U.S.-China Trade: The United States Has Not Restricted Imports	 
under the China Safeguard (29-SEP-05, GAO-05-1056).		 
                                                                 
In joining the World Trade Organization (WTO) in December 2001,  
China agreed to a number of mechanisms to allow other WTO members
to address disruptive import surges from that country. Among	 
these was a transitional product-specific safeguard. In general, 
safeguards are temporary import restrictions of limited duration 
that provide an opportunity for domestic industries to adjust to 
increasing imports. U.S. law includes a number of other 	 
safeguards including a communist country safeguard, known as	 
"section 406," and a global safeguard, known as "section 201,"	 
which have both applied to China. In light of increased concern  
about Chinese trade practices and the U.S. government response to
them, the conference report on fiscal year 2004 appropriations	 
requested that GAO review the efforts of U.S. government agencies
responsible for ensuring free and fair trade with that country.  
In this report, which is one of a series, GAO (1) describes the  
China safeguard, (2) describes how it has been used thus far, and
(3) examines issues related to the President's discretion to	 
apply the safeguard. Other safeguards provide context to	 
understand this mechanism. We provided ITC and USTR a draft of	 
this report for their review and comment. Both agencies chose to 
provide technical comments from their staff. We incorporated	 
their suggestions as appropriate.				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-1056					        
    ACCNO:   A38699						        
  TITLE:     U.S.-China Trade: The United States Has Not Restricted   
Imports under the China Safeguard				 
     DATE:   09/29/2005 
  SUBJECT:   Foreign governments				 
	     Foreign trade agreements				 
	     Import restriction 				 
	     International cooperation				 
	     International organizations			 
	     International trade				 
	     International trade regulation			 
	     International trade restriction			 
	     Foreign trade policies				 
	     Import regulation					 
	     China						 

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GAO-05-1056

United States Government Accountability Office

GAO

                       Report to Congressional Committees

September 2005

U.S.-CHINA TRADE

     The United States Has Not Restricted Imports under the China Safeguard

GAO-05-1056

Highlights of GAO-05-1056, a report to congressional committees

In joining the World Trade Organization (WTO) in December 2001, China
agreed to a number of mechanisms to allow other WTO members to address
disruptive import surges from that country. Among these was a transitional
product-specific safeguard. In general, safeguards are temporary import
restrictions of limited duration that provide an opportunity for domestic
industries to adjust to increasing imports. U.S. law includes a number of
other safeguards including a communist country safeguard, known as
"section 406," and a global safeguard, known as "section 201," which have
both applied to China.

In light of increased concern about Chinese trade practices and the U.S.
government response to them, the conference report on fiscal year 2004
appropriations requested that GAO review the efforts of U.S. government
agencies responsible for ensuring free and fair trade with that country.
In this report, which is one of a series, GAO (1) describes the China
safeguard, (2) describes how it has been used thus far, and (3) examines
issues related to the President's discretion to apply the safeguard. Other
safeguards provide context to understand this mechanism.

We provided ITC and USTR a draft of this report for their review and
comment. Both agencies chose to provide technical comments from their
staff. We incorporated their suggestions as appropriate.

September 2005

U.S.-CHINA TRADE

The United States Has Not Restricted Imports under the China Safeguard

The China safeguard permits WTO members, including the United States, to
address disruptive import surges from China. In the United States, the
China safeguard is implemented under section 421 of the Trade Act of 1974,
which allows U.S. firms to petition for relief and establishes a
three-step process. This process involves the International Trade
Commission (ITC), Office of the U.S. Trade Representative (USTR), and the
President and determines whether Chinese imports are causing market
disruption to domestic producers and whether a remedy is in the national
economic interest. The entire process takes about 150 days. Under the
terms of China's WTO accession agreement, WTO members may use the China
safeguard until 2013.

To date, the United States has not applied the China safeguard in five
cases brought by domestic producers. In a sixth case, ITC has not yet
reached a decision. In two cases, ITC found no market disruption. In three
cases, ITC found market disruption and USTR evaluated the pros and cons of
various options and made a recommendation to the President. In all three
cases, the President declined to provide relief to the domestic industry
after he found it would not be in the national economic interest because
the costs would outweigh the benefits. The success rate for China
safeguard petitions is similar to communist country safeguard petitions,
but differs from that of global safeguard petitions.

The President's decisions not to provide import relief after ITC found
market disruption generated controversy, including a lawsuit claiming that
he exceeded his authority. The relevant House committee intended that the
law create a presumption in favor of relief upon an ITC injury finding.
Nonetheless, the U.S. Court of International Trade found the President has
broad discretion not to apply a China safeguard. Moreover, the President
considers the question of whether to provide relief from a broader
perspective than ITC. The President weighs the benefits of relief against
the costs and considers factors such as the effect on consumers and
downstream users, which ITC does not. The President cited third-country
imports in all his decisions denying relief under both the Chinese and
communist country safeguards. Under the global safeguard, third-country
imports generally cannot diminish the potential benefits of import relief
to the domestic industry and the President has often provided relief,
especially since 1988 when U.S. trade laws were revised.

Outcomes of Completed China Safeguard Petitions (as of September 2005) ITC
vote on Presidential Product name market disruption determination

                                                Pedestal           Rejected   
                                                actuators 3-2 in 3-year quota 
                                                favor            
                                                                     Rejected 
     www.gao.gov/cgi-bin/getrpt?GAO-05-1056.    Wire hangers 5-0       3-year 
                                                in favor           additional 
                                                                         duty 
                                                Brake drums and               
     To view the full product, including the    rotors 4-0           N/A
                      scope                     against          
                                                Waterworks           Rejected 
    and methodology, click on the link above.   fittings 6-0 in        3-year 
                                                favor             tariff rate 
                                                                        quota 
For more information, contact Loren Yager at Mattress                      
        (202) 512-4347 or [email protected].       innersprings 6-0     N/A
                                                against          
                                                 Sources: GAO,   
                                                    ITC, and     
                                                  presidential   
                                                   documents.    

