching such a new round would be enhanced considerably if the United States could by then show that it is serious about living up to its WTO obligations, particularly when we lose antidumping and textile cases that cause so much resentment around the world. The catch: Zoellick also needs Congress to give him fast-track negotiating authority to take to Qatar.

True, major exporters like Boeing and Caterpillar would not even think of wrecking the WTO just for their beloved FSC tax break. But the domestic steel and textile lobbies — which desperately want to hang on their antidumping and other protectionist schemes — sure would. So, the more that Zoellick goes around demonstrating a true regard for the Rule of Law when the U.S. is on the wrong end of WTO cases, the more difficult it could be to attract support on Capitol Hill for fast track.

Accordingly, Zoellick is keeping his head down. Last month, he declined even to express public support for the position that the United States should comply faithfully with adverse WTO rulings in the same manner that we expect other countries to comply. Meanwhile, the USTR’s strategy is to delay politically difficult decisions as long as possible by filing appeals to prolong the necessity of actually doing something about bringing the United States into full compliance with its WTO obligations. Zoellick’s press secretary, Rich Mills, refused to return a telephone call asking about his boss’ attitude toward WTO compliance.

But soon enough the question will be answered, as the USTR will have to respond to cases that are now piling up on his desk.

“Certainly, the good faith intentions of the United States are going to be tested in the coming months,” says Simon Lester, a former WTO legal officer in Geneva who is now president of WorldTradeLaw.net, a start-up that will provide commentary on all WTO dispute-settlement reports. “This will tell us whether the Zoellick team is going to take WTO commitments seriously.”

Good faith on Zoellick’s part is hardly the first phrase that comes to mind in a current WTO case involving combed cotton yarn from Pakistan.

In late April, a panel established for the WTO’s Textiles Monitoring Body ruled that draconian U.S. quotas that the Clinton administration slapped on Pakistan were unjustified, and ought to be dropped at once. No wonder. When the Commerce Department’s Committee on the Implementation of Textile Agreements sought to roll back Pakistani imports of combed cotton in 1999, the decision had the usual strangeness that is associated with the secretive CITA (which is so non-transparent that it has been compared to bureaucracy, North-Korea style).

CITA reached its decision to cap the Pakistani imports “entirely on confidential, unverified summary data prepared by the U.S. yarn industry,” noted Laura Jones, the executive director of the U.S. Association of Importers of Textiles and Apparel, in a recent letter to Zoellick. Furthermore, how could CITA blame Pakistan and not Mexico for a “surge” of imports that stood to injure U.S. industry? In the 1997-98 time frame that CITA looked at, Mexican imports of the same cotton had increased more than twice Pakistan’s.

But as soon as he got wind of the Pakistan win over the United States — no doubt before he had read it — Zoellick ordered his press secretary, Rich Mills, to say that the United States would appeal the case.

The “good faith” problem associated with Zoellick’s exercising an otherwise legal right of appeal is that in nine months the U.S. (illegal) quotas on Pakistan will expire anyway, due to the WTO’s three-year limit on all quotas. Thus, if the United States files an appeal and continues to drag out the process, Pakistan will have won a victory on paper only. The same Third World countries that the United States wants to work with to launch a new WTO round when ministers meet in November will have another legitimate complaint about American high-handedness. But if Zoellick does the right thing, lawmakers like Sen. Jesse Helms (R-N.C.) will not be happy.

There are also several losing cases involving steel that Zoellick will have to figure out how to handle. Zoellick has already tried to buy time by filing an appeal in one politically-charged case involving Japan. In February, a WTO panel ruled that the Department of Commerce had used a skewed methodology to hit Japanese steel makers with duties up to 67 percent on hot-rolled steel from Japan. Zoellick presumably understands very well that the rest of the world rightly resents the dishonest distortions that define how Commerce calculates antidumping margins. But remember, the USTR also wants to get along with the U.S. steel lobby — at least until George W. Bush gets fast track.

Another steel headache that is headed Zoellick’s way is the U.S. Antidumping Act of 1916. This is an old relic that dispute-resolution panels convened at the request of the Japanese and Europeans have concluded is WTO-illegal (because it is inconsistent with the antidumping code that WTO members have all agreed to). Zoellick has until July 26 to comply.

In theory, it should be easy to persuade Congress to clear the books of the 1916 Antidumping Act. The hoary statute is part criminal, part civil. Foreigners could be prosecuted for a misdemeanor (one year in prison), if it could be established that they had conspired to materially injure American firms by “dumping.” The statute also authorizes U.S. companies are authorized to take the foreigners to court, hoping to recover triple antitrust damages.

Problem is, in the last 85 years nobody has ever prosecuted or litigated a 1916 Act case to a successful conclusion. But the steel lobby likes it because the old law does have a modicum of harassment value. Wheeling-Pittsburgh and a couple other troubled domestic steel makers have ripped off a few cash settlements from a handful of foreign steel interests in recent years, as the foreigners calculated the costs of settling the nuisance suits were cheaper than fighting.

Probably Zoellick will try to buy additional time next month by leaning on the Japanese and Europeans to refrain from immediate retaliation when the U.S. fails to meet the deadline for clearing the 1916 act off the books.

At one level, Zoellick’s strategy could be viewed as shrewd. Shortly after his outburst in Strasbourg on the FSC tax case, for example, the WTO decided to postpone its ruling from May 21 to perhaps late this month. That means that Zoellick can appeal an adverse ruling until after WTO ministers meet in November.

But while the USTR can run, he can’t hide forever.

The United States keeps asking other countries to move on economic reforms that are far more difficult than anything we are being asked to do to comply with WTO cases that we lose. We ask the world to summon the political will that the United States has lost.

The world looks to the United States for leadership in international economics. Bill Clinton mostly ducked that leadership for eight years. Probably by the end of this year we will know whether George W. Bush will succeed in getting that leadership back on track.

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