Waiting for the Many Other Shoes to Drop

By: John P. Donohue

In the late 19th and early 20th century, in response to the growth in urban manufacturing, New York City began an aggressive program of building apartments for its expanding workforce.  In many of these hastily-constructed apartments, the materials were inferior; the walls and floors were thin; and the apartments were constructed one directly on top of the other.  So, at the end of the day, a tenement dweller could not help but hear his upstairs neighbor’s shoe drop to the floor, and, when it did, he knew that another shoe would drop shortly thereafter.  Hence, the maxim “waiting for the other shoe to drop.”

For the Port of Philadelphia, we are waiting for several Washington D.C. shoes to drop. 

In February of this year, the Commerce Department finally tendered its report to the president under section 232 of the Trade Expansion Act on the question of whether imports of automobiles and their parts constitute a threat to the national security of the United States and thereby warrants the imposition of duties on them.  The president must act on that report by May 18.  And so, we wait, and ask whether this substantial commitment of our port to managing and clearing automotive cargo will be stymied by a presidential signature.  The consequences of a special assessment on automobiles and parts for national security reasons, if it comes, can be significant.  Some economists estimate that the assessments in the automobile case could outweigh the assessments in the China case by a factor of three.  More on the China case below. 

The United States Trade Representative, having imposed three rounds of duties on goods from China, some at 10% and others at 25% has told the Congress that if the United States does not get the intellectual property protections it wants from the section 301 negotiations, he  reserves the right to increase the 10% special assessment on $200 billion in goods to 25% and perhaps add a new duty on the remaining $250 billion in Chinese goods which have so far escaped presidential retaliation.  And so, we wait for resolution of the 301-trade dispute or for another shoe to drop.

As if that were not enough, a different section 301 action, fully 15 years in the making, alleging illegal subsidies by EU governments to certain European aircraft producers, has now ripened to a point where the United States is proposing duties of a whopping 100% against a wide array of products from the European Union valued at $21 billion.  This list is in two parts and covers helicopters, aircraft undercarriages, fuselages and aircraft parts from Germany, France, the United Kingdom and Spain, and a much larger list of goods from all of the EU Member States.  The second list concentrates heavily, but by no means exclusively, on European Union food, wearing apparel and wine products.  Retaliatory duties in this case could come as early as this summer.  As with all of these cases in which product lists for retaliation are published, a hearing in the EU aircraft case on which of the items on the list should be continued, and which items on the list should be removed will be held in Washington on May 15. 

Business executives hate uncertainties, but these international trade uncertainties are particularly difficult.  These retaliatory duties, especially the 100% assessments in the emerging aircraft case, cannot be overcome by price reductions or acceptance of lower profit margins.  At these levels they are de facto embargos. They require companies to make structural business decisions.  Do we terminate a relationship with a long-term supplier in a targeted country because his prices will be immediately uncompetitive?  Do we close a factory in China or Europe? Do we test product competencies in lesser developed and less reliable countries? Do we just ride out the international trade storm?  Business persons are barraged daily with the most difficult and structural business decisions. 

And the merits of these cases vary significantly.  The idea that the importation of a Ferrari or a Volvo into the United States (or thousands of them for that matter) constitutes a threat to our national security is almost laughable, but the fact is that no one in the international automobile industry is laughing.  They are very, very worried.  On the other hand, there is virtually unanimous consensus that the United States had to take action against the People’s Republic to stop the wholesale confiscation of American intellectual property, and we probably would have been much better off if prior administrations had acted more aggressively and sooner.  The American case here is solid, as it is in the case of European subsidies to Airbus in which the WTO panel and the Appellate Body have both sustained the legitimacy of the U.S. position. And while the timing of this retaliatory plan is coincidental, it is nonetheless particularly troublesome.     

And so, we wait.  For the government of China to realize that it cannot take our intellectual property without adverse consequences; for the EU to recognize that when it signed the Agreement on Subsidies and Countervailing Measures it made a promise to the world that it did not keep; and for the United States to recognize that an assessment of 232 duties on automobiles and parts is both bad law and bad policy. 

Brace yourself.  I think your neighbor may be heading to bed. 

Reprinted with the permission of the Maritime Exchange for the Delaware River and Bay