Shakedown artists

by Henry on March 25, 2011

Via Alex Tabarrok, this “Wall Street Journal article”:http://online.wsj.com/article/SB10001424052748704081604576144401022132530.html is very interesting.

bq. Some U.S. furniture makers and their lawyers have found a reliable way to extract cash from Chinese competitors deemed by U.S. officials to have “dumped” their products in the U.S., selling them at unfairly low prices. Each year since 2006, they have asked the Commerce Department to review the U.S. duties paid by Chinese manufacturers on imports of wooden bedroom furniture. Many Chinese firms, fearing a steep rise in duties, agreed within months each time to pay cash to their U.S. competitors in return for being removed from the review list. “Everybody in the industry in the U.S. and China understands that these payments are clever shakedowns,” said William Silverman, a lawyer representing U.S. furniture retailers, big importers of Chinese products, at an October hearing of the U.S. International Trade Commission. … About $13 million was paid to a group of 20 U.S. furniture makers from 2006 through 2009, according to a November ITC report. The U.S. firms told the ITC that a much larger, but unspecified, amount of money went to pay the U.S. firms’ lawyers.

Not many people realize how much of US trade policy is effectively set by private industry groups, whose interest in free trade, for better or worse, is largely opportunistic. This is especially obvious in the area of property rights. I recently finished reading an excellent “report”:http://piracy.ssrc.org/ edited by Joe Karaganis on the politics of the piracy debate, which has a good chapter on just this topic by Sean Flynn and Karaganis.

The so-called “Special 301” process, under which the US identifies purported offenders against US-preferred intellectual property standards, is especially open to abuse.

bq. US copyright industries and the USTR have, in key respects, a symbiotic relationship. The IIPA was instrumental in the creation of the Special 301 process, and annual IIPA country submissions furnish the primary and often only evidence on copyright issues cited in the Special 301 reports. In all but a few cases in any given year, the USTR closely follows IIPA recommendations in assigning countries to the watch lists. In 2008, the USTR accepted forty-six of the IIPA’s fifty-four recommendations (84%). In 2010, it accepted all the Priority Watch List recommendations and twenty-one of twenty-four for the Watch List (an acceptance rate of 91%). For the most part, IIPA findings and recommendations simply pass through into USTR reporting.

bq. This close relationship is not an accident. The USTR was created in 1974 to explicitly strengthen the ties between industry and government in trade negotiations. Its mandate was revised repeatedly in the 1970s and 1980s to make the USTR more responsive to business needs and revised further to ensure that it would not be limited or constrained by the provisions of existing trade agreements, such as the GATT and later the WTO. … The 1985 case against Korea, also primarily on pharmaceutical patents, established what one negotiator described as a “blueprint” for the resolution of Special 301 disputes: bilateral treaties, or side agreements, that committed the targeted country to higher levels of patent and copyright protection …

bq. The strategic dimension of these actions grew more explicit in the late 1980s as the Uruguay Round of GATT negotiations neared its conclusion and set the stage for a new international trade agreement—the eventual WTO. Developing countries, led by India and Brazil, supported the strengthening of existing provisions on counterfeiting but opposed the inclusion of broader IP rules in the form of TRIPS. … The United States placed five of the ten “hard-liners” opposing TRIPS in the first Special 301 Report in 1989—Brazil, India, Argentina, Yugoslavia, and Egypt. Two years later, India, China, and Thailand became the first Priority Foreign Countries, triggering Section 301 investigations. Brazil lost its GSP benefits in 1988, Thailand in 1989, and India in 1992—all on matters related to pharmaceutical patents. US pressure, combined with assurances that TRIPS would end such unilateral action, eventually broke the anti-TRIPS coalition. … Congress [then] amended the trade statute in 1994 to specify that even countries fully compliant with TRIPS might lack “adequate and effective” IP protection. The amended statute authorized the use of Special 301 to promote IP and enforcement policy beyond what was required by TRIPS.

bq. The USTR has direct ties to industry through various advisory committees. … long-standing revolving door between the USTR and its industry clients, which creates a reward system for USTR officials who cater to industry requests …

Flynn and Karaganis suggest that the process has become slightly more open in the last couple of years – countries which are targeted now have a little time to present their counter-arguments. But it is hard to escape the conclusion that the USTR is effectively an instrument through which US businesses can use government processes to threaten harsh retaliation against countries which do not conform to a very specific and narrow set of intellectual property standards, that favor US producers, but are not at all in the interests of these countries themselves.

