Policy Perspectives
by Philip S. Gallas
May 1, 2007
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.
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