Contents 	

Letter

Results in Brief	Background	U.S. Law Establishes Three-Step Process for
China Safeguard 	

Decisions The United States Has Never Applied the China Safeguard The
President Has Exercised His Broad Discretion in Deciding Not

to Apply Relief Agency Comments and Our Evaluation

1

3 4

5 11

17 23

Appendix I Objectives, Scope, and Methodology

Appendix II GAO Contact and Staff Acknowledgments

Tables

Table 1: Comparison of China, Communist Country, and Global

Safeguards Table 2: Results of ITC China Safeguard Investigations
(2002-2005) Table 3: Reasons Cited by the President in Decisions Not to

Provide Import Relief Table 4: Outcomes of Completed China, Communist
Country, and Global Safeguard Cases (as of September 2005)

                                     11 14

                                       16

                                       17

Figures

Figure 1: China Safeguard Timeline 6 Figure 2: Dates of China Safeguard
Petitions 12

Abbreviations

ITC International Trade Commission	TPSC Trade Policy Staff Committee 	USTR
Office of the United States Trade Representative 	WTO World Trade
Organization 	

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

United States Government Accountability Office Washington, DC 20548

September 29, 2005 	

The Honorable Richard C. Shelby 	Chairman 	The Honorable Barbara A.
Mikulski	Ranking Member	Subcommittee on Commerce, Justice, and Science
   	Committee on Appropriations 	United States Senate 	

The Honorable Frank R. Wolf	Chairman 	The Honorable Alan B. Mollohan
   	Ranking Member	Subcommittee on Science, State, Justice and 	

Commerce, and Related Agencies 	Committee on Appropriations 	House of
Representatives 	

Imports from China have grown rapidly over the last decade, from a total
   	value of about $42 billion in 1995 to over $196 billion in 2004.1 While
   	lowering U.S. prices, and therefore benefiting consumers, this growth has
   	presented a major challenge for U.S. producers that compete with Chinese
   	products in the U.S. market. 	

In joining the World Trade Organization (WTO) in December 2001, China
   	agreed to a number of unique import relief mechanisms. Among them was 	a
transitional product-specific safeguard (China safeguard) that
allows	other members to impose import restraints (such as quotas or
tariffs) on	China in the event of disruptive import surges.2	

In light of increased concern about Chinese trade practices and the
U.S.	government response to them, the conference report on fiscal year
2004 	appropriations legislation3 requested that GAO monitor the efforts
of U.S. 	

1Both values are expressed in constant 2004 dollars. 	2WTO Protocol on the
Accession of the People's Republic of China, art. 16. 	3H.R. Rep. No.
108-401, at 574 (2003). 	

government agencies responsible for ensuring free and fair trade with that
country. In subsequent discussions with staff from the House
Appropriations Committee's Subcommittee on Science, State, Justice and
Commerce, and Related Agencies, we agreed to provide a number of reports
on relief mechanisms available to U.S. producers who are adversely
affected by unfair or surging imports and the manner in which these
mechanisms have been applied to China.4 In this report we (1) describe the
China safeguard, (2) describe how the safeguard has been used thus far,
and (3) examine issues related to the President's discretion to apply the
safeguard.

To describe the safeguard, we reviewed U.S. laws and procedures as well as
relevant WTO agreements. We interviewed staff members from the Office of
the U.S. Trade Representative (USTR), the U.S. International Trade
Commission (ITC), WTO officials, and other experts on trade law. In
describing how the safeguard has been used thus far, we reviewed the
official case records for each of the five completed safeguard
investigations conducted by ITC and USTR. To clarify the views of those
favoring and opposing safeguard measures, we spoke with attorneys
representing both petitioners and respondents. We also interviewed Chinese
government officials to obtain their perspective on the China safeguard.
To examine the application of presidential discretion, we reviewed and
analyzed the presidential determinations, and documents related to the
legal challenge of one of these decisions. We compared the China safeguard
with other safeguards throughout the report in order to provide context
for understanding the outcomes so far. We performed our work from January
2004 to September 2005 in accordance with generally accepted government
auditing standards. Appendix I contains a more detailed description of our
scope and methodology.

4We have already published reports on both the China textile safeguard and
the application of countervailing duties to China. GAO, U.S.-China Trade:
Textile Safeguard Procedures Should Be Improved, GAO-05-296 (Washington
D.C.: Apr. 4, 2005) and U.S.-China Trade: Commerce Faces Practical and
Legal Challenges in Applying Countervailing Duties, GAO-05-474 (Washington
D.C.: June 17, 2005). A forthcoming report will discuss antidumping
measures against China.

  Results in Brief

The China safeguard allows WTO members to restrict surging imports from
China that cause market disruption to the domestic industry. In the United
States, the safeguard is implemented by section 421 of the Trade Act of
1974,5 which establishes a three-step process to consider its application.
First, after receiving a petition, ITC determines whether there is market
disruption by investigating whether imports from China have injured U.S.
producers. If ITC does not find market disruption, the case ends. If ITC
finds market disruption, it proposes a potential remedy for USTR's and the
President's consideration. Second, USTR consults with China to seek an
agreement that would address ITC's finding of market disruption.
Concurrently, USTR obtains and evaluates information from interested
parties on the appropriateness of any proposed remedy and makes a
recommendation to the President. Finally, section 421 requires the
President to provide relief unless he determines that doing so is not in
the national economic interest, or would cause serious harm to U.S.
national security. The China safeguard was modeled after the communist
country safeguard and contains similar features. A number of these
features differ from the U.S. global safeguard, which generally must be
applied to products from all U.S. trading partners.

The United States has yet to apply the China safeguard, even though it has
completed its consideration of five petitions for relief filed by U.S.
producers. In a sixth case, ITC is expected to make a determination in
early October 2005. In two instances, ITC found no market disruption and
the cases ended. In the three other cases, ITC found market disruption and
recommended a remedy to USTR and the President. In these three cases,
USTR's consultations with the Chinese did not result in any agreements to
address the market disruption. USTR held public hearings and heard
testimony on a number of remedy options, including ITC-proposed tariffs,
quotas, and not providing any relief. USTR evaluated the pros and cons of
the various options and made a recommendation to the President. In all
three cases, the President declined to provide relief because he found it
would not be in the national economic interest of the United States.
Presidents have made similar decisions to deny relief under the communist
country safeguard. In contrast, Presidents have granted relief in half of
the global safeguard cases in which ITC recommended relief, and in all
such cases after Congress revised U.S. trade law in 1988.

