President Trump has issued a new executive order focusing on international cheaters, who do not pay their debts due to dumping penalties. The order targets the problem of unpaid special customs duties known as “Countervailing Duties” (CVD), levied on products from companies found guilty by an “anti-dumping” investigation.
First to the jargon: “Dumping” refers to a type of predatory trade practice. In its simplest form, it amounts to a company selling a product in a foreign market for less than it costs to make it. In theory, the goal of “dumping” is to drive down the price, and in doing so, muscle out smaller, weaker competition in order to later establish a monopoly status on that market. Under the rules of the World Trade Organization, dumping is a prohibited practice, and countries are permitted to levy special taxes on goods found to be unfairly dumped in their market in order to rebalance the price level. These tariffs are called “Countervailing Duties”, abbreviated as CVD.
The US currently has filed 379 AD/CVD cases. The largest number deal with various steel products, as well as agricultural and manufactured goods. Of the culprits, China is in the lead with 142 pending cases. At issue in the executive order is a problem brought to light by a 2016 report from the Government Accountability Office. The GAO report noted that only about 30% of the duties assessed and owed are ultimately paid, resulting in approximately $2.8 billion in unpaid levies. The report notes the majority of these are owed by the largest importers, and some 90% of the unpaid duties are owed by Chinese companies.
The facts seem to support President Trump’s views on trade. These companies are “cheaters” who take advantage of the US market, but don’t comply with its rules. They deserve to be punished, since by selling to a country which offers them vast business protections, and then flaunting its laws they add insult to injury.
We also need to keep this order in context. The order requires Customs and Border Patrol to enact stricter and higher bonding requirements on imports. Companies owing duties must “post higher bail” at the border to import their goods. There will be results. Yet, it is also important to bear in mind the scale of the evasion, which is only about one half of one percent of the overall trade deficit. Yet, as behooves good business practices – every bit counts.
The symbolism of this order may be more important than the substance. After all, if a domestic firm were to engage in “dumping” or sell their goods below cost, we would call it a “sale” benefitting the customer. The timing of the order is also noteworthy – only a week ahead of an official visit by Chinese President Xi Jinping. This order may have been posturing ahead of their meeting, as President Trump aimed to extract concessions from the Chinese. Every bit counts!
How effective do you believe these measures will be? Leave a comment, or send me an email to share your thoughts!