INSIGHT: US tightens the screws on trade policy with China

15 March 2012 17:23  [Source: ICIS news]

US tensions with China over trade intensifyBy Joe Kamalick

WASHINGTON (ICIS)--The US this week turned the screws tighter still on trade policy with China, launching a new case against Beijing before the World Trade Organization (WTO) and passing legislation to facilitate trade-related penalties against the Middle Kingdom.

The US joined Japan and the EU in filing a complaint against China before the WTO, charging that Beijing continues to restrict exports of rare earths critical to refining, petrochemicals production and other industries.

In announcing the WTO complaint, US trade representative Ron Kirk said that “America’s workers and manufacturers are being hurt in both established and budding industrial sectors by these policies”.

China continues to make its export restraints more restrictive, resulting in massive distortions and harmful disruptions in supply chains for these materials through the global marketplace,” he added.

The 17 chemical and mineral substances known as rare earths also are crucial to the manufacture of weapons and space systems, lasers and fibre optic communications, to name but a few applications.

Despite the name, rare earth elements (REEs) are not actually rare – most of them are found in almost any soil around the world – but extremely rare are those areas in which these substances can be found in concentrations that make mining them commercially feasible. China supplies about 95% of rare earth elements worldwide.

In addition to a variety of restrictions imposed by Beijing on REEs, the US complaint said that China puts similar restraints on its exports of materials other than REEs, including intermediate products derived from REEs, such as tungsten and molybdenum.

In all, China restricts the export of more than 100 materials covered under WTO tariff codes, the office of the US Trade Representative (USTR) said.

The new multinational charges against China came just six weeks after the WTO ruled in the US's favour in an earlier complaint about Beijing’s trade restrictions.

They also followed charges levelled at Beijing in early February before the congressionally chartered US-China Economic and Security Review Commission (USCC), alleging that China is also moving to control critical resources in other countries.

Citing the earlier WTO findings on Beijing’s trade restrictions, Kirk said: “China’s export restraint measures on rare earths, tungsten and molybdenum appear to be part of the same troubling industrial policy aimed at providing substantial competitive advantages for Chinese manufacturers.”

In addition to the key role played by these restricted materials – often as catalysts, in petrochemicals production and refining – rare earths and the other two metals are critical to the manufacture of such products as hybrid auto batteries, wind turbines, steel and advanced electronics.

In the action filed on Tuesday, the US asked the WTO to host consultations between Washington and Beijing.

That request for consultations is the first formal step in the WTO dispute-resolution process.

If those talks do not produce satisfactory results within 60 days, the US would request that the WTO establish a dispute settlement panel to examine the charges against Beijing and rule on their validity.

Perhaps more significant than the new WTO complaint, Congress this week passed and President Barack Obama signed into law a bill, HR 4105, that amends the US Tariff Act in a way that allows the US to begin imposing countervailing duties on imports of goods from non-market countries that subsidise the production or export of those goods.

The original 1930 Tariff Act exempted non-market countries – such as Communist command-economy nations – from US countervailing duties on the grounds that the economy of such a country is essentially a single entity.

In other words, the output of a non-market economy is wholly subsidised, as the national government more or less controls everything. 

Application of countervailing duties against imports from a non-market economy, it was reasoned in the 1930 statute, would produce absurd results, effectively barring that country’s products entirely.

The Obama administration had previously tried to impose countervailing duties on some China-made products using a different statute, but in December 2011, a federal appellate court ruled that bypassing the Tariff Act was illegal.

In turn, this prompted broad bipartisan support in Congress for HR 4105 to amend the Tariff Act.

That change received broad support because over the last several years – especially during and even after the 2008–2009 recession – public sentiment has grown against China for its real or suspected unfair trading practices and industrial espionage targeting the US.

Aggravating that growing public hostility is the fact that the quadrennial US presidential election campaign season is in full fury, and many candidates are vying for votes with promises to get tough on China if elected.

Given the tenor of the times, Obama could not have vetoed HR 4150, even if he had wanted to do so. He would probably have been blasted for being “soft” on China and inconsiderate of American workers hurt by Beijing’s unfair trading practices.

But making Chinese exports now subject to countervailing duties could elevate what has been a fairly low-key, tit-for-tat US-China exchange of WTO charges and counter-charges into a much wider and more consequential trade war between the two major economies.

Daniel Ikenson, a senior trade policy analyst at the conservative Cato Institute in Washington, DC, predicts that by enacting HR 4105, the US will “likely spark harsh reprisals from Beijing in the form of retaliatory tariffs and other market restrictions” because ending China’s status as a non-market economy under US law will be “perceived as a direct affront to Chinese exporters”.

The first shot might well have been fired in what could become a growing transpacific trade war.

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy


By: Joe Kamalick
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