Lazy Boys Shakedown Chinese Furniture Makers

James Hagerty at the WSJ has an excellent piece showing how trade policy really works at the ground floor level:

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.

The Chinese firms have paid millions of dollars to Lay-Z-Boy (really, I am not making this up) other US furniture makers and to their bagmen lawyers to avoid having the ITC sicked on them. I suppose one could argue that the payments are an efficient way of redistributing the gains from trade. The question then becomes why are US firms assumed to own the rights to sell to US consumers?

Hat tip to Chuck Sicotte.

Comments

Great post. The WSJ article says that the law firms of the US furniture companies got much more money from the Chinese manufacturers than the US companies got from the Chinese. That the law firms are the real extortionists is suggested by this report of a conversation: "Mr. Dorn [a Washinton lawyer] "asked me what I could give him that would entice his client…to drop me from the review," she told the ITC."

"why are US firms assumed to own the rights to sell to US consumers?"

The US has established rules for fair play in markets, including anti-dumping rules. Firms that play by the rules, have just as much right to sell to US consumers. If US firms have a right, it is merely to report being harmed by violations of the rules. That is not "ownership of rights to sell to US consumers" any more than reporting thefts.

The mere act of legislating those so called anti-dumping laws can create a perverse ownership right.

Yes... but if foreign companies are skirting the rules and harming U.S. consumers (which I don't concede), who gave Lazy Boy the exclusive right to licence that criminal behavior?

If I told the guy robbing my next-door neighbor "Hey, I won't report you to the police if you pay me a percentage of what you steal", I would be complicit in the robbery. If foreign companies truly are dumping product, and Lazy Boy is taking money in order not to report them, then Lazy Boy's actions are criminal.

Alex:

If the question is "why are US firms assumed to own the rights to sell to US consumers, then isn't this just a description of so-called "Coasian bargaining"? It's a term I deplore because it seems to describe all situations involving bargaining around positive transaction costs to allocate entitlements - in other words, all bargaining. However, if it applies in situations where parties avoid court disputes through settlements, then why wouldn't it apply here?

Best.

Dan

pRyDDS I'm not easily impressed. . . but that's impressing me! :)

Interesting. But it's spelled "La-Z-Boy"--without the "y".

This looks like an obvious capture of the ITC by the big furniture makers. The smaller domestic furniture makers can't influence the ITC the way the big ones can. So, the big furniture makers get extra rents. If the Chinese firms don't pay up, the ITC does Lazy Boy's bidding.

@Mike Huben

The US hasn't established rules for fair play in markets, US politicians have. To confuse the US with US politicians, and believe that politicians' behavior reflects the "public interest" is to subscribe to a naive and romantic view of government.

Huben is a long time troll of the GMU blog complex. It is best not to encourage him.

I don't think it is really surprising that as GATT and the WTO require more and more free trade the people who want to benefit from protectionism get more and more sneaky and rule-minded and nakedly greedy in pursuing their basic goal: extracting private profits at the expense of the public good. Stuff like this is a byproduct of the overwhelming success of the movement to liberalize trade in goods, not a sign of its failure. Seventy years ago the domestic firms would just get congress to slap a 200 percent tariff on Chinese goods and hide behind the usual claims about building domestic industry and jobs and etc.

To me this creates a real risk: because the most blatant hypocrisies and attempts to game the system are going to pop up in the world of trade in goods, a lot of the best anecdotes about the dangers of protectionism are going to be in the world of trade in goods, where the argument for free trade has basically won amongst elites and where free trade policies are being inexorably implemented year to year. There is a risk that these anecdotes distract attention from the real battle right now: trying to liberalize immigration restrictions, the trade in services, and international intellectual property law, plus working domestically to make sure the benefits realized from a freer international system are evenly distributed (or, if you care less about distributive justice, not).

On the other hand, I haven't had my coffee yet, so god knows how relevant or interesting this comment is.

Meanwhile Alex does what he can to elect Republicans, who enjoy murdering foreigners all around the world.

Wu,

You need to read this

http://marginalrevolution.com/marginalrevolution/2008/09/why-libertarian.html

"Why Libertarians Should Vote for Obama (1)
by Alex Tabarrok on September 9, 2008 at 7:41 am in Political Science | Permalink

First, war. War is the antithesis of the libertarian philosophy of
consent, voluntarism and trade. With every war in American history
Leviathan has grown larger and our liberties have withered. War is the
health of the state. And now, fulfilling the dreams of Big Brother, we are
in a perpetual war."

That is as funny in retrospect as it was naive at the time. Lesson learned, I hope?

Private settlements are the exception in trade (the texts are sufficiently clear that there are few incentives to bargain outside of the institution), but this is an striking example.

The last time we saw similar behaviour was in the 1980s, with the US threatening Japanese industries using similar tactics. In this case, this hinges on China being formally considered a non-market economy by the WTO (part of its accession deal), which gives huge leverage for antidumping petitioners in the US: how do you identify a "fair price" in a non-market economy? US firms are able to exploit this ambiguity.

But it's likely coming to an end, as suggested by a WTO Appellate Body ruling against the US last week on precisely this issue, in a dispute brought by China (US--AD/CVD, DS379).

The ITC is vomiting on the Chinese?

Sicced is the word you wanted.

It seems to me that some worry a lot about the anti-trust merits of the T-Mobile /AT&T merger. This kind of market power is much more troubling to me - and this is why I see so much hypocrisy in government - the DOJ may persecute wireless companies for potential anti-competitive behavior, when evidence exists, clear as day, that these furniture makers are engaged in extortion, keeping prices higher for consumers. This is government enabled market power, a much bigger concern than the stuff DOJ spends their time on

It does my heart good to know I could beat MR to a post by a solid month. Not that I can really take that much credit since I got it from Cafe Hayek.

The thing I find interesting is whether we blame businesses or governments for rent seeking. Boudreaux sees the fault pretty squarely with the government. The article seems to focus more on the business' culpability: 'A Commerce Department spokesman said it didn't approve of the private settlements but lacked "authority to investigate or police agreements between private parties."' So we need more authority to combat the misuse of our authority.

Might be an antitrust claim here. This sounds like sham litigation, and side payments designed to raise rivals cost so they sell into the US at a higher price.

If I were Chinese, I would counterclaim, or if I were a consumer, I would look to form a class action or at least get someone to look at this. If I were LazyBoy, I would keep my mouth shut.

"I suppose one could argue that the payments are an efficient way of redistributing the gains from trade."

It's not efficient if it is a de facto tariff. The efficiency gains can only be described as such when the U.S. furniture makers cut back production and do something else. If they keep producing because their right to the extortionary money is only granted because of their status as producers, it's unclear whether this is more efficient than a tariff-based system that uses fewer lawyers.

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