United States Found Guilty Again

Brazil is winning another trade case against the United States, arising from the imposition of import restrictions on orange juice. The last Brazilian victory against American protectionism was seven months ago, when the International Trade Organization (ITO) ruled definitively against illegal subsidies provided by Washington to American cotton exporters. In the case of orange juice, the victory is still incomplete, since the American government will be able to appeal the arbiters’ decision. If they do, the dispute will continue until the second half of 2011. But a reversal of the result appears unlikely, in view of decisions adopted in a number of similar cases.

In its trade complaint lodged in September 2009, Brazil challenged the method that had been used by the U.S. authorities for verifying the existence of dumping of Brazilian orange juice. The method, known as “zeroing,” had already been ruled to be illegal by earlier ITO arbitration panels.

The verification of “dumping” involves a comparison of export prices with “normal” prices in the reference markets and also in the market of the importing country. Prices that are lower than normal can be taken as evidence of dumping. But in a comprehensive investigation, some prices above normal may also be found. When this occurs, such prices must be taken into account both in the determination of whether dumping has actually taken place and, where appropriate, in establishing the taxes to be imposed in order to “level” the playing field. The practice of zeroing consists in ignoring sales at above-normal prices — in other words, those with a negative dumping margin.

This means, however, that only prices lower than normal are taken into account and, as a result, the magnitude of dumping is inflated. It may well be that no dumping has actually taken place at all, but the use of this method permits the imposition of a trade barrier, even when there has been no unfair competition. When part of the sample is discarded, the normal market variation in prices may be misinterpreted as a “proof” of dumping.

In March 2009, six months before Brazil submitted its complaint, the government of Thailand lodged a complaint against the U.S. for its use of zeroing in an investigation of dumping involving sales of plastic bags.

In February 2009, the ITO’s Appellate Body had given a definitive victory to the European Community in a complaint against the use of zeroing by the American government. Similar decisions had previously been made by ITO judges in other cases brought against the U.S.

The U.S. government had already announced in 2007 its intention to abandon the use of zeroing in new antidumping investigations, maintaining them only for investigations that were already underway. The ITO Appellate Body — which has the responsibility for reviewing complaints and issuing final decisions — warned the U.S., however, not to continue in violation, noting that the date at which a case had begun was of no relevance.

The repeated condemnations are evidence of the unwillingness of the U.S. authorities to take into account their international obligations with regard to trade. In the case of the U.S., its contempt for its ITO obligations has, in a number of cases, been accompanied by a display of force.

When the loser fails to comply with the judges’ verdict, the winner of the case is authorized to retaliate. But such action is unlikely when the guilty party is very powerful, since retaliation may well turn out to be bad business. It’s not enough simply to be in the right.

As the responsibility for the sanction, in such cases, is handed over to one of the parties, instead of being exercised in a collective manner, the international trade system operates under a legal system subject to important defects. These defects become all the more apparent when the government of a great power has strong commitments to protectionist interests.

These commitments aren’t new in the case of the U.S. and seem to have become strengthened with the election of President Barack Obama. The maintaining of import barriers for ethanol is a confirmation of this and might well be the basis for a new complaint to be lodged by Brazil.