Finally a glimpse into Bush administration strategy on China trade this year:

The U.S. Department of Commerce today announced
its preliminary decision to apply U.S. anti-subsidy law to imports from
China.  This is the first time countervailing duties will be imposed on
imports from a non-market economy.  The decision alters a 23-year old
bipartisan policy of not applying the countervailing duty (CVD) law to
non-market economy countries, and reflects China’s economic
development. 


Today’s preliminary decision
determined that Chinese producers and exporters of coated free sheet
paper received countervailable subsidies ranging from 10.90 to 20.35
percent. 

In the face of a great deal of criticism from the new Democratic Congress, the Bush administration has been conducting its China trade policy so far this year on autopilot.  I’ve been curious to see what will happen, particularly in the face of ever worsening bilateral trade deficit numbers.  And now this.

As you may know, I am a harsh critic of antidumping, which every economist will tell you makes absolutely no sense.  It’s a completely political tool, and I therefore find it rather abhorrent. In this case, we are dealing with antidumping’s slightly less abhorrent relative, countervailing duties.  Countervailing duties are tied in to improper subsidies given to enterprises by governments.  You can imagine how improper subsidies, such as government loans given on extremely favorable terms, would give firms an unfavorable advantage in some cases.

For the record, the Commerce Department’s announcement concerns imports of glossy paper into the US from China.  The complainant in this matter is NewPage, a Dayton, Ohio-based paper company that used to be owned by the Mead Corp. Another detail for the record, for what it’s worth: NewPage is a large employer in Dayton, an important city in the swing state of Ohio.  Also, by the way, Dayton is in the third Congressional District, which is represented by Michael Turner, a Republican congressman.

I am impressed by the political coalition put together to support this new policy in this specific case.  Not only do we have an important employer in a politically sensitive part of the country, represented by a Republican, but we also have a large number of workers who through happenstance are being represented by very powerful union the United Steelworkers.  The steel industry in Ohio has been devastated over the years, even with the ham-handed bit of trade protection introduced by the Bush administration a few years ago.  Apparently a large percentage of this company’s workers were formerly steelworkers. We’ve got the business community on board and a big union on board, and it therefore follows that we’ve got Republicans and Democrats on board.  Isn’t that cool?

Some details.  The Commerce Department’s decision overturns a 23-year-old policy of not applying these sorts of duties to countries that do not have market economies.  While it’s true that China’s economy has developed significantly over the past few years, particularly since it entered WTO, I think many people would agree with me that the Commerce Department’s decision has very little to do with Chinese economic development or the present state of its economy but more with political pressure from the rising trade deficit. Implementing anything related to the value of the RMB is problematic, particularly given current WTO law, but countervailing duties is a much more permissive area.

The biggest problem here is not really the timing of the decision, the motivation behind his decision, or the political coalition formed to push this decision.  This is all normal when we talk about trade policy, particularly when you’re dealing with things like antidumping or countervailing duties. No, problem here is in the implementation.  Let’s take a look at what this company CEO had to say when he spoke to Congress last February.

Speaking in front of the US House of Representatives on February 15, James Tyrone, a VP of NewPage, listed several improper subsidies being given to Chinese paper companies. First, Tyrone stated that the Chinese government provides favorable loans through government-owned banks.  No mention was made in his testimony of course that a majority of Chinese businesses, no matter what they do or what industry they are in, receive loans from government banks, which are the largest banks in the country.  The problem of favorable loans being given to businesses is of course a huge problem here, and although one motivation for such lending has been because of express policy direction from the central government, there has been much more lending that has taken place outside the policy framework for many other reasons, quite a few of which are actively discouraged by the central government.  Now, I wouldn’t expect Mr. Tyrone to understand the myriad problems facing the Chinese financial sector, but then again, he chose to go in front of Congress and talk about the stuff, didn’t he?

Second, Mr. Tyrone also mentioned grants that are being given to paper companies by the Chinese government. Again, I have no way of knowing what Mr. Tyrone considers to be “the Chinese government” in this case, and whether we are talking about an industry development plan sanctioned by Beijing or not. Something tells me that this distinction is not so important to most US lawmakers, most likely because in their minds, Beijing is still a monolithic all powerful institution that controls every nook and cranny of the country.

Third, Mr. Tyrone referred to tax breaks based on export performance and domestic equipment purchases.  That sounds an awful lot like VAT refunds to me.  These guys wouldn’t be basing part of their new policy decision on China’s general VAT system would they? Who knows?

Fourth, mention was made in Tyrone’s testimony about loan forgiveness in the case of a company that went bankrupt in 2003.  Are you kidding me?  Government loans that were forgiven when a large company, I would guess a state-owned enterprise, went belly up? This one stuns me.

Okay, enough of harping on Mr. Tyrone and his complaints. To be fair, there are certainly a lot of subsidies originating with the government here at all levels and that allow Chinese companies to export and be successful internationally.  I am not even really disputing this since it is pretty obvious.  My point is, and it is certainly fairly easy to see from Mr. Tyrone’s testimony, that the specific complaints of Chinese subsidies involve a great number of issues related to the central government, the financial sector, and a lot of overlapping economic policies in this country.  Therefore, when US authorities move to investigate these complaints from terrified US companies who are definitely facing severe competition from overseas, I think they are faced with an insurmountable task.  How do you, as a Commerce Department investigator, figure out what is an improper subsidy, what is a holdover from the planned economy of days past, and what is actually a mechanism completely proper under WTO rules?  I do not envy them this task at all.

So why is the Bush administration using this enforcement mechanism to show its credibility on trade policy?  Well, the same reason why they’ve used antidumping in the past.  Because investigations will be ridiculous and impossible, which introduces a great deal of flexibility into the process.  In other words, if it’s extremely difficult to tell what’s an improper subsidy and what is allowable government support, then the domestic government can go ahead and make a decision based on political grounds, which is what it wanted to do in the first place anyway.  Ouch, that was even more cynical than usual for me.

Okay, enough rambling.  Here are some links:

Testimony of James Tyrone, NewPage Corp., before the House Ways & Means Committee, Feb 15, 2007

Commerce Department Press Release

TMCnet background story

IHT article

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