Unwitting Victims of a Trade Battle

MEXICO CITY —  California vintners and dairy farmers are caught in the cross-fire of an escalating trade war that could cost two of the state’s most important agriculture businesses millions of dollars in lost sales to its southern neighbor.

Mexico this month became the fourth U.S. trading partner to slap retaliatory tariffs on American products, responding to a U.S. trade practice that has inflamed allies and been deemed illegal by the World Trade Organization.

U.S. wines are now subject to a 20% penalty in Mexico, while some dried-milk powders used to make products such as ice cream and yogurt have been hit with a 30% duty. California is the nation’s largest producer of both wine and milk.

Mexico is hitting back at the United States over a U.S. trade law that has funneled more than $1 billion to American companies that have successfully challenged cheap imports from foreign competitors. The law, known as the Byrd amendment, has been a flashpoint for controversy since Sen. Robert C. Byrd (D-W.Va.) slipped it into a Clinton-era spending bill to help his region’s steel producers.

Officially named the Continued Dumping and Subsidy Offset Act of 2000, the legislation for the first time gave U.S. companies that successfully brought anti-dumping suits against foreign firms a share of the penalties collected by the U.S. government. The funds previously went directly to the U.S. Treasury.

Foreign companies criticized the practice as an illegal subsidy to their U.S. competitors. The WTO agreed, allowing 11 trading partners to hit the U.S. with retaliatory tariffs worth an estimated $150 million a year. Most of those penalties have been leveled at industries or products whose U.S. companies have never benefited from the Byrd amendment, a strategy meant to goad U.S. businesses into calling for the law’s repeal.

“It’s a little like a drive-by shooting,” said Lewis Leibowitz, legal council for Consuming Industries Trade Action Coalition, a group of U.S. importers working to overturn the amendment. “You’re minding your own business and ‘kaboom!’ Any good can be retaliated against.”

The WTO authorized Mexico this year to collect $20.9 million from U.S. exporters of wine, dried milk powder and chewing gum. Neither U.S. vintners nor dairy farmers have benefited from the amendment.

Some U.S. industries say the penalties are trivial compared with what they could lose in market share. American dairy producers, for example, shipped nearly 74,000 metric tons of so-called powdered dairy blends to Mexico last year, valued at more than $160 million, according to the U.S. Dairy Export Council.

They now worry that the dispute could drag on indefinitely, encouraging Mexican buyers to look elsewhere for this dairy product and squeezing them out of a market niche that they currently dominate.

“This has the potential to disrupt hundreds of millions of dollars’ worth of sales,” said Rich Lewis, chief executive of DairyAmerica, a Fresno-based dairy cooperative whose largest export market is Mexico. “I get discouraged with the politics.”

Although the Byrd amendment payouts have been substantial since they began in 2001, most of the money has flowed to a handful of industries, including steel, cement, candles and food products.

U.S. retailers, food processors and other large importers fear that the prospect of a fat payday could lead to more dumping claims by U.S. firms on a wider variety of goods. They say the legislation has benefited a few large companies while driving up prices for millions of American consumers.

Timken Co., a Canton, Ohio-based maker of metal bearings, received $52.7 million, or nearly 20% of all Byrd amendment funds distributed to claimants in fiscal 2004, according to a Congressional Research Service report. The publicly traded company posted revenue in calendar year 2004 of $4.5 billion and net income of $136 million.

“It’s the worst form of corporate welfare,” Leibowitz of the trade action coalition said. “It’s like Robin Hood in reverse. The bigger you are the more money you get.”

Timken spokeswoman Denise Bowler said company records showed that the firm collected $39.7 million in Byrd amendment payments in calendar year 2004. She said there would be no payouts if foreign competitors played by the rules.

“The Byrd amendment is simply based on the principle that companies and their workers that are hurt by unfair trade should have the opportunity to rebuild their industries when dumping continues.” Bowler said. “We would prefer that they stop dumping.”

Not all beneficiaries of the amendment are corporate titans. Monterey Mushrooms Inc., a Watsonville, Calif., grower and packer, has collected more than $1 million since 2001 for damages it has suffered at the hands of low-cost Chinese, Indian and Indonesian producers of canned mushrooms, Chief Financial Officer Ray Selle said.

