February 2004

Furniture Follies

The same American furniture makers that accuse China of "dumping," themselves buy Chinese furniture.

Consider In the Matter of: Wooden Bedroom Furniture from China, a hotly-disputed antidumping case that threatens to impose high tariffs on more than $1 billion in annual U.S. imports. The petitioning American manufacturers maintain that they are motivated solely by a patriotic desire to save thousands of American jobs. But a bit of digging into what’s really going on suggests that the petitioners should be taken to the woodshed for their outrageous hypocrisy.

The petition is being pressed by the Committee for Legal Trade, a coalition of beleaguered American furniture makers scattered nationwide, but mainly concentrated in small towns in the Carolinas and Virginia, and also California. The coalition is asking for tariffs on imports of bedroom furniture from China that range from a prohibitive 158% to a simply staggering 440.9%. Even tariffs far lower — say in the old Smoot-Hawley range of “only” 50% or 75% — would be more than enough to add thousands of dollars to the price stickers of the beds and dresser drawers that American shoppers will see in their favorite furniture stores. And for anyone naïve enough to think that surely the U.S. government wouldn’t be inclined to inflict such economic pain upon the American public — not to mention U.S. retailers, who employ far more American workers — think again.

Last month, the U.S. International Trade Commission voted unanimously that there was a “reasonable indication” that the struggling domestic furniture makers were either materially injured, or “threatened with material injury” because of the allegedly dumped imports. The Commerce Department is expected to crunch the numbers and make its preliminary calculations on how high the antidumping tariffs should be by late April or the first week in May.

It certainly isn’t wrong for the domestic furniture makers — who really are going through hard times because China, with its lower labor costs, now has a clear comparative advantage in the business of making furniture — to petition their government for relief. Still, long experience in such cases suggests that consumers should always watch their wallets when domestic industries that can’t really compete claim that they are only seeking “a level playing field.” Indeed, a measure of hypocrisy is built into the antidumping actions, where the narrow self interest of domestic petitioners is, by law, considered more important than the national economic welfare. But digging into this case quickly turns up evidence of a cynicism that simply reeks with unenlightened self interest.

Unenlightened and cynical
Unenlightened self-interest is the first phrase that comes to mind when describing litigation that will surely never achieve any useful public good, even if the petitioners win it. Significantly, the head of the St. Louis-based Furniture Brands International, which is the world’s largest manufacturer of home furnishings, has said that he has a Plan B, and a Plan C, and whatever other plans it might take to avoid crippling tariffs. “If tariffs are imposed at a modest rate, we will likely pay the tariffs and will continue importing from China,” W.G. “Mickey” Holliman told reporters when the case was filed last October. “If tariffs are imposed at a higher rate, we will expand our current sourcing initiatives in Indonesia, the Philippines, Malaysia, Vietnam and India — and we may look to other countries as well.” Holliman has already been proven correct. In recent months, China’s competitors in other Asian countries have been gearing up to expand their furniture exports. The bottom line: antidumping tariffs might shift some jobs from China to elsewhere in Asia, but they are not going to bring back American jobs.

The cynical part of the case begins with the acknowledged fact that the same American furniture makers who are accusing China of dumping are themselves enthusiastic importers of Chinese bedroom furniture. It’s only when U.S. retailers like Crate & Barrel, The Bombay Company, and JCPenney also buy from the Chinese, and not from them, that the U.S. manufacturers cry foul. Thus, the allegations over “dumping” appear to be a smokescreen for a struggle over who will control the multi-billion dollar American furniture industry: manufacturers, or the retailers who don’t really need them anymore.

The photo that accompanies this article of the Made in China shipment to Vaughan- Bassett Furniture company — one of the companies that is spearheading the anti-China antidumping litigation — vividly illustrates how domestic furniture makers are playing on both ends of the so-called level playing field. Vaughan-Bassett, which has four plants in Virginia and the Carolinas and which tends to advertise itself as a purveyor of “Made in USA” furniture, does not accuse the Chinese of “dumping” — that is, whenever Vaughan-Bassett, and not some retailer, is the buyer.

