By Kip Howlett, president, Hardwood Plywood and Veneer Association
Are seeking legal remedies for violations of the international trade law a trade war? No. Duties are never unprecedented when violations of the trade law have been found. The levels of price dumping and the amount of the subsidies are determined by the facts of each case. To counteract dumping and government subsidies, international trade law puts in place remedies which are not punitive but remedial to level the playing field. Products are supposed to be traded fairly. China itself is an aggressive user of anti-dumping law against imports coming into China.
Are the six domestic companies seeking a competitive leg up in the marketplace by petitioning the federal government to investigate unfair trade practices in China? No. Remedies are not designed to give someone a competitive leg up. They’re designed to make trade fair. If a company has a natural economic advantage, then so be it. It’s a free market.
Importers are “baffled” that the Department of Commerce found preliminary antidumping and countervailing duties. A significant number of Chinese producers refused to respond to the initial questionnaire and are viewed as a matter of law and policy “to have something to hide.” Moreover Commerce examines “adverse facts” relevant to this investigation that are in the public domain as well as to the Department to calculate the preliminary rates. The preliminary determinations did not come out of thin air. (1)
Commerce is now in the in-depth investigation phase which includes in-country visits. The final dumping margins and countervailing duties for subsidies will result in final duty determinations scheduled to be announced on September 17th.
Chinese manufacturers use lots of illegally harvested timber. ”Because after massive floods blamed on deforestation of China’s forests, China sharply restricted logging at home. According to the EIA (Environment Investigation Agency), last year one-third of all the timber sold worldwide was bought by China, with little regard to its origin. After analyzing trade data for 36 supplier countries, the EIA has concluded that approximately 10 percent of the logs and sawed timber is illegal, representing “turnover” of $3.7 billion.” China is the world’s largest hardwood log importer and the world’s largest illegal log importer. The report goes on to say: “the Chinese Government has done virtually nothing to curb illegal imports, while putting in place policies to ensure supply from some of the worst illegal logging hotspots in the world.” (2)
China is not known for its strong environmental protection or safety record in products or the workplace. The August 10th edition of The Economist’s cover calls China: “The world’s worst polluter – Can China clean up fast enough?” (3)
Environment International reported: “Over the last 20 years, China’s formaldehyde industry has experienced unprecedented growth, and now produces one-third of the world’s formaldehyde. More than 65 percent of the Chinese formaldehyde output is used to produce resins mainly found in wood products – the major source of indoor pollution in China. Although the Chinese government has issued a series of standards to regulate formaldehyde exposure, concentrations in homes, office buildings, workshops, public places and food often exceed the national standards . . . The wood processing industry has the highest average industrial formaldehyde concentration, caused in part by unventilated workshops and a lack of safety precautions.” (4)
Will the domestic cabinet industry be harmed if they do not have access to cheap Chinese hardwood plywood if duties are imposed to address the trade law violations?
The answer depends on how much is hardwood plywood contributing to the total cost of production. If hardwood plywood is 20-25 percent of the total cost of a cabinet, the impact is not significant. Product quality will improve because of the better product quality of the U.S. made product. Fewer claims or consumers deselecting are positive effects on both the cost and revenue side. The recall cost is a 100 percent and probably more than the original price.
Will U.S. cabinet producers lose market share in the new housing market? That depends on the builder choice for quality and demand sensitivity of the cost of cabinets in a kitchen to the overall price of the house. If there are $6,000 of cabinets in a $250,000 house (2.4 percent) and hardwood plywood is 20-25 percent of the cost of the $6,000 cabinets, then the cost of the house will affected 0.06 percent. How sensitive is consumer demand to that change when the cost is amortized over a 30 year mortgage? A half percent increase in mortgage rates drives up the paid home price far more.
The very point of dumping and subsidization is to capture a foreign market. Eventually, the unfair traders monopolize the foreign market (by driving competitors out through price undercutting). And, in any monopoly, without strict controls, prices increase dramatically. This is China’s aim, even while it keeps its own domestic market protected. They export $670 million of HWPW and we export to them $250,000 of HWPW and $17.6 million of hardwood veneer.
There are no hardwood plywood products which are currently imported from China that cannot be manufactured by domestic producers. If a cabinet or furniture company wants to source their requirements from domestic producers, they surely can. And, since the domestic producers are operating at about 50 percent of their production capacity, there is plenty of room to ratchet up production to meet increased demand.
By ratcheting up production to meet increased demand, domestic manufacturers can spread their fixed overhead costs over a larger production pool. This, by itself, would serve as a natural “brake” on any price increases.
Chinese imports squeezed out other countries who used to have a larger share of the U.S. market. These suppliers will also come back into the market as well. There will not be supply shortages. There will be a new market equilibrium which will be based on the fair trade of hardwood plywood.
If there is an influx of ready to assemble Chinese cabinets that incorporate the hardwood plywood that used to be destined for the U.S. market, the U.S. cabinet industry has a remedy. Welcome to our world.
(1) Commerce Preliminarily Finds Dumping of Imports of Hardwood and Decorative Plywood from the People’s Republic of China http://ia.ita.doc.gov/download/factsheets/factsheet_China-Hardwood-Decorative-Plywood-Prelim-30APR13.pdfhttp://www.usitc.gov/trade_remedy/731_ad_701_cvd/investigations/2012/hardwood_plywood/prelimphase.htm
(2) ‘Appetite for Destruction: China’s Trade in Illegal Timber’ highlights China’s lack of action against illegal logging http://www.timberdesignandtechnology.com/chinas-voracious-appetite-for-timber-driving-illegal-trade-says-eia-report/
(3) The Economist, August 10-16, 2013, www.economist.com
(4) Environment International 35 (2009), 1210-1224