The Department of Commerce (DOC) recently imposed anti-dumping tariffs on Chinese producers of solar-energy equipment. Chinese competitors, the DOC decided, materially injured American solar companies by selling goods at a price lower than “fair value,” as determined by the government. This comes on the heels of a separate set of tariffs proposed in March to counteract Chinese subsidies. Given the current administration’s tendency to subsidize green-energy companies like Solyndra in almost every way possible, U.S. retaliation in this case is questionable — as is the process DOC uses to calculate whether tariffs should be imposed in the first place.
The methodology the DOC uses to determine anti-dumping tariffs is inherently flawed. There are two economic classifications a nation can receive: “non-market economy” or “market economy.” For non-market economies, the DOC assumes that government interventions play a larger role than supply and demand in determining prices. The U.S. considers China a non-market economy, which it is. But the DOC then uses this classification to justify unfair and arbitrary methods of measuring Chinese dumping margins, which largely establish the tariff rates.
Since supply and demand are not, under this theory, the prevailing economic forces in China, the DOC tries to estimate what the prices would be in China if it were a market economy. According to Dan Ikenson, a policy analyst with the Cato Institute, the DOC doesn’t actually discover the true price difference, but instead concocts “differences between an exporter’s price in the U.S. market and a fictitious hodgepodge of estimated components serving as a proxy for his home market prices.”
One of the most infamous cases involved Chinese wooden-furniture manufacturers. The DOC had to estimate the values of 500 company-specific factors to determine “fair prices.” Strangely, it estimated the prices for Chinese companies using statistics from India. As Ikenson writes in one study, “For most of the factors of production in the Furniture case, the DOC relied on Indian import estimates for their average cost to Chinese producers.”
The above example may appear strange, but it is not an isolated incident. In fact, the flawed methodology is actually written into the World Trade Organization (WTO) treaty. When China joined the WTO in 2001, it accepted terms that allowed the DOC to use a “methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail in the industry.” In other words, the DOC can analyze Chinese companies without analyzing Chinese prices. The results have been used to support the imposition of tariffs ranging from 31 percent to more than 200 percent.
From currency manipulation to intellectual-property theft, the United States has legitimate economic complaints about China, but there are tangible benefits to the relationship as well, and it would be a mistake for Washington to overlook them. Between 2001 and 2005, American commodity exports to China increased by 81 percent, compared with 10 percent for the rest of the world. For all the talk of China’s export-driven economy, many Americans have become better off thanks to rising Chinese imports, and it would be foolish to undermine that relationship because of desire to shelter favored businesses based on questionable methods.
— Noah Glyn is an editorial intern at National Review.