Where are Commerce’s Chinese subsidy calculations?

Dan Drezner is sympathetic to the imposition of countervailing duties on Chinese coated paper exports, since “this policy shift seems to make sense within the context of what those duties are supposed to accomplish.” He links to a NY Times piece describing the Department of Commerce’s previous position on non-market economies: “[I]t is impossible to determine what a subsidy is in a state-controlled economy… Today, that reasoning is regarded as out-of-date as China has moved from a faltering economy two decades ago to an export superpower.”

Is there good reason to believe that the calculation of the countervailing duties has become feasible? The GAO backgrounder I quoted suggested that Commerce’s calculations might rely upon third-country data. The department’s press release (pdf) and fact sheet (pdf) say nothing about how they determined the subsidization rates. (If you know where to find that information, please let me know.)

The specific allegations I’ve seen in the press are low-interest loans, tax breaks, and other subsidies. Given the structure of China’s financial system, I doubt those were easily identified. That means I’m unable to refute Zhou Shijian, a former trade negotiator for China, who says “the U.S. Department of Commerce hasn’t produced substantive evidence.”

Below the fold, I’ve reproduced a few paragraphs from two segments of the USITC’s December determination on coated sheet paper from China, Indonesia, and Korea. (I don’t recommend reading the full 198 pages (pdf).) The first portion is the ruling on the volume of imports. The second is the chairman’s dissent. I think the dissenting opinion, which focuses more greatly on product differentiation, is the preferable interpretation, but the more intriguing aspect is the degree to which the determination depends on the interpretation of a single data point.

The determination:

Section 771(7)(C)(i) of the Act provides that the “Commission shall consider whether the volume of imports of the merchandise, or any increase in that volume, either in absolute terms or relative to production or consumption in the United States, is significant.”

The absolute volume of cumulated subject imports rose throughout the POI. The largest single-year increase was between 2003 and 2004, when the volume of subject imports rose from *** short tons to *** short tons. Volume rose again to *** tons in 2005. In interim 2006, the volume of cumulated subject imports reached *** short tons, which was higher than the volume in either interim or full-year 2005.

During the POI, cumulated subject imports also rose relative to production and consumption in the United States. Subject imports’ share of U.S. apparent consumption rose from *** percent in 2003 to *** percent in 2005, and was *** percent in interim 2006, compared with *** percent in interim 2005. During the 2003-2005 period, subject imports’ gain in market share came largely at the expense of non-subject imports, the market share of which declined from *** percent in 2003 to *** percent in 2005.117 In interim 2006, however, subject imports’ continued gain in market share was directly at the expense of the domestic industry, the market share of which was *** percent in interim 2006 compared with *** percent in interim 2005, while non-subject imports’ market share declined only slightly. In addition, the ratio of subject imports to domestic CFSP production rose over the POI.

For the foregoing reasons, we find, for purposes of the preliminary phase of these investigations, that the volume of subject imports is significant, both in absolute terms and relative to consumption and production in the United States.

The dissent:

In relative terms, however, the increases in the volume of subject imports were more modest. In 2003, subject imports accounted for *** percent of apparent U.S. consumption. In 2005, subject imports accounted for *** percent of apparent U.S. consumption, an increase of less than *** percentage points. Furthermore, that modest increase came at the expense of other imports. Nonsubject imports accounted for *** percent of apparent U.S. consumption in 2005, down from *** percent in 2003. The market share of the domestic like product was, in 2005, essentially unchanged from 2003, *** percent to *** percent. In interim 2006, subject imports were *** percent, up from *** percent in interim 2005. But shipments of the domestic product in interim 2006 still accounted for *** percent of the market, while nonsubject imports accounted for *** percent.

The volume data alone present a mixed picture, with absolute increases but rather modest shifts in market share. In addition, the record indicates a notable attenuation of competition between subject imports and the domestic like product. As noted, web rolls account for a significant majority of apparent U.S. consumption. Similarly, domestic production is heavily concentrated on the web roll sector. Subject imports, however, are heavily concentrated in sheets and, to a lesser extent, sheeter rolls. Of the nearly *** short tons of subject CFSP imported between 2003 and 2005, less than *** short tons were web rolls. The record does not provide an indication why web rolls did not account for a more significant share of subject imports, as web rolls are produced in each of the subject countries. Respondents claim that shipping difficulties make web rolls an unprofitable and difficult item to ship, but the record indicates that respondents did ship modest volumes of sheeter rolls, which suggests that the shipping of rolls can be done profitably. Whatever the reason, subject imports were essentially absent from the product segment that accounts for approximately 70 percent of apparent U.S. consumption, and this absence was consistent over the POI.

Web rolls are designed for use in rotary web presses and are intended for high-volume printing through high-speed presses at high temperatures. Sheet CFSP, on the other hand, is intended to be used in sheet-fed presses, for shorter runs, with higher-grade finishes. The record provides no indication that these products are interchangeable in the market.

Thus, the record indicates that subject imports increased modestly relative to overall apparent domestic consumption. The market share of subject imports increased between 2003 and 2005, but that increase came at the expense of nonsubject imports rather than the domestic industry, and only in interim 2006 did the market share of the domestic industry decline modestly. The record indicates that subject imports were absent from a significant segment of the domestic market. For these reasons, I find that the volume of subject imports is not significant.

In interim 2006, however, subject imports’ continued gain in market share was directly at the expense of the domestic industry” versus “only in interim 2006 did the market share of the domestic industry decline modestly”! And this debate is about an undisputed fact – the market share of imports. Imagine making determinations about estimates of subsidization via low-interest loans!

4 thoughts on “Where are Commerce’s Chinese subsidy calculations?

  1. Daniel W. Drezner

    Two steps forward, one step back on trade

    The two steps forward are that the United States and South Korea signed a free trade deal just before the deadline of having it approved under President Bush’s Trade Promotion Authority. The New York Times’ Choe Sang Hun explains: United…

  2. Joshua Xanadu

    One problem with the “China is no longer a non-market economy, but a export superpower” argument FOR the countervailing duties is that WE WILL STILL use the non-market argument to impose anti-dumping duties!

    From past experience, this has allowed shoddy U.S. manufacturers beaten by Chinese exporters (and voted by U.S. consumers) to sustain themselves purely through anti-dumping kickbacks through the double-dipping Byrd Amendment.

    If they no longer allow anti-dumping, then I could see justification for countervailing measures. But since we will likely continue both, this will also be compounded by the completely illegal Byrd Amendment. (Canada, EU, and virtually everyone else including the WTO recognizes this)

  3. China Hand

    Hi, Jonathan, I write a blog on China affairs called China Matters. I’m a first-time reader but considering the way the China trade war seems to be heating up, I’ll be back often. I see the CVD determination as part of a “managed trade” middle way between free trade and fair trade, using US legal trade barriers as levers to dismantle Chinese trade barriers, much as we tried to do with Japan. I also think Treasury is running the China show because the main US priority is increased foreign access to Chinese financial markets. I make my case at the URL given above. I’d be interested to know what your take is.
    China Hand

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