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“[I]t is impossible to determine what a subsidy is in a state-controlled economy… Today, that reasoning is regarded as out-of-date as China has moved from a faltering economy two decades ago to an export superpower.”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.

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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“[I]t is impossible to determine what a subsidy is in a state-controlled economy… Today, that reasoning is regarded as out-of-date as China has moved from a faltering economy two decades ago to an export superpower.”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.

Continue reading →

Passionate Protectionists

Yonhap:

A South Korean man set himself afire on Sunday to dramatize his opposition to a proposed free trade agreement between his country and the United States, as negotiations were coming to a close, with an extended deadline only hours away.

Against the Democratic trade agenda

An Orange County Register editorial calls Democratic demands for labor and environmental standards “deal-breakers for genuinely freer trade.”

In a BBC interview (RealVideo), Cato’s Dan Ikenson says that the magnitude and timing of Democratic demands suggest they’re trying to terminate TPA rather than actually adopt their agenda.

What drives China's economy?

The Economist on China the “export juggernaut”:

So supercharged has the Chinese export machine become that it has sucked in vast quantities of parts and components for final assembly from other parts of Asia—Thailand, Malaysia, Singapore, the Philippines and Indonesia, as well as richer Taiwan and South Korea. The effect of WTO membership, in other words, has been to bind China more tightly into existing and highly sophisticated pan-Asian production networks, a task greatly facilitated by the internet. Everybody has benefited, even rich Japan, which in 2002-03 was pulled out of a decade and a half’s slump by Chinese demand for top-notch components and capital goods. South-East Asia has got a further boost: rich in resources, including rubber, crude oil, palm oil and natural gas, it looks likely to profit from China’s appetite for raw materials for a long time to come.

Trade within East Asia has grown even faster than the region’s trade with the rest of the world, suggesting deeper specialisation and integration. But China’s impetus has also profoundly altered the course of trade flows in Asia. As a paper last year by the Centre d’Etudes Prospectives et d’Informations Internationales (CEPII) in Paris describes, the China effect over the past decade or more has been the driving force behind a shift in Japan from exporting finished goods to Europe and North America towards exporting parts and components for assembly on the mainland. In turn, Japan now imports finished goods (such as office machines and computers) from China where previously they came from America and Europe.

I think this concluding claim may be subject to dispute:

Though very open to trade, China’s economy, like America’s, is essentially driven by its own huge domestic demand. This demand is now growing at a clip of 9% a year and starting to act as a regional engine of growth, sucking in imports.

For example, Nick Lardy argues:

China’s external surplus continues to balloon and, short of a US recession, seems likely to expand further in 2007. Household consumption as a share of GDP continued to decline in the first half of 2006. Despite much lip service to increasing budget outlays on social services, little evidence of a fundamental shift in government spending has emerged. So Chinese households’ precautionary saving persists. There is little evidence of a more flexible exchange rate and increased independence of monetary policy that would allow higher domestic interest rates. These and other factors suggest that China’s transition toward more consumption-driven growth is likely to be substantially delayed.

UPDATE: Brad Setser has more along that line of thought.

What drives China's economy?

The Economist on China the “export juggernaut”:

So supercharged has the Chinese export machine become that it has sucked in vast quantities of parts and components for final assembly from other parts of Asia—Thailand, Malaysia, Singapore, the Philippines and Indonesia, as well as richer Taiwan and South Korea. The effect of WTO membership, in other words, has been to bind China more tightly into existing and highly sophisticated pan-Asian production networks, a task greatly facilitated by the internet. Everybody has benefited, even rich Japan, which in 2002-03 was pulled out of a decade and a half’s slump by Chinese demand for top-notch components and capital goods. South-East Asia has got a further boost: rich in resources, including rubber, crude oil, palm oil and natural gas, it looks likely to profit from China’s appetite for raw materials for a long time to come.

Trade within East Asia has grown even faster than the region’s trade with the rest of the world, suggesting deeper specialisation and integration. But China’s impetus has also profoundly altered the course of trade flows in Asia. As a paper last year by the Centre d’Etudes Prospectives et d’Informations Internationales (CEPII) in Paris describes, the China effect over the past decade or more has been the driving force behind a shift in Japan from exporting finished goods to Europe and North America towards exporting parts and components for assembly on the mainland. In turn, Japan now imports finished goods (such as office machines and computers) from China where previously they came from America and Europe.

I think this concluding claim may be subject to dispute:

Though very open to trade, China’s economy, like America’s, is essentially driven by its own huge domestic demand. This demand is now growing at a clip of 9% a year and starting to act as a regional engine of growth, sucking in imports.

