China Calls U.S. Paper Duties `Unacceptable,' May Respond

By Eugene Tang and Mark Drajem

March 31 (Bloomberg) -- China's commerce ministry said U.S. tariffs on imports of coated paper from the nation are unacceptable and it reserves the right to take ``necessary'' action, signaling the dispute may escalate.

The U.S. Commerce Department, reversing more than two decades of practice, decided yesterday to levy countervailing duties to compensate for alleged Chinese subsidies to exporters. The change of policy opens the way for steel, textile and other U.S. manufacturers to apply for the same protection.

The tariffs ``have severely damaged the interests of Chinese industry,'' Commerce Ministry spokesman Wang Xinpei said in a statement today on its Web site. ``It's unacceptable and China strongly demands the U.S. to reconsider the decision.''

The dollar fell on concern the levies will provoke trade tensions with China, the second-largest holder of U.S. debt. The department's action comes as U.S. lawmakers, vexed by a record $232.5 billion trade deficit with China, prepare to consider stiffer measures aimed at fighting what many call the nation's weak currency, subsidies and other unfair trade practices.

The Commerce Department said Chinese paper producers benefit from government grants, tax incentives, debt forgiveness and other unfair subsidies. 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.

Countervailing Duties

Secretary of Commerce Carlos Gutierrez announced the tariffs at a press conference in Washington. The decision is preliminary and initial duties will range from 10.9 percent to 20.3 percent. The average tariff on glossy paper, used in magazines and art books, will average 18.16 percent.

Countervailing duties are tariffs imposed to offset the benefits of government subsidies. They are different from antidumping duties, which apply to goods sold overseas at or below the price they are sold in their home country.

Under decade-old practices, antidumping duties are the only ones that have been applied on products from ``non-market'' economies such as China because it's difficult to identify subsidies in those nations.

``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 yesterday.

`Very Dissatisfied'

The Chinese government lost a U.S. court case on March 29 aimed at preventing this decision. The combination of the court ruling and yesterday's decision may spur other industries to hire lawyers and file similar complaints.

China is ``very dissatisfied'' with the tariffs, which ``are clearly incompatible with the court verdict which has yet to take effect,'' China commerce ministry spokesman Wang said.

``We'll closely monitor and reserve the right to take any necessary action,'' Wang said in the statement, without saying what action the government may take.

The statement also criticized U.S. insistence on treating China as a non-market economy. Designation as a market economy would make it easier for Chinese companies to fight anti-dumping actions. The U.S. has imposed antidumping tariffs on Chinese televisions, furniture and textiles in the past four years.

More to Follow?

The dollar weakened 0.2 percent to $1.3358 against the euro at 4:19 p.m. in New York and declined 0.2 percent to 117.84 yen on speculation the levies will reduce trade flows from China.

China is the second-largest U.S. trading partner behind Canada and holds more than $400 billion of U.S. debt.

U.S. lawmakers and manufacturers accuse China of holding down the value of the yuan to spur exports. The nation's trade surplus jumped 74 percent to $177.5 billion last year, helping to power economic growth of 10.7 percent, the fastest in a decade.

The yuan has gained about 7.1 percent since China ended a decade-old peg to the dollar in July 2005, closing at 7.7302 to the U.S. currency yesterday. The government allows the yuan to move by no more than 0.3 percent either side of a daily reference rate against the dollar.

U.S. retailers and companies such as General Motors Corp., which import goods from China, oppose countervailing duties, arguing tariffs would be applied twice on many 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 say.

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.

``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.''

To contact the reporter on this story: Eugene Tang in Beijing on eugenetang@bloomberg.net ; Mark Drajem in Washington at mdrajem@bloomberg.net

Last Updated: March 31, 2007 03:19 EDT

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