China's Antidumping Investigations against US Feed Products: Lessons from the Trenches

Abstract

China has initiated three antidumping (AD) investigations against US feed products since 2010, despite clear mutual benefits from such exports from the US to China. This article provides a close examination of these investigations, what prompted them, how they were resolved, and the costs they imposed on importers and exporters. The article also describes the political economy around these investigations and how China's antidumping laws provide it with flexibility to manage these investigations. The article concludes that this flexibility makes China well-positioned to continue using AD investigations against some trade partners in the future, particularly if AD use continues to rise globally.

1. Introduction

Despite clear mutual benefits of the US exporting land- and water-intensive feed grains to China, China's imports of US feed grains and products have been on a roller-coaster ride for over a decade. Among the trade disputes involving US feed products were three antidumping (AD) investigations over the period 2010–2018 – two against US dried distiller's grains with solubles (DDGS) and one against US sorghum.¹ These three AD investigations occurred during a period of rising U.S–China trade tensions and each was more aggressive than the last.

In this paper, I examine the three antidumping (AD) investigations China initiated on the imports of US feed products over the last several years (Table 1). The paper provides a detailed description of how each investigation began, proceeded, and concluded, and how these disputes affected US producers and importers in China. I discuss how the changing US–China trade relationship and China's changing domestic politics affected the investigations, and also how China's AD practices differ from other countries and the advantages these differences provide for trade policy practitioners in China. The paper is drawn largely from my personal experience on the ground in China working on feed grain import issues during the period these investigations occurred, following years as an economist specializing in China's agricultural economy and trade.

Table 1. Three anti-dumping investigations into US feed products by China

The paper is structured with an overview of the three AD cases against US feed grains, followed by a discussion that addresses debates in the literature on the topic. The choice of feed grains as a focus is useful because, as land- and water-intensive products that are inputs into the long-favored feed and livestock industry, prominent policy advocates argue that these imports are good for China, and leaders have been reluctant to impose restrictions on imports.²

2. Overview of the Three AD Cases against US Feed Grains

China and the US have different resource endowments that underlie the potential for mutually beneficial trade. China's endowment of arable land per capita is roughly one fifth that in the US and less than one quarter the freshwater per capita.³ This has implications for feeding China's large population, particularly as the population grows more prosperous and consumes more animal proteins, the production of which relies on land-intensive grain for feed. China could import animal products but instead seeks to support domestic production of these products. China's increasing consumption of animal products, and corresponding domestic production, strains China's ability to produce sufficient land-intensive feed grain to meet rising demand.

When China began importing small amounts of US DDGS in 2009, it was seen as a promising market for exports to expand (Fabiosa et al., 2009). As US ethanol production, which produces DDGS as a co-product, expanded significantly over the 2000s, large amounts of DDGS came onto the market as a new feed ingredient. By the end of the decade, DDGS producers began seeking export markets and China's large and growing feed and livestock industry, and restrictions on corn imports, made China a top market for DDGS export promotion.

2.1 AD1: US DDGS

By summer 2010, China was importing a substantial flow of US DDGS of roughly 300,000 metric tons (MT)/month (Figure 1). At this pace, the impact imports had on the demand for domestic DDGS caught the attention of China's ethanol industry, prompting four ethanol and alcohol producers in China to petition China's Ministry of Commerce (MOFCOM) to initiate an antidumping investigation into US DDGS. MOFCOM followed through with an AD investigation into US DDGS exports to China announced on 28 December 2010.⁴

Figure 1. Monthly US DDGS Exports to China: 2009–2021.

China's domestic feed and livestock industry, led by the China Feed Industry Association (CFIA) and several prominent feed companies, openly came out against imposing duties. The industry argued that imposing duties would benefit the fuel industry (ethanol producers) over the interests of the food industry (livestock producers), and advocated aggressively in a hearing held on the issue in July 2011, where several prominent feed and livestock enterprises presented opposition to imposing duties.⁵ Due in part to this resistance, MOFCOM extended the investigation for up to an additional six months from December 2011. On 22 June 2012, days before the end of the extension, MOFCOM quietly announced that the petition to investigate US DDGS for dumping had been withdrawn on 10 May. Because of this, and the realization that imposing duties were not ‘in the public interest’, MOFCOM decided to accept the withdrawal, end the investigation, and no duties would be imposed.

