The timing of the Commerce Department’s decision late last week to impose tariffs on paper imports from China was no accident. It came just days before the U.S. Trade Representative’s office announced the completion of a U.S.–South Korea free-trade agreement. In order to build congressional support for that deal and other upcoming trade legislation, the administration had to do something big to show U.S. manufacturers that it takes their concerns about China seriously. Unfortunately, the move brings the United States perilously close to the edge of a trade war with China that would have devastating consequences for American consumers. Between now and October, when Commerce is scheduled to make a final determination on the paper tariffs, the administration should look for an opportunity to scrap them.
Because of exaggerated concerns about trade deficits (our trade deficit with China is about a third of our total trade deficit), the question of how to deal with the emerging exporting behemoth has become a central question for U.S. trade policy. U.S. manufacturers and organized labor complain that China’s abundance of cheap labor and cheap capital (the latter of which state-run banks provide to promote exports) allows Chinese manufacturers to undercut them in the U.S. market. The U.S. government should protect them from this unfair competition, they say, by imposing tariffs on the cheap imports. This is the kind of argument that gets ratings for people like CNN’s Lou Dobbs and wins elections for people like newly elected senator Sherrod Brown (D., Ohio), author of Myths of Free Trade.
It is also the argument that undersecretary of commerce for international trade Franklin L. Lavin made to the Washington Post on Monday. “The Chinese economy is replete with subsidies,” Lavin told the Post. “It gives Chinese exporters an unfair advantage in the U.S. market, and we’re determined to do what we can to unwind that advantage.”
What people like Dobbs, Brown, and Lavin leave out is that, while they’re busy “unwind[ing] that advantage” for Chinese exporters, they’re simultaneously unwinding millions of dollars in savings for American consumers. When the Chinese government subsidizes exports to the United States, it is selling goods and services to Americans at a discount. That’s a boon for the U.S. economy, but the protectionists don’t see it that way. They’d rather force Americans to pay higher prices for magazines and business brochures in order to protect the domestic paper industry’s market share.
That’s bad enough, but consumers should have bigger worries on the heels of this announcement. The Commerce Department ruling opens the door to new tariffs on everything from steel to textiles, because it reverses a decades-old policy of treating China as a non-market (Communist) economy for the purposes of assigning “countervailing duties,” which are tariffs that offset subsidized exports. Because it’s difficult to know which exports are subsidized in a Communist country, Congress has traditionally exempted non-market economies from countervailing duties, subjecting them instead to lower tariffs called “antidumping duties.” The new policy at Commerce doesn’t change China’s status from non-market to market economy. Instead, it treats China as both in order to maximize the political payoff.
More important, China’s commerce ministry has stated that China will take whatever steps are “necessary” in response to the decision, which it called “unacceptable.” These statements indicate that the dispute could spill over from the paper industry and affect other areas of trade with China, making it harder for American companies to take advantage of the business opportunities such a rapidly growing economy presents.
In order to understand why an administration nominally devoted to the advancement of free trade would support such an economically harmful decision, one need look no farther than Monday’s announcement of the completion of the U.S.–South Korea free-trade agreement. The U.S-Korea deal would be the biggest of its kind since NAFTA, and would increase trade between the two countries by $20 billion, according to some studies. The Bush administration is under pressure to get Congress to approve the deal before June, when all trade agreements, including newly inked deals with Colombia, Peru, and Panama, will take a back seat to a highly contentious battle over the renewal of the president’s power to submit trade agreements to Congress for an up-or-down vote.
It’s no secret that the new Democratic majority in Congress is highly critical of the Bush administration’s trade policy in particular and skeptical about free trade in general, and getting the U.S.-Korea deal through Congress will not be easy. For this reason, the Chinese paper tariffs look suspiciously like an administration attempt to placate Democrats, manufacturers, and big labor on the eve of a major trade deal. Even if this attempt works, which it may not, the benefits of the Korea deal will not outweigh the costs of a trade war with one of America’s most significant sources of affordable imports. Before the Commerce Department finalizes these paper tariffs, the administration should redouble its efforts to negotiate with China, through initiatives such as treasury secretary Henry Paulson’s Strategic Economic Dialogue, in order to find a solution to this problem that isn’t paid for out of the pockets of American consumers.