SEATTLE -- My company's problem with the U.S. government began this past summer. It involved our efforts to import manhole covers from China. I admit this is a fairly obscure product, but the grief we have had over it is a good indication of more widespread difficulties faced by U.S. firms and their foreign counterparts as they seek to expand East-West economic ties.
What happened last summer was that the Commerce Department announced it had preliminarily decided -- retroactive to 1987 -- to increase duties on China-origin manhole covers from the current 11 percent to as much as 97 percent. Commerce's final determination, it was cheerfully promised, would be made before the New Year. My company's assessment will likely be in the millions of dollars. Bankruptcy looms.
Looking back over my company's six years of business in China, it is not as if we have had an easy time of it. China has become well known as a difficult, frustrating business environment. Our own profit margin of 5 or 6 percent on manhole covers, essentially a commodity business, is ample testimony to this fact.
What we never expected, though, was to be submarined by Uncle Sam. Yet the Commerce Department has enthusiastically, and unfairly, in my view, sided with an unhappy coalition of primarily eastern U.S. foundries that have argued that Chinese exporters are "dumping" manhole covers in the U.S. market -- that is, selling at "less than fair market value." Commerce proposes to punish U.S. importers for the alleged sins of the Chinese exporters.
It apparently does not matter that not one of the U.S. coalition foundries is located within 1,500 miles of Seattle, or that we sell these products only to a Seattle-area foundry not in competition with any of the coalition foundries. Maybe our Chinese supplier is "dumping" products elsewhere in the United States? Not likely -- my company is its only U.S. buyer.
But these are mere practical matters, and not of relevance to the policy makers and attorneys who are having a field day in a genuine growth industry: the interpretation of U.S. trade law. What, after all, is "less than fair market value?" The issues are complicated, even in a market economy, but in a non-market economy, the U.S. Commerce Department makes them next to impossible.
Unfortunately, in the case of China, the Soviet Union and, still, most of Eastern Europe, none of these countries' production costs or sales prices are market-based. This means they are not considered relevant for scrutiny under U.S. trade law, which requires the imposition of a special anti-dumping duty on imported goods the U.S. International Trade Commission has decided are materially injuring U.S. industry. (The anti-dumping duty is the difference between the "fair" value and the dumped price.)
Nobody has suggested the alternative of excluding nonmarket economies from U.S. trade law. But the fabricated solution employed by Commerce is incredible: the use of a "surrogate" country to give artificial birth to piecemeal, fabricated data as if it were meaningful. In our case, for example, Commerce arbitrarily decided that production costs in China are comparable to those of the Philippines, which has zero percent share of the U.S. manhole-cover market.
Commerce employed this method even though no Philippine foundry was willing to provide production cost data. The reason is that the information a surrogate supplies can be used against it in the future, as a Finnish steel plate producer learned after agreeing to serve as a surrogate in a review of steel plate from Romania. The Finnish producer's reward for cooperating was to be the subject of an antidumping review itself.
Commerce analysts, who admit that the Philippine surrogate methodology is problematical, persisted. They "constructed" the imaginary costs for raw materials from the United States, Britain and Japan imported into the Philippines only to be exported back to the United States as manhole covers! One interesting result of this process is that sand was found by the sagacious Commerce Department analysts to be more expensive than pig iron -- a notion that would make the Sahara Desert truly the world's greatest untapped storehouse of wealth.
The choice of a surrogate, never announced by Commerce beforehand, can make an enormous difference. For Chinese manhole covers, in its 1986 review Commerce compared Belgian, Canadian, French and Japanese manhole covers and "constructed" an 11 percent anti-dumping duty. Now Commerce has decided to use the Philippine surrogate, with the result being a 97 percent duty! This in spite of the fact that, except for price increases, the Chinese selling practices have been consistent over the years.
Other recent cases have been even more dramatic. A review of potassium chloride from what used to be East Germany included a preliminary duty of 112 percent. However, in the final determination, Commerce changed surrogates and the 112 percent duty was reduced to zero.
Because of this crazy methodology, there is no way a foreign exporter, or a U.S. importer, can know in advance the country, or even group of countries, whose production costs -- real or imaginary -- will be used to provide the measure of "fair value."
The surrogate method also negates any advantage that China or, say, the Soviet Union, might enjoy as a low-cost manufacturer. China obviously enjoys a comparative advantage in labor costs. But this comparative advantage is eliminated when those units of labor are valued at prices that prevail in a country that does not share China's low level of economic development. China is also self-sufficient in the requisite raw materials for manufacturing manhole covers. The Philippines is not.
Recently, in retaliation for Commerce's antics, a Chinese buyer suspended negotiations with us for the purchase of nearly a million dollars in U.S.-made construction machinery.
The writer is president of Overseas Trade Corp. in Seattle.