Economics & Research Blog
A Perspective on the Paper Tariff
By Dr. Joe Webb
Published: April 20, 2007
Last month, the Commerce Department placed tariffs on coated paper from China. Tariffs have a history of being short-sighted and counterproductive. In reading the book The Emerging Markets Century by Antoine van Agtmael, there was a profile of the Mexican cement company CEMEX. He explains how, because of tariffs and a chain of unintended consequences, it grew to be the largest manufacturer of cement in the United States, with manufacturing plants around the world. The story is quite fascinating. The following excerpt is reproduced with the permission of the author.
THE ARTICLE - Printed with permission
HOW AN ANTI-DUMPING SUIT TRANSFORMED CEMEX INTO A GLOBAL PRODUCER
CEMEX’s Cortez-like “reconquest” of North America began with a serious setback. In 1989, eight local cement companies in the American Southwest joined two unions to form the Ad-Hoc Committee of AZ-NM-TX-FL [Arizona, New Mexico, Texas, Florida] Producers of Gray Portland Cement, a pressure group spearheaded by Southdown, the largest cement producer in the United States. Among the Ad-Hoc Committee’s lengthy litany of complaints was that soaring imports of Mexican cement to the southwest region – characterized as “unfair foreign competition” – had forced seven cement plants in the southern region to shut their doors. Petitioners alleged that dumping by low-cost Mexican producers had depressed the price of cement in the United States by more than 50 percent. “Our investigation to date convinces us that the Mexicans’ success in U.S. markets is due to dumping and not to any other factor. We should not have to cede U.S. markets and U.S. jobs to unfairly priced imports from Mexico. If we lose out to fair competition from Mexico, so be it!” declared Southdown CEO Clarence Comer. The success of his suit was – some cynical observers surmised – not entirely unconnected to the firm’s contribution to George H. W. Bush’s 1988 presidential campaign. In November 1989, the International Trade Commission (ITC), an arm of the U.S. Department of Commerce, found in favor of the petitioners’ charges, leaving Zambrano steaming, then scheming. “It was the only time in my job I ever felt furious enough to cry,” Zambrano confessed to me years later. Yet CEMEX’s nuanced reaction to the threat of federal litigation reflected its growing sophistication as a global competitor. It immediately hired a raft of top-notch legal and media advisors in the United States to explain its position in greater depth than bold headlines and cheap rhetoric. The Wall Street Journal and other media outlets weighed in on CEMEX’s side. While legally contending that the ITC had virtually ignored CEMEX’s greater costs in importing cement into the United States, CEMEX viewed the anti-dumping charges as simply an expedient way to stifle expansion there. Having consolidated as much as possible in Mexico, Zambrano considered expansion into the nearest viable market – the U.S. – as critical to the firm’s survival. But after the International Trade Commission imposed anti-dumping duties of 58 percent on al Mexican cement imports, the Mexican government appealed to a GATT arbitration panel, which ruled in its favor, finding that the tariffs imposed violated global international trade accords. An odd loophole in the GATT agreement permitted the United States to unilaterally reject the arbitrator’s ruling and maintain the 58 percent “countervailing duties.” One obvious way to circumvent the anti-dumping ruling would be for CEMEX to continue to import cement into the United States from third parties based in nations other than Mexico -- even if those third parties were owned by CEMEX. As a major trader as well as producer of cement, Zambrano simply ramped up imports into the United States from operations in other countries. He routed many tons of cheap Chinese cement through CEMEX’s own network of terminals on the U.S. West Coast. Encountering this regulatory roadblock in the United States caused the firm to reconceive its international expansion strategy, and ultimately fashion itself into a stronger global competitor. As Hector Medina, executive vice president of planning and finance put it: “The anti-dumping ruling made us realize that the U.S. was not the whole world.” He flatly described the anti-dumping suit as “a blessing in disguise,” because it forced CEMEX to “play with the adults.”
SHOOTING YOURSELF IN THE FOOT
Let’s take a moment to analyze the Phyrric victory achieved by the anti-dumping suit. Two decades ago, the United States imported one out of ten tons of cement. Today, imports account for one out of four tons of cement. As for CEMEX, it (along with a few other Mexican cement producers) exported five million tons of cement to the United States from Mexico ten years ago. Today, the U.S. continues to import the same five million tons of cement from CEMEX, nearly one quarter of its total cement imports, but less than two million tons originate in Mexico. In an interview with Cement Americas in July 2002, Gilberto Perez, CEMEX’s president of U.S. operations, defiantly maintained, “We haven’t lost market share because of the dumping suit.” Instead, CEMEX, simply acquired companies in Venezuela, the Caribbean, and elsewhere that now do the majority of exporting to the United States. Today, in part as a result of the unintended consequences of the anti-dumping suit, CEMEX has transformed itself into the largest cement producer in the United States. As for Southdown, the Texas-based company that initiated the anti-dumping suit, it was eventually taken over by a foreign firm: CEMEX! “That was a bonus I really savored,” Zambrano proudly told me many years later. In short, the anti-dumping suit transformed CEMEX into the global company it is today with only 21 percent of its sales from Mexico, 27 percent from the United States, 28 percent from Europe, and 24 percent from the rest of the world. The U.S. consumer now pays higher prices for imported cement. And since nearly half of all cement consumed in the United States is purchased for infrastructure and other public works, the U.S. government and taxpayers have ended up footing the bill for this ill-fated attempt to save domestic cement producers from extinction.