By Charles Benoit, CPA Trade Counsel
Last month, President Biden stunned the trade community around the world when he announced a two-year legal immunity from our anti-dumping and countervailing duty (AD/CVD) laws for solar panels imported from Cambodia, Malaysia, Thailand or Vietnam (including Chinese ones that illegally circumvent duties through those countries). International cartels and foreign state-owned enterprises especially took notice. They saw that everything was up for grabs politically. Findings by the independent U.S. International Trade Commission were no longer ‘final’. The Kingdom of Morocco is now aiming for the same immunity from trade laws for its state-owned fertilizer monopoly based on what the President did for Chinese solar. Senator Chuck Grassley, a top Republican on the trade file, and thirty other GOP lawmakers are keen to help the Kingdom with its desired immunity.
Background: Global Rules Based Trade Isn’t Actually Supposed to Be a Free For All
Before we get to this week’s hollowing-out of America, a refresher. For most of our country’s history, Congress set tariffs based on what their gut told them was a good mix of revenue and protection. Those were the good times. In 1947 though, the United States and much of the free world signed on to the General Agreement on Tariffs and Trade (GATT), a trade agreement that now governs the entire global economy. Every country that signed on to the GATT promised a long list of maximum tariff rates (like tax ceilings, known as ‘bound rates’).
The GATT’s underpinning rationale was that lowering tariffs would increase global welfare by helping countries unlock their ‘comparative advantage’. It’s a joke, clearly. But for what it’s worth, the drafters believed they were writing a pro-competitive document. And for that reason, the GATT allows at least two instances where it would be acceptable for a country to collect higher tariffs than it promised in its GATT-bound rates:
- Anti-Dumping duties: The first instance was if a foreign company, or cartel of companies, sold product below cost or below fair value into a foreign market in the hopes of running the domestic producer out of business. If this dumping could be proved, then the receiving country could temporarily charge ‘anti-dumping’ tariffs against the foreign company’s product. Anti-dumping laws are important, and in the United States they pre-dated the GATT by more than a quarter-century. The first U.S. anti-dumping laws were part of the development of antitrust law in the early 20th century.
- Countervailing duties: The second instance was if a foreign government was subsidizing a specific imported product. A foreign subsidy, after all, was not intended to be part of a country’s ‘comparative advantage’. And so the GATT authorizes “Countervailing duties”, which fight subsidized products by imposing an offsetting tariff.
Together, these two rule sets are often referred to as “AD/CVD” for short hand. If you’re going to have a rules-based trading system, these rules are absolute necessities. Every country uses AD/CVD.
AD/CVDs Aren’t Supposed to Be Political
It’s important to understand that AD/CVD are unlike certain other uses of tariffs you’ve heard about. Most significantly, AD/CVDs are not political. They don’t involve political discretion, unlike national security tariffs or safeguard tariffs. In the United States, we even created an elaborate ‘bifurcated’ system: decisions about AD/CVD injury are made by independent USITC Commissioners, unbeholden to any President or Congress.
That’s why President Biden’s decision last month to use an obscure emergency power to nullify an AD/CVD investigation against Chinese solar imports was so shocking. No President, at least since the GATT era began in 1947, had ever nullified an AD/CVD investigation like this. President Biden’s solar-emergency declaration gave a two-year immunity to any parts and components of Chinese solar modules that were circumventing duties through southeast Asia.
But perhaps this development was inevitable. Foreign cartels and state-owned enterprises have strengthened their grip on our marketplace, and increasingly, our politicians.
President Biden Took Away GATT’s Tools for Fair Competition
When then-Senator Biden ran for the Presidency, he had a “Made in America” platform, where he promised he would:
Rally our allies in a coordinated effort to pressure the Chinese government and other trade abusers to follow the rules and hold them to account when they do not.
Instead, when he issued his “emergency declaration for solar“, he did the literal opposite. His declaration gave a two-year immunity to any Chinese solar modules that were being transshipped through southeast Asia, and any other potential AD/CVD concerns producers in those countries had for the same two-years.
