Why does the U.S. keep losing WTO cases?

January, 2003: Cover Story

By Greg Rushford

Published in the Rushford Report

The United States has a serious rule-of-law problem with the World Trade Organization. But the root of the problem isn’t with the WTO’s Dispute Settlement Body in Geneva , it’s in Washington , D.C. — where the U.S. International Trade Commission, knowing fully well that it is on dubious legal grounds, still insists on flouting key requirements of U.S. trade law. The reason for the ITC’s intransigence seems to be the usual Washington explanation where mischief is afoot: politics and bureaucracy.

            Although the legal issues are not generally understood on Capitol Hill or by the press, they are not particularly difficult. You don’t have to be a $500-per-hour international trade lawyer to see what’s happening.

            Since the WTO’s binding dispute settlement proceedings got underway in 1995, there have been four challenges to U.S. Section 201 safeguards’ determinations — line pipe from Korea , lamb from New Zealand and Australia , wheat gluten from Europe , and steel wire rod, also from the EU. In each case, of course, there were several different issues of varying complexity. But one issue stands out: the WTO dispute process has basically found that the ITC has not been performing its required “injury” analysis properly, so as to comply with Article 4 of the WTO’s safeguards agreement.

             Moreover, in dispute proceedings involving challenges to U.S. antidumping actions, the WTO’s appellate body has found that the methodology that the ITC has been using to find “injury” by reason of the alleged “dumping” does not stand up to scrutiny. For example, when Japan challenged a U.S. antidumping action that targeted Japanese hot-rolled steel exports, the ITC was unable to demonstrate that it had performed its injury determination to comply with the requirements of Article 3.5 of the WTO’s antidumping code.

            Veteran legal observers expect more of the same when pending decisions are handed down this year. Indeed, President George W. Bush’s Section 201 steel plan could be the next U.S. safeguards case to be shot down in Geneva , perhaps later this month or soon thereafter.

            A concerned Sen. Max Baucus (MT) — who has heard from the Stand Up for Steel lobby — has asked, “What’s going on?” Answering his own question, the top Democrat on the Finance Committee has likened the WTO’s dispute settlement body to “a kangaroo court” that is biased against “core” principles of U.S. trade law.           

            The senator’s question is a very good one. But his answer isn’t. In short, the ITC has been losing WTO cases for the same reason it has lost cases in the U.S. Court of International Trade and the U.S. Court of Appeals for the Federal Circuit — where U.S. trade law is the only issue. The ITC’s injury analysis has also been shot down by a U.S.-Canada Nafta panel, which also looked only to controlling U.S. law, not the WTO’s safeguards agreement and its antidumping code.

            To date, the ITC’s response has been to hunker down. Last month, I sent in a written question to ITC Chairwoman Deana Okun asking if the commission intends to make any changes in its injury analyses to comply with U.S. law, and also WTO legal requirements. I asked Okun if she cared to dispute that the requirements of controlling U.S. law and the WTO’s antidumping- and safeguards agreements are essentially the same. Okun authorized a spokesman to say only, “No comment.”

            Getting its injury analyses right is at the core of the ITC’s mission. In Section 201 safeguards cases involving import surges, and also in antidumping cases where the Commerce Department has calculated “dumped” imports, the ITC must find a causal link between the injury and the imports. If it doesn’t find such a connection, the case must be thrown out.

            Article 3.5 of the WTO antidumping code — only one paragraph — specifies that when a national authority like the ITC looks to see whether a domestic industry has been injured by alleged “dumped imports,” the commissioners must also examine other relevant factors that may be contributing to the injury, such as the “volume and prices of imports not sold at dumping prices.”

            Most people would see the logic: if the so-called “non-subject,”  or “fairly” traded imports — and not the “dumped” imports — are setting market prices, the competitive “injury” to the domestic petitioner can hardly be blamed on dumping.

