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Just a few months ago, Houston-based Vinson & Elkins had no international trade practice to speak of, but last week the firm was at the table — literally — testifying before a congressional subcommittee on one of the hot-button China trade issues of the day. The Texas firm had sought a trade group to service its burgeoning Asia practice for a while. Vinson & Elkins, which had opened posts in Beijing in 1997, Shanghai in 2005, and Hong Kong in 2006, found its clients had an increasing amount of trade-related matters, which it had no choice but to send away to other firms. But in November, its D.C. office snagged Willkie Farr & Gallagher’s entire 20-person international trade group and in the process catapulted itself into the center of a battle over measures aimed at chipping away at the United States’ mammoth trade imbalance with China. And the firm has gone as far as helping China sue the U.S. government over trade policy. Last year, the U.S. trade deficit with China reached a record $232.5 billion, which led to cries for action on Capitol Hill. Industries that have been overwhelmed by a flood of cheap Chinese imports blame China’s widespread government subsidies and the country’s undervalued currency for the deficit and the loss of U.S. manufacturing jobs. In the face of the deficit numbers, Congress, and in turn the Bush administration, have been under pressure to get tough on China. One sign of change from the administration came last November when the Commerce Department announced that it would reconsider its policy of not applying “countervailing duties” (a duty levied on imports to offset subsidies by foreign governments) to goods from countries with nonmarket economies, such as China. Commerce accepted a request from Dayton, Ohio-based paper manufacturer NewPage Corp. to consider whether these duties should be applied to imports of glossy paper from China. Current trade law allows U.S. companies to petition the Commerce Department for countervailing duties on imports of goods they claim are unfairly subsidized. The law doesn’t specifically address whether these duties can apply to goods from both market and nonmarket economies, but Commerce’s long-standing policy has been to not apply it to nonmarket economies on the grounds that government intervention in those economies is so extensive that it is very difficult to determine what subsidies are in play. Represented by King & Spalding trade partners Gilbert Kaplan and Joseph Dorn, NewPage argued that China provides its domestic paper producers with very significant subsidies, such as low-cost loans from government-owned banks, tax breaks based on export performance, and grants for the development of new paper capacity. These subsidies, the company claimed, allow Chinese producers to greatly undercut prevailing prices. China has increased its market share in glossy paper in the United States by an average of 75 percent annually during the past four years, the company noted. The Chinese government hired Vinson & Elkins’ international trade partners, including Daniel Porter and William Barringer, when they were still at Willkie Farr, to represent it. In addition to defending itself in the investigation, China decided to also challenge Commerce’s very right to initiate the investigation. In January, Porter filed a complaint on behalf of China in the Court of International Trade asking it to stop Commerce’s investigation, claiming that it is illegal. “For 20 years, the Commerce Department has been adamant that it can’t apply these duties to nonmarket economies,” Porter says. China’s position is that if Commerce is going to make this “about-face change” in its policy, it should have to follow more formal rulemaking procedures to revise its stance before being able to start an investigation against its goods, Porter says. The Commerce Department is expected to hand down its decision by April 2. Although the Court of International Trade could rule at any time on China’s petition to enjoin Commerce from proceeding with the investigation, few international trade lawyers expect the Chinese bid to succeed. “A lot of industries are standing by to see what happens in this case,” says David Hartquist, chairman of Kelley Drye Collier Shannon’s international trade practice and the executive director of the Committee to Support U.S. Trade Laws. “A lot of them would like to file a case on Chinese subsidies but are reluctant to do so because of the Commerce Department’s long-standing policy.” If NewPage’s petition is successful, it could open the floodgates for similar requests from a wide range of industries including steel, furniture and textiles, electronics, and shrimp. Defending foreign steel companies in countervailing-duty and other trade-remedy cases has been a focus of their practice, says Vinson & Elkins partner Kenneth Pierce. “China will be a major target,” Pierce says, but notes that Vietnam, which is also classified as a nonmarket economy, will see more cases, too. IN THE BALANCE Meanwhile, the Bush administration has recently made other moves in response to calls for