519 U.S.C. S: 2451.

The President's decisions not to provide import relief after ITC found
market disruption generated controversy, including a legal challenge to
his first safeguard decision before the U.S. Court of International Trade
claiming that he exceeded his authority. The legislative history of
section 421 shows that the relevant committee intended that there would be
a presumption in favor of the President's providing relief once ITC found
market disruption. While section 421 court held that the President still
has broad discretion not to apply the China safeguard. Furthermore, the
President considers the question of whether to provide relief from a
broader perspective than ITC, which focuses on the domestic industry. In
contrast, the President focuses on the national economic interest when
weighing the benefits of relief against the costs, and considers factors
such as the effect on consumers and downstream users, which ITC does not.
Furthermore, the President cited third-country imports in all his
decisions denying relief under both the Chinese and communist country
safeguards. Conversely, under the global safeguard, third-country imports
generally cannot diminish the potential benefits of import relief to the
domestic industry. The President's decisions have been different under the
global safeguard.

We provided ITC and USTR a draft of this report for their review and
comment. Both agencies chose to provide technical comments from their
staff. We incorporated their suggestions as appropriate.

Background
In general, safeguards are temporary import restrictions that provide an
opportunity for domestic industries to adjust to increasing imports. Both
the WTO Agreement on Safeguards and article XIX of the General Agreement
on Tariffs and Trade establish general rules for the application of
safeguard measures. Safeguard actions taken under the WTO usually apply to
all imports of a product irrespective of source.6 Other multilateral and
bilateral trade agreements also contain safeguard provisions. China's WTO
accession agreement is an example of such an agreement. Its provisions
contain a transitional product-specific safeguard that permits WTO
members, including the United States, to take measures to address
disruptive import surges from China alone. Under the terms of China's WTO
accession agreement, members may use the China safeguard until 2013.

                    6WTO Agreement on Safeguards, art. 2.2.

  U.S. Law Establishes Three-Step Process for China Safeguard Decisions

In addition to the China safeguard, three other safeguards have been
applied to imports from that country in the United States. First, a
communist country safeguard applied to China prior to its WTO accession
and still applies to import surges from other communist countries that are
not WTO members.7 Second, Chinese imports are subject to a U.S. global
safeguard that applies to all WTO members.8 Third, a textile safeguard
provided for in China's WTO accession agreement covers textile and apparel
imports from China.9

In the United States, the China safeguard is implemented under section 421
of the Trade Act of 1974, as amended, which Congress enacted as part of
the legislation authorizing the President to grant China permanent normal
trade relations status.10 Under section 421, U.S. firms may petition the
government to apply a China safeguard. The section establishes a
three-step process to consider China safeguard petitions. This three-step
process involves ITC, USTR, and the President, and it results in
determinations about whether import surges from China have caused market
disruption and whether a remedy is in the national economic interest or,
in extraordinary circumstances, would cause serious harm to national
security. The entire process takes approximately 150 days (see fig. 1).11
The China safeguard was modeled on the communist country safeguard, which
applied to China before it became a WTO member.

7The communist country safeguard is set forth under section 406 of the
Trade Act of 1974.

8In the United States, the global safeguard is set forth in section 201 of
the Trade Act of 1974 and is sometimes referred to as the "escape clause"
or the "section 201 safeguard."

9GAO-05-296.

10Pub. L. No. 106-286, 114 Stat. 880.

11Petitioners may claim "critical circumstances" and seek that provisional
relief be provided within 65 days. 19 U.S.C. S: 2451(i).

Figure 1: China Safeguard Timeline

Sources: GAO analysis of information provided by USTR and ITC.

Note: The President, USTR, the House Committee on Ways and Means, and the
Senate Committee on Finance may also request an investigation. Time frames
vary if "critical circumstances" are involved.

U.S. Producers May File Petitions Claiming Market Disruption Due to
Chinese Imports

U.S. producers and certain other entities may file petitions to initiate
China safeguard investigations with ITC. These include trade associations,
firms, certified or recognized unions, or groups of workers that represent
an industry. The President, USTR, the Senate Committee on Finance, and the
House of Representatives' Committee on Ways and Means can also request
investigations.12

The petition must include certain information supporting a claim that
imports from China are causing market disruption to an industry. Petitions
must include, among other things, the following: product description,
import data, domestic production data, and data showing injury. Petitions
must also include information on all known producers in China and the type
of import relief sought.

The Role of ITC Is to Determine Market Disruption and Recommend a Remedy

ITC determines whether imports from China are causing market disruption to
U.S. producers and, if so, recommends a remedy to address it. Upon
receiving a petition, ITC initiates an investigation by publishing a
notice in the Federal Register and holding public hearings to afford
interested parties the opportunity to present information. ITC receives
information on both market disruption and potential remedies from parties
through written submission and oral testimony. ITC has 60 days to
determine whether the imports from China are causing-or threatening to
cause-market disruption to domestic producers.

More specifically, ITC must determine whether imports from China are
entering the United States in "such increased quantities or under such
conditions as to cause or threaten to cause market disruption" to domestic
producers. According to section 421, to determine that market disruption
exists ITC must make the following three findings:

o  	Imports of the subject product from China are increasing rapidly,
either absolutely or relatively.

o  	The domestic industry is materially injured or threatened with
material injury.

o  	Such rapidly increasing imports are a significant cause of the
material injury or threat of material injury.

12Id. S:S: 2451(b) and 2252(a).

If a majority of ITC commissioners determine that market disruption does
not exist, the case ends.13 After an affirmative determination, ITC must
propose a remedy. This could include the imposition of a duty, or an
additional duty, or another import restriction (such as a quota) necessary
to prevent or remedy the market disruption.

Within 20 days after making a determination of market disruption, ITC must
transmit a report to the President and USTR. The ITC report must include
the determination, the reasons for it, recommendations of proposed
remedies, and any dissenting or separate views of commissioners. The
report must also describe the short-and long-term effects that recommended
remedies are likely to have on the petitioning domestic industry, other
domestic industries, and consumers. In addition, the report must describe
the short-and long-term effects of not taking the recommended action on
the petitioning domestic industry, its workers, the communities where
production facilities of the industry are located, and on other domestic
industries.