{ 23 comments }

1

rea 03.25.11 at 4:08 pm

I’m not sure I understand this. If they aren’t engaged in illegal dumping, why are they worried enough to pay?

If I call the police to report a burglary, does that represent criminal law effectively being made by a private individual?

2

Metatone 03.25.11 at 4:26 pm

@rea

Perhaps this will sound familiar from the discussions on international law around interventions elsewhere on the blog, but the distinction here is that there is no independent judiciary or fully-fledged due process.

3

Lemuel Pitkin 03.25.11 at 4:31 pm

Rea-

Presumably the difference is that (1) the “crime” of dumping is not well defined burglary and (2) in any case, there is no objective legal-judicial system to resolve it.

Of course, while your question about burglary was rhetorical, there are plenty of times and places where those conditions wouldn’t be satisfied for it either, and an accusation of burglary might well amount to a shakedown. For a vivid illustration of what that kind of legal regime looks like, just pick up B. Traven’s Government.

4

The Raven 03.25.11 at 4:34 pm

This kind of thing, by the way, is what “free trade” advocates are rightfully concerned with. The idea of free trade has been abused as part of right-wing radicalism but, applied to IP protectionism, has considerable validity.

5

Colin Reid 03.25.11 at 5:20 pm

@rea: It depends why you decide to report the burglary to the police. If you make your silence conditional on the burglar doing something unrelated, that’s blackmail, possibly a more serious crime than the original burglary.

If you really want a free market, investigations of dumping shouldn’t depend on some rival company making a complaint. (In theory, the government should not just be ensuring a level playing field for existing companies in the industry, but also potential companies that would be set up if trading conditions were more favourable.) It’s this dependency that creates the shakedown situation described. If the Chinese companies are inherently more efficient at producing furniture than the US ones, it may well be the equilibrium solution for US companies to keep siphoning money off them like this instead of producing their own furniture. It’s similar to the way IP law has created a whole industry out of ‘patent trolling’.

6

PHB 03.25.11 at 6:02 pm

@Metatone

Because it is cheaper to pay off the extortion than fight a case in court. Particularly since you risk having your goods impounded while the case is dragged out.

I see the same thing all the time in patent disputes. It costs $300-$600 an hour to hire a good patent attorney and most cases will involve a couple of them plus an expert plus para-legals. Add that all up and your costs come out at several tens of thousands per week.

It can often cost $100K just to construe the claims and prepare an outline of a defense for a client. If the case actually goes to trial you will likely be out $2-$5 million and that is for defending against the most putrid, ridiculous nonsense patent you can imagine. If there is a possibility the claim might be legitimate then expect $10 million plus.

So it is not at all uncommon for the cases to be settled out of court and it means precisely nothing about the strength of the claim. Here we have the same corrupt legal system at work. A system that has no penalties for frivolous lawsuits is going to see them pile up.

7

John B 03.25.11 at 6:14 pm

I have heard many complaints about the antidumping “shakedowns” but they leave me confused. How is it different from any other private settlement of civil litigation, where A has a legal right to sue B but refrains in exchange for cash? Most courts encourage settlement of civil cases and accept almost any agreement. In the same way, US furniture makers have a right to ask the US Commerce Department to review recent dumping by the foreign producers. Foreign producers can avoid the risk and expense by paying the supposedly injured parties. If they prefer, they can fight the action at the agency, the courts, and even the WTO. Now, one can substantively criticize the dumping laws – or the tort laws – and the WSJ does, but this sounds like just another way for the WSJ to say it doesn’t like restrictions on imports.

8

rea 03.25.11 at 6:15 pm

(1) Is there really no judicial review option here for companies accused of dumping? I’m no expert in these matters, but that’s surprising, and I don’t see any obvious reason why such a regulatory scheme would pass constitutional muster.

