SPEAKING FREELY 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 hereif you are interested in
contributing.
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