This first salvo in what would become a much more contentious trade relationship in feed ingredients was instructive in that it highlighted a progressive element of China's AD regulations as well as a relatively more open political environment. Like other countries (but not the US), China's AD law requires that the ‘public interest’ is taken into consideration before imposing duties.⁶ This allowed domestic users to advocate against imposing duties as they would not be in the public interest due to the affect they would have on food prices and livestock industry development. Moreover, some prominent scholars and policy advocates at that time, and years prior, argued that importing feed ingredients was ‘good for China’ because it allowed China to allocate scarce land and water resources away from grain production to higher-valued uses.⁷ This latter point became less pronounced in the political environment in subsequent years.

The announcement of this AD investigation had a clear but modest impact on US DDGS exports. During the investigation, importers limited their pipeline, wary of possible preliminary duties being imposed, causing US DDGS exports to China to stay well below 200,000/month, and total US exports to fall by roughly 15% while the investigation was underway.⁸ DDGS prices, however, rallied more than 30% over the period, with Gulf FOB prices going from roughly $230/MT in December 2010 to over $300/MT by July 2012, largely driven by rising corn prices due to drought in the US at that time.⁹ DDGS prices (and sorghum prices for that matter) are largely determined by corn prices for which DDGS (and sorghum) are close substitutes in feed use, and corn is a far larger market than either DDGS or sorghum.¹⁰ Thus, the fall off in DDGS exports to China could also be partially explained by rising corn and DDGS prices in the US DDGS exports to China rebounded in 2013, with the US total DDGS exports of 9.7 MMT and exports to China at 4.4 MMT in 2013, or 45% of total US DDGS exports, despite prices remaining above $300/MT throughout the year.

2.2 AD2: US DDGS

The second antidumping investigation occurred after a surge in DDGS imports in 2015 caused by another US–China trade dispute. In November 2013, China began testing shipments of US corn for a genetically engineered trait, MIR162, that had yet to be approved for import to China but had been commercialized in the United States, and by the end of 2013, began testing US DDGS, which are made from corn, for evidence of this trait as well. This issue ultimately resulted in US DDGS exports to China falling to near zero by November 2014.¹¹ MIR162 was approved for import in December 2014, and US DDGS exports quickly rebounded and reached nearly 1 million metric tons a month over the summer of 2015. This surge resulted in the China Alcoholic Beverages Industry Association, which includes ethanol producers, petitioning MOFCOM for a second antidumping investigation into US DDGS, which MOFCOM initiated in January 2016. This time petitioners included US government subsidies to ethanol (DDGS) producers in their complaint, which would allow for countervailing duties in addition to antidumping duties.

From the beginning, this investigation was different from the previous one. In meetings with CFIA, which vocally opposed the previous investigation, I was surprised to find that they did not oppose, indeed seemed to support, this investigation.¹² China's leading feed and livestock companies, nearly all of which are private enterprises, major importers of DDGS, and vocally opposed to the investigation in 2010–2012, also did not vocally oppose the 2016 investigation, although many privately hoped the investigation would end without imposing duties. None of the feed and livestock companies that presented at the July 2011 hearing in the previous investigation were willing to present at the hearing held for the second investigation in August 2016. As one senior manager of a prominent feed and livestock company told me at the time, ‘We hope they don't impose duties, but if they do, and everyone in China needs to pay them, then we can still compete.’ Some even expressed optimism that no duties would be imposed because, as I heard many times from importers in China, ‘There is no dumping.’¹³

MOFCOM announced preliminary duties, and ultimately a final determination, and in both cases the duties were well above expectations. The higher-than-expected duties were imposed in tandem with trade-related actions against China by the US in the waning days of the Obama administration. On 13 September 2016, the US requested consultations under the WTO dispute settlement understanding (DSU) charging that China's subsidies to corn, wheat, and rice producers exceeded their WTO deminimus levels. Ten days later, on 23 September MOFCOM announced preliminary duties on US DDGS of 33.8%, which was at the high end of the range that the industry was hoping for (many stated that duties of 15–30% would still allow for some imports). At 33.8%, US DDGS exports to China would be significantly reduced, but probably not entirely eliminated. The US filed a second request for consultation under the WTO's DSU on 15 December 2016, regarding China's tariff-rate quota (TRQ) administration for the same agricultural products: wheat, corn, and rice.

