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May, 2004

THE YANKEE TRADER

The Byrd Amendment: For and Against

The innocuous sounding Continued Dumping and Subsidy Offset Act of 2000 is perhaps the most controversial U.S. trade law. The Byrd amendment, as it is commonly known - after the provision's chief sponsor, Sen. Robert Byrd (D-W.VA) - requires antidumping tariffs that are collected by U.S. Customs to be turned over to American petitioning companies.

The law is widely scorned by international trade practitioners as the ultimate example of corporate welfare. But the revenues that the Byrd amendment has generated for them are dearly loved by recipient companies, some of whom are small businesses that insist that without it, they would go under. Such cries have clearly resonated on Capitol Hill. Both supporters and opponents of the Byrd amendment vehemently claim the high moral ground.

The controversy is not likely to go away any time soon. The World Trade Organization's Appellate Body determined last year that the Byrd amendment violates U.S. obligations as a WTO member - a ruling that many in Washington's trade bar had predicted from day one.

Now, if Congress does not repeal the law, U.S. exporters will sooner or later be hit with financial penalties that will be determined by a WTO arbitrator. Since the "final" deadline for congressional action was on December 27, 2003, and the prospects for congressional action in this election year are considered improbable at best, the tensions are building.

The United States insists that other WTO members that lose such trade cases should act swiftly and in good faith to bring their laws into compliance with their international obligations. American prestige is therefore involved, thanks to the congressional stall.

To understand why opinion on the Byrd amendment is so sharply divided, with neither side presently in the mood to budge, here are the pros and cons. First, the cons.

Why the Byrd amendment is resented

To the critics, the very notion that a few favored American private interests can actually reach into the public Treasury and fill their pockets with cash that was extracted from their foreign competitors is offensive on its face. Moreover, the slippery manner in which the wily old lawmaker from West Virginia got the law passed immediately raised hackles.

Sen. Byrd launched his sneak attack on October 3, 2000 in a conference room in the U.S. Capitol where lawmakers from the House and Senate were meeting to reconcile their differences in a $78 billion agriculture appropriations bill. The senator - who was fronting basically for the domestic steel lobby that has long taken the lead in antidumping matters - brought up his idea to add a new provision that neither body had considered.

Why not turn over U.S. antidumping tariffs directly to the petitioning American companies that had brought the cases? Byrd suggested. The senator said that this was a sensible and non-controversial measure. He reasoned that the tariff revenues that had been collected by U.S. Customs were false profits that foreign exporters with their "unfair" pricing schemes had in effect taken out of the pockets of the antidumping petitioners in the first place.

Given the venerable Byrd's personal stature - he was then in his 42nd year as a U.S. senator -- and his assurance that the measure would help farm interests from beef to mushrooms, his word was good enough for the agriculture conferees. In the next few days, some of those lawmakers acknowledged, off the record, that they were mainly ignorant of the ramifications of what they had voted for, and had been misled. But by then it was too late. There had been no public hearings, and no opportunity for real debate before the Byrd amendment became Public Law 106-387.

Byrd has also assured the agriculture appropriators that his amendment's financial impact would be small, estimating that the U.S. Treasury was collecting about $40 million annually in antidumping and countervailing-duty tariffs. It turned out that the senator's number had come from the Congressional Budget Office, which got it from U.S. Customs. The number was wildly wrong. Immediately, experienced Washington trade lawyers like Ken Pierce, a partner in Willkie Farr & Gallagher who represents foreign respondents in antidumping litigation, guesstimated that Byrd distributions could amount to perhaps $200 million a year.

The trade lawyers were right. Customs turned over $231 million in Byrd duties to petitioning U.S. industries in 2001, $330 million in 2002, and $190 million in 2003. "The Congressional Budget Office projects that distributions will total $3.8 billion from 2005 through 2014," the CBO recently informed Rep. Bill Thomas (R-Calif.), who chairs the Ways and Means Committee.

In the days after Sen. Byrd pushed his amendment into law in October 2000, critics like Rep. Jim Kolbe (RAZ), an Appropriations Committee member and one of the Republican Party's leading free trade advocates, were quick to predict that the Byrd revenues would be "a grab bag for domestic producers." The critics now say that their concerns have been documented.

