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AIM for Good Business Issue Articles

A “Free Market” Is Not Always A “Fair Market” In International Trade

Nathan Dampf, AIM Director of Communications, 7/14/2011


Two U.S. companies are finding that all companies have to play by the same rules…only as long as they are within the United States.


Missouri-based Leggett and Platt is pleading with U.S. elected officials to even the international playing field, while Massachusetts-based American Superconductor is involved in an international lawsuit. Both companies, while coordinating business in the United States’ “capitalist” economy, find that not all companies play by the same rules.


In early May, Leggett and Platt Chief Operating Officer Karl Glassman testified before the United States Senate Committee on Finance’s Subcommittee on International Trade, Customs, and Global Competitiveness that enforcement of U.S. trade laws should be a priority for Congress in a tariff-evasion scheme by some spring manufacturers in Asia. Glassman addressed the committee regarding “trade cheats” and how they are evading U.S. trade laws.


He first discussed the background of Leggett and Platt’s mattress innerspring operations. The company has manufactured innersprings in China specifically for the Asian market. Company officials throughout the years have realized that it is not cost-effective to manufacture the springs in China to ship to the U.S.


Beginning in the early 2000s, Glassman states that innersprings came into the U.S. from Chinese manufacturers at “prices lower than [Leggett and Platt’s] cost of production.” He continues, “By December 2007, our U.S. innerspring operations had deteriorated to the point that we filed an antidumping case against innersprings from China, South Africa and Vietnam. This case resulted in antidumping duty orders on goods from all three countries, and innersprings from China are now subject to antidumping duties ranging from 164 percent to 234 percent.”


While the antidumping penalties were instituted, Leggett and Platt confirmed that cheap innersprings continued to enter the U.S., but through third-party countries: Hong Kong, Taiwan, and Malaysia worth an estimated $1.5 million.


“This made no sense to us,” said Glassman, “so we hired a private investigator to examine the alleged manufacturing facilities listed on the bills of lading.”


The investigator found no evidence of genuine innerspring production in Hong Kong or Taiwan. There is innerspring production in Malaysia, however it is incapable of producing the volume of innersprings coming into the U.S. Since discovering the problem, Leggett and Platt has formed a coalition of eleven industries against the Trade-Duty evasion. The group estimates that the U.S. Treasury has lost over $400 million each year in unpaid duties. The group is urging Congress to implement “tools to address these illegal activities in a timely manner.”


American Superconductor, based out of Massachusetts, is having a similar international problem, except their product has been hijacked by a contracted customer. Several years ago, Chinese wind turbine producer, Sinovel, agreed to a set of multi-year contracts to purchase roughly $1 billion worth of product from American Superconductor. About four years later, the two companies are in a legal dispute in which American Superconductor alleges Sinovel has launched a subsidiary that makes the same product American Superconductor was selling to Sinovel.


The Sinovel subsidiary, Dalian Guotong Electronics, is manufacturing the frequency converters to replace the American Superconductor imports. Guotong is 22.5 percent owned by Sinovel and 32.5 percent owned by a Sinovel partner (Financial Times).

Sinovel has already agreed to purchase the equivalent of $46 million from Goutong this year.


Sinovel has stated that the company will continue to buy from American Superconductor, but has only purchased 11 percent of the original agreements amounting to roughly $317 million. The absence of purchases has drastically hurt American Superconductor which counted on revenues from sales to Sinovel.  




A “Free Market” is not necessarily a “Fair Market.” As children, we often complain, “That’s not fair.” No it isn’t. But it is business.


The United States is not often competing on the same playing field as the rest of the world. Countries often institute their own rules or sign World Trade Organization-negotiated agreements, but with no international trade authority with teeth, businesses sometimes find themselves in these situations. The need for caution can be seen by looking into the evolution of television manufacturing.


The television originally was invented in Europe. During World War II, the importance of a television was apparent, but production lagged demand. Once the War was over, production rapidly increased in Britain, Germany, and the United States. Production slowed during the Vietnam War, so television manufacturers looked to outsource production. American countries quickly looked to Asia.


Between 1960 and 1968, American television manufacturer RCA, had granted over 105 licenses for television inventions to Japanese companies. The labor was much cheaper and quality standards were greater as Japanese policy-makers imposed strict quality controls. The Japanese had proven themselves and RCA saw an opportunity to capitalize on low wages and production costs.


To grow profits in the U.S. retail markets, RCA had Japanese personnel visit the United States operations to learn certain efficiencies while inspecting RCA television plants. RCA also provided a technology transfer engineering laboratory in Tokyo in 1954. But, with the knowledge of the U.S. plant know-how, and the technology transfer lab, the Japanese part manufacturers presented RCA and other U.S. television manufacturers, and those companies’ suppliers with the first consequence of U.S. outsourcing.


Beginning in the mid-1950s, Japanese part manufacturers were selling cheaper parts in the United States. The U.S. manufacturing community was not known for its tight supplier relationships, so that left the door open for Japanese TV component producers to out sell American suppliers despite an - at the time - inferior product. But in the early 1960s, Japanese suppliers instituted their quality inspections to the point of .01 percent component defect.


It took time for the Japanese, and other Asian manufacturers to out pace the American TV maker. In 1978, the United States accounted for three of the top ten largest TV manufacturers, two of which were top five. Japan took five of the ten spots, and only two of the top five. By 1987, two Japanese manufacturers pushed all but Zenith out of the top ten manufacturers. By 1997, eight Asian TV manufacturers made up the top ten TV manufacturers in the world. Zenith was no longer in the top ten after it was sold to Korean manufacturer LG in 1998, costing nearly 2,000 U.S. jobs.


In the day of global competition, it is important that companies do globalize and our countries encourage free trade. But, within that “Free Market”, it should also be a “Fair Market” where international contracts are subject to scrutiny and low-quality parts – although cheaper – are recognized as such. Currently, some groups are pursuing an international trade “hub” in St. Louis. Associated Industries has encouraged our members to participate in international trade that benefits Missouri companies. But those partnerships should be mutually beneficial. While we do not want to be isolationists, our companies must enhance our own U.S. supplier networks. Secondly, they must be responsible and understand the possibilities of their product being reverse-engineered and sold like the Leggett and Platt innerspring, or reverse-engineered by subsidiaries to reduce costs such as the American Superconducter-Sinovel relationship. If our companies do not, it is possible that every industry may end up looking like the U.S. television industry.