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    China Business
     Aug 7, 2007
When tariffs encourage free trade
By Scott M Berry

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Despite decades of pro-market reforms, the United States still classifies the People's Republic of China as a non-market economy. Until recently, this designation has prevented US businesses from effectively combating the illegal subsidization of

Chinese industries. This is not to suggest that the US should prematurely change China's economic classification - such a step would discourage reform and retard further progress toward economic liberalization. Rather, lawmakers should allow US companies access to a tool designed to fight foreign subsidies - the countervailing duty.

A countervailing duty (CVD) is a tariff placed on imports whose production is subsidized by a foreign government. The tariff is calculated to match the exact amount of government subsidization and is paid "at the docks" (on entry to the country). Its precision makes it the perfect tool to counter unfair foreign trade practices because it effectively shifts the burden of the subsidy on to foreign suppliers.

Furthermore, foreign companies are cognizant of the costs they incur from CVDs, so there is an immediate incentive for them to pressure their government to cease the subsidization. Unlike other tariffs, CVDs are not intended to buoy domestic industries artificially - they actually encourage free trade by eliminating artificially low prices and encouraging fair competition.

As long as China retains its non-market status, however, its industries are in effect immune to the threat of CVD retaliation. The US Department of Commerce has long held that CVDs cannot be applied to non-market economies because of extensive state interference, which makes the degree of industrial subsidization impossible to calculate. This is a fair supposition, and has generally held true.

But China is no ordinary non-market economy. Enough market transformations have taken place to make it possible to detect many forms of subsidization, such as tax breaks, debt forgiveness, and low-cost loans - all illegal under Article 3 of the World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures. Significant reforms have already taken place over the past several decades, and US trade laws need to keep pace with the evolving global economy.

Using a cannon to kill a fly
In lieu of CVDs, US companies seeking relief from illegally subsidized Chinese goods have sought recourse through the Department of Commerce's archaic anti-dumping duties. As the name implies, these duties are intended to prevent the excessive dumping of cheap foreign goods into the US market.

Anti-dumping duties correct imbalances by slapping huge import fines on the targeted products, frequently exceeding 100% of the goods' original price. While anti-dumping duties may seem an effective deterrent, their application has proved counterproductive in the context of Chinese imports. Because anti-dumping duties are so excessive, their application gives China clear grounds to cry foul at the WTO, claiming US companies are intentionally applying duties that are too high in an effort to lock them out of the US market to protect America's own industries.

Not only does this diminish the United States' credibility on free trade, it also undermines its ability to push for further Chinese trade liberalization. Some international trade analysts have even suggested that excessive anti-dumping measures could spark a trade war between the United States and China.

One of the biggest roadblocks to tariff reform is the fear that CVDs will be used in conjunction with existing anti-dumping duties. This would place Chinese importers in "double jeopardy" - in other words, they could be forced to pay two import duties simultaneously. This outcome would render the precise nature of CVDs irrelevant, as well as further alienating the Chinese government.

Fortunately, concerns over the threat of "double-counting" are overblown - the practice is prohibited under both US and international trade law. Furthermore, new legislation could be carefully tailored to prevent the simultaneous application of anti-dumping duties and CVDs. Such a proposal should draw support from both sides of the US ideological spectrum - supporters of economic liberalization and domestic protectionists can find common ground in an effort to level the commercial playing field with China.

The US Department of Commerce has already set the stage for reform - in March, it made a preliminary determination that imports of coated-free sheet paper from China benefit from subsidies that are countervailable under US law. The Department of Commerce's finding came one day after the Court of International Trade dismissed a lawsuit filed by the Chinese government that sought to prevent the department from modifying its tariff policy.

The court held that it does not have jurisdiction to decide the case because the Department of Commerce has yet to make a final decision regarding the application of CVDs on Chinese imports. While the court did not directly address the department's legal authority to impose CVDs, its preliminary findings are encouraging. The court's opinion noted that "it is not clear that Commerce is prohibited from applying countervailing duty law to NMEs" (non-market economies).

The opinion also suggested that "nothing in the language of the countervailing duty statute excludes NMEs" and that the US Congress did not have an opportunity to address the issue because there were no NMEs at the time the CVD statute was enacted (1897). The door is open for much-needed reform, and Congress should take action to protect US industry and ensure fair competition by allowing for the imposition of CVDs on subsidized Chinese imports.

Scott M Berry is a senior policy analyst at the Center for Trade Liberalization and has a degree in political science and geography from the University of Mary Washington in Virginia.

(Copyright 2007 Scott M Berry.)

Speaking Freely is an Asia Times Online feature that allows guest writers to have their say. Please click here if you are interested in contributing.

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