When the critics cite abuses, the Timken Co. is usually the first name that pops up. Based in Canton, Ohio, Timken makes tapered roller bearings for the auto industry, ball bearings for aerospace, and alloy steel. The Timken Co. has long been one of the most frequent users of the U.S. antidumping laws. In 2003, Timken and its newly acquired Torrington subsidiary, collected some $72.5 million in Byrd revenues. This amount represents 38 percent of the $190 million Byrd distributions last year. Timken's profits last year were $36.5 million - half the company's Byrd revenues. To the law's critics, this is unseemly.

W. R. "Tim" Timken, Jr., 65, who retired as a company executive at the end of last year, continues to chair the board of directors. Timken, also a former chairman of the National Association of Manufacturers, is one of the Republican Party's biggest financial supporters. Working with lawmakers like Ohio Republican Sen. Mike DeWine, Timken lobbied for the passage of what became the Byrd amendment - DeWine also pushed for the measure before Byrd used his seniority and position on the appropriations committee to slip it into law.

Since 2000, Timken and his family have given $1.1 million dollars to help elect President George W. Bush (who spoke at the company's Ohio headquarters in April 2003), and also Republicans like Sens. Elizabeth Dole (NC), George Allen (VA), and DeWine. A$72.5 million return in 2003 for $1 million and peanuts is a handsome return for political contributions, the Byrd amendment's critics scoff. Moreover, Timken has pulled in similar sums in each of the three years that the Byrd revenues have been doled out - a staggering return on a political investment, no matter how it is calculated.

At least the Timken Co. is a world-class competitor that would be expected to thrive without the antidumping weapon. The same can't be said for many struggling antidumping petitioners from declining industries. All they seek is a level playing field upon which they can compete fairly with "unfair" foreign competitors, antidumping petitioners insist.

But it doesn't take much understanding of economics to understand why the antidumping statute itself is not well-regarded. While the political support for antidumping remedies is based on the rhetoric of predatory pricing, the antidumping laws aren't concerned with genuine predation. The international price discrimination that the antidumping law seeks to tax represents conduct that is practiced routinely by domestic businesses within U.S. borders. In fact, the cost-cutting and the healthy competition that it generates is widely praised as evidence of how the marketplace should work.

Nor is the less-than-partial manner in which the antidumping law is administered by the U.S. Commerce Department respected as evidence of a "level playing field." The way the game is played in Republican and Democratic administrations alike, is to punish foreigners.

The antidumping law's pernicious effects on the overall economy have been documented too many times to repeat in this space. In 1995, for example, the U.S. International Trade Commission closely examined the economic effects of antidumping and countervailing-duty orders that were in effect in 1991, concluding that the U.S. economy lost more than $1.5 billion that year because of the trade cases.

"The law subsidizes the output of some firms at the expense of others, leading to inefficient use of capital, labor, and other resources of the economy," the Congressional Budget Office reported to Ways and Means Chairman Bill Thomas on March, 2, 2004. While the CBO did not cite individual cases, one that comes to mind is an antidumping action brought against imports of indigo dye from China. Indigo is the stuff that puts the blue in blue jeans. When the case was filed five years ago, some downstream domestic textile makers complained that if antidumping tariffs were slapped on the indigo that they needed to make their denim, this would give them one more incentive to move offshore - costing American jobs.

Why supporters love the Byrd amendment

Don't tell that to Lawrence Kaminski, the president of Buffalo Color, which is based in Buffalo, New York, and is - or was - the only domestic manufacturer of indigo. Kaminski is the man who filed the 1999 antidumping petition against China.

Buffalo Color won the case, or so Kaminski thought at the time. But it didn't work out the way he expected. These days, Kaminski is working his heart out to keep his company alive. Without the $87,000 in Byrd revenues that he collected in 2003, Buffalo Color would no longer exist, Kaminski says.

When I called him last month, Kaminski had a story to tell that he believes illustrates the realities of competition in the real business world, no matter what academic economists and free trade theorists who criticize the antidumping laws maintain.

