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U.S. Puts Tariffs on Chinese Paper
More Actions Anticipated Over Subsidy System

By Ariana Eunjung Cha and Peter S. Goodman
Washington Post Foreign Service
Tuesday, April 3, 2007

SHANGHAI, April 2 -- Chinese industry and trade groups accused the Bush administration on Monday of a misguided and hypocritical approach to trade for its decision last week to slap steep tariffs on certain Chinese-made paper.

The United States contends the glossy paper is subsidized by the Chinese state. But China's Ministry of Commerce called the economic sanctions "unacceptable." Hua Min, head of the World Economy Research Institute at Fudan University in Shanghai, called the American stance "absurd," noting that the United States just a few years ago was found to be giving illegal tax rebates to companies such as Boeing and Microsoft.

In Washington, officials at the Commerce Department said they had no choice but to act on a petition filed by an aggrieved U.S. paper company whose sales have been undercut by cheap Chinese imports.

"The Chinese economy is replete with subsidies," Undersecretary of Commerce for International Trade Franklin L. Lavin said in an interview Monday. "It gives Chinese exporters an unfair advantage in the U.S. market, and we're determined to do what we can to unwind that advantage."

The decision to impose tariffs on one product -- high-gloss paper, used to print magazines and some books -- has sown anticipation that this is merely the first in a string of such cases, with the administration likely to follow with similar action against a range of Chinese industries, possibly including steel, textiles and plastics.

The new Democratic leadership on Capitol Hill accuses the administration of allowing China to carve into the U.S. market with a range of alleged wrongdoings, from maintaining an underpriced currency -- which makes Chinese goods cheap on world markets -- to pumping credit to favored industries. The political situation has forced the administration to adopt tactics that make it appear to be taking a harder line, analysts said.

"The potential spillover could be big," said Pietra Rivoli, a trade expert at Georgetown University.

In years past, the potential U.S. response to supposed subsidies was limited by ambiguities in the law. The administration could accuse China of dumping its products at below-market prices in the United States, but the tariffs in those cases are small. Tariffs allowed in response to subsidies are far larger, up to 20 percent in this case.

For two decades, the United States had refrained from taking that approach in cases involving "non-market" economies because in socialist and communist systems, subsidies are routine. This time, bolstered by a federal court decision affirming the approach, the administration formally accused China of subsidies.

Lavin, the Commerce undersecretary, said the administration hopes negotiations can resolve future trade disputes. But "we're prepared to use this countervailing duties route if we have to," he said.

On Monday, the administration continued its offensive on trade, accusing 63 countries -- not least China and the European Union -- of maintaining unfair barriers to U.S. exports.

"The administration continues to use all enforcement tools at its disposal to ensure fair treatment in the global marketplace for U.S. workers and consumers," U.S. Trade Representative Susan C. Schwab said in a statement.

In China, the administration's logic has provoked charges that the United States is simply ignorant of the ways of modern Chinese business -- misinterpreting, as illegal subsidies, temporary assistance that the government provides state-owned companies to ease their transition toward capitalism.

"Americans don't really understand China's economic operating rules," said Zhao Yumin, director of the Chinese Academy of International Trade and Economic Cooperation, which is affiliated with the Ministry of Commerce. "They are saying this is a matter of fair trade, but they got something wrong in the basic facts."

Given the degree to which the U.S. and Chinese economies have become intertwined, with firms in the United States relying on cheap products from China, Zhao predicted that the Bush administration's tactics would eventually provoke a backlash at home.

"They will not only harm China but also American interests," she said.

In Washington, some analysts suggested the tariff case reflects domestic politics, not the pursuit of genuine national interest. Grant Aldonas, a former Bush administration undersecretary of commerce for international trade, said U.S. companies doing business in China are chiefly interested in greater protection of copyrights and patents, combating rampant counterfeiting, and eliminating barriers to selling products.

"This is for consumption on Capitol Hill," Aldonas said. "I'm afraid the administration is being responsive to the wrong group."

Aldonas said the subsidy case would undercut the high-level dialogue between China and the Bush administration, led by Treasury Secretary Henry M. Paulson Jr., which is aimed at progress on major issues, such as persuading Beijing to reform its banking system to allow its currency to float with the market.

At least one of the Chinese companies targeted by the duties said it would fight the U.S. decision. Gao Junjie, a manager at the Shandong Chenming Paper Holdings, which would have a 10.9 percent duty imposed on its high-gloss paper, said the company had hired a team of lawyers.

Chenming sends about 10 percent of its paper to the United States each year. Its paper sells domestically for $850 a ton, but only $750 in the United States because it does not have to pay state taxes on its exports. The Chinese company also receives discounts on imported equipment and loans from state-owned banks, Gao said. He said the company does not think any of this assistance is illegal or unfair.

"The sanctions are completely unjustified," Gao said.

But that flow of credit explains why U.S. firms are crying foul.

"We can compete against Chinese wages, but competing against the deep pockets of the Chinese government is entirely different," said John Engler, president of the National Association of Manufacturers, in praising the Commerce Department's action.

Goodman reported from New York. Staff researchers Wang Juan and Crissie Ding contributed to this report from China.

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