In late March, the Commerce Department reversed twenty-three years of U.S. trade policy by imposing countervailing duties on China for the first time. Commerce’s determination likely heralds a sea change in the U.S. approach to China trade and echoes growing sentiments in Washington that the Bush Administration hold China accountable for granting major subsidies to Chinese companies.

The potential impact of the Commerce determination should not be minimized by corporations, businesses and exporters heavily invested in the global marketplace. The ruling may encourage an avalanche of similar complaints from U.S. manufacturers—especially in the steel and textile/apparel industries—allegedly harmed by a surge in Chinese imports. In a worst-case scenario, the ruling could ignite a trade war between the United States and China. Such a result is unlikely—but, nevertheless, the determination is the 21st century international trade equivalent of the “shot heard round the world.” 

The specific cause of this turmoil in U.S.-China trade was a complaint filed with Commerce in October 2006 by Ohio-based NewPage Corp., which challenged Chinese imports of coated free sheet (high gloss) paper typically used in magazines and newspapers. Although the dollar impact of the decision is minimal (total last year were $224 million, 0.1% of all Chinese imports), imports of coated free-sheet paper from China soared 177 percent from 2005-06. NewPage Corp. alleged—and Commerce agreed—that the imports skyrocketed because China provided a host of unfair subsidies—tax breaks, debt forgiveness, and low cost loans—to Chinese manufacturers.

Commerce’s determination could lead to countervailing duties ranging from 10.9 to 20.35 percent on glossy paper imports from China. Countervailing duties are a powerful new weapon against non-market economies such as China. U.S. companies have typically relied on antidumping duties as the weapon of choice against Chinese imports sold below cost in the United States.

U.S. importers of glossy paper will immediately feel the pinch of the new ruling. U.S Customs and Border Protection will begin collecting security (cash deposits or bonds) from importers of glossy paper products until the Commerce Department announces its final decision later this year. 

The Commerce Department determination is symbolic and sets an important precedent. The NewPage decision allows the Bush Administration to demonstrate it is the new cop on the trade beat, but without punishing China.  It is based on the Bush Administration’s belief that in the last 25 years, China has significantly moved from a 1980’s Soviet-style economy to a more market-based one.

The National Association of Manufacturers, labor organizations and environmental groups hailed the Commerce ruling as a much needed step toward fair trade. “We will use every tool at our disposal to guarantee our workers and our companies a level playing field,” Commerce Secretary Carlos Gutierrez said at a press conference announcing the trade decision. 

The United States may be playing with fire. Global markets dislike uncertainty—witness the drop in the U.S. stock market following Commerce’s announcement. The Chinese government is outraged—and retaliation is clearly an option.  

The risk is real, the impact on exporters, importers and consumers potentially severe. Consider the retail industry. Virtually every toy is imported from China—as are 70 percent of shoes and approximately 15 percent of clothes.  

How China will react remains to be seen. China could challenge the decision in federal court, at the World Trade Organization, or use its own trade remedy laws to go after U.S. companies. A trade conflict with China would produce casualties on both sides. We live in interesting—and dangerous—times. wt



Philip S. Gallas is Of Counsel and Julio A. Fernandez an International Trade Analyst in the Washington, D.C. office of Vorys, Sater, Seymour and Pease LLP.