The Role of USTR Is to Make a Recommendation to the President

If ITC renders an affirmative determination, USTR undertakes two parallel
efforts. First, USTR consults with China about ITC's finding and seeks to
reach an agreement that would prevent or remedy the market disruption.14
If the U.S. and Chinese governments do not reach agreement after 60 days
(or if the President determines that an agreement reached is not
addressing the market disruption), the United States may then apply a
safeguard.

Concurrently, USTR obtains and evaluates information from interested
parties on the appropriateness of ITC's or any other proposed remedy and
makes a recommendation to the President. Within 20 days after receiving
the ITC report, USTR issues a Federal Register notice to solicit comments
from the public (e.g., importers and consumers). USTR must hold a public
hearing if requested to do so. USTR evaluates the information it receives
and consults with the other agencies of the Trade Policy Staff Committee

13If the commissioners are equally divided with respect to injury, the
President can consider either finding (negative or affirmative) as the ITC
determination.

14There is some overlap between the ITC and USTR phases of the process.
The ITC has 60 days to determine whether there is market disruption. After
that it has 20 days to formulate a remedy to the market disruption found
to exist. USTR must request consultations within 5 days after receiving
the market disruption determination.

(TPSC).15 Within 55 days after receiving the ITC report, USTR must make a
recommendation to the President about what action, if any, to take to
prevent or remedy market disruption.

The Role of the President Is to Decide Whether Relief Is in the National
Interest

Under section 421 the President makes the final decision on the provision
of import relief. Within 15 days after receiving a USTR recommendation,
the President must decide whether and to what extent to provide relief.
Section 421 states: "the President shall provide import relief... unless
the President determines that provision of such relief is not in the
national economic interest of the United States or, in extraordinary
cases, that the taking of action... would cause serious harm to the
national security of the United States." Although the law does not define
"national economic interest," it further states that the President may
determine "that providing import relief is not in the national economic
interest of the United States only if [he] finds that the taking of such
action would have an adverse impact on the United States economy clearly
greater than the benefits of such action." Finally, section 421 requires
the President to publish his decision and the reasons for it in the
Federal Register.16

China Safeguard Modeled on Communist Country Safeguard

The China safeguard was modeled on the communist country safeguard. In
fact, according to its legislative history, it was intended to replace the
communist country safeguard for China since it would no longer apply once
China became a member of the WTO. As shown in table 1 below, the
safeguards share several important characteristics. Both safeguards are
limited in scope to imports from particular countries; while the former is
limited to imports from China, the latter is limited to imports from one
or more communist countries. They also share similar criteria with regard
to ITC market disruption determinations and identify the President as
final decision maker on whether to provide relief. In addition, both
safeguards have a 150-day determination period.

In contrast, the China safeguard is significantly different from the
global safeguard. The China safeguard is narrower in scope than the global

15The TPSC is the mechanism by which USTR consults with other agencies on
trade policy matters.

1619 U.S.C. S: 2451(l). Section 421 also authorizes the President to
modify, reduce, or terminate the safeguard relief that he imposed. On the
other hand, the President can also extend the effective period of the
safeguard action. Id. S: 2451(n) and (o).

safeguard; it can only be applied to imports from that one country,
whereas the global safeguard generally must be applied to all foreign
sources of a particular product. Also, the China safeguard's market
disruption standard is regarded to be easier to meet than the criteria for
determining injury due to imports under the global safeguard. 17
Furthermore, the standard for presidential action is also different under
the global safeguard as it places more emphasis on assisting the domestic
industries' efforts to adjust to international competition (including
worker adjustments), and sets forth a broader range of factors for the
President to consider in determining whether to provide relief. Finally,
the time frame for the China safeguard process is shorter than the global
safeguard.

17See S. Rep. No. 93-1299, at 212 (1974) and 146 Cong. Rec. 18,112 (2000)
(statement of Sen. Collins which included a September 7, 2000 letter from
then-U.S. Trade Representative Charlene Barshefsky to Sen. Collins).

     Table 1: Comparison of China, Communist Country, and Global Safeguards

             China safeguard (section   Communist country   Global safeguard  
                       421)             safeguard             (section 201)   
            effective in December 2001  (section 406)       enacted in 1974a  
                                        enacted in 1974     
    Scope       Imports from China      Imports from a      Imports from all  
                                        communist country    foreign sources  
                                                            substantial cause 
    Injury  significant cause of        significant cause   of serious injury 
standard material injury or          of material injury  or                
                  threat thereof         or threat thereof   threat thereof   

Presidential "...the President shall provide import "...the President must
provide "...the President shall take all

standard 
relief for such industry ...unless the import relief,
unless he determines appropriate and feasible action President determines
that provision of that relief is not in the national within his power
which the President such relief is not in the national economic interest."
determines will facilitate efforts by economic interest of the United
States the domestic industry to make a or, in extraordinary cases, would
cause positive adjustment to import serious harm to the national security
of competition and provide greater the United States." economic and social
benefits than

costs."

ITC statutory           80 days              3 months             180 days 
time frame                                                
USTR statutory          55 days                N/A                    N/Ab 
time frame                                                

                                       c

Presidential 15 days 75 days 60 days
statutory time frame

    The United States Has Never Applied the China Safeguard

Source: GAO.

aCongress amended the standard for presidential action for the global
safeguard in the Omnibus Trade and Competitiveness Act of 1988, Pub. L.
No. 100-418, 102 Stat. 1225.

bThe Trade Policy Staff Committee must advise the President; however, no
specific time frame is outlined in the statute.

cThe President has an additional 60 days to negotiate an orderly marketing
agreement, if necessary.

Note: Time frames vary if "critical circumstances" are involved.

N/A=Not applicable.

Between August 2002 and September 2005, the United States considered five
petitions from domestic producers to apply the China safeguard but it has
not provided relief. ITC made negative determinations on two petitions
and, in three other cases, found market disruption and recommended
restricting imports to remedy the situation, ITC is expected to make a
determination in a sixth case in early October 2005. In each of the three
cases where ITC found market disruption, USTR formulated a presidential
recommendation after evaluating various options. The President then
decided not to provide any import relief. The success rate for China
safeguard petitions is similar to communist country safeguard petitions,
but differs from that of global safeguard petitions.