For example, Nick Lardy argues:

China’s external surplus continues to balloon and, short of a US recession, seems likely to expand further in 2007. Household consumption as a share of GDP continued to decline in the first half of 2006. Despite much lip service to increasing budget outlays on social services, little evidence of a fundamental shift in government spending has emerged. So Chinese households’ precautionary saving persists. There is little evidence of a more flexible exchange rate and increased independence of monetary policy that would allow higher domestic interest rates. These and other factors suggest that China’s transition toward more consumption-driven growth is likely to be substantially delayed.

UPDATE: Brad Setser has more along that line of thought.

What drives China’s economy?

The Economist on China the “export juggernaut”:

So supercharged has the Chinese export machine become that it has sucked in vast quantities of parts and components for final assembly from other parts of Asia—Thailand, Malaysia, Singapore, the Philippines and Indonesia, as well as richer Taiwan and South Korea. The effect of WTO membership, in other words, has been to bind China more tightly into existing and highly sophisticated pan-Asian production networks, a task greatly facilitated by the internet. Everybody has benefited, even rich Japan, which in 2002-03 was pulled out of a decade and a half’s slump by Chinese demand for top-notch components and capital goods. South-East Asia has got a further boost: rich in resources, including rubber, crude oil, palm oil and natural gas, it looks likely to profit from China’s appetite for raw materials for a long time to come.

Trade within East Asia has grown even faster than the region’s trade with the rest of the world, suggesting deeper specialisation and integration. But China’s impetus has also profoundly altered the course of trade flows in Asia. As a paper last year by the Centre d’Etudes Prospectives et d’Informations Internationales (CEPII) in Paris describes, the China effect over the past decade or more has been the driving force behind a shift in Japan from exporting finished goods to Europe and North America towards exporting parts and components for assembly on the mainland. In turn, Japan now imports finished goods (such as office machines and computers) from China where previously they came from America and Europe.

I think this concluding claim may be subject to dispute:

Though very open to trade, China’s economy, like America’s, is essentially driven by its own huge domestic demand. This demand is now growing at a clip of 9% a year and starting to act as a regional engine of growth, sucking in imports.

For example, Nick Lardy argues:

China’s external surplus continues to balloon and, short of a US recession, seems likely to expand further in 2007. Household consumption as a share of GDP continued to decline in the first half of 2006. Despite much lip service to increasing budget outlays on social services, little evidence of a fundamental shift in government spending has emerged. So Chinese households’ precautionary saving persists. There is little evidence of a more flexible exchange rate and increased independence of monetary policy that would allow higher domestic interest rates. These and other factors suggest that China’s transition toward more consumption-driven growth is likely to be substantially delayed.

UPDATE: Brad Setser has more along that line of thought.

China hit by US CVDs

The US Commerce Department has approved the application of countervailing duties to Chinese exports of coated paper, ending a 23-year policy of not applying CVDs to non-market economies. The FT says the move has weakened the dollar. Emmanuel thinks the US may be unleashing a trade war.

CVDs are the economically appropriate response to damaging subsidization (which may or may not be what’s happening here) and authorized under WTO rules, so the US action is not a blatant act of protectionism.

Here’s a helpful GAO backgrounder explaining some of the complications the move may involve:

Commerce could reclassify China as a market economy or individual Chinese industries as “market oriented” and apply CVDs against China as a market economy. Commerce has criteria for such determinations, but said that China is unlikely to satisfy them in the near term. It could also reverse its 1984 position and apply CVDs without any change in China’s NME status. However, absent a congressional grant of authority, such a decision could be challenged in court, with uncertain results. World Trade Organization (WTO) rules do not explicitly preclude either alternative.

Commerce would face challenges, regardless of the alternative adopted. Chinese subsidies remain difficult to identify and measure. Employing third-country information or “facts available” may help, but would not eliminate these difficulties. Commerce lacks clear authority to fully implement China’s WTO commitment on use of third-country information in CVD cases.

What happens next?

China will have a window of seven days to decide whether it wants to negotiate a suspension agreement with the United States. We have a funny feeling you should be on the lookout for this, since a suspension agreement would let China avoid the technical decision of U.S. anti-subsidy duties, which it clearly wants to avoid.

But a suspension agreement would come with a price – and that is likely to be a Chinese commitment to eliminate any of the subsides Commerce targets in its preliminary ruling, which could be tough.

The Department of Commerce press release is not very informative about the methodology used or particular subsidies identified, so I don’t have a clear understanding of the issue at this stage. Developing…

UPDATE: FT: ”’The Chinese side strongly demands the US to reconsider this decision and make prompt changes’… Beijing’s commerce ministry hinted it might consider retaliatory action for the new US duties, or if it is subjected to additional penalties.”