Rough Road Ahead for U.S.-China Trade

The U.S. move to slap Chinese glossy paper with duties on subsidy grounds changes the trade playbook—and creates further opportunities for discord

by Frederik Balfour

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Abrupt and unilateral trade sanctions by the U.S. directed at China are scarcely a new phenomenon. Since China joined the World Trade Organization in 2001, the U.S. has slapped dozens of anti-dumping measures on Chinese exports—such as color TVs, wooden furniture, and steel, not to mention brassieres and bath towels—and made three separate appeals to the WTO on matters regarding Chinese subsidies.

But the decision on Mar. 30 to impose countervailing duties on imports of glossy paper manufactured in China is a game-changer. It marks a significant departure from past practices and could well signal some nasty months ahead between Washington and Beijing. With the U.S. heading into a Presidential election cycle, and given a $232.5 billion trade deficit with China, hectoring the mainland on trade is a very tempting political proposition.

Just how China will react long term is unclear (though trade officials blasted the U.S. move on paper products) and the Chinese government's recent policy of token measures instead of fundamental reforms may have to be revised. So far this decade, Beijing has managed to calm things down with the Bush Administration using some headline-grabbing purchases of U.S. goods.

Reversing a Policy

Last year Beijing announced a multi-billion dollar deal to purchase Boeing (BA) aircraft and there are reports out now that China will make $12.5 billion worth of additional purchases of U.S. soybeans, cotton, machinery, and electronics. But with trade numbers having grown so gargantuan, China's biggest trading partners—or at least the U.S.—aren't likely to be bought off so easily this time around.

By adding countervailing duties to its trade protectionist toolbox, the U.S. is reversing a 23-year policy against such measures when it comes to so-called non-market economies such as China. One reason is that the U.S. Commerce Dept. has usually argued that identifying a specific subsidy underpinning an export sector is a very tough thing to do in a country such as China, where free land and cheap tax credits, not to mention preferential pricing between state-owned suppliers, are prevalent.

"This new development is very important," says Wang Yong, director of Beijing University's Center for International Political Economy. "The U.S. is changing the rules of the game between the two countries." The view that Washington is ratcheting up the pressure is shared by Shanghai-based Standard Chartered's Stephen Green who says this focus-shift to punishing Chinese companies for the alleged government breaks they receive is "a landmark development" for U.S.-Chinese trade relations.

All Exporters Vulnerable

He reckons this latest move could pave the way for the U.S. to impose duties on all sorts of Chinese companies, and on Chinese-based companies in which foreigners have a stake, an opinion shared by many in Washington. Frank Lavin, the U.S. Under-Secretary of Commerce for International Trade, suggested in a recent speech hosted by the National Association of Manufacturers in Washington that the action on Chinese coated paper makers has "implications [that] could go well beyond this case and its particulars."

But by ruling that value-added tax exemptions and bank loans of any kind are a form of subsidy, any mainland-based exporter is potentially vulnerable, including foreign firms. That means, for example, a foreign manufacturer, based in the heartland city of Chengdu, that received a favorable land deal and a cheap loan could be fair game if its exports to the U.S. were viewed as damaging.

While this new U.S. trade strategy will be targeting primarily Chinese firms, even a very aggressive campaign would make little difference in the lopsided bilateral trade numbers between the countries. The U.S., for instance, only imported $224 million worth of coated paper from China last year, a fraction of the $287.8 billion in total imports from China last year.