U.S. Firms Filed Six Petitions

U.S. firms have filed six petitions for China safeguard relief since
section 421 was enacted (see fig. 2). The petitioners representing the
domestic industry ranged from one firm in two cases to seven firms and a
union in the most recent petition. The products involved are the
following:

o  pedestal actuators (for raising and lowering seats in mobility
scooters),

o  certain steel wire garment hangers,

o  brake drums and rotors,

o  ductile iron waterworks fittings (for municipal water systems),

o  uncovered innersprings used in mattresses, and

o  circular welded nonalloy steel pipes.

                  Figure 2: Dates of China Safeguard Petitions

             Source: GAO analysis of ITC Federal Register notices.

ITC Found Market ITC made negative determinations in two of five completed
China Disruption in Three of Five safeguard cases.18 In cases brought by
manufacturers of brake drums and Cases rotors and mattress innersprings,
ITC determined that Chinese imports

18ITC is expected to make a determination in the steel pipes case in early
October 2005.

had not disrupted the domestic market. More specifically, in the brake
drums and rotors case, ITC found that although imports from China were
increasing rapidly, the domestic industry was neither materially injured
nor threatened with material injury. In the mattress innerspring case, ITC
was divided on the reasons for making a negative determination. Three of
the commissioners determined that imports from China were not increasing
rapidly. The other three commissioners determined that the domestic
industry was not materially injured or threatened with material injury. In
both cases, ITC cited the industries' healthy profit margins and stable or
rising prices as evidence that neither industry was materially injured or
threatened with material injury.

In the remaining three cases (pedestal actuators, wire hangers, and
waterworks fittings), ITC found market disruption and recommended measures
to remedy it. In all three cases, ITC cited factors such as falling
production and employment in its determinations that the industry was
materially injured. Furthermore, ITC noted declines in the industries'
health that coincided with a surge in Chinese imports when they determined
that rapidly increasing imports from China were a significant cause of
material injury. In other words, Chinese imports caused market disruption
to the domestic industry. In deciding which import restriction to
recommend, ITC considered the conditions of competition in the domestic
industry (e.g., demand conditions, and import and domestic supply
conditions), as well as comments received from parties in the cases.

ITC recommended different import restrictions to remedy the market
disruption it found in each case. For example, as noted in table 2 below,
ITC found that a 3-year, declining tariff on wire hangers from China was
the most appropriate remedy in that case. In contrast, ITC recommended a
3-year quota in the pedestal actuator case because there was only one
supplier and one primary purchaser of pedestal actuators, and the
domestic-imported price differential was large. In addition, the ITC also
proposed that the President direct the Departments of Commerce and Labor
to provide expedited consideration of trade adjustment assistance
applications for workers in the wire hangers and waterworks fittings
industries.

       Table 2: Results of ITC China Safeguard Investigations (2002-2005)

Number of ITC market disruption Product name firms Value of imports vote
ITC majority remedy recommendation

Brake drums and rotors  3-firm coalition  Brake drums:   4-0 negative N/A 
                                             $13,090,000                 
                                             Brake rotors:               
                                             $166,228,000                
                                             (2002)                      

     Mattress    4 $5,894,000   6-0 negative                N/A               
innersprings                                
                     (2003)                    
                 3  $8,814,000 5-0 affirmative 3-year duty in addition to the 
Wire hangers         (2001)                                   current duty 
                                               (25% in year 1; 20% in year 2; 
                                                                      and 15% 
                                                        in year 3).           

                                                           3-year tariff-rate 
Waterworks fittings 1 $22,656,000 6-0 affirmative    quota, in addition to 
                                                                          the 
                           (2002)                        current rate of duty 
                                                         (50% duty on imports 
                                                      above 14,324 short tons 
                                                               in year 1; 40% 
                                                      tariff on imports above 
                                                            15,398 short tons 
                                                     in year 2; and 30%       
                                                     tariff on imports        
                                                     above 16,553 short tons  
                                                     in year 3).              

Pedestal actuators 1 Number not publicly 3-2 affirmative 3-year
quantitative restriction (5,626 units available in year 1; 6,470 units in
year 2; and 7,440 units in year 3).

           Sources: ITC staff reports and views of the commissioners.

         Note: Value of imports in last full year before investigation.

USTR Consulted with Chinese, Sought Comments, and Considered Multiple
Options

USTR consulted with the Chinese government, solicited and obtained
comments from a variety of sources, and analyzed the advantages and
disadvantages of the ITC remedies and other options in formulating its
recommendations to the President.

After receiving each of the three affirmative market disruption
determinations from ITC, USTR requested consultations with the Chinese
government. USTR notified the WTO Committee on Safeguards of the
consultation requests. Representatives of the two governments met but did
not reach any agreements to address the market disruption found by ITC,
according to USTR officials. During the 60-day consultation period, USTR
continued to gather information from interested parties about any
potential remedies.

USTR, in conjunction with other agencies on the TPSC, held a 1-day public
hearing for each of the cases and obtained views on what, if any, type of
import restriction was in the public interest. The parties also had the
opportunity to provide written comments. In addition to the ITC-

recommended remedies, USTR sought comment on alternate remedies and on not
providing relief. The hearings included both the domestic petitioners and
Chinese respondents, as well as other interested parties such as importers
and downstream users. For example, the wire hanger hearing included
testimony from a hanger distributor. In the pedestal actuator and wire
hanger cases, a representative from the Chinese government testified that
applying the safeguard would damage U.S.-China bilateral economic
relations, in addition to raising procedural and substantive concerns.19
USTR officials said that certain information relevant to the effectiveness
of potential remedies surfaced at these hearings, that did not surface in
the ITC proceedings.

