Trade spat emerges after manufacturers demand protection from Chinese imports Last month, United States President George W. Bush won a war, dispatched an envoy to Beijing to deal with yet another North Korean nuclear crisis and signalled his intention to reappoint Alan Greenspan as head of the Federal Reserve. He also stared down America's clothes hanger industry, which was demanding protection from an alleged surge in Chinese imports. The industry petition, filed through the US International Trade Commission (ITC) under Section 421 of the Trade Act, was only the second of its kind and demonstrated that China's accession to the World Trade Organisation (WTO) had not put an end to the Sino-US trade spats that punctuated the 1990s. It had merely shifted them to different fields of battle. Section 421 is one of these key new battlegrounds. Stemming from a surprisingly audacious concession secured by the US in its bilateral WTO accession negotiations with China, the so-called 'safeguard mechanism' allows America to unilaterally raise tariffs or impose quotas on Chinese goods that the ITC finds are 'being imported into the US in such increased quantities or under such concessions as to cause market disruption to domestic producers'. Unlike anti-dumping cases, where US industry must prove that Chinese goods are being sold at below-cost pricing, under Section 421 increased volumes alone are sufficient to trigger sanctions, even if in doing so US consumers are denied access to higher-quality, lower-cost goods. 'I had no idea there was a US hanger industry. I guess I had no idea where hangers came from,' recalled Hamilton Loeb, Washington-based partner with Paul Hastings, the law firm that successfully defended China's clothes hanger industry in the action. But as Mr Loeb was to discover in a very short period of time, America does indeed have a clothes hanger manufacturing industry, dominated by six major producers with about 1,200 workers and factories in places such as Palm Harbor, Florida, Leeds, Alabama, and South Hackensack, New Jersey. They manufacture approximately 3.4 billion hangers a year, and their principal customers are dry cleaning businesses and uniform rental companies across the country. Many are second- or third-generation family-owned firms, and they believe their businesses are under threat from Chinese imports. 'Like my father and his father before him, I would like to see my son running the business sometime in the future. I hope that will still be possible,' M&B Metal Products Company president Milton Magnus said last week in testimony before a US congressional subcommittee. 'I have been in the garment hanger business for over 28 years, and I have never seen anything like the Chinese pricing. 'They aren't just a few percentage points below our prices - they are 20, 30 and even 50 per cent below. When it comes to serving the US market, we have found that even our Mexican hangers cannot compete with the underselling by Chinese hangers.' The first shot in the great Sino-US clothes hanger war was fired on November 27 last year by CHC Industries, the biggest player in the industry, and two other US firms - Mr Magnus' M&B Metal Products and United Wire Hanger Corp. In their filing with the ITC, they requested that a 1.85 US cent tariff be charged on each imported hanger for a period of five years. With the average cost of a hanger in the US between three and four US cents, the proposed tariff would have been a serious blow to Chinese exporters. Five years is also a long period of time considering that Section 421 remedies are supposed to be 'temporary' and designed to give affected US industries a bit of 'breathing room'. The filing started the clock on what Mr Loeb describes as 'an incredibly fast track - the fastest in all of trade law by any measure'. Upon receipt of a complaint, 'petitioners' (Section 421-speak for plaintiffs) and 'respondents' (defendants) have 30 days to prepare for an ITC hearing. The ITC then has another month to issue a recommendation, which is passed to the White House for final approval. In the course of its extremely detailed investigation, petitioners and respondents are asked to submit sensitive market and strategic information, which the ITC pledges to keep confidential and later destroy. Petitioners have all the time they want to collate data, line up experts and then spring their filing. But unsuspecting respondents half-a-world away and their lawyers have little time to prepare. And few Chinese exporters are inclined to provide such sensitive information to a US government body they have never heard of. In the case of the clothes hanger war, however, there was an important wrinkle: one of the companies lined up against the petition - Laidlaw - was a major American manufacturer. Laidlaw was opposed to the Section 421 petition because of a commercial relationship it has with a Chinese company, Shanghai Wells. Unlike its competitors, who have stuck to a largely domestic manufacturing strategy, Laidlaw buys hangers from - and sells chemicals to - Shanghai Wells. With a major US manufacturer's business at risk, respondents were able to react more quickly, and also argue that the petition would damage the interests of at least one US corporation rather than just Chinese parties. Mr Loeb and Paul Hastings were engaged by the Ministry of Commerce in Beijing to represent not just Shanghai Wells, but the entire Chinese clothes hanger industry. Besides the damage to Laidlaw, respondents argued that a tariff on Chinese hangers would force dry cleaners across the US to either absorb the extra cost or pass it on to their customers. More broadly, Mr Loeb argued that the commercial relationship between Laidlaw and Shanghai Wells was precisely the type of economic activity that China's entry into the WTO was supposed to encourage. 'It is a classic model of what everyone wanted to happen,' he said, adding that in this case, China was exporting low-value products (clothes hangers) and importing higher value ones (chemicals). As Mr Loeb noted: 'Hangers are one of the lowest value industrial steel commodities you can imagine.' Nevertheless, round one went to CHC Industries, M&B Metal Products and United Wire Hanger. In an exhaustive 47-page finding that contains just about every fact and figure of relevance to the 'steel wire garment hanger' industry, the ITC noted that hanger imports from China had increased from 28.8 million units and 0.7 per cent of domestic production in 1997 to 405.7 million units and 12.9 per cent over the first nine months of last year. The reasons for this were simple: Chinese hangers were cheaper - and better. As the ITC found: 'Of those [buyers] indicating a quality difference, most preferred the quality of Chinese hangers.' Still, in February the ITC endorsed a three-year tariff hike: 25 per cent in the first year, 20 per cent in the second and 15 per cent in the third. This recommendation was forwarded to the White House. The ITC's recommendation thus delivered, petitioners and respondents turned their attention to the president's economic and trade advisers, who - as Mr Loeb put it - received an unexpected tutorial in 'the economics of the hanger trade'. There was a real war on, of course, so it took a few months for the White House to wade into another one over clothes hangers. 'With all that was going on in April it seemed a little out of proportion that something like this should get all the way to the president,' said Mr Loeb. 'But my understanding is that in this case it did.' The White House rejected the ITC's recommendation, citing 'an uneven impact on domestic distributors of wire hangers' such as Laidlaw, 'a negative effect on the thousands of small, family-owned dry-cleaning businesses across the United States' and the fact that 'domestic producers still account for over 85 per cent of the US wire hanger market'. However, two other unstated considerations appear to have weighed just as heavily on the White House. First was the fear of setting a precedent - if President Bush was prepared to protect as low-value an industry as clothes hanger manufacturing, no other business lobby would hesitate to petition for relief under Section 421. Second was the prospect of getting the Chinese government bent out of shape. 'I underscore that the decision in this case will not and cannot be viewed in isolation,' said Liu Danyang, a Ministry of Commerce official, in a hearing before the Office of the United States Trade Representative on April 1. 'A decision to impose a remedy will have consequences for bilateral and multilateral issues that go well beyond wire hangers.' With China off the hook, that left the original petitioners feeling like they had been hung out to dry. 'Our industry did not ask for a special favour or handout by filing our case under Section 421,' complained a bitter Mr Magnus. 'We asked only for the relief to which we were entitled under a law to which the Chinese themselves agreed.'