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Apr 12, 2017 | 19:10 GMT

U.S.: Washington Tests A New Tool To Counter Alleged Trade Manipulation

The use of the measure against South Korea could open the way for its targeted deployment against China.
(Stratfor)

The Trump administration has invoked a new tool for the first time in its ongoing crackdown on alleged trade manipulation. On April 11, the U.S. Department of Commerce used Section 504 of the 2015 Trade Preferences Act to recalculate anti-dumping measures on two South Korean companies. The United States argued, using the Trade Preferences Act, that a "particular market situation" allows for unfair trading practices so that the actual cost of production does not accurately reflect costs in an ordinary case.

These producers of casing and drill pipes use Chinese steel as inputs for their products. Washington used a combination of four arguments to justify increasing one of the anti-dumping margins from 8.04 percent to 24.91 percent. The first is that Seoul interferes in the economy by subsidizing domestic hot-rolled steel suppliers and that these suppliers are allied with the producers of products such as drill pipes and casings. The United States also says that the low-cost electricity used in manufacturing steel is a tool of Korean government policy and that electricity supplier Korea Electric Power Corporation is a state-owned enterprise. The Department of Commerce contended as well that South Korea does not apply the World Trade Organization's (WTO) nonmarket status to China when calculating its own South Korea-China anti-dumping and countervailing duties margins. This makes steel particularly cheap for South Korean producers.

While South Korea is the target of this measure, its future importance lies in its possible use against China if WTO members are forced to designate China a "market economy." China has been embroiled in a WTO case against the European Union and United States since December 2016. Beijing contends that these WTO members violated China's 2001 accession agreement by not according it market economy status. (This designation, among other things, means that domestic prices in a member economy are mostly determined by competition instead of being set according to the government's wishes.) Because China is designated a nonmarket economy, other countries are able to compare China's export prices and production costs to those of similar countries when calculating anti-dumping margins. Attaining recognized market economy status will make it more difficult for states to impose anti-dumping regulations on Chinese imports. The WTO likely will take several years to issue a verdict. In the meantime, Washington has used several tools at its disposal to crack down on China's alleged trade manipulation — and the new administration has doubled down on these measures

Section 504 of the Trade Preferences Act mirrors a similar EU measure to calculate steeper anti-dumping measures. U.S. Commerce Secretary Wilbur Ross said April 11 that the United States will continue to use all tools under the act to enforce trade rules. What is most significant about this, however, is that these measures can be used later against China. The U.S. Department of Commerce's use of the act was clearly designed to test WTO rules for future application in other circumstances. If it passes muster, Washington could broadly grant China market economy status and still use this mechanism to enforce rules pertaining to nonmarket economies in certain sectors. And the current U.S. administration wants all the tools it has available to deal with China's peculiarities and state-owned enterprises.

South Korea will now likely challenge the U.S. use of the rule in the WTO. The European Union's use of similar mechanisms is already the subject of a dispute settlement case, DS494, brought by Russia in 2015. The argument against the mechanism is that WTO's anti-dumping agreement allows disregarding sales prices, but not costs if such a situation exists.

If the United States and the European Union lose these cases, it could remove a key tool in their bid to counter certain Chinese trade practices. Such a tool could be critical in an arrangement in which Washington and Brussels treat different sectors of the Chinese economy differently. Certain sectors, such as the tech sector, fit the definition of a market economy far more than do China's heavy industries like steel. 

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