Commerce Department Applies New Duties Against China (Update7)

By Mark Drajem

March 30 (Bloomberg) -- The U.S. Commerce Department, reversing more than two decades of practice, decided today to levy new duties on imports from China to compensate for Chinese subsidies to exporters.

The change of policy by the Bush administration, which debated the action for months, applies initially to imports of coated paper from China. It also opens the way for steel companies, textile producers and other manufacturers facing competition from China to apply for the same protection.

``This decision is the most significant step toward a stronger trade policy with China than we have experienced in this decade,'' Republican Representative Phil English of Pennsylvania said in a statement.

Concern that the decision might provoke trade tension with China sent the dollar lower and stocks down earlier in the day. The dollar fell 0.2 percent to $1.3358 against the euro at 4:19 p.m. in New York. The Dow Jones Industrial Average rose 5.60 or 0.05 percent, to 12,354.35 today after earlier falling as low as 12,242.60.

China is the second-largest U.S. trading partner behind Canada and holds more than $400 billion of U.S. debt. The overall U.S. trade deficit with China reached $232.5 billion last year, the largest trade gap between two nations in history.

Some Chinese producers ``are being singled out by the government to receive subsidies, and, therefore, represent unfair competition,'' Commerce Secretary Carlos Gutierrez, who announced the change today, said in an interview. ``We don't see this as protection. We simply are applying the rules.''

The department's action comes as U.S. lawmakers, aggravated by the record trade deficit, are preparing to consider stiffer measures aimed at fighting what many call China's weak currency, unfair subsidies and other trade practices.

No `Body Blow'

``This is a response to the size of the trade deficit and Congress,'' said Jeffrey Bader, who heads China studies at the Brookings Institution in Washington. ``The administration wanted to do something that doesn't deliver a body blow to trade, but will be seen as responsive to domestic concerns.''

Under decade-old practices, antidumping duties are the only ones that have been applied on products from countries such as China with managed economies because it is difficult to identify subsidies in those nations.

Antidumping duties apply to goods sold overseas at or below the price they are sold for in the home country. Separate tariffs, called countervailing duties, aim to offset the benefits of government subsidies, and those are the tariffs Gutierrez announced today in Washington.

The decision to levy countervailing duties is preliminary. The initial duties will range from 10.9 percent to 20.3 percent. The average tariff on the glossy paper, used in glossy magazines and art books, will average 18.16 percent for China.

Court Ruling Yesterday

The Chinese government lost a U.S. court case yesterday aimed at preventing this decision. The combination of yesterday's court ruling and today's decision may spur industries to hire lawyers and file similar complaints.

``You are going to see a proliferation of these cases now,'' said James Jochum, a partner at the law firm of Mayer, Brown, Rowe & Maw LLP in Washington and the former top Commerce Department official responsible for deciding import complaints. ``This is a significant move. It isn't a one-off thing.''

Gutierrez said that in the 1980s and 1990s, Chinese or other companies in non-market economies wouldn't change their behavior in response to other nations' tariffs.

Now, as China becomes a greater participant in world markets, ``Chinese companies do change their behavior,'' he said.

Retailers Opposed

U.S. retailers and companies such as General Motors Corp., which import goods from China, oppose levying countervailing duties, arguing it means duties would be applied twice on many Chinese products -- once for dumping and once for subsidies. Any advantage a company in China gets from a subsidy is already offset by steeper antidumping duties levied against non-market economies, they argue.

Steel producers, such as Charlotte, North Carolina-based Nucor Corp., and textile makers say that expanded tariffs are necessary to protect them from unfair, subsidized Chinese competition.

The immediate case concerns a complaint by NewPage Corp. that low-cost imports of subsidized glossy paper from China, South Korea and Indonesia are harming its profitability.

The preliminary duties on South Korean paper products will be 1.76 percent with some companies exempted. Indonesian companies will have to pay 21.24 percent rates, Commerce also announced.

More Than Doubled

China's exports of coated paper more than doubled in 2006 to $224 million from their level in 2005, according to U.S. government data.

Dayton, Ohio-based NewPage, the largest maker of coated paper in the U.S., has operations in Kentucky, Maine, Maryland and Michigan. The complaint was also backed by the United Steelworkers, which represents workers at NewPage.

``The administration's decision only comes after years of public outcry over Chinese subsidies,'' said union president Leo Gerard.

Importers of this paper will be charged these duties once this decision is published in the Federal Register. The duties will be adjusted -- and may be withdrawn -- in a final Commerce ruling that must be made before mid-October. After that decision, the U.S. International Trade Commission will rule one last time before the tariffs are officially imposed. If the ITC rejects the duties, companies will be refunded tariffs they paid.
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