After the hearings, the USTR staff weighed the pros and cons of the
various courses of action. USTR considered ITC's analysis, as well as the
testimony and written submissions provided by interested parties, and
sought comments from other TPSC members. According to detailed briefings
from USTR officials, in each case USTR considered the ITCrecommended
remedy among other remedies presented, as well as the option of having no
remedy. USTR staff worked with the U.S. Trade Representative throughout
the proceedings. USTR staff then drafted a recommendation in a memorandum
to the U.S. Trade Representative, who assessed the various options. The
Trade Representative then made a recommendation in a memorandum to the
President.

printed in the Federal Register and are summarized in table 3. The
President's decisions did not cite national security concerns as a reason
in any of the three cases.

19For example, in both cases the Chinese government argued that any remedy
imposed would be ineffective because it would not help the petitioners and
would harm U.S. consumers.

20In the wire hangers case, the President directed the Secretary of
Commerce and the Secretary of Labor to expedite consideration of any Trade
Adjustment Assistance applications received from domestic hanger producers
or their workers and to provide such other requested assistance or relief
as they deemed appropriate, consistent with their statutory mandate.

President Decided Not to The President declined to provide relief in all
three cases.20 He found that

Apply the China Safeguard 	imposing remedies such as duties and quotas
would not be in the national economic interest. The President's reasons
for not providing relief were

Table 3: Reasons Cited by the President in Decisions Not to Provide Import
                                     Relief

Case Reasons by the President

Pedestal actuators 	Imposing the ITC's recommended quota would not benefit
the domestic producing industry and would cause imports to shift from
China to other offshore sources.

The cost of the quota to downstream users and consumers would
substantially outweigh the benefit to producer's income.

Relief would negatively impact workers in downstream industries, which
have a significantly larger number of workers than the domestic pedestal
actuator industry.

Relief would negatively affect disabled and elderly purchasers of mobility
scooters and electric wheelchairs.

Wire hangers Imposing additional tariffs on Chinese imports would affect
domestic producers unevenly.

Domestic producers have already begun to pursue adjustment strategies.

Domestic producers have a dominant share of the market and thus have the
opportunity to adjust to competition from Chinese imports even without
import relief.

There is a strong possibility that if additional tariffs were imposed,
production would shift to third countries.

Additional tariffs would have an uneven impact on domestic distributors of
wire hangers.

Additional tariffs would likely have a negative effect on small
dry-cleaning businesses.

Waterworks fittings 	A remedy would be ineffective because imports from
third countries would likely replace curtailed Chinese imports.

Import relief would cost U.S. consumers substantially more than the
increased income realized by domestic producers.

a

Domestic producers enjoy a strong competitive position in the U.S. market.
In 2002 and 2003, imports of this product have been relatively stable in
volume terms and declined slightly

a

in value terms.

Source: GAO summaries of presidential determinations of January 17, 2003,
April 25, 2003, and March 3, 2004.

aThe President noted that this reason was not necessary in reaching his
determination.

China and Communist Country Safeguard Outcomes Differ from Global
Safeguard

The final outcomes of China safeguard cases are similar to those of
communist country21 safeguard cases but different than global safeguard
cases. As shown in table 4, domestic industries have sought relief under
the China and communist country safeguards far less frequently than they
have sought relief under the global safeguard. Overall, petitioners have
been denied relief in almost all China and communist country safeguard
cases but have been granted import relief in about one quarter of global
safeguard cases. Of those cases where ITC found the industry was injured
by imports, the President denied relief in all but one of the China and
communist country safeguard cases. Conversely, the President granted

21There is no statutory list of communist countries. Petitioners have
brought cases against the following countries: Romania, China, USSR,
Poland, and East Germany.

relief in about half of the global safeguard cases where the ITC found
injury. Moreover, since Congress amended the global safeguard's standard
for presidential action in the 1988 Trade Act, the President has always
provided relief when ITC found injury.

Table 4: Outcomes of Completed China, Communist Country, and Global
Safeguard Cases (as of September 2005)

Communist country China safeguard safeguarda Global safeguardb

Number of cases
since enacted 5 13c

                     ITC determination                           
                        o  Affirmative      3            4                 34 
                         o  Tie vote d      0            1                  6 
                           o  Negative      2            7                 32 
                         o  Terminated      0            1                  1 

                    Presidential decision                        
                         on import relief                        
                              o  Provided     0          1e               19f 
                          o  Not provided     3          4g      

Source: GAO analysis of ITC import injury investigation statistics and
presidential determinations.

aSince section 406 was modified by the Omnibus Trade and Competitiveness
Act of 1988, there have been only two petitions. One case was terminated;
in the other, the ITC made an affirmative injury determination and the
President denied relief.

bSince section 201 was modified by the Trade Act of 1988, there have been
13 petitions.

cChina has been the target of 7 out of the 13 section 406 cases brought by
petitioners.

dIn the case of a tie vote, the President may accept either an affirmative
or negative determination.

eThe President directed the U.S. Trade Representative to negotiate an
orderly marketing agreement with China.

fWith respect to the six tie votes referred to him under the global
safeguard, the President provided import relief in one case.

gIn the one section 406 case in which the ITC commissioners were evenly
divided, the President took no action to restrict imports.

The President's decisions not to impose relief in the three China
safeguard cases in which ITC found market disruption have been criticized.
Nevertheless, the President has broad discretionary authority under
section 421 to consider U.S. national economic and security interests when
weighing the facts and circumstances particular to each case. This broad
discretion was upheld by the U.S. Court of International Trade. This,

    The President Has Exercised His Broad Discretion in Deciding Not to Apply
    Relief

together with the fact that the President considers factors that ITC does
not, including consumer cost and the potential for imports from other
countries, allows him to reject relief even when it has been recommended
by ITC.

Presidential Decisions Not to Apply Safeguards Have Generated Controversy

Several different groups have criticized the President's decisions not to
apply China safeguard relief. For example, company officials and trade
lawyers who were unsuccessful in obtaining relief criticized the
President's decisions in several congressional hearings. As we discuss
later, one company subsequently filed a lawsuit against the President
claiming he exceeded his authority in rejecting ITC's recommended remedy.