“We have been able to stabilize prices, get back some market share and recoup some of the losses we sustained,” Selle said. “There used to be a thriving mushroom-canning business in the U.S. Now there are only four of us left.”

But critics say the payouts act as a disincentive for U.S. companies to become more competitive. Wally Stevens, president of the American Seafood Distributors Assn. in Boston, said that foreign producers with aquaculture operations were more efficient than U.S. fishermen using traditional techniques. Yet they are penalized with tariffs as high as 50% on some products.

“It rewards people and industries that refuse to change,” he said.

The payments also have angered foreign firms, which call them unfair subsidies. The WTO declared the practice illegal in 2002. It granted 11 U.S. trading partners -- Australia, Brazil, Canada, Chile, India, Indonesia, Thailand, the European Union, Japan, Mexico and South Korea -- the right to put retaliatory tariffs on American products until the U.S. ended the practice.

Australia, Indonesia and Thailand eventually agreed to settle their differences with the United States without sanctions. But Canada, the EU, Japan and Mexico have fired retaliatory salvos and the rest are lining up to do the same.

Those tariffs have hit a variety of U.S. firms, from makers of eyeglasses to growers of sweet corn. The vast majority of them are not party to any dumping claims against foreign competitors. Some had little knowledge of the measure until they found out their products were being targeted for retaliation.

“We have nothing to do with the Byrd amendment,” said Joe Rollo, director of the international department at the Wine Institute, a San Francisco-based trade group for California’s wine industry.

Mexico, he said, isn’t a major market for California wine, representing less than 2% of the $800 million of wine that the state’s vintners exported last year. Still, he said he found it troubling that California’s wine industry was taking the hit for a trade dust-up in which it had no part.

“We prefer not to get caught up in disputes over other product categories,” Rollo said. “It hasn’t been on our radar screen, but it may be now.”

Trade experts say the targeting of industries outside a dispute is a time-tested way to split the business community and spur lawmakers to act.

“We want to send a signal, particularly to the U.S. Congress, that we believe that there should be a cost for the U.S. violation of international trade rules,” said Kenneth Smith, Mexico’s director general for international trade negotiations.

The Bush administration has expressed support for repealing the Byrd amendment, but Congress has shown little willingness to go along. Gary Hufbauer, an economist at the Institute for International Economics in Washington, said the reason was simple: money.

With payouts from the amendment averaging nearly $260 million a year since 2001, Hufbauer said the protected industry groups were lobbying hard to keep the law. He said a mammoth payout could result from a legal battle that the U.S. has been waging with Canada over that nation’s alleged dumping of softwood lumber.

Canada has denied the U.S. claims and has won favorable rulings from the WTO and a North American Free Trade Agreement panel. It wants the U.S. to return more than $4 billion in anti-dumping tariffs collected from Canadian producers.

The U.S. has refused. Hufbauer said legal wrangling has continued largely because the prospective payouts to U.S. lumber companies could be huge.

“With $4 billion at stake, you would fight to the last,” Hufbauer said. The dispute “has been a poison for U.S.-Canada relations.... That is what the Byrd amendment has generated.”

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Getting paid

When penalties are collected on foreign products ruled to have been dumped in the U.S., part of those duties go to American business.

Fiscal 2004 disbursements, by state

(In millions)

Pennsylvania: $23.1

New York: $18.7

Texas: $15.9

New Hampshire: $13.2

Idaho: $12.1

New Jersey: $11.6

Louisiana: $8.5

Illinois: $7.8

California: $6.1

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Companies getting the highest disbursements in fiscal 2004

*--* Amount Company Product (in millions) Timken Bearings $52.7 Lancaster Colony Candles 26.2 Micron Technology DRAM 12.0 Emerson Power Trans. Bearings 11.6 International Steel Steel products 10.4 Home Fragrance Holdings Candles 8.4 Wellman Polyester staple fibers 7.9 United States Steel Steel products 7.1 AK Steel Steel products 6.8 Holcim U.S. Grey portland cement 4.7

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Source: Congressional Research Service

Los Angeles Times