Categorized | China, Currency

Trade Issues With China Flare Anew


Reposted from The New York Times


Trade Issues With China Flare Anew

Keith Bradsher  |  March 12, 2012  |  The New York Times

Peter Parks/Agence France-Presse — Getty Images

Chinese workers assembling solar panels.

HONG KONG — A month after Vice President Xi Jinping’s visit to the United States and Europe, the brief trade policy détente between China and its two biggest export markets is about to end.

Five separate issues — involving auto parts, cars, solar panels, anti-subsidy laws and rare earth metals — are the subject of separate initiatives by American officials, European officials or both.

On Tuesday, in fact, the United States, the European Union and Japan filed a formal “request for consultations” with China at the World Trade Organizatio about restrictions on exports of rare earths plus two other minerals, tungsten and molybdenum. Underscoring  the diplomatic sensitivities of the case  as well as the importance of trade in an  election year, President Obama announced the move from the White House on Tuesday, a senior administration official said.

The request for consultations is the first step in a process that will lead to a full-fledged legal case in 60 days at the trade organization unless China unexpectedly agrees to the demands. The European Union has been trying without success for two years to persuade China to abandon its export taxes and export quotas on rare earths, said a European official who insisted on anonymity because of the diplomatic and legal sensitivities of the issue.

‘‘What we have seen unfortunately is not just lack of engagement, but also that the restrictions have been tightened over the past couple years,’’ the official said.

A Chinese official said that China would have no comment on the issue until the Commerce Ministry’s regular monthly news conference, scheduled for Thursday in Beijing.

But the state-run news agency, Xinhua, carried a commentary asserting: “The U.S. decision to bring a lawsuit against China over its rare earth export quotas is likely to hurt bilateral trade ties and trigger a backlash from China instead of settling the rift.”

The commentary said China had imposed limits on its rare earth industry so as to protect the environment, including moves to tighten environmental restrictions on rare earth processors. But the commentary did not mention that these limits also include export restrictions that have pushed prices for the 17 rare earths in markets outside China up to several times the level of prices inside China, giving companies an incentive to move factories to China.

“These rare earth export restrictions are not about the environment, they are about favoring Chinese industry over global industry,” the European official said.

In another sign of the economic and strategic importance of rare earths, the case represents the first time that Japan has started a formal trade case against China at the World Trade Organization since the creation of the agency in 1995, although Japan has played a supporting role in a dozen cases filed by other countries against China.

Japan had been reluctant until now to bring any trade cases against China, where memories of World War II atrocities by Japanese soldiers still rankle. Japan decided to proceed with the case after China halted shipments of rare earths to Japan for two months in the fall of 2010 during a dispute over contested islands in the East China Sea.

Rare earths are vital to various sophisticated technologies, including smartphones, smart bombs, large wind turbines and electric cars. Tungsten and molybdenum are used to strengthen steel and other industrial materials. China is the world’s dominant producer of rare earths, tungsten and molybdenum, and it has imposed increasingly stringent export taxes and quotas on them for the past two years despite having promised the W.T.O. when it joined in 2001 that it would remove export taxes and quotas on all goods except for a handful of other products.

“If China would simply let the market work on its own, we’d have no objections,” President Obama said Tuesday. “But their policies currently are preventing that from happening, and they go against the very rules that China agreed to follow” when it joined the W.T.O. in 2001.

The minerals trade case and the other trade issues are likely to meet Chinese resistance, particularly as senior officials in Beijing are jockeying for position ahead of a Communist Party conclave this autumn that is expected to choose a slate of leaders for the country for the next five years or more.

Compounding the trade tensions is the prospect of revived frictions over China’s currency policies.

After rising fairly consistently againstthe dollar for nearly two years, helping quiet Western criticism that Beijing has kept the renminbi artificially low, the currency has begun to weaken again, making Chinese exports more competitive on the global market. On Monday, the Chinese currency fell further against the dollar, after China’s central bank lowered its daily target for the currency. It has now fallen 0.5 percent against the dollar so far this year, after rising 4.7 percent last year.