            Article 4 of the WTO safeguards agreement tracks the same reasoning: ITC commissioners must “evaluate all relevant factors,” such as the “rate and amount of the increase in imports,” before finding that there was “a causal link” between the increased imports and the serious injury. One line in Article 4(b) says it all: “When factors other than increased imports are causing injury to the domestic industry at the same time, such injury shall not be attributed to increased imports.”

            The problem is that the ITC has gotten used to making its injury findings without engaging in such rigorous economic analysis. Commissioners have said that dumping only has to be a cause of injury to a domestic competitor — just somewhere in the mix with other contributing factors. The commission — backed up by lawyers for the domestic steel lobby, which is the driving force behind the political support for the protectionist U.S. trade laws — has also argued that the “dumping” doesn’t even have to be a significant factor in the injury. 

            “Generally, there is no deep analysis in these injury determinations,” explains Brink Lindsey, an experienced trade lawyer who is now director of the Cato Institute’s trade policy center. “If imports are rising, commissioners can always find that they are the cause.”

            All the WTO dispute body is asking is that the ITC undertake some sort of a rational economic analysis to figure out what’s really going on in trade litigation, and then explain itself convincingly. You would think that it shouldn’t be such a big deal to ask the ITC to do this. But it is.

            Last year, for example, in the case brought by South Korea against U.S. safeguards on welded line pipe, the WTO’s appellate body criticized the ITC for its shoddy analysis of other contributing economic factors to the U.S. industry’s “injury,” such as the sharp declines in the oil and natural gas markets. And in the successful challenge brought by Japan over the U.S. antidumping action against hot-rolled steel, the ITC did not thoroughly analyze all contributing factors to the petitioning U.S. industry’s economic condition, including increased production capacity at mini-mills and the adverse effects of a strike at General Motors.

            While its critics blame the WTO, the fact remains that the ITC doesn’t want to perform essentially the same injury analysis even when required by U.S. law.

            The controlling U.S. legal authority was handed down in December, 1997 by the U.S. Court of Appeals for the Federal Circuit in an antidumping case involving magnesium imports from Russia , Ukraine , and China . The ruling in Gerald Metals vs. the United States tracks the reasoning that drives the WTO’s Article 4 safeguards agreement, and also Article 3.5 of the antidumping code.

            Gerald Metals turned on the fact that the petitioning domestic magnesium producer, the Utah-based Magnesium Corporation of America , was being “injured” by perfectly fair competition in the global marketplace, and not “by reason of” the alleged dumping, as the U.S. antidumping statute requires.

            But as I reported in some detail last month, the ITC bureaucracy has dug in its heels. Gerald Metals could be likened to the legal elephant in the ITC’s hearing room. While the commissioners and the agency’s lawyers know it is there, they try to ignore it. As best I can determine, the commission has never cited Gerald Metals as the justification for throwing out any antidumping petition. Last month, I asked ITC General Counsel Lyn Schlitt if she could cite any such cases. I never heard back.

            In October 2002, the ITC flat-out defied an instruction from a U.S.-Canada binational panel convened pursuant to Nafta to apply the Gerald Metals’ test in still another antidumping case involving magnesium, this time from Canada . Faced with such defiance, the government of Quebec is now asking the Nafta panel to apply the U.S. law for itself, ordering the ITC to terminate the litigation (see, Sinning Against The Trade Bureaucracy: In Re Magnesium from Canada,” The Rushford Report, December 2002).

            Need more convincing that the root of the problem is not with the WTO, but with the ITC’s failure to follow U.S. law? Check out Nippon Steel v. United States and Weirton Steel. In this antidumping action, the West Virginia-based Weirton alleged that it was being injured by “dumped” imports of tin- and chromium-coated steel from Japan . The ITC agreed with Weirton .

            But then a federal judge tied a legal tin can to Weirton ’s case, and to the ITC’s apparent desperation to agree with the politically-connected West Virginia mill.