(2) “Dumping” is not a matter of “Chinese companies [being] inherently more efficient at producing furniture than the US ones.” “Dumping” means that the foreign company is selling its product in this country at a loss, or at a price cheaper than it sells its product domestically. It’s a form of predatory pricing, a classic unfair trade practice. Compare what got Standard Oil in legal trouble about a century ago. S. O. would move into a new area, sell its product at a loss until all its local competitors went out of business trying to keep up, then jack the price back up.S. O. could do that because it was so much larger than its competitors and could outlast them. Today, Chinese firms can do that because they are backed by the government of the largest country in the world.

(3) You can’t have a functioning free market unless you have rules preventing this sort of thing. If you don’t have the rules, you end up with a monopoly, not a free market.

9

LFC 03.25.11 at 8:27 pm

rea @1:
I’m not sure I understand this. If they aren’t engaged in illegal dumping, why are they worried enough to pay?

As I read the WSJ excerpt in the post, the situation is this: the companies in question have been found guilty of dumping by the U.S. ITC and have been ordered to pay extra import duties as a result. The “shakedown” payments are made to remove the companies’ names from the ‘review list’ — a review not of the dumping finding, but of the amount of extra duties they are paying. In other words, the shakedown payments are to ensure that the current level of anti-dumping duties assessed vs. these companies does not rise. That’s how I read it.

10

Chaz 03.25.11 at 8:30 pm

As far as the judicial workings in the U.S., my understanding is that it is all handled by federal agencies as described above, outside of what we would consider the court system, and there’s not any real right of appeal to an American court or other agency.

What the Chinese can do is file a complaint with the WTO challenging the legitimacy of the tariffs. This has worked for them in the past, although the cases take years to resolve.

11

Chaz 03.25.11 at 8:42 pm

Building on what LFC just said, the situation could be improper without really being a shakedown. Perhaps the Chinese companies really are guilty of dumping, and are trying to corner the market (or the low-end side of it). The American companies may have decided that they payoffs they are receiving from the Chinese are more lucrative than the profits they could get from pursuing tariffs and actually making furniture. Both sides win! Now, if you had to pay off the impacted American workers as well, that math probably wouldn’t work out. But they don’t have a voice in this process (although their union could perhaps bring suit, if they have one), so they just get screwed.

12

rdb 03.25.11 at 11:08 pm

Related? Groklaw: Why Is Microsoft Seeking New State Laws That Allow it to Sue Competitors For Piracy by Overseas Suppliers?
Microsoft seems to be trying to get its own personal unfair competition laws passed state by state, so it can sue US companies who get parts from overseas companies who used pirated Microsoft software anywhere in their business. The laws allow Microsoft to block the US company from selling the finished product in the state and compel them to pay damages for what the overseas supplier did.

13

stubydoo 03.25.11 at 11:09 pm

The anti-dumping laws have always been deliberately designed to be Stalinesque in their vagueness. Some folks cite this as an argument against “free trade”, but genuine free traders have always hated the anti-dumping laws. They are just a ploy to sneak in old-fashioned protectionism through the back door.

Regarding the concerns of rea @7 above about the Rockefeller strategy of predatory pricing, such ploys are going to be self-defeating unless you are very large and all of your competitors are small. If you think such a situation is applicable here, I think you overestimate the strategic coordination level of Chinese firms. In any case, ordinary anti-trust law already deals with such practices – there was never any need to add the anti-dumping rules – certainly not ones like under the current design.

14

c.l. ball 03.26.11 at 1:01 am

I’m puzzled as to why the ITC drops the PRC firms because the firms paid graymail to US rivals. USTR was created in 1963 as the STR. It took over trade negotiation lead from State. It got further authority in 1974 but did not become USTR until 1979. STR was created because State was seen as insufficiently attentive to domestic concerns, and farmers feared that Commerce would ignore them.

USTR has been independent of US Industry control. US satellite makers opposed USTR sec 301 cases against Japan in 88-89 but USTR ignored them. Things might have changed over the past 20 years but in 89, when I was there, industry execs were desparate to influence USTR policy.

15

John M. 03.26.11 at 8:33 am

“If you don’t have the rules, you end up with a monopoly, not a free market.”.