Biden’s Made-in-America pledge began with his belief that “American workers can out-compete anyone, but their government needs to fight for them.” Whether the President would actually fight was an open question. But no one expected the President to start fighting against American workers.
31 GOP lawmakers love President Biden’s abandonment of trade rules
On July 14, Senator Grassley, along with 30 other GOP lawmakers, cited the President’s the solar-emergency declaration in a letter asking him to set aside AD/CVDs in effect on fertilizer imports from Morocco, as well as Trinidad and Tobago. This actually involved attacking two separate AD/CVD rulings: an earlier one on phosphate fertilizer from Morocco and Russia in place from well before the fertilizer prices spikes, and another on urea ammonium nitrate fertilizer from Russia and Trinidad and Tobago that wasn’t even final yet.
These GOP lawmakers could have saved themselves some of this debasement. While back in August 2020 the USITC first found injury for phosphate fertilizer from Morocco, the week after Grassley’s letter, the USITC announced they did not find injury for nitrate fertilizer from Trinidad & Tobago. The GATT sets a (unreasonably) high bar for proving AD/CVDs, so the lawmakers should have at least let the USITC make its finding on nitrate fertilizer before condemning the investigation. (It’s not okay afterwards, either, though! But front-running a ruling is additionally harmful, as other countries likely perceive a link between the lobbying and the factual finding.)
Tony Will, CEO of CF Industries Holdings, Inc., said this week regarding the nitrate fertilizer decision: “Unfortunately, this outcome will perpetuate an unlevel playing field for a domestic industry that has invested billions of dollars in the U.S. to ensure American farmers have a reliable source of UAN fertilizer.”
In December, Reuters reported that Morocco’s state-owned phosphate miner and fertilizer producer had paid white-show law firm Covington & Burling LLP over $1 million per month ($15 million between Oct. 2020 and Dec. 2021). But not just for lawyers, this was also for lobbyists and public affairs campaigns. According to a Foreign Agent filing, the scope of work included “legislative and executive department messaging and communication strategies” that address their state owned firm’s “role in the U.S. fertilizer sector and the potential impact of tariffs”.
Look, not only is there no Presidential or Congressional decision making in adjudicating an AD/CVD case, there’s not even a jury! The final deciders are five, independent bipartisan Commissioners at the USITC, required to make a judgment based on the record before them.
So it would have been unclear to those of us who believed in the rule of law what ‘return on investment’ Covington was pitching for its lobbying. But now we know. Adverse USITC adjudications on an import no longer have to mean tariffs. Blasting cash across the Beltway can indeed bear fruit even in independent adjudications, as it did with solar.
We Should Be Disconnecting from the Global Fertilizer Market, Not Cementing Reliance
America still has a competitive ecosystem of domestic fertilizer producers. We’re still a major producer of nitrogen and phosphorus fertilizers, although depend heavily on Canada for imports for potassium-based fertilizers. Canada is the top global source of potassium-based fertilizers due to substantial potash deposits in Saskatchewan, where Florida-based fertilizer producer The Mosaic Company also mines.
The United States is one of just three countries among the sixty-five that produce fertilizer to have 20 or more unique producers.
Outside our hemisphere, the majority of fertilizer production comes from state-owned enterprises or from states where there is no meaningful difference between private and public enterprise. China and Russia are the two biggest global producers. These state-owned producers and cartels already enjoy immunity from our antitrust laws, thanks to the State Department and Justice Department’s promotion of bad “act-of-state” doctrine jurisprudence. (But that’s another article).
And absent any AD/CVD, or other tariff action like a Safeguard, we grant a 0% tariff rate to the entire world on fertilizer. Fertilizer has its own chapter in our tariff schedule (Chapter 31), and it’s all marked ‘free’. Not even Europe has gone this extreme, maintaining a 6.5% base tariff on their fertilizer imports.
