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U.S. Shifts Policy, Imposes Trade Sanctions on China

The Bush administration, facing heavy pressure to deal with soaring trade deficits, said Friday it is imposing economic sanctions against China to protect American paper producers from unfair Chinese government subsidies.

The action reverses 23 years of U.S. trade policy by treating China, which is classified as a nonmarket economy, in the same way that other U.S. trading partners are treated in disputes involving government subsidies.

"We don't want or like protectionism," Commerce Secretary Carlos Gutierrez told CNBC's Dylan Ratigan. "We simply want U.S. companies to have a level playing field."

"China's economy has developed to the point that we can add another trade remedy tool," Gutierrez said at a press conference announcing the sanctions. "The China of today is not the China of years ago. Just as China has evolved, so has the range of our tools to make sure Americans are treated fairly."

The action means that China's imports of glossy paper will be subjected to tariffs ranging from 10.9% up to 20.4% as a penalty for subsidies that the Chinese government is providing for its own companies. Those extra duties will be imposed immediately on a preliminary basis pending further review in coming months to set the final penalty margin.

Gutierrez told CNBC that the decision followed a suit filed by American paper maker NewPage, which alleged unfair trade practices. The commerce chief said that after investigation, his team was able to "identify specific illegal subsidies" in this case and decided to take action.

The case was being closely watched by a number of other U.S. industries from steel to furniture.

For two decades, the U.S. government has held that American companies did not have a right to challenge government subsidies granted to their foreign competitors if those companies were in "nonmarket economies" such as China.

However, last year, the administration let it be known that it was ready to consider reversing that policy.

President Bush is facing heavy political pressure from Congress, now in the hands of Democrats, to deal with soaring U.S. trade deficits, including a record $232.5 billion imbalance with China.

Officials at the United Steel Workers union, which represents many of the workers at U.S. paper plants, hailed the administration's decision, saying it would help protect jobs for workers at 22 paper mills in 13 states who produce the glossy paper being covered by the sanctions.

China suffered a defeat on Thursday in an effort to derail the administration's change in policy when the U.S. Court of International Trade, a federal court which handles trade matters, ruled that the administration did have the right to proceed with sanctions.

Judge Gregory W. Carman, who heard the case for the trade court, rejected China's request to grant an injunction to stop the U.S. government from proceeding.

This trade dispute is being followed closely by a number of other American industries -- from steel to furniture -- that have been battered in recent years by a flood of imports from China.

U.S. companies have always had the right to file dumping cases against China, which can result in penalty duties if Chinese companies are found to be selling products in the United States below cost.

But the ability to file subsidy cases could significantly expand the level of penalties that Chinese imports could face, giving American producers more protection.

The fact that the Bush administration made it known last year that it was now willing to consider cases against China involving government subsidies was seen as part of a new get-tough approach in the face of soaring U.S. trade deficits.

Treasury Secretary Henry Paulson is leading an effort to pressure China to allow its currency to rise in value against the dollar. American manufacturers contend that China is devaluing its currency by as much as 40% to give the country unfair trade advantages.

China would have the right to appeal the decision of the trade court, which is based in New York, to the U.S. Court of Appeals in Washington. The Chinese Embassy and attorneys representing China did not immediately respond to telephone calls seeking comment.

In his decision, Carman said the court did not have jurisdiction in the case because China could seek redress from the courts once a Commerce decision had become final.

Gilbert Kaplan, an attorney with the Washington law firm of King & Spalding, which is representing New Page, called the ruling a "significant win" because it allows Commerce to go forward with the subsidies case.