In 2007, Leslie and Jim Thompson, a husband and wife who owned a Georgia-based furniture company, learned they might have to pay a heavy import duty on items they produced in Shanghai.
When they looked into the issue, they ended up talking to a high-powered Washington lawyer representing La-Z-Boy and other large furniture manufacturers. He asked them what they could give him to make the problem go away.
The couple refused to negotiate. “My husband and I were not, and are not, willing to pay what we believe were extortion payments,” Leslie Thompson told the U.S. International Trade Commission at a hearing.
But the lawyer’s response was completely legal.
In 2004, the Commerce Department determined that some Chinese companies were “dumping” wooden bedroom furniture in the U.S. market, selling items at less than fair value. As a result, the U.S. began imposing duties on Chinese furniture imports. The goal was to increase the prices of Chinese goods for U.S. consumers enough to allow domestic companies to compete.
Rather than charging the same amount for all Chinese imports, the Commerce Department sets manufacturer-specific duties, which can change based on periodic reviews of trade practices. The strange part, however, is that not all manufacturers are subject to reviews. It is up to the U.S. furniture makers affected by the alleged dumping to decide which Chinese companies they would like to have scrutinized.
The review process is unpredictable and arbitrary, with trade officials generally extrapolating from minimal and hard-to-validate information. The duties are then applied retroactively. This means companies can suddenly find themselves owing huge amounts on furniture they have already shipped and sold. For many companies, particularly smaller ones, this uncertain business climate is intolerable.
As a result, many Chinese manufacturers are willing to pay handsomely to avoid being subject to such a review. And American companies are happy to take advantage of this. It has become standard practice for Chinese firms to pay large settlement fees to U.S. manufacturers to avoid being named for review. An ITC report estimated that a group of 20 U.S. furniture makers received about $13 million in antidumping settlement money between 2006 and 2009.
One ITC commissioner commented, “I cannot figure out for the life of me how [the settlement payments] are actually legal.” The American furniture manufacturers’ lawyers, however, insist that everything is legitimate. Joseph Dorn, the lawyer the Thompsons spoke with, told The Wall Street Journal, “settling legal disputes is commonplace, legal and totally appropriate.” He left out the word “lucrative.” Manufacturers told the ITC that their lawyers received even more than the $13 million they got from the deals. American manufacturers may struggle to compete, but American lawyering is thriving.
Washington is well within its rights to protect U.S. enterprises, including domestic manufacturers, from unfair trade practices. Listening to manufacturers’ complaints is an essential part of that effort. But it is one thing to listen to domestic producers and then take independent action; it is quite another to allow the government’s authority to be turned into the legal equivalent of a Molotov cocktail, tossed through the store window of any importer who does not agree to pay protection money.
As usual when government power is subverted to protect narrow parochial interests, the biggest loser is the U.S. consumer. A level playing field for international trade would promote competition. The current system of anti-dumping duties makes real competition unnecessary. Why should American companies make and price their products competitively, if they can use the threat of government sanctions to extract payments without having to produce anything at all? Meanwhile, the draconian threat of retroactive duties deters foreign producers from underpricing their U.S. rivals, and the costs of the so-called settlement fees also get added to import prices. The result is that you and I pay more than we should for the goods we want.
The best solution would be for the U.S. to apply duties equally and prospectively, rather than retroactively, to all Chinese wooden furniture imports, regardless of manufacturer. This would fix the uncertain business climate and stop Chinese companies’ fates from being decided by their competitors. The Chinese government and the Chinese furniture industry would then have an incentive to reform their business practices in order to get the duties lifted.
Yes, some companies that are not guilty of dumping might face duties as a result of this change, but they would, at least, be freed from an environment of corruption and uncertainty. A broader examination of the industry might find that U.S. producers are being hurt less by illegal dumping and more by the fact that China simply has cost advantages that American producers cannot match – in which case, some American firms will gravitate toward more competitive or less price-sensitive niches, while others will quit the business. That’s how competition works. To the extent China actually does engage in dumping, a uniform and well-documented countervailing duty would encourage that country’s furniture industry to bring its practices into line with international norms.
The Thompsons, by the way, eventually closed their operations in Shanghai because of the uncertainty over duties. The moral of their story: If something looks like extortion and feels like extortion, it probably is extortion. It shouldn’t be legal.