After filing the case in 1999, Buffalo Color got 129% tariffs on Chinese indigo in June of 2000, Kaminski related. "That's how far down they had been selling below cost.," he said of his Chinese competitors. At first, the tariffs achieved their intended result. "We brought the price up to a level playing field where they were bringing indigo into the US, and we were making a profit," Kaminski recalls.

But in the third quarter of 2002, Kaminski says the imports from China basically stopped: "Somebody shut that faucet off."

Pretty soon, however, low-priced imports of indigo from South Korea started coming into the United States, Kaminski discovered. "Far as I know, Korea doesn't produce indigo." When he investigated, Kaminski found evidence that the cheap "Korean" indigo was really made in China.

Buffalo Color filed Chapter 11 bankruptcy protection in 2002, and is today trying to survive. All but 24 of the company's 146 employees have been let go. Indigo was 80% of Buffalo Color's business, but that's now dormant. "They put us out of business," Kaminski says.

When Kaminski alerted U.S. Commerce officials to the alleged Chinese-Korean illegal evasion of antidumping duties, he ran into a frustrating wall of bureaucracy. To date, nothing much has been done, the Buffalo Color president laments. It has been pretty much the same story at U.S. Customs. At Customs, policing individual trade cases has never been a top priority - and particularly so these days, as Customs'most vital mission is to protect the nation against terrorist attacks.

In 1999, Kaminski turned to veteran Washington trade lawyers Paul Rosenthal and Michael Kershow to represent him in winning the antidumping case against Chinese indigo. The litigation cost about $1 million, Kaminski says. Presently, of course, Buffalo Color could not afford a topflight legal effort to wage further trade litigation. This is why the Byrd revenues are so important to Kaminski. In 2001 and 2002, Buffalo Color received $242,581.73 and $344,391.26 respectively. "Without that $87,000 last year, the doors would have been shut," Kaminski emphasizes. "Without the Byrd money, there would be no hope."

There's more to the story

Rep. Louise Slaughter, a Democrat from Buffalo who has been working hard to help her constituent, is outraged that the Byrd revenues that Buffalo Color received only amounted to $87,000 in 2003. For openers, the Customs check in the amount of $87,848 that arrived in Kaminski's office on December 27, 2003 was somehow mutilated in the mail. It arrived inside a plastic envelope, with a note from the U.S. Postal Service apologizing for any inconvenience. It took Rep. Slaughter's office almost two months to get a replacement check written. Meanwhile, the bankrupt Buffalo Color twisted (CNN's Lou Dobbs, where are you?).

That's not the worst

Rep. Slaughter, thanks in part to information developed by constituent Kaminski and Collier Shannon's Michael Kershow, has learned that Buffalo Color should have received nearly $630 thousand more in 2003 Byrd revenues, on top of the $87,000 the company got. When she began poking around, the congresswoman discovered that Customs has the money, but the bureaucracy isn't ready to distribute it.

When she raised the issue personally with Robert Bonner, the commissioner of customs & border protection, Slaughter basically was given some bureaucratic mumbo jumbo about how the Customs'and Commerce bureaucracies could not make distributions "until the funds are transferred to the special account created for that purpose." The bureaucrats offered no apology for the fact that they had failed to transfer the funds to this special account in timely fashion.

Don't worry, Bonner said, Buffalo Color would get the $629,932.86 after the end of the next fiscal year - after September 2004. For Buffalo Color's Kaminski and his remaining employees, that's a long way off.

"I appreciate your interest in Customs and Border Protection," Bonner told Slaughter in an April 21 letter. "If we may offer further assistance, please contact me or have a member of your staff contact Mr. L. Seth Statler, Deputy Assistant Commissioner, Office of Congressional Affairs," Bonner added.

The Bush administration would like to repeal the Byrd amendment. Wonder what kind of a reception Deputy Assistant Customs Commissioner Statler would receive from Louise Slaughter - the top Democrat on the powerful Rules Committee - if he sought her vote for that purpose?

Reprinted with Permission from The Rushford Report .