If Somali pirates or Libyan warlords decided to get into the fertilizer business, we’d welcome their fertilizer with the same tariff treatment provided to American producers with their own investments in Saskatchewan.
So it’s not an exaggeration to say that AD/CVDs are pretty much all we’ve got for any notion of ‘fair competition’ across borders.
And anyone who says “who cares, let China make it, if they’re cheaper” is a fool. It’s been bad news for the world that China became the top global fertilizer supplier: China cut off exports in 2008, and they did it again last year.
As Europe is learning the hard way, allowing your nation to be dependent on adversarial regimes is a sure-fire ticket to hard times.
Senator Grassley Fails to Follow His Own Failed Ideology
Senator Grassley just doesn’t get it though.
Raising tariffs will hurt both US & China economies + more importantly will hurt US farmers/consumers/businesses Enough is enough China needs to negotiate seriously & quit moving the goalpost Enforceable trade deal needed for certainty
— ChuckGrassley (@ChuckGrassley) May 13, 2019
Even this May, he sent a letter to Ambassador Tai at USTR with three other Senators, asking if she could “engage” with China to see if they wouldn’t mind resuming their fertilizer exports to us.
It doesn’t appear that Senator Grassley has ever thought hard about this. For example, in a 1992 Senate Finance Hearing, Senator Grassley observed that “we want to have great faith in the American farmer, can compete against the German farmer or the French farmer or any farmer in the world, but we can’t compete against the treasuries of these other countries and their subsidies.” This is just him reciting what he’s heard from globalist economists and shilling for the GATT. It doesn’t occur to him whether there may be other pitfalls from putting, say, American garlic farmers into direct competition with their indentured and long-suffering counterparts in the poorest countries of the world. He sticks to worrying about rich-country subsidies, which his precious rules-based trade has an answer for!
But even with all of that, it turns out, he’s not so worried about foreign subsidies after all.
Iowa farmers are facing record inflation & are seeing fertilizer prices soar to record levels That’s why last wk I sent a letter to Pres Biden &the International Trade Commission asking them 2do what they can to lower costs +suspend tariffs on imported fertilizer
— ChuckGrassley (@ChuckGrassley) March 22, 2022
Senator Roger Marshall of Kansas has also been soliciting other GOP lawmakers into this folly.
The Biden Administration needs to take a look at phosphate-based fertilizers from Morocco now. Duties on some of our most reliable trading partners is the last thing we need amid record inflation. 2/2
— Dr. Roger Marshall (@RogerMarshallMD) July 18, 2022
It’s ironic, as we were all assured that President Trump was the threat to rules-based trade. But it turns out no one was quicker to throw out the rule-book than the politicians who spent their lives insisting on fealty to rules-based trade.
Cutting tariffs will spur future price hikes and shocks, more inflation
Less imports means more self-reliance, and less exposure to overseas drama and supply shocks. It’s what built this nation, where imports were a trivial part of our GDP. The best hedge against inflation risk is less trade, not more.
Senator Grassley deserves condemnation for a career spent in pursuit of globalizing our supply chains and increasing our reliance on adversaries. He hasn’t pivoted. But there is a glimmer of understanding: in that May letter to USTR, he asked her to dig us out of the mess he helped create, asking her “to develop and begin executing a strategic plan for the long-term stability of fertilizer trade for our farmers and ranchers.”
Senator Grassley, if you’re reading this: you’re the law-maker, you should be developing the strategy. USTR gets sued into oblivion when they try to use what limited tools they do have.
Here’s an idea: stop granting duty-free treatment to the entire world on fertilizer imports as a starting point. You should put forward a bill to raise fertilizer tariffs substantially from their current “0%” under our ‘Normal Trade Relations’ tariff schedule. Doing so would leave our tariff at zero for friendly countries with whom we have a separate Free Trade Agreement (notably for fertilizer, Canadian imports under USMCA) while insulating our market from overseas predatory state-owned enterprises in China and elsewhere. We all agree we should be energy independent, at least on this continent, let’s try the same for fertilizer.