In most matters of international trade, the United States is like a popular seventh-grade girl, surrounded by throngs of admirers and wannabes.
But when it comes to math -- specifically a method of calculating duties on certain imports -- the United States is eating its lunch alone.
Millions of dollars each year ride on this calculation, known as "zeroing," which is used by the Commerce Department to determine whether a foreign company is selling goods here at less than fair value. If a company is dumping its products, the U.S. government adds a duty to even out the playing field.
But virtually every one of the World Trade Organization's 153 member countries objects to how Washington juggles the numbers. The United States has been hit with more than a dozen suits at the WTO challenging zeroing -- and lost them all before the trade body's highest court.
Now, the United States faces the prospect of retaliatory sanctions from the European Union, Japan and Mexico. A WTO arbitrator is currently weighing the first request from Europe to impose $311 million in tariffs, with a decision due as early as next week.
The Obama administration is in an awkward position. If it quits using zeroing, it will trigger the wrath of the domestic industries it benefits -- primarily steel makers, but also producers of products ranging from shrimp to ball bearings to plastic bags. If it clings to zeroing in the face of WTO condemnation, American exporters will be punished by sanctions.
The official position from the Office of the U.S. Trade Representative is that Washington "has indicated that it intends to work to bring itself into compliance," according to a spokeswoman.
But trade lawyers say the government has made similar promises for years.
"The decisions just keep getting worse and worse for the U.S., and countries continue to bring cases," said Steptoe & Johnson trade partner Richard Cunningham, who is based in Washington. "Commerce could change the [zeroing] rules without a change in the statute, but the real question is: Can the administration take the political heat?"
Cunningham is arguing a case before the U.S. Court of Appeals for the Federal Circuit on April 6 that may force the issue. He's suing the Commerce Department on behalf of a European steel maker that wants a $27 million refund of anti-dumping duties and deposits. But in a related case of first impression, domestic steel companies are also suing the government, saying the concessions that Commerce has made on zeroing violate U.S. laws.
For the United States, refusing to comply with the WTO decisions may have broader consequences as well, given President Obama's goal of doubling exports within the next five years.
"Trade is a two-way street," said Greenberg Traurig partner James Bacchus, who until 2003 was chair of the WTO's seven-judge appellate body. "If we want other countries to comply with their obligations to us, we need to be prepared to comply with rulings in the WTO dispute settlement process, even when they don't go our way."
What makes zeroing so significant is that, unlike disputes over a particular commodity -- say, cotton from Brazil -- the methodology is relevant in every dumping case. "Whenever you have something that cuts across a large segment of industries, you get much more of a charged reaction," said Nancy Fisher, a Washington-based trade partner at Pillsbury Winthrop Shaw Pittman. "There's a big divide on the issue."
The best way to explain zeroing is by (simplified) example. Say a company exports two similar products. One is sold for $100 at home and $90 abroad. The other is sold for $100 at home and $110 abroad.
The WTO-approved approach is to compute the "dumping margins" for each product -- that is, the difference between the price at home and abroad -- then average them together. In this case, it's plus $10 for the $90 product, and minus $10 for the $110 one. That makes the overall margin zero, which means the company is not dumping.
But the United States ignores cases of "negative dumping." The $110 product yields a margin not of minus $10, but zero (hence the term zeroing). Combining the "zeroed" margin with the $10 dumped margin on the $90 item results in an average margin of $5. That means the company would be labeled a dumper, its products subject to duties set by the Commerce Department.
"We pretend a negative number is equal to zero, and it inflates the dumping margin," said Hogan & Hartson trade partner Lewis Leibowitz, who is based in Washington. "I'd like my country to take the high road in trade issues, and eliminating zeroing is the high road side of the issue."
But Kelley Drye & Warren Washington managing partner Paul Rosenthal, who represents domestic industries including steel and pasta makers, countered that zeroing is justified. Rosenthal compared it to the speed limit. "If you're going 65 in a 55 mph zone for one hour, and 45 in a 55 for one hour, you're not off the hook for speeding," he said.
The same logic applies to zeroing. "It's great if you weren't dumping on some sales, but you can't use that to offset the dumped sales," he said.
The key legal issue in the WTO cases revolves around the meaning of Article 2.4.2 of the Anti-dumping Agreement, which requires a "fair comparison" of export prices. The WTO's appellate body has repeatedly ruled that zeroing is inconsistent with the agreement.
The USTR, which serves as Washington's legal counsel at the WTO, sees it differently. "Officials, including our Office of General Counsel, under both the prior and the current administrations, have said repeatedly and clearly that these findings are not based on the text of the WTO Antidumping Agreement," said the spokeswoman in a written statement in response to questions from The National Law Journal.
Or as Linda Andros, legislative counsel for the United Steelworkers of America, put it, "The WTO judges are reading tea leaves in the vague language of the agreement." Andros noted that, during the Uruguay Round trade negotiations, Japan specifically tried to ban zeroing, but other countries said no. Since the resulting Anti-dumping Agreement "does not say anything about prohibiting zeroing," she argued, that means it's allowed.
To James Hecht, a Washington-based partner at Skadden, Arps, Slate, Meagher & Flom's international trade group, the appellate body decisions "essentially allow opponents of the trade laws to achieve through litigation what they could not achieve through negotiation."
The European Union filed a WTO complaint against the United States in 2003, challenging the application of zeroing in products including steel, pasta, ball bearings and chemicals. In 2006, the appellate body found in favor of Europe.
Zeroing complaints from other countries followed -- carbon steel from Japan, shrimp from Thailand, Ecuador and Vietnam, stainless steel from Mexico, orange juice from Brazil, polyethylene bags from Thailand, steel from Korea -- and so did the U.S. government losses.
SHRIMP AND STEEL
Now, Europe is moving to impose retaliatory sanctions on American exports to force full compliance with the decision.
Still, the USTR stressed that the United States has "complied in several respects with the prior rulings."
In some instances, Washington settled disputes by revoking specific dumping orders. In shrimp from Ecuador, for example, importers were on the hook for "millions and millions of dollars" in duties as a result of zeroing calculations, said Akin Gump Strauss Hauer & Feld trade partner Warren Connelly, who represented the country in the 2005 dispute.
After losing at the WTO, the United States revoked the duties. That made Ecuador "very pleased," said Connelly, but didn't resolve the problem of zeroing.
In a move that seems to have satisfied no one, the Commerce Department in 2007 announced it would no longer use zeroing in new dumping investigations.
U.S. Steel Corp. and five other companies sued the government, arguing that the policy is "unlawful and must be overturned." Skadden's Robert Lighthizer and Jeffrey Gerrish are leading the U.S. Steel team. The case is likely to be argued before the Federal Circuit this summer.
Nor did the concession placate Europe or others, because the United States continues to rely on zeroing in administrative reviews. The Commerce Department periodically reviews existing orders -- there are currently 245 -- to determine whether dumping is ongoing and adjust the margins. The USTR said it is "examining the possibility of an administrative change" in review cases.
The case before the Federal Circuit on April 6, Corus v. U.S., concerns such reviews.
The dumping duties on Corus' hot-rolled steel were challenged as part of Europe's case. In 2007, Commerce recalculated Corus' original margins without zeroing and found no dumping had occurred after all. Nonetheless, Commerce is still collecting duties on Corus products based on an administrative review. Corus argues this is unwarranted and wants its money back.
Since 2007, the U.S. government "will have collected approximately $27 million, all after determining that Corus had not engaged in dumping," said Cunningham of Steptoe, who represents Corus. "In addition to making a mockery of compliance with WTO decisions, this is in clear violation of U.S. law."