The US Commerce Department has approved the application of countervailing duties to Chinese exports of coated paper, ending a 23-year policy of not applying CVDs to non-market economies. The FT says the move has weakened the dollar. Emmanuel thinks the US may be unleashing a trade war.

CVDs are the economically appropriate response to damaging subsidization (which may or may not be what’s happening here) and authorized under WTO rules, so the US action is not a blatant act of protectionism.

Here’s a helpful GAO backgrounder explaining some of the complications the move may involve:

Commerce could reclassify China as a market economy or individual Chinese industries as “market oriented” and apply CVDs against China as a market economy. Commerce has criteria for such determinations, but said that China is unlikely to satisfy them in the near term. It could also reverse its 1984 position and apply CVDs without any change in China’s NME status. However, absent a congressional grant of authority, such a decision could be challenged in court, with uncertain results. World Trade Organization (WTO) rules do not explicitly preclude either alternative.

Commerce would face challenges, regardless of the alternative adopted. Chinese subsidies remain difficult to identify and measure. Employing third-country information or “facts available” may help, but would not eliminate these difficulties. Commerce lacks clear authority to fully implement China’s WTO commitment on use of third-country information in CVD cases.

What happens next?

China will have a window of seven days to decide whether it wants to negotiate a suspension agreement with the United States. We have a funny feeling you should be on the lookout for this, since a suspension agreement would let China avoid the technical decision of U.S. anti-subsidy duties, which it clearly wants to avoid.

But a suspension agreement would come with a price – and that is likely to be a Chinese commitment to eliminate any of the subsides Commerce targets in its preliminary ruling, which could be tough.

The Department of Commerce press release is not very informative about the methodology used or particular subsidies identified, so I don’t have a clear understanding of the issue at this stage. Developing…

UPDATE: FT: ”’The Chinese side strongly demands the US to reconsider this decision and make prompt changes’… Beijing’s commerce ministry hinted it might consider retaliatory action for the new US duties, or if it is subjected to additional penalties.”