In July 2005, legislation was introduced in Congress to change the
President's discretion.22 Some congressmen expressed disapproval over the
President's decisions based on the fact that ITC made unanimous,
affirmative determinations in two of these cases. One representative in
particular argued that the President was not following the intent of the
law in rejecting the safeguard actions. Also, 21 other House members wrote
the President stating their belief that Congress had carefully limited the
President's discretion to deny relief. In this regard, the legislative
history of section 421 shows that the House Committee on Ways and Means
intended a presumption in favor of relief. The House report stated:

The bill establishes clear standards for the application of Presidential
discretion in providing relief to injured industries and workers. If the
ITC makes an affirmative determination on market disruption, there would
be a presumption in favor of providing relief. That presumption can be
overcome only if the President finds that providing relief would have an
adverse impact on the United States economy clearly greater than the
benefits of such action, or, in extraordinary cases, that such action
would cause serious

                                       23

harm to the national security of the United States.

This legislative history, together with the China safeguard's shorter time
frames and lesser injury standard, and other procedural characteristics,
may have created an expectation that the likelihood for relief under the
China safeguard was going to be greater compared with the global
safeguard.

22H.R. 3306, 109 Cong., 1st Sess. (2005). 23H.R. Rep. No. 106-632, at 18
(2000).

Similarly, the U.S.-China Economic and Security Review Commission, a body
established by Congress to monitor and investigate the security and
economic implications of the bilateral economic relationship between the
United States and China, held hearings and criticized the administration
for failing to apply the safeguard after an affirmative ITC injury
determination. In March 2005, this commission recommended that Congress
consider amending the China safeguard to either eliminate the President's
discretion or limit it to the consideration of noneconomic national
security factors after an affirmative ITC finding.

In addition, the lack of any positive decisions by the President in these
cases may have discouraged other U.S. producers from seeking relief under
the China safeguard. Several trade lawyers representing domestic U.S.
producers with whom we spoke told us about their reluctance to bring
additional China safeguard cases in the future because they thought that
the President would reject them based on political considerations. The
U.S.-China Economic Security Review Commission expressed similar concern
that repeated presidential refusal to apply the safeguard had undermined
the instrument's efficacy. Indeed, until August 2005, when producers filed
a petition on steel pipe, no China safeguard petition had been filed since
March 2004, when the President rejected an ITC recommendation to provide
relief from imports of Chinese ductile iron waterworks fittings.

Court Has Found that the President Has Broad Statutory Discretion

Despite criticisms, the President's discretion under the China safeguard
is quite broad. The President must provide relief unless he finds that it
is not in the national economic or security interest. With regard to the
former, the President is authorized to deny relief when he finds that the
relief would have an adverse impact on the United States economy clearly
greater than the benefits.

In June 2004, the U.S. Court of International Trade affirmed the
President's broad discretionary authority in a case brought by the
petitioner in the first China product safeguard case.24 In that case,
Motion Systems Corp. contended that the President had exceeded his
authority under section 421 by not providing relief. In particular, Motion
Systems argued that the President was required to quantify the adverse
impact of providing relief and demonstrate that the adverse impact was
clearly greater than the

24Motion Systems Corp. v. Bush, 342 F. Supp. 2d 1247 (C.I.T. 2004).

benefits that the relief would provide to the domestic industry. In this
regard, Motion Systems maintained that section 421 created a presumption
of relief once ITC made an affirmative determination of market
disruption.25

In affirming the President's decision,26 the Court held that the President
had not exceeded his authority and said the law granted him "considerable
discretion."27 The Court found that section 421 made no reference to
evidence or a burden of proof that the President must satisfy to support
his conclusion that the imposition of a safeguard would have an adverse
impact on the U.S. economy clearly greater than its benefits.28 The Court
also noted that the President was not prohibited from considering
political factors in making a finding about the adverse impact on the U.S.
economy, including trade relations between the United States and China.29
Finally, the Court did not specifically comment on the presumption of
relief issue.

President Considers a Broader Range of Factors than ITC

While ITC makes remedy recommendations that would alleviate market
disruption, the President considers a broader range of factors than ITC in
determining whether to apply China safeguard relief. Specifically, under
section 421, ITC focuses on the domestic industry involved in the
proceeding, both in the context of making injury determinations and
recommendations for relief. For example, among the factors ITC considered
in determining material injury were the idling of U.S. production
facilities and the ability of firms within the industry to produce at
reasonable profit, wage, and employment levels.30 Thus, ITC did not

25In making this argument Motion Systems relied, in part, on the language
in the House Report, quoted above in the text.

26An appeal of the decision is pending before the Court of Appeals for the
Federal Circuit.

27The Court's analysis focused on the standard of review the Court should
apply in reviewing presidential actions under U.S. trade statutes. 342
F.Supp. at 1258-67.

28In this regard, the Court disagreed that the "clearly greater" language
requires that the evidence supporting the President's denial must be
"clear and convincing," "beyond a reasonable doubt," or
"more-than-substantial." Id.1261-62.

29Nevertheless, the Court found that neither the record before it, nor the
text of the President's decision, established that trade relations between
the United States and China were a factor in the President's decision. Id.
at 1265-66.

30The ITC commissioners have noted in their determinations that they do
not consider any one factor dispositive. E.g., Pedestal Actuators from
China, Inv. No. TA-421-1, USITC Pub. 3557 at 13 (Nov. 2002).

weigh the interests of other groups such as consumers and downstream
industries against potential benefits to the domestic industry when
developing its recommendations for the President to consider. 31
Nevertheless, ITC reports on the potential economic effect of its
recommended remedies, as described earlier. However, section 421, does not
require ITC to consider these broad economic effects when developing its
recommendations.

In contrast, as discussed above, section 421 authorizes the President to
consider overall U.S. economic and security interests in deciding whether
to impose China safeguard relief.32 In each of the three cases where ITC
found injury and recommended a remedy, the President found, among other
things, that relief would have an adverse impact on other participants in
the economy. The President determined that relief would carry substantial
costs for consumers or downstream users of the products involved.
Specifically, the President cited the increased costs to aged and disabled
consumers of mobility scooters as a reason for not providing relief in the
pedestal actuator case. In the wire hangers case, the President stated
that relief would have an uneven impact on wire hanger distributors and
impose increased costs on dry cleaning companies. Finally, in the
waterworks fittings case, the President found that the costs to consumers
would substantially outweigh producer income benefits.