The trade action that likely caused the most resentment among China's leadership, however, is the decision in December 2016 to continue China's ‘non-market economy’ (NME) status under the WTO.¹⁴ China was admitted to the WTO on 11 December 2001, and perhaps the most contentious part of China's WTO accession negotiations was that the NME statuswould be lifted in 15 years.¹⁵ As such, MOFCOM expected NME removal at the 15-year mark, 11 December 2016. However, that did not occur: the US, and other major trading partners, argued that China continued various practices that did not qualify it for market economy status under their domestic definition of an NME.¹⁶ NME status has implications for any antidumping investigation against China in that, as an NME, investigators can use prices from a surrogate country other than China to construct ‘normal value’. This practice can be, and apparently often is, abused to determine high ‘dumping’ margins that can then justify high anti-dumping tariffs against producers in China (Watson, 2014; Liu and Zhang, 2022). Producers in China have defended themselves against more anti-dumping investigations than any other country (Bown, 2021; Schiavo et al., 2021), and this is in part due to NME status that makes it easier to determine large dumping margins.

With these two events – a WTO dispute consultation request and the continuation of NME – occurring in December 2016, it was not a big surprise when, on 11 January 2017, China not only found dumping and subsidies, but levied final duties well above the preliminary duties imposed the previous September. The final duties ranged from 42.2 to 53.7% for dumping, and an additional 11.2 to 12% for subsidies, which added up to levels well beyond the preliminary duties (33.8%) and high enough to make DDGS imports unprofitable.¹⁷ These duties abruptly ended US DDGS exports to China and have remained in place despite even China's commitment to import large amounts of US agricultural products under the Phase One agreement reached in January 2020.

The surge in China's DDGS imports in 2015 was mostly induced by the pent-up demand that was released onto the market once the MIR162 import restrictions from the previous year were removed in December 2014, but it nonetheless provided strong support for a dumping investigation.¹⁸ China's feed and livestock industry would be direct beneficiaries of this dumping, if it indeed occurred, and therefore they have no commercial interest in not opposing the levying of duties, especially after successfully making the ‘public interest’ argument under China's AD regulations the last time. These actions call into question the extent to which the state and Party exert control over private enterprises in China.¹⁹ State and Party influence over private enterprises, however, can serve to help steer the outcomes of AD investigations. In this case, the natural opposition to AD duties remained silent, which allowed MOFCOM to carry out the investigation without confronting rambunctious opposition and be able to make determinations according to their own internal deliberations and criteria. The 2016 AD investigation into US DDGS was held during a period of increasing tensions between the two countries, with a US presidential election and several specific US trade actions against China occurring while the investigation was taking place. It also occurred during a period of rising nationalism in China and efforts to increase the role of the state and Party in otherwise independent organizations and enterprises.²⁰ The AD investigation against US DDGS imports became more of a national cause to address perceived US transgressions that everyone in China must support, regardless of whether they benefitted or not.

In the end, the actual economic effect was not particularly strong. Importers in China and end users were given plenty of time to ship the DDGS import commitments they had on the books when the investigation was announced in January before preliminary duties were imposed in September. While the preliminary duties were higher than expected, importers had trimmed their pipeline in expectation of such duties and losses by importers were not excessive.²¹ Total US DDGS exports hardly changed as the industry aggressively promoted DDGS in other countries. Prices dropped slightly when duties were imposed, but US DDGS prices then rallied to levels well above corn prices by July 2017 and stayed well above US corn prices until 2019 due to a sharp rise in soybean meal prices.²²

