Stewart and Stewart Lawyer Urges Policymakers to Strengthen Trade Rules and Improve Domestic Trade Remedy and Competition Laws

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Elizabeth Drake, a partner in the Washington, D.C.-based international trade law firm Stewart and Stewart, offers five recommendations for policymakers to minimize harm to domestic companies

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Policymakers should thus be approaching Chinese investment not merely on the basis of investments that have already been made, but also on the basis of what is likely to occur in the near future.

In testimony before the U.S.-China Economic and Security Review Commission, an international trade lawyer has urged policymakers to strengthen trade rules and improve domestic trade remedy and competition laws to minimize harm to domestic companies resulting from direct investments by subsidized and state-owned firms from China in the United States.

Chinese direct investment in the United States topped $17 billion in 2012, a record level that is likely to continue to grow, according to testimony given May 9 by Elizabeth Drake, a partner in the Washington, D.C.-based international trade law firm Stewart and Stewart.

“By 2020, China’s global outbound investment stock is poised to reach $2 trillion, more than six times what it was in 2010,” Drake said, citing recent research from the East Asian Bureau of Economic Research. “Policymakers should thus be approaching Chinese investment not merely on the basis of investments that have already been made, but also on the basis of what is likely to occur in the near future.”

Continuation of direct investment here by government subsidized and government-owned businesses is “an explicit policy” of China, and the threats to the domestic economy are obvious and in some cases already demonstrated, Drake told the commission.
An obvious harm Drake outlined is unfair price competition.

“When a U.S. firm has to obtain credit at market rates to finance its activities, but a Chinese firm can obtain financing at minimal or even zero percent interest from Chinese state-owned banks, it distorts competition in the United States market,” Drake said.

Chinese enterprises that are government owned have an even greater advantage.

“They can rely on state support to maintain losses that may never be recouped, and make other operating decisions on a non-commercial basis, in order to meet political or industrial policy goals,” Drake said.

This creates two types of unfairness related to price.

“Such state support permits a Chinese firm to make investments and acquire resources and technology it otherwise could not if it had to pay market rates for equity and finance,” Drake said. “In addition, such state support may permit Chinese firms to make decisions regarding the sales prices of their goods and services that do not reflect market fundamentals and that undercut their U.S. competitors.”

Current U.S. antitrust and countervailing duty laws are inadequate and do not protect domestic workers from such unfair price competition.

“Pricing is only deemed anti-competitive if the predator is likely to eventually collect enough profits to make up for the losses caused by the predatory behavior,” Drake said as she explained a basic premise antitrust law, adding that this is “profit maximizing behavior of market actors that simply may not apply to certain Chinese firms.”

U.S. countervailing duty law only addresses the injury caused by subsidized imports of goods, not direct investments by subsidized firms, Drake added.

A second already demonstrated harm is competition for resources and technology, a threat to U.S. competitiveness in world markets and, possibly, to U.S. national security. Drake provided a specific example to the commission:    

“In 1995, a group of companies that included Chinese state owned enterprises sought to acquire Magnaquench, the only U.S. producer of neodymium-iron-boron magnets. The magnets are an important technology for MRIs, wind turbines, automotive motors, and a wide array of other applications,” Drake said, adding “The magnets also have critical military applications, including target lasers, satellite communications systems, radar amplifiers, and more.”

The investment was approved on the basis of a commitment from the investors to keep production of the magnets in the United States for at least five years, according to research by the Institute for the Analysis of Global Security.

“The day after the five-year period expired, the investors closed the facility, laid off the workers, and took the equipment and technology to China,” she said. The research reveals “By 2007, China had more than 130 enterprises engaged in manufacturing the critical permanent magnets; the U.S. had none.”

U.S. policies are insufficient to ensure such foreign investments are properly screened and contrast with those of other countries, Drake said. “Australia and Canada, for example, apply a net benefit test when evaluating proposed foreign investment, and the test includes economic, as well as national security, criteria.”

Drake then offered a number of options for policymakers to consider to maximize the benefits, and minimize the potential threat, of Chinese investment in the U.S. Among them were:

  •     Get China to agree to binding obligations regarding its direct foreign investments based on the principles of competitive neutrality. “New disciplines should, at a minimum, require transparency and disclosure as to the extent of state support, ownership, and control. All firms should be required to operate on the basis of competitive neutrality, with business decisions made on the basis of commercial considerations rather than government policies whether those decision relate to pricing, sourcing, or acquisition of resources and technology. To be meaningful, such obligations would need to be enforceable through a dispute settlement mechanism and the prospect of economic consequence for non-compliance,” Drake said.
  •     Improve the process for screening new investments in the U.S., particularly investments by firms that are supported or controlled by foreign governments. Drake mentioned Australia’s practice that requires directors and officers of an entity to be independent from the foreign government in some cases.
  •     Create a means for U.S. workers and firms to seek redress where they have suffered competitive harm, or are threatened with harm, due to unfair competition with foreign investors. “While certain tools already exist in domestic competition laws, these tools should be re-evaluated to ensure that they adequately address competition with firms that benefit from foreign government support or are controlled by foreign governments. Predatory pricing rules, for example, may need to be revised to permit alternative means of establishing predatory behavior where the firms involved are subsidized by the government or there are other indications that they do not operate on a commercial basis,” Drake said.
  •     The law should give a private right of action to domestic firms and workers that have been harmed by subsidized and state owned enterprise investment in the United States. “The right of action should cover harm due to anticompetitive behavior as well as harm stemming from discriminatory and non-commercial purchasing decisions. If harm is shown, the injured party should be entitled to compensation for lost revenues, lost wages, and other damages,” Drake said.
  •     Finally, the SEC should clarify that state support for, and control over, an enterprise are material items that require disclosure in the interest of protecting private investors. “The terms of state assistance and financing to SOEs, the terms of supply and procurement contracts with state-owned suppliers and purchasers, and the relationship between a firm’s directors and officers and the government should all be considered material information for which disclosure is required,” Drake said.

Drake’s full testimony can be downloaded at FDI Testimony Drake May 9 2013.pdf

The U.S.-China Economic and Security Review Commission was created by the United States Congress in October 2000 with the legislative mandate to monitor, investigate, and submit to Congress an annual report on the national security implications of the bilateral trade and economic relationship between the United States and the People’s Republic of China, and to provide recommendations, where appropriate, to Congress for legislative and administrative action.

About Stewart and Stewart
For 50 years, the firm of Stewart and Stewart has helped companies, workers, and governments succeed amid the complexities and rapid change of international trade. Stewart and Stewart are proud of their tradition of integrity, expertise, and creative approach to the law in such areas as trade remedies, customs, and international trade agreements. Today, more than ever, globalization is creating spectacular new opportunities and posing daunting new challenges for U.S. farmers, manufacturers and service companies. Stewart and Stewart enters its next half century blessed with a talented and tested team to assist clients in competing at home and around the world so they can create the jobs and innovations of tomorrow, survive potential challenges or crises and overcome obstacles and distortions in the marketplace.

Stewart and Stewart is a member of the International Society of Primerus Law Firms.

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Derek N. Hoeft

Elizabeth Drake, Esq.
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