The President's decisions also took into account the unique facts and
circumstances in each case. For example, in the pedestal actuator case
there was only one petitioner seeking relief and one dominant purchaser.
In the wire hanger case, domestic producers had different business models
that affected whether a remedy would benefit or disadvantage them. In
addition, the U.S. Trade Representative noted in a March 2004
congressional hearing that, while not necessary to the President's
decision, in the waterworks fittings case the petitioner faced serious
problems besides competing Chinese imports.33 Although the President did

31Furthermore, ITC's recommended remedies only address imports from China
that caused market disruption.

32In making its required recommendations to the President about what, if
any, action to take to prevent or remedy market disruption, USTR informed
us that it both considers a broader range of information about the
domestic industry involved than ITC, as well as broader national economic
factors.

33President Bush's Trade Agenda: Hearing Before the House Comm. on Ways
and Means, 108th Cong. 43 (2004)(statement of Robert Zoellick, United
States Trade Representative).

not provide import relief in these cases, he stated that he remains
committed to applying the China safeguard when circumstances warrant.

President Cites Third Country Imports When Denying Relief

The President has considered whether relief would benefit the producers
involved in every case.34 In his decisions denying relief the President
stated that imposing a safeguard would have limited benefits. One factor
that the President has cited in all three cases is that applying a
safeguard would lead to production being shifted from China to other
countries rather than to U.S. producers. In the waterworks fittings case,
the President specifically identified other current suppliers to the U.S.
market such as India, Brazil, Korea, and Mexico.

Similarly, in all but one communist country safeguard determinations, the
President found, among other things, that providing relief would have
resulted in imports shifting from the communist country involved to other
offshore sources. With only one exception, the President has never
approved a remedy under the communist country safeguard. In contrast,
under the global safeguard, imports from other countries generally cannot
diminish the potential benefits of import relief.35 Since the global
safeguard statute was enacted in 1974, the President applied relief in
approximately half of the cases in which ITC has made a positive injury
determination. Moreover, since it was substantially amended in 1988, the
President has provided relief in every such global safeguard case. It is
not possible to identify all the factors that contribute to such opposite
results among the different safeguards. However, one consistent factor has
been that the China and communist country safeguards, respectively, are
limited in scope to products from one or a few countries; this allows
other foreign sources to gain market share of the product and reduce the
potential benefit of the safeguard to the domestic producers.

34A USTR official testified in April 2005 that the extent to which relief
would benefit the domestic producers was "first and foremost" among the
economic factors that the administration examines in deciding whether to
impose relief.

35In global safeguards, the United States excludes developing country
imports that fall below a threshold level, and under varying circumstances
may also exclude imports from countries with which it has entered into a
free trade agreement, such as Canada and Mexico.

    Agency Comments
    and Our Evaluation

We provided ITC and USTR a draft of this report for their review and
comment. Both agencies chose to provide technical comments from their
staff. USTR staff cautioned against drawing overall conclusions about the
use of the China safeguard given the small number of cases considered thus
far. Additionally, both USTR and ITC staff suggested we clarify our
characterizations of section 421's legislative history and of the Motion
Systems Corp. v. Bush lawsuit. We modified the report in response to their
suggestions. USTR and ITC also provided other suggestions to make the
report more accurate and clear, which we incorporated as appropriate.

We are sending copies of this report to ITC and USTR, appropriate
congressional committees, and other interested parties. We will also make
copies available to others upon request. In addition, the report will be
available at no charge on the GAO Web site at http://www.gao.gov.

If you or any of your staff have any questions about this report, please
contact me at (202) 512-4347 or [email protected]. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this report. GAO staff who made major contributions to this
report are listed in appendix II.

Loren Yager
Director, International Affairs and Trade

  Appendix I: Objectives, Scope, and Methodology

To address our objectives, we reviewed U.S. laws and procedures as well as
relevant World Trade Organization (WTO) agreements and China's accession
agreement. To ensure our understanding of relevant laws, procedures, and
agreements, we spoke with officials from the Office of the United States
Trade Representative (USTR) and the International Trade Commission (ITC).
In addition, we interviewed officials from the WTO and officials from the
government of China. Finally, we spoke with law firms that had direct
experience in China safeguard cases, as well as law firms with broad
experience in trade actions against China.

To describe how the safeguard has been applied thus far, we examined each
phase of the process. For the ITC phase, we reviewed and analyzed each of
the determinations the ITC commissioners issued during the five China
safeguard injury investigations completed as of July 31, 2005, to
understand the rationale behind them. We further obtained private sector
views of the ITC process by speaking with law firms that had represented
petitioners and/or respondents in each of the five China safeguard injury
investigations. For the USTR phase of the process, we spoke with law firms
that had represented petitioners and/or respondents that participated in
each of the three China safeguard remedy investigations and reviewed the
transcripts of all three USTR hearings. USTR neither made the documents
related to their analyses nor their recommendations available to us.
Instead, we relied on detailed briefings from USTR officials on the nature
and substance of their deliberations culminating in a recommendation to
the President. For the presidential phase of the process, we reviewed each
of the President's three determinations made under the China safeguard. To
compare the use of the China safeguard with the communist country and
global safeguards, we reviewed ITC import injury investigation statistics
and presidential determinations in the China, communist country, and
global safeguard cases. We found the ITC injury statistics to be
sufficiently reliable for presenting and contrasting ITC's final
disposition of cases brought under these statutes.

To examine the issues related to the application of presidential
discretion, we analyzed the reasons the President gave in his decisions
not to provide import relief. Additionally, we reviewed the legislative
history of the China safeguard and written and oral testimony before
Congress and the U.S.-China Economic and Security Review Commission. We
reviewed the Court of International Trade's decision in the Motion Systems
case against the government and the submissions of parties to the case.
Finally, we

Appendix I: Objectives, Scope, and Methodology

analyzed the presidential determinations made under the communist country
and global safeguards.1

1We confined our analysis of presidential determinations under section 201
of the Trade Act of 1974 to those made after 1988 when Congress
substantially amended the law.

  Appendix II: GAO Contact and Staff Acknowledgments

GAO Contact Loren Yager (202) 512-4347

Staff 	In addition to the individual named above, Adam R. Cowles, R.
Gifford Howland, Michael McAtee, and Richard Seldin made significant

    Acknowledgments contributions to this report.

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