2.3 AD3: US Sorghum

The 3rd AD investigation took place at the height of the trade tensions under the Trump administration in first half of 2018. Over the course of 2017, the US initiated a series of investigations, each of which could justify US trade retaliation. These included two investigations under Section 232 of the Trade Expansion Act of 1962 to determine whether US imports of steel and aluminum posed a threat to national security, an investigation into whether surging washing machine and solar panel exports to the US damaged the US domestic industries under Section 201 of the Trade Act of 1974, and an investigation into whether China's intellectual property right (IPR) practices caused economic damages to the US, which could result in trade remedy actions under Section 301 of the 1974 Trade Act in August 2017. Only the last of these investigations was China specific, but the US actions based on their findings ultimately resulted in the tit-for-tat imposition of tariffs, which became known as the ‘232 tariffs’ and the ‘301 tariffs’. China responded to the first of these, the ‘201 tariffs’ announced on 22 January 2018, with an antidumping and countervailing duty (AD/CVD) investigation into US sorghum, announced on 5 February 2018.

China's AD/CVD investigation against US sorghum was exceedingly costly but short lived. To be cooperative with the investigation, the roughly 50,000 sorghum producers in the US responded to a questionnaire that included detailed production information to estimate production costs and the role of subsidies.²³ The legal and logistical costs of this effort for the US sorghum industry were significant, but China had become a huge market for US sorghum, importing roughly half of all US sorghum produced since sorghum exports to China began in 2013.²⁴

On 16 February 2018, less than two weeks after the sorghum AD/CVD investigation was announced, the US released the findings of the 232 investigation which led to 25% duties on imported steel and 10% duties on imported aluminum starting 23 March 2018. On 22 March 2018, the USTR released the 301 investigation report, which concluded that there was significant IPR infringement and cost to US industry, followed by an announcement 3 April to impose duties on $50 billion of US imports from China. China immediately countered, on 4 April, with an announcement of equivalent tariffs on $50 billion of US exports, much of which were agricultural products, including sorghum (and DDGS, corn, soybeans, and others).

On 17 April, just two and a half months after the investigation was initiated, China announced preliminary AD/CV duties on US sorghum of 178.6%.²⁵ The duties were not only announced well before anyone expected them, but were also far higher than expectations – importers would have to deposit more than USD 21 million to customs authorities in order to land a bulk vessel carrying 60,000 metric tons of sorghum valued at only USD 12 million. Since many traders had contracted sorghum purchases before the investigation was announced, they accelerated their deliveries in order to land them in China before preliminary duties were imposed, and because of that there were more than 20 bulk vessels of US sorghum enroute to China when the preliminary duties were announced.²⁶ Nearly all of these shipments were ‘unwound’ – sold back to the exporter or diverted to third country markets. Since China's corn prices, and thus sorghum prices, were well above international prices, the unwinding of these shipments cost importers tens of millions of dollars.

In the end, importers could have landed these vessels in China. By early May 2018, there was a period of détente between the two countries, with a high-level delegation from the US traveling to Beijing the first week of May, followed by a delegation from China led by Vice-Premier Liu He traveling to Washington in mid-May. It was at the conclusion of Liu's trip to the United States on 17 May, exactly one month after the duties were imposed, that China announced it was canceling the investigation – again due to ‘public interest’ – and the duties would no longer be imposed, and all preliminary duties collected would be returned.²⁷

This short, sharp, shock to the sorghum market did significant economic damage to sorghum traders, mostly importers in China who owned the majority of the sorghum in transit to China when the duties were imposed. Not only did the importers who unwound their purchases lose tens of millions of dollars as described above, but sorghum prices in the US also fell, so producers and traders holding sorghum also lost.²⁸ The end users in China also had to scramble to find alternative feed supplies upon realizing that over 1 MMT in sorghum shipments would not arrive. Because of the more comprehensive tariff tit-for-tat over the 301 tariffs that started in July 2018, sorghum exports to China did not recover until the Phase One trade deal in January, 2020 (Figure 2).

Figure 2. Monthly US Sorghum Exports to China: 2009–2021.

