United States: A High Bar for US Safeguards - The Bush Administration Sets a High Hurdle for Using the Section 421 Safeguard

China’s World Trade Organization (WTO) accession agreement includes two safeguards that allow WTO members, under certain conditions, to restrict the quantity of imports specifically from China. One safeguard—limited to textile and apparel products— has been used by both the United States and the European Union in recent years. The other safeguard can be applied to any good imported from China. In US law, this general safeguard appears as Section 421 of the Trade Act of 1974 and is available until December 2013. Despite considering several petitions, the United States has never used this safeguard, nor has any other WTO member.

The Bush administration’s December 2005 rejection of the most recent Section 421 petition—which US pipemakers filed over imports of Chinese circular steel pipe—indicates that, though the administration has not made a categorical decision to forego the use of this safeguard, it has set a high hurdle for petitioners. Companies and industries that compete with Chinese imports may find it worthwhile to review the process by which the United States considers petitions under Section 421, the dispositions of the previous petitions, and the implications of the circular steel pipe petition for their own situation.

Section 421 allows the US president to restrict Chinese products that are "being imported into the United States in such increased quantities or under such conditions as to cause or threaten to cause market disruption" to the competing US industry. Market disruption exists when imports of Chinese goods are "increasing rapidly...so as to be a significant cause of material injury, or threat of material injury, to the domestic industry." (A safeguard differs from antidumping duties in that a safeguard is taken against all imports of a certain product, whereas antidumping duties are assessed against individual exporters of the product.)

Several steps must occur before the president makes the decision to impose a Section 421 safeguard. First, the US International Trade Commission (ITC) considers petitions to determine whether imports from China have caused or are threatening to cause market disruption in the United States. If either one of these determinations is made, ITC

issues a report to the US Trade Representative (USTR) explaining its determination and recommending a remedy. Then, after seeking public comment and consulting with China, USTR makes a recommendation to the president on what action, if any, to take regarding the petition. The recommended remedy is usually a quota or a tariff-rate quota. Under the statute, the president may choose to take no action only if he finds that providing relief would have an adverse impact on the US economy clearly greater than the benefits of the relief.

US industries have filed six petitions to impose Section 421 safeguards since 2001. ITC rejected two petitions after determining that neither market disruption nor threat of market disruption were established. In all four instances when ITC found market disruption, President George W. Bush decided against granting relief.

The first safeguard petition, which Motion Systems Corp. filed in August 2002, involved imports of Chinese pedestal actuators, which are used in wheelchairs and motor scooters. Though ITC found market disruption, President Bush decided to take no action, citing the high overall cost to the US economy of imposing a safeguard compared to the likely small benefit to the US industry. The president noted that the proposed remedy would create hardships for the elderly and disabled who rely on pedestal actuators to operate wheelchairs.

The US wire hanger industry filed the second Section 421 petition in November 2002. Again, ITC found market disruption, but the president denied relief on grounds that a safeguard would affect the domestic industry unevenly because it would harm the sizable part of the domestic industry that relies on imported hangers, including the many small, family-owned businesses that make up the dry cleaning industry.

The US iron waterworks fittings industry filed the third petition in September 2003. Again, notwithstanding an ITC determination of market disruption, the president decided not to provide relief, citing the high overall cost to the US economy of imposing a safeguard compared to the likely low benefit to the US industry. The president also noted that the domestic industry was in a strong competitive position in the US market and that the increase in Chinese imports had leveled off.

As mentioned above, US pipemakers filed a petition to seek relief from Chinese imports of circular steel pipe in August 2005. ITC issued a report in October 2005 in which two commissioners found market disruption, two commissioners found threat of market disruption, and two commissioners found no market disruption. On December 30, 2005, Bush decided against providing relief on grounds that the costs of such relief would outweigh the benefits. He reasoned that import restrictions would provide little benefit to domestic producers because imports from China, which accounted for only about one-third of all US imports of circular steel pipe, would be replaced by imports from other foreign producers.

The circular steel pipe decision confirms that, though the Bush administration has not foreclosed the possibility of using Section 421, petitioners have a significant hurdle to overcome before the administration will impose import restrictions. To be successful, a petitioner must effectively meet two burdens. First, the petitioner must show clearly that the import penetration of the Chinese product and the effect of that import penetration on the domestic industry are severe. Second, the petitioner must show that US producers—rather than other foreign producers—would benefit from limiting Chinese imports. If these conditions cannot be met, it is likely that the president will find that the economic costs of restricting imports outweigh the benefits.

In the face of congressional pressure to "get tough" with China, some within the administration no doubt urged that Section 421 be used in the steel pipe case. Indeed, the steel pipe petition provided an opportunity for the new USTR Rob Portman to establish a different standard for considering Section 421 petitions. But, in the end, the administration followed the precedent set by previous Section 421 cases. One factor the administration certainly considered was that lowering the bar would have opened the door to a flood of new petitions.

Under China’s WTO accession agreement, the textiles and apparel safeguard expires at the end of 2008, while the Section 421 safeguard expires at the end of 2013. Presumably, the US textile and apparel industry will turn to the Section 421 safeguard for relief after the textile and apparel safeguard expires. Indeed, as we approach the 2008 presidential election, US industry is likely to press candidates to make commitments regarding the use of Section 421 in limiting imports from China.

Meanwhile, it is difficult to imagine much activity under Section 421, given the significant hurdles facing petitioners. This has prompted some interest among US manufacturers in seeking legislative changes to Section 421 to further limit the president’s discretion in deciding whether to take action.

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