Tuesday, May 29, 2007

Defining China's Economy

Defining China's Economy
May 29, 2007

Since the U.S. Commerce Department imposed preliminary duties on Chinese paper imports in March, it's had a troubling question on its hands: What is China today, a market economy, or a nonmarket economy?

For over two decades, U.S. law has considered China a "nonmarket" economy. That makes sense to us, given that credit on the mainland is still largely doled out by state-owned banks, with little nod to market forces. The Party may have welcomed the creation of private companies -- and there are many -- but its grip on the levers of power remains firm.

The paper case, however, implied that Commerce thought Chinese companies, in some cases, can be evaluated as operating in a market economy. That put the Department in an awkward spot. For antidumping cases, when a U.S. firm alleges that a Chinese firm is selling at "below market" costs in the U.S., Commerce uses "surrogate" prices to estimate the Chinese company's costs. But in the case of countervailing duties, Commerce is now saying it can use Chinese prices -- implying the mainland is a market economy.

Now, Commerce is trying to mop up this mess. Last week, the Department filed a notice asking for advice on whether it "might grant market-economy treatment to individual Chinese respondents, and, if so, how this might affect our antidumping duty calculations for such enterprises."

If Commerce decides that some China firms aren't subject to surrogate price analysis, that could reduce the sting of some antidumping cases. But the fact remains that the paper case opened up a whole new world of protectionist filings, anyway, in the form of countervailing duties.

It's conceivable that Commerce could, someday, hit Chinese companies with both duties and dumping charges, a form of doublecounting. No matter how Commerce defines China, it's protectionism that's defining Washington these days.

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