3. Conclusion and Discussion

As has been well established in the literature on antidumping, the three AD cases described in this paper had nothing to do with predatory pricing or dumping (Prusa, 2005; Nelson, 2006; Wu, 2012). An alternative explanation for the increasing adoption of, and use of, AD policies is the role they may play as a ‘safety valve’ that allows countries to pursue broad trade liberalization while allaying the concerns of domestic producers that are vulnerable to competition from foreign producers (Niels and ten Kate, 2006). There is no doubt that China's accession to the WTO in 2001 represents China committing to a broad trade liberalization agenda. While there must have been push back against WTO accession by conservative forces wary of joining the global club of capitalist economies, it is impossible to know whether promulgating a formal AD law, which China did in 1997 during negotiations to join the WTO, played a role in placating those opposed to trade liberalization.²⁹ China's entering the WTO under NME status, however, did likely placate producers in other countries. The US, which took the lead in negotiating China's accession agreement, insisted upon NME status and this served as a safety valve that allowed opponents in the US to agree to accession while assuring US producers that they have an effective means to use AD to protect themselves against imports from China if warranted.

Another explanation for the growing use of AD investigations is that AD investigations may play an important retaliatory role (Bao and Qiu, 2011; Osang and Warren, 2019). Evidence of this is mixed, but much of it compares country A initiating an AD investigation against producers in country B some time after an AD investigation was initiated by country B against the country A's domestic producers.³⁰ While China's AD law explicitly allows for AD investigations to be initiated in retaliation to AD investigations against China's producers, defining retaliation as the use of one AD investigation in response to a prior AD investigation may be too narrow. In the case of AD3 against US sorghum, it was almost certainly initiated to retaliate against other, non-AD trade measures against China during the Trump administration.³¹ AD2 may have been in part initiated in response to some specific prior AD investigation against producers in China, but there was no clear action prior to the investigation that seemed to be the cause. AD2, however, was timed to occur not only during a presidential election but the one-year investigation period also included the date when NME status was expected to be withdrawn by the US and other trade partners: 11 December 2016. The high duties in both the preliminary and final determination were widely viewed to have been influenced by the continuation of NME status, in addition to two WTO consultation requests by the US on China's agricultural policies in late 2016.

China's overall AD policies and practices are progressive and can be effectively implemented. They are progressive because they explicitly include a ‘public interest’ clause that allows policymakers to evaluate how importers and consumers are affected by trade protection before imposing duties (Yu, 2005; Hylke and Zanardi, 2010; Wu, 2012; Le and Tong, 2017). Public interest clauses are not required under the WTO's Antidumping Agreement (ADA), only a few other countries have them, and the US is not among these and has been opposed to its inclusion in WTO guidelines (US GAO, 2022). Of the three AD cases reviewed in this paper, one ultimately resulted in no duties and another lifted preliminary duties imposed, both justified by the public interest argument. This is an important element of flexibility to not impose duties when the interests of domestic consumers outweigh the interest of domestic producers.

China's overall AD policies are also effective for reasons related to the arguments made in Wu (2016). The influence of the state and Party on private enterprises – including industry associations – is greater than that found in a more liberal political economy. This explains why CFIA, in private meetings, actually endorsed MOFCOM's investigation in AD2, after openly and effectively arguing against imposing duties in AD1. It also explains why the enterprises that submitted the petition requesting an investigation in AD1 withdrew their petition after nearly 18 months of investigation, even though MOFCOM had reportedly established dumping, injury, and estimated dumping margins.³² After losing to resistance from those opposed to implementing the duties, MOFCOM could keep its findings and use the face saving way out by asking the original petitioners to withdraw the petition. In China, such a request would be difficult not to comply with, but in other countries that extend their enterprises more independence, such an event would be less likely to occur.

The combination of these two aspects of China's AD policies and practices give policy makers in China more ability to target and control AD investigations. This bodes well for China to continue increasing its use of AD investigations as a means to counter trade and other issues brought against its policies. If the WTO is not prepared to reform AD guidelines to rein in AD use, then there is little incentive for China to not do so. Moreover, if the US seeks to expand its own use of AD rather than support reforms to limit its use, then China can be expected to do so as well.³³