What dumping?
The legal basis to challenge the imposition of any antidumping tariffs at all would appear to be strong. The Chinese furniture makers, many of which are foreign owned by investors from the United States, Europe, Hong Kong, Taiwan, and Singapore, are widely respected in industry circles as modern, capitalistic enterprises. They are clearly market-driven. The Chinese companies buy and sell in the international marketplace at market prices, and say that they have the books and records to document their actual costs — if only the American government will look at them.

As one U.S. furniture industry observer who does business with both domestic manufacturers and the Chinese notes with more than a tinge of sarcasm, the idea that these successful Asian capitalists are losing vast sums of money in their export sales to America is “absurd.” The industry insider, who prefers not to be quoted by name because of the acrimony that has already marked the case, says that it is widely believed that the Chinese manufacturers are making “about 30% net” annually. He asks: “If the Chinese plants are dumping goods at a loss, why is it that some of the plant owners have become billionaires?”

But there is ample precedent to suspect that the Commerce Department’s Import Administration will refuse to look at the actual books that would reveal the true Chinese pricing and costs. U.S. Commerce Secretary Don Evans, like President George W. Bush, has of late been blasting away at China for being an “unfair” trader at every opportunity. Officials who report to Evans know that they have the discretion to cook the books practically anyway they wish in antidumping cases to come up with high antidumping margins.

Readers of this publication are familiar with the old “non-market economy” dodge, where China’s costs of production become a game of let’s pretend. Instead of looking at the actual records that would show the true costs of the Chinese furniture business, Commerce will pretend that China is India, which will be selected as a surrogate market economy. The officials will then use statistics relating to the cost of producing furniture in India to determine whether China has been “unfair” in its pricing. This is, of course, preposterous.

But the smart money would bet that by April or May, the Chinese will be found to have been “dumping” by large margins. It would be a rare Spring day in Washington indeed should the bureaucrats at Commerce determine otherwise.

Acrimony at the bar
Nobody involved in the furniture war, it seems, is shy about voicing strong opinions. “This case is about a billion dollars of dumped imports from China that has displaced thousands of U.S. jobs and closed dozens of U.S. factories,” Joseph Dorn, a partner in the Washington office of King & Spalding who represents the domestic furniture petitioners, has asserted in testimony before the U.S. International Trade Commission. “Unless the dumping is stopped, the job losses and factory closings will continue, and another U.S. industry will be destroyed by Chinese imports.”

Dorn’s assertion is “economic nonsense,” retorted John Greenwald, a partner in Wilmer, Cutler & Pickering who represents a group of Chinese manufacturers. “When I come up to the Commission and speak to you all, I try to be circumspect in what I say,” Greenwald noted. “In this particular case, however, there is only one word to describe the petition that has been filed, and that is, fraud.” Greenwald pointedly told the ITC that the petitioning domestic furniture makers’ estimates of Chinese prices for bedroom furniture were “based on a representation of cost that the petitioners themselves know to be untrue because they buy from the Chinese factories that they accuse of dumping.”

“This is one of the most cynical trade cases brought before the ITC in recent memory,” blasted William Silverman in a press release on January 9, the day after the ITC announced its preliminary determination in favor of the petitioners. Silverman is a partner in Hunton & Williams who represents the Furniture Retailers of America, a coalition of over 60 U.S. retailers including Crate & Barrel and The Bombay Company.

The reaction to the filing in business circles has been even stronger. Andrew Zuppa, the vice president of marketing for the Colorado based American Furniture Warehouse, Inc., told reporter Mick Normington of the Business Journal, in Greensboro, N.C., that he wasn’t going to buy any more bedroom sets from companies that signed onto the antidumping petition. “We’ve decided that these are companies we don’t want to do business with,” Zuppa declared. Replied Doug Basset, a vice president at Vaughn-Basset, “We’re disappointed that they dropped us.”

