Chinese Pencil Anti-Dumping Duties Revisted

Bloomberg.com published an article on June 27th covering the pencil industry titled "New Jersey Pencil Maker Cedes No. 2's to China". While the title refers specifically to General Pencil Company and quotes it's owner and CEO Jim Weissenborn, the article has a broader focus on U.S. Anti-Dumping as it applies to the pencil industry as a whole. Anti-dumping duties and the Chinese pencil industry is a topic I've commented on in past posts over the years: Pencil Anti Dumping Duties: Primer and Pencil Anti Dumping Duties: Changes in the Air.

The article was prompted by the June 13th decision by the U.S. Trade Commission to extend for another 5 years the countervailing anti-dumping duties against Chinese pencils. In addition to Weissenborn it includes includes quotes from other industry representatives in support of the duties as well as several economists who claim that such duties do little to protect U.S. producers as production just gets shifted to other low cost countries. The article provides several statistics regarding the U.S. Pencil industry gleaned from the associated filings demonstrating that despite the duties (which have been in place about 15-20 years now) imports of Chinese pencils to the US have increased five fold since 1996 with statements that US producers accounted for just 14% of US pencil sales in 2008.

I agree generally with the statistical trends and the views of the economists that the long term impacts of anti-dumping duties don't necessarily protect U.S. Producers from the challenges of global competition. ONe can always nit-pic specific figures and percentages. The fact is in the end you still have to compete on your own innovation, manufacturing and/or purchasing efficiency and ultimately find your proper niche in the market. A point Jim Weissenborn speaks to well in the article with respect to General's market focus.

However, one aspect that is not addressed in the authors argument is that a large portion of the Chinese pencils coming into the US are in fact not paying significant anti-dumping duties relative to the China wide rate of 114%. This is because there is a process of reviewing and applying for producer specific anti-dumping duty rate adjustments with the Commerce Department. As a result the largest Chinese exporters to the U.S. are only subject to anti-dumping duty rates in the range of 1-5%, not 114%. This rate adjustment review process is an expensive and complicated legal and accounting process that makes sense for only the largest suppliers. This itself introduces further inefficiencies and opportunities for gaming the system to avoid duties, including shipping pencils from other suppliers via the favored duties of these larger entities a challenging issue to police. Eliminating such special rate reduction applications might make the system simpler in total. However, it still does not address the fact that such a change would likely spur an increased wave of trans-shipment of Chinese pencils to the US via other countries, an illegal practice, though challenging to police and administer.

Regardless of such inefficiencies in the system many Pencil industry insiders believe the duties are warranted given the "hidden subsidies" received by Chinese producers. One example is the VAT rebates received from the Chinese government on finished pencils exported from China. These are not applicable to slats and other components exported, thus favoring finished production in China itself. Another form of subsidy has been domestic wood costs that has been artificially low due to over harvesting over many years. In fact we are now seeing that China is experiencing dramatic increases in wood costs for all sorts of industries as the Government is curtailing harvest levels on it's forests through out the country. This is currently driving a cycle of inflationary price increases in raw material, slats and ultimate Chinese pencil prices. A subject I'll be addressing in a future post sometime in the next month, but the point here is that Chinese wood supply has been at relative lower costs than other substitute woods for our industry many years and would have been higher if forests were managed more effectively on a sustained. Fortunately the Chinese now seem to be working to correct this, though this has not dimmed their appetite for wood.

In the end the anti-dumping duties have assisted the US industry from being totally decimated by Chinese imports, even though many US Producers have had to become involved in Chinese production or imported pencil supply themselves to competitively serve some share of their US sales. Small private family owned producers such as General's and Musgrave mentioned in the Bloomberg article remain in existence today in part through the benefit of such protective duties, but just as importantly through their own dedication and commitment to producing and marketing quality products. offering superior customer service and valuing the traditions and knowledge developed through several generations involvement in the industry and the contributions to the communities in which they live. Strictly economic arguments on the subject of the good and evil of protective duties to society rarely address these social benefits.