I’m getting that on a T-Shirt. As for the main post, is the situation not one that a private payment (“pay cash to their U.S. competitors”) can be made to avoid a public cost or penalty (“in return for being removed from the review list”) ? I’ll freely admit that I have long held that the US Government is particularly corrupted by private interests (in comparative western terms) but this seems blatant even for the US…

16

mw 03.26.11 at 11:32 am

I’ll freely admit that I have long held that the US Government is particularly corrupted by private interests .

Often it’s in the same way that shop-keepers are ‘corrupted’ by mobsters demanding protection money. Regulatory capture works as much top-down as bottom-up. One of the ways to capture new sources of campaign contributions (and lobbying and industry jobs for friends and relatives or cushy retirement sinecures) is for politicians to announce hearings to establish regulations for an industry that been previously ignored (nice company you got there — it’d be a shame if regulations were passed that favored your competitors). When that happens watch how fast the companies gear up to come to the capitol and start spreading the money around.

Take ‘net neutrality’ for example. Think of the money that big telecom and internet companies are now spending to try to influence the direction of those laws & regulations. All that was previously an unexploited resource — a huge reserve of cash ready to be drilled and tapped and all it took was a few visionary politicians and regulators who were innovative enough to start talking about imposing the right kinds of regulations.

17

Pete 03.26.11 at 11:51 am

I suspect the Chinese companies are entirely used to paying shakedown payments in their domestic operations..

18

Andrew 03.26.11 at 12:30 pm

Obviously the thing to do is start a small furniture company, and then contact these other firms for payment. In fact, let’s just show these other firms a business plan, cash to make good on it, and a drafted letter to the Commerce Department. We can get paid and avoid the hassle of actually running a business. Hell, anyone have some stuff they want to sell on e-bay? Furniture perhaps? Let’s put up some ads, draft the letter, and get paid. A portion of the proceeds will go towards funding Crooked Timber, union efforts in Wisconsin, and the ACLU.

Anyway, I agree that the activity is unlikely to be that intended to be fostered by the law. And there is something vaguely fishy about the whole thing. It sounds like a group of domestic firms colluding to gain risk-free payments from Chinese firms, in exchange for foregoing an option designed to protect competition among firms.

And it’s not clear to me that the payed firms are foregoing any private right of action, but rather are simply agreeing to NOT report what is essentially a violation of law in exchange for cash. That also strikes me as troubling, and I wonder as to the extent of the enforceability of these agreements.

One easy way to fix this would be to make the request for review anonymous, and impose penalties on any party that breaks that anonymity – including the complaining party.

But the reality may be somewhat more complex than the newspaper article captures.

19

Myles 03.26.11 at 7:58 pm

I suspect the Chinese companies are entirely used to paying shakedown payments in their domestic operations..

Pete wins the thread.

20

Henry 03.27.11 at 1:23 am

bq. USTR has been independent of US Industry control. US satellite makers opposed USTR sec 301 cases against Japan in 88-89 but USTR ignored them. Things might have changed over the past 20 years but in 89, when I was there, industry execs were desparate to influence USTR policy.

In IP policy at least, industry has always driven things see e.g. this Susan Sell (2010), “The Rise and Rule of a Trade-Based Strategy: Historical Institutionalism and the International Regulation of Intellectual Property” Review of International Political Economy.

21

Lemuel Pitkin 03.28.11 at 9:22 pm

Re 8-

The idea that is is, could, or should be illegal for a company to price its products below cost is so far from the way any actual market works that only a lawyer could possibly believe it. (And even then it’s impressive.) I guess it’s not literally true that every single business that has existed for more than a few years has at some point priced something below cost, either to build or maintain market share, or as a loss leader for something else. But you’d have to look pretty hard to find the exceptions.

22

LFC 03.28.11 at 9:46 pm

We’re aren’t talking about occasional use of a loss leader here, but something much more systematic.

23

Lemuel Pitkin 03.28.11 at 10:06 pm

If there’s a definition of dumping that doesn’t include a whole range of normal business practices by companies in the US (and everywhere else), I’d like to see it.

Comments on this entry are closed.