Say it with tariffs

Zheng Rui sounds just one tone short of exasperated even though it’s been weeks since the US Department of Commerce announced its clampdown. The executive director for China of Asia Pulp & Paper (APP), one of the world’s largest producers of paper and packaging materials, says that even during the financial crisis his firm was able to maintain growth without undermining its US rivals.

"We were getting market share from European companies, not American domestic producers. There is no indication of injury," said Rui. "Domestic producers’ underperformance is not related to the market share of imports!"

The US said in March that it would impose preliminary countervailing duties of between 3.92% and 12.83% on coated paper imports from China in response to government subsidies that were deemed to give Chinese producers an unfair competitive advantage. APP is hoping the International Trade Commission (ITC) will ultimately reject them.

"We were very disappointed with the preliminary ruling because we had beaten the exact same case three years ago. The ITC found there was no injury to domestic US producers from Chinese coated paper," said Rui. "The case is still under review so we will concentrate our focus to defend and fight."

The EU has also threatened an anti-subsidy investigation – its first – into Chinese coated paper imports, but paper is just one of many industries caught up in the growing number of trade disputes between Beijing and its major trading partners.  The list of goods targeted by antidumping and countervailing measures makes interesting reading: tires, car parts, chicken parts, ribbons, electric blankets, shoes, PVC, steel drill pipes, seamless steel pipes, oil drill pipes and casings, and any number of organic and inorganic chemicals.

A war with no winners

As this list grows, so too has talk of a trade war with China, particularly after the US Trade Representative’s Office released a report in April accusing Beijing of raising protectionist, non-tariff barriers to trade. While many would agree that the number of trade disputes could increase depending on the global economic climate, an all-out clash over commerce is unlikely. Quite simply, nobody wants one – and weaker nations have more to lose.

"China is a big boy now, but it is still a poor country," said Razeen Sally, director of the European Centre for International Political Economy (ECIPE). "If you’re talking about mutual losses between the US, EU and China, China would most likely lose more because it is still behind the West. New relationships with BRIC countries will not substitute these crucial relationships with the US and EU."

The value of the Chinese currency has been a key point of tension in relations between China and its trading partners, and in their calling for further actions against Beijing. The renminbi has maintained a stable rate of about RMB6.83 to the US dollar since the onset of the financial crisis, a valuation that the US and others have continuously pressured China to alter. Many argue that an undervalued renminbi is first and foremost an export trade subsidy, and one of the causes of China’s growing trade surplus.

 "In the US there is a raging debate as to whether China is using its currency as an export subsidy and if that can be addressed by some sort of policy or through trade laws," said Theodore Kassinger, senior partner at O’Melveny & Myers in Washington DC, and former counsel general and deputy secretary of the US Department of Commerce under the Bush Administration. "The administration has resisted that but there is a lot of political pressure."

To date, US policy makers have resisted growing calls to label Beijing a "currency manipulator," with Treasury Secretary Timothy Geithner postponing a report in April on US trade partners’ currency policies. He also met with his opposite number in China in a surprise visit designed to quell calls from Congress to take tougher action.

On a recent visit to the US capital, President Hu Jintao bluntly stated that while China would "firmly stick to a path of reforming the [renminbi’s] exchange rate formation mechanism," appreciation of the domestic currency "would neither balance Sino-US trade nor solve the unemployment problem in the US."

Echoing this sentiment, Susan Schwab, strategic advisor to law firm Mayer Brown and former US Trade Representative under the Bush administration, said addressing the currency issue is no substitute for the US getting its own economic house in order – and likewise with the Chinese. "More importantly, China is not going to act on the renminbi just because we asked them to," she said.

Schwab noted that lately there has been evidence of a lowering of the bilateral temperature as leaders seek to prevent the currency issue from spilling over into something uglier. However, neither side can appear to be acting under pressure from the other, and negotiations are likely to be ongoing.

European indecision

In Europe, the trade debate is not as polarized or politicized as it is in the US. As a result, there is a less pressure coming from the EU on exchange rates and the bilateral trade deficit, and any antagonistic fervor is relatively toned down.

"There’s no fixed position on China," said ECIPE’s Sally. "There’s a lot of indecision in the EU about what to do about China. Why? Partly because of the way Brussels works – different constituencies with different positions, as well as different member states with their own position on China, particularly Great Britain, France and Germany."

Despite signals that China will indeed upwardly adjust the value of its currency, in time and on its own terms, trade skirmishes continue, with Beijing in turn picking up the gauntlet: It has filed cases against countries including the US in areas like cars and chicken parts.

From a US perspective, said Kassinger at O’Melveny & Myers, these and other cases raised by China, including its recently imposed duties on imports of electrical steel from the US and Russia, seem to be merely retaliatory actions, and not really justified on the merits.

"The number of cars exported to China from the US is miniscule," he said. "Does anyone really believe that these are really causing injury to China’s auto industry? From the US side there is some troubling tit-for-tat action from China; from a Chinese perspective there is a lot of unjustified protectionist action."

