The ITC Investigation Focus on LSPTV Market Condition and the impart of Imports

The U.S. International Trade Commission (US ITC) is conducting an on-going investigation of alleged unfair trade practices by Chinese companies supplying what are labeled “low-speed personal transportation vehicles” (LSPTVs) to the U.S. market. The product label includes not only finished golf carts and LSVs, but subassemblies thereof and various categories of parts. A number of HTS import codes are included.

The ITC investigators adopted a broad-based definition of the market, termed “domestic-like”, to encompass all the various end and in-process product categories that are common to the industry.

Substitutability concept examined.

The ITC’s detailed preliminary report is available to the public and is the basis for the issues analyzed in this article. You can access the report by going to ITC.gov.net and reference the investigation numbers 701-TA-31 and 731-TA-1700. In Section V of the report, ITC investigators look at the concept of substitutability in the market; i.e., to what degree imported Chinese LSPTVs are substitutes—viable options—for domestically-produced vehicles..

In economics, the term elasticity is used as a measure of the responsiveness of product demand to changes in price. Specially, the quantitative formula for elasticity is the ratio of the percentage change in quantity to the percentage chance in price. One of the variables that impacts elasticity is the availability of substitutes: the more substitutes available to the consumer, the more elastic is demand for the given product.

An illustration of elasticity

As an example of the above let’s suppose you observe that the price of your favorite beer has been increased. Right away you check the shelf at the grocery store for alternative brands and their prices. The more brands available, the more likely it is that you will choose a close substitute at a lower price. In the case of many close substitutes whose prices are unchanged, the more responsive you are likely to be to an increase (or decrease) in price of your otherwise favorite beer. Obviously, this example could be applied to any product, including LSPTVs.

Implications of substitutability and elasticity for the ITC’s determinations

The petitioner in the ITC investigation is the American Low Speed Personal Transportation Vehicle Coalition, comprise of two companies, Club Car and EZ-GO Textron. The goal of the coalition is to have, based on ITC findings and recommendation, the Commerce Department impose tariffs and/or countervailing duties on Chinese manufacturers, which could force price increases of finished product in the United States. The contention of the Coalition is that Chinese manufacturers are being subsidized by the Chinese government, thus allowing their U.S. dealers to cut their price unfairly.

Here are the two possibilities with regard to substitutability:

• If fully assembled vehicles fabricated from subassemblies are highly substitutable with domestic brands, this would imply that price is a major factor in consumers’ decision to purchase (i.e., high demand elasticity with regard to price);
• If vehicles fabricated from subassemblies are not significantly substitutable for domestic brands, this would imply they are in a different market category and not directly competitive with domestically-produced GCT vehicles.

If the ITC finds the former situation pertains, then it is likely that penalties (e.g. tariffs) will be assessed.

Tariffs have already been assessed on importers

It is important to note that tariffs have already been assessed on imports in product categories petitioners and the ITC deem to be actual finished and subassembly units, as well as other categories of GCT vehicle parts included in the ITC’s sweeping definition of LSPTVs.

Here, buried in footnote 205 of the chapter on substitutability, is a list of duties already assessed to the benefit of domestic manufacturers:

Effective September 1, 2019, subject merchandise entering under HTS subheading 8703.10.50 became subject to an additional 10 percent ad valorem duty. Effective July 6, 2018, subject merchandise entering under HTS subheading 8703.90.01 became subject to an additional 25 percent ad valorem duty. Effective September 24, 2018, subject merchandise entering under HTS subheadings 8706.00.15 and 8707.10.00 became subject to an additional 25 percent ad valorem duty.

Thus, we see that from 2018 to the current date four different import categories pertaining to GCT vehicles have been already assessed various levels of tariffs, ranging between 10% and 25% of landed value. It should be noted, in addition, that of the four categories listed, only one is defined by the Department of Commerce as “golf carts”. That one is HTS 8703.10.50.

Guidance given to SVR by a DOC analysts is that subassemblies, as well as finished units are included in this category. The ten percent ad valorem duty currently assessed on golf carts in this HTS category is a least one-half the average mark-up on vehicle sales at retail.

Implications for findings on subsidies from the Chinese government

In theory, the 10% ad valorem duty already assessed on imported golf carts and subassemblies would compensate for subsides amounting to 10% of value-added in China. Again, in theory, for the DOC to impose further tariffs in the this HTS category, it would have to find subsidies greater than 10% of value-added.

ITC findings with regard to substitutability and import prices

Here is the ITC’s finding, quoting from the preliminary report: “Based on the record in the preliminary phase of these investigations, we find that there
is high degree of substitutability between subject imports and domestically produced LSPTVs of the same product type.” (Italics added for emphasis.)

The ITC report also finds that price played a significant role in purchasers’ decisions. Here is the conclusion of the ITC, based on surveys of domestic manufacturers and importers:

In sum, based on the record of the preliminary phase of these investigations, we find that subject imports significantly undersold the domestic like product, leading to lost sales and a shift in market share from the domestic industry to subject imports over the POI. We therefore find that subject imports had significant price effects. See preliminary report, p. 34.

Is price the only factor and does this mean tariffs will be assessed?

While price is a significant factor in a purchasers’ choice of GCT vehicles, it is not the only one. Upgrades and post-sale servicing are also factors, according to the ITC. The fact that imports are “underselling” domestic manufacturers, leading to lost sales and “shifts in market share” does not automatically justify increased tariffs. After all, lost sales and shifts in market share are part and parcel of the free market, capitalist system in which America prides itself.

Beyond the competitive impact of imports, there must, or should be, a finding that unfair practices, namely Chinese government subsidies are key to the price and market share advantages of imports. In the next article we look at the ITC’s findings in this regard.

 

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Contact the Author: Steve Metzger at smetzger@smallvehicleresource.com.  Or check out our website at www.smallvehicleresource.com, where you will find an extensive database of vehicle models and can make side-by-side comparisons of vehicles based on a full set of specifications.