US: Screw WTO, It's D-I-Y Time

♠ Posted by Emmanuel in , at 3/30/2007 05:41:00 PM
Here are some preliminary thoughts on the US measure to impose countervailing duties (CVDs, or more commonly referred to as tariffs) on coated paper products from China. Coated paper is of the glossy sort you find in books, magazines, annual reports, brochures, and gift wrap. The case was brought forth by NewPage Corporation, a coated paper producer headquartered in Dayton, Ohio late last year to the US International Trade Commission (ITC). Upon investigation, the ITC found the American paper industry "materially injured" by Chinese imports. The ITC then forwarded the case to the Department of Commerce (DOC), which announced today that countervailing duties would be applied to Chinese coated paper imports ranging from 10.9% to 20.35% for subsidies including tax breaks, debt forgiveness, and low-cost loans. The term "countervailing" refers to these duties purportedly offsetting the amount by which coated paper was subsidized to sell at lower prices in the US market.

Some of you might be wondering what the brouhaha is all about as coated paper does not exactly occupy the commanding heights of global industry. The importance of this case lies in setting a precedent that may pave the way for many, many more similar actions by US manufacturers in industries such as furniture, steel, and rubber against China . Going into a bit of the legal nitty-gritty, China was previously categorized as a "non-market economy" (NME) by the DOC. As such, CVDs were not applied to these countries. The case in question is that of Georgetown Steel in [1984]1986 where the Commerce Department stated
We believe that a subsidy is definitionally any action that distorts or subverts the market process and results in a misallocation of resources, encouraging inefficient production and lessening of world wealth.

In NMEs, resources are not allocated by a market...allocation is achieved by central planning. Without a market, it is obviously meaningless to look for a misallocation of resources caused by subsidies. There is no market process to distort or subvert.

It is this fundamental distinction--that in an NME system the government does not interfere in the market process, but supplants it--that has led us to conclude that subsidies have no meaning outside the context of a market economy.
That was then. This is now according to Commerce Secretary Carlos Gutierrez:
China’s economy has developed to the point that we can add another trade remedy tool, such as the countervailing duty law. The China of today is not the China of years ago. Just as China has evolved, so has the range of our tools to make sure Americans are treated fairly. By acting on the petition filed last October, the United States today is demonstrating its continued commitment to leveling the playing field for American manufacturers, workers and farmers.
I would not harp on this case if it could not portend something big, like a full-blown trade war. With this ruling, an avalanche of complaints may be brought forward against China by firms in several other industries as the DOC is seen as being more receptive as demonstrated by NewPage. Again, notice the timing of this ruling (near election season 2008) and the location of the complainant (rust belt Ohio). If you're a public choice theorist, the vote-gaining angle is obvious. China, for one, has already made it clear that it views this case as "unfair." It made a last-ditch effort to gain an injunction at the US Court of International Trade but failed. While CVDs are allowed under WTO rules if distorting subsidies can be substantiated, this is the first time that the US has not gone through the WTO in seeking remedies and applied these sanctions directly against China--exactly as Peter Morici suggests it should do. The US may have just let loose the dogs of (trade) war.

March 31 Update : To no one's surprise, China is "strongly dissatisfied" with the measure according to Xinhua News agency. What is ironic is that China still insists on having itself classified as a non-market economy by appealing to US (and not international or WTO) precedent. If that's all there is to China's retort, then color me unimpressed. I suspect however that China has more drastic, market-moving tricks up its sleeves.