Since the onset of the financial crisis, the number of trade disputes globally has risen as governments have taken remedial action to protect indigenous industry. The growing divide between developed Western economies and developing economies like China is now all the more noticeable, but Schwab says this phenomenon started some time ago. "I think that what we saw with the recession and over the last 18 months is an acceleration of trends that existed before the economic crisis: emerging economies advancing, growth of Western economies falling," she said. "Evolution of a multi-polar global economy predates the recession."

Pu Lingchen, senior partner at Zhonglun Law Firm in Beijing, agrees that the economic downturn proved a watershed in the history of China’s trade relationships. But he argues that globalization and the development of Chinese industry over the past decade have strengthened the country’s economic clout and, in doing so, brought some unwelcome attention from trading partners. The 265 cases brought against China since 2008 – largely by the US, EU, Canada and India – are testament to this.

"Trade remedies, like anti-dumping measures, are escalating in a very obvious way," said Pu, who also serves as a legal advisor to the Ministry of Commerce and has defended Chinese enterprises in anti-dumping, anti-subsidy, and safeguards proceedings.

Proactive response

Some Chinese companies are taking note of this escalation and are gearing up for what they see as protectionist threats to their business. Yin Minshan, CEO and co-founder of Chongqing Lifan Group, a vehicle and auto parts maker, said his company has readied itself for possible future actions by setting up an in-house legal department. About a dozen international trade lawyers are on staff to waterproof compliance and contracts.

Yin believes there is a widespread misunderstanding of China among developed nations: They look at China’s rapid economic emergence and at their own domestic unemployment rates, and then hone in on what they perceive to be an unfavorable balance of trade. "Attacking China’s exports is not fair – it just shows a jealous mentality," said Yin.

Zhonglun’s Pu contends that there is an imbalance between trade and economic power: The rules that China said it would adhere to on joining the WTO in 2001 were set by developed economies, but the dynamics have altered since then. With government researchers expecting the value of Chinese trade to reach US$5.4 trillion by 2020, the country is pushing to have a greater say in the international arena. This is transforming multilateral and bilateral relationships.

The regulation game

If the trade environment has changed then so have the channels through which trade action is taken. According to ECIPE’s Sally, the financial crisis has accelerated threats of protectionism in China and other parts of the world, but not through typical, textbook measures like tariffs and quotas. Governments are instead opting for more subtle strategies, often involving domestic regulatory action.

"[These] are more difficult to limit, to contain, or to reverse than classical protectionist instruments, which are also more constrained by WTO disciplines," said Sally.

Such subtle strategies serve as a reminder to trade groups that even if China does resume currency appreciation, many of Beijing’s industry regulations still favor local enterprises, thereby creating barriers to entry for foreign players.

The "indigenous innovation" rules included in China’s government procurement program are a case in point: By potentially prohibiting foreign companies that did not have "Chinese intellectual property and proprietary brands," overseas technology firms were ineligible for multi-billion dollar government bids. The rules were widely criticized by trade groups such as the American Chamber of Commerce and the European Chamber of Commerce as being ultimately protectionist in nature.

While the Ministry of Science and Technology has now omitted this clause from its government procurement rules, EU Ambassador Serge Abou is still cautious about how the move will play out. "At first glance it is better," Abou said of the new rules. But he stressed that implementation will be the proof of the pudding.

"Foreign companies should enjoy the same rights as local companies," he said. "They employ people, contribute to growth, to research and innovation, but we have seen symptoms of our companies not being treated the same as Chinese companies."

Technology is likely to continue to be a contentious issue for foreign firms both in terms of implementation of intellectual property rules, standard-setting and government procurement regulations. But Pu at Zhonglun, who has defended mainland firms producing everything from shoes to steel, sees Chinese exports as facing the greater threat – and as in the case of APP’s coated paper, it’s not just about high technology.

Hurting the little guy

"Protectionism occurs across almost all sectors, from raw materials, like chemicals, minerals, metals, to consumer products, auto parts, and electronics," Pu said. He maintains that US and EU trade action has resulted in some small- and medium-sized enterprises going out of business, particularly in low margin sectors like chemicals and footwear.

Needless to say, opinion is divided on the matter. Robert Poole, vice president of the US-China Business Council in Beijing, argues that only about 3% of China’s trade to the US is affected by anti-dumping, countervailing duties or other measures. About the same number – approximately 4% – of US trade with China is subject to tariffs or other regulatory actions.

"In the grand scheme of things it is a miniscule amount," added Schwab. "But in the broader context, if you happen to be one of the companies in China or the US that comes under that 3%, then it is a big deal, there is a commercial impact, and it does affect the bottom line."

Lifan Group’s Yin sees the bottom line in a different light. He believes that even if there is an escalation in trade disputes between China and its trading partners, at the end of the business day, everybody wants cheap goods.

"If the US and the EU continue to put tariffs on Chinese goods, their consumers won’t react very positively to it," Yin said. "More importantly, China is still not a rich country. If developed countries keep putting pressure on Chinese products – well, the world is a big place, and there are other markets we can sell to."

It is a courageous assertion, but not one that any side wants to put to the test.  Rows like these rarely produce winners.