            In December 2001, U.S. Judge Jane Restani of the New York-based Court of International Trade relied upon Gerald Metals’ causation test in sending the proceedings back to the ITC. Restani instructed the commission to take another crack at analyzing other possible contributing factors that may have “made a material contribution to [ Weirton ’s] injury.”

            Once again, the ITC balked, refusing to perform its injury analysis to comply with Gerald Metals. So Washington lawyers for Nippon Steel — Willkie Farr & Gallagher’s William Barringer, James Durling, Daniel Porter, Sean Thornton and Karl von Shriltz — filed another appeal in New York .

            On August 9, 2002 Restani issued a blistering 44-page opinion that ordered the ITC to terminate the case. The judge carefully documented the extraordinary lengths that commissioners had resorted to in their enthusiasm to support Weirton ’s allegations that it had been injured by the Japanese competition.

            The judge found that “uncontested evidence lead inexorably to the conclusion that lower priced subject imports did not have a material effect on domestic prices.” She found that for two of the three years that the ITC had looked at, the Japanese had generally offered their steel in the U.S. market at a higher price than Weirton ’s. Moreover, imports from other countries than Japan had enjoyed a greater market share in the United States . 

            Judge Restani also found that Weirton sold mainly in the eastern part of the United States , while the Japanese steel sold in the west. And Weirton ’s own documents showed how its pricing had been based on domestic competition, not the Japanese. “[T]he only pricing documents submitted by Weirton apparently showed that its pricing range was determined without regard to foreign prices,” Restani observed. Furthermore, Weirton ’s own customers cited quality and service problems with the long-troubled West Virginia mill. As Restani put it, evidence “showed domestic producers’ on-time performance was poor during the POI [period of investigation].”

            All this — the ITC overlooked, or tried to explain away.

            “The Commission failed to take into account relevant market factors in determining price sensitivity,” Restani ruled. The ITC had “ignored the court’s directive” to properly analyze price data. Commissioners had “ignored explanatory information” that contradicted Weirton ’s claims. The ITC would not explain its flawed methodology. In one part of its determination, “the Commission’s analysis cannot be supported by substantial evidence because there is no logical connection between the facts found and the choice made,” Restani determined.

            “The Commission’s apparent tunnel-vision is misleading and violates the court’s directive to analyze and present data in a manner that facilitates review,” the judge  concluded.

            The logical question is: what is driving this institutional tunnel-vision?

            It seems that the ITC bureaucracy is split down the middle. While insiders are keeping their heads down, informed street talk in the trade bar believes that the independent agency’s economists would very much prefer to engage in honest economic analysis. The commission’s economists are generally respected, and they do not seem to want to get the reputation for jiggering facts to punish foreigners — like, for example, their counterparts in the Commerce Department’s import administration. But the ITC’s lawyers seem to insist that the ITC has wide discretion in how cases are handled.

            Commissioners — who know how tough steel politics can be in Washington — also seem to find it convenient to have wide discretion, particularly when the political winds blow strong. This would explain why they went to such extraordinary lengths to help out Weirton Steel blame its problems on Japanese competitors. The commission had received what could be considered veiled threats of political retaliation from Sen. Jay Rockefeller (D-WVA), who was advocating Weirton ’s case. While Judge Restani found no evidence that intimidation from Congress had actually changed any votes, everyone knows that these matters may be subtle — but they are real.

            And in giving the go-ahead to the Bush steel plan that is currently under serious WTO fire, the ITC even found “injury” to domestic mills when most categories of steel imports were actually falling. Remember, Article 4 of the WTO’s safeguards agreement requires evidence of rising imports. To find such evidence, commissioners counted imports of semi-finished slabs. Since these slabs were brought in by the domestic mills themselves, and were considered necessary for the mills to turn them into finished products, how could the ITC honestly say that these slab imports harmed the same mills?

            While we wait for a WTO dispute panel to answer that question, the inevitable conclusion is this: As surely as night follows day, until the ITC starts performing its required economic analyses to comply with U.S. law, Uncle Sam is going to keep losing trade cases, no matter where they are brought.

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