Hard times in the U.S.
The petitioners cite evidence that they are truly going through hard times. “Petitioners lost more than half of their operating income from 2000 to 2002,” their lawyer Joseph Dorn told the ITC in a staff conference last November. “They lost another half of their operating income from the first half of 2002 to the first half of 2003.”

The domestic furniture makers say that their operating profit margin declined from 12% in 2000, to three percent in 2002. For the first six months of 2003, the petitioners say that they were barely breaking even, with a profit of only about one percent. The petitioners say that their cash flow fell by 60 percent from 2000 to 2002, and another 80 percent in the first six months of last year.

Meanwhile, Chinese exports of bedroom furniture shot up from $565 million in 2001 to nearly $1 billion last year.

The U.S. petitioners — overlooking the fact that U.S. southern non-union states, with their comparatively cheap labor costs, once happily took American jobs from New England — complain that China has a comparative advantage concerning the costs of labor. In China, workers may earn around 50 cents per hour, compared to $15 per hour that American workers rake in. Put another way, estimated labor costs for a bedroom armoire made in China could be about $5, compared to $150 for the same piece of furniture made in America.

No wonder about half of all the wood furniture that Americans buy now comes from China.

Is China “unfair?”
The American furniture makers’ case that China’s bedroom furniture trade is “unfair” begins with numbers — and how to interpret them. The petition for trade relief was signed by 27 of the nation‘s 52 domestic furniture makers, which is slightly below 52% of the U.S. industry, according to ITC data. But it is unclear precisely who is really “American,” and who is foreign.

Petitioner Kincaid Furniture, Inc., of Caldwell, N.C. is a subsidiary of La-Z-Boy’s Case Goods Group, which is a major importer of furniture and one of China’s best customers.

Meanwhile, a Chinese company named Lacquer Craft Manufacturing Co. is cited in the petition as “a prime example” of China’s essential unfairness. Lacquer Craft is located near Hong Kong, on land in southern China that a decade ago was “mainly farmland and dirt roads,” Denise Becker of the Greensboro, N. C.-based News & Record, has reported. “This is the land of opportunity here,” Becker was told by Mohammed Amini, Lacquer Craft’s vice president of sales and marketing when she visited the company‘s operations in Dong Guan City last year. Amini “moved to China from California seven years ago,” the reporter observed.

The American petitioners also complain that Lacquer Craft has invested “at least $25 million to purchase the brand name and sales and marketing network of Universal Furniture, which has long been a major player in the U.S. wooden furniture market.” Should America put up a sign: foreign investors are not welcome here?

What is “unfair” to the U.S. furniture makers who have lost their comparative advantage appears to be a model of how international trade ought to look.

The Chinese “force” us to buy from them
The U.S. furniture makers acknowledge that they, too, buy a lot of furniture from China. They make us do it, the domestic petitioners insist. “In order to protect our customer base and market share, each of our companies has been forced to import from China to take advantage of the low import prices,” Steve Kincaid, the president of Kincaid Furniture and also president of the La-Z-Boy Case Goods Group, told the ITC in testimony on November 21, 2003.

“First,” Kincaid explained, “the Chinese prices are so low that it is becoming increasingly difficult to find any product that we cannot source more cheaply from China that we can produce in our own plants.” His group has lost important sales to major hotel operations like the Venetian in Las Vegas and the Marriott Hotel Desert Ridge, Kincaid declared. “Second, if we do not source from China, our customers will do so directly. In fact, over the last several years, retailers and hotels have been rapidly shifting to direct imports from China. The Chinese factories are bypassing us and going straight to our long-time customers.”

Kincaid added that he was rebuffed when he recently tried to sell a bedroom suite to “one of the top” American retailers. “His reaction, why should I buy this suite that is made domestically from you?” Kincaid complained. “He claimed that buying a comparable imported suite from China, he could sell it at retail for the wholesale price I was quoting.”

Americans like Kincaid think that it is fair when they buy from China at the best price they can get — and unfair when other American businesses want to do the same.

This case doesn’t pass the laugh test.

Reprinted with Permission from The Rushford Report.