For the last month, American and European officials had mostly deferred action on trade tensions with China.

The United States, seeking a good start with Mr. Xi, who is expected to become China’s top leader next winter, postponed acting on the solar panel trade dispute until March to avoid colliding with the Chinese official’s visit to the White House in February.

But China is seldom popular during election years in the United States, and this year is no exception. Mitt Romney and Congressional Democrats and labor unions have little in common politically — except that they have all called for tough trade policies toward China. It would be politically difficult for the White House to ignore the outcry.

The European Union, for its part, has also been fairly quiet in the last month about Chinese trade policies, as it lobbied for a public commitment of Chinese money to ease theEuropean debt crisis. But that sense of crisis has cooled somewhat, now that Greece has succeeded in reaching a debt reduction deal with its private creditors.

And senior European Union officials have concluded that even if Beijing does decide to lend money toward a European bailout after two years of resistance, it would not be enough to make a significant difference, according to a person with a detailed knowledge of European deliberations on the issue who was not authorized to comment publicly.

A World Trade Organization appeals panel ruled in late January that China must eliminate its export taxes on nine widely used industrial materials, not including rare earths or tungsten. The panel strongly criticized China’s export quota system, saying the policies favored Chinese domestic manufacturers over their global competitors that also need the same raw supplies.

The panel did leave open the possibility that the separate system of quotas could be reformed instead of being scrapped entirely. Chinese trade officials are to join the W.T.O.’s monthly dispute-settlement meeting for all member nations in Geneva on March 23 to discuss the matter.

Chinese commerce ministry officials have already told Chinese state-controlled media that they do not plan to change their rare earth policies in light of the W.T.O. appeals panel decision.

In the United States and Europe, lawmakers, unions and businesses have been chafing at what has seemed to them like Western delay in addressing the rare earth issue. The other four trade issues now also likely to move to center stage are these:

AUTO PARTS About 150 members of the House and Senate are preparing to send a letter to President Obama this week asking him to investigate whether China has violated American trade laws by helping its auto parts manufacturers become big suppliers to the United States market. The president is expected to refer the letter to the new interagency trade enforcement task force he announced in January during his State of the Union address.

CARS After promising late last year not to discriminate against foreign products in government procurement, China unexpectedly released this month a draft list of automobiles that government officials may buy. All of the more than 140 models are Chinese brands, with no foreign nameplates — even though most foreign brands are now made in China, including the Audis and Buicks popular with Chinese officials.

Federal procurement practices in the  United States allow the purchase of foreign brands, including imports as well as foreign brands produced in the United States, although critics contend that American government agencies tend to show an informal preference for Detroit brands anyway.

SOLAR PANELS The United States Commerce Department is scheduled to release on March 20 an initial decision on whether China has illegally subsidized solar panel shipments to the United States. The department is widely expected to impose retroactive tariffs on the Chinese products.

ANTI-SUBSIDY CASES Congress has just passed, and President Obama planned to sign Tuesday in the Rose Garden, a law that would retroactively revise some American trade laws to 2006. The move would help American companies and labor unions bring anti-subsidy cases against companies in nonmarket economies like China.

Quick action on trade, though, can sometimes create new problems. In mid-December, a federal appeals court in Washington ruled that off-road tires from China could not be subjected to the anti-subsidy taxes the Commerce Department had tried to impose. The court said Congress had never explicitly stated that nonmarket economies like China’s could be accused of giving preferential subsidies to local manufacturers.

Congress has quickly responded by passing a law that awaits President Obama’s signature, making such cases retroactive to 2006 — the year that the Commerce Department began letting anti-subsidy cases be filed against China.

Andrew Schroth, a trade lawyer in the Hong Kong office of Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt who sometimes represents the Chinese commerce ministry in trade cases, said that the United States could be violating its World Trade Organization commitments by making such a legislative change without first consulting China.

“The U.S. is trying to change the rules on them,” he said.

The Obama administration is already seeking a rehearing of the December appeals court decision. The administration wants to argue that Congress has always implicitly allowed anti-subsidy cases against nonmarket economies — a stance that would be harder for China to challenge at the trade organization.


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