it to toughen its China policy. On Feb. 2, U.S. Trade Representative Susan Schwab announced that the United States had filed a complaint accusing China of violating its commitments on subsidies at the World Trade Organization. The administration has also signaled its willingness to file a similar WTO case on charges that China fails to respect intellectual property rights. Commerce’s reconsideration of its countervailing-duty policy and the WTO case can be seen as attempts by the administration to show that it’s getting tough on China in order to stave off more far-reaching congressional action, some trade experts say. But these measures may not be enough to appease the newly Democratic Congress, which is eager to reassert its role in forming the nation’s trade policy. “Our trading relationship with China is unbalanced and unsustainable,” said Rep. Sander Levin (D-Mich.), chairman of the House Ways and Means Committee’s Trade Subcommittee, at a hearing last week to consider a bill that would explicitly allow U.S. manufacturers to petition for countervailing duties against nonmarket economies. Levin said that even though Commerce announced it was reconsidering its policy on applying countervailing-duty law, Congress needed to act to make sure the department applied the law “in the right way” and in “every” case. Assistant Secretary of Commerce for Import Administration David Spooner said there was “no legal bar” to Commerce applying countervailing-duty law to nonmarket economies and assured the subcommittee that Commerce would do so “as long as appropriate circumstances warrant.” Nonetheless, a number of members faulted the Bush administration for not taking China to task for failure to honor its trade commitments. “As our jobs are being shipped overseas, the Chinese have enchanted the administration with �dialogue’ just as the Sirens tempted Ulysses with their song,” said Rep. Peter Visclosky (D-Ind.), chairman of the Congressional Steel Caucus. Visclosky, who earlier submitted a letter on behalf of 32 members of the caucus in support of the bill, introduced by Reps. Artur Davis (D-Ala.) and Phil English, (R-Pa.), decried the administration’s “lack of urgency” on China trade issues. The steel industry is one of the biggest backers of extending the duties to Chinese imports, claiming that government subsidies have fueled the gargantuan growth in China’s steel industry, which has quadrupled its crude steel production in 10 years. Vinson & Elkins’ Porter was one of the few voices at the hearing not pushing the bill. Porter highlighted potential problems with applying countervailing duties to nonmarket economies while continuing to treat China as a nonmarket economy for the purposes of calculating anti-dumping duties. Under U.S. law, the Commerce Department can impose duties if an import is found to have been “dumped” in the United States, or sold below cost. The United States currently has 61 anti-dumping orders on Chinese imports. Porter noted that the special methodology the department uses to calculate anti-dumping duties in nonmarket economies already offsets most of the price distortions of subsidization, but that the bill had no fix for the possible “double-counting” problem. David Phelps, testifying on behalf of the Consuming Industries Trade Action Coalition, echoed a point made by Rep. Wally Herger (R-Calif.), the subcommittee’s ranking member, that it’s “critical to maintain our focus on the U.S. economy as a whole.” He urged the committee to consider the adverse impact the change could have on consumers, retailers, and industries that depend on low-cost raw materials and inputs for their competitiveness. ON THE HORIZON Several international trade lawyers and experts predicted the measure would pass. “It’s at the top of the list for likely action by Congress,” says Kevin Dempsey, an international trade partner with Dewey Ballantine, who has advocated for the application of countervailing duties to China on behalf of the Southern Shrimp Alliance. The subsidy legislation is expected to be the first in a series of bills addressing the U.S. trade imbalance with China. The next, more controversial measure will likely be a bill introduced by Reps. Tim Ryan (D-Ohio) and Duncan Hunter (R-Calif.) that targets China’s policy of manipulating its currency to create trade advantages. Still, some trade lawyers question how much of a difference the subsidy bill would make for U.S. industries if it appropriately accounted for the double-counting problem. “If they go forward on that basis, it won’t make a big difference,” says John Greenwald, an international trade partner at WilmerHale and former head of import administration at the Commerce Department. Industries threatened by Chinese imports would be better off petitioning for safeguards on Chinese goods that would allow for the imposition of quotas, Greenwald says, acknowledging that the administration has little political will to invoke safeguard measures, which are discretionary. “People are much more comfortable dealing with anti-dumping and countervailing duties because they are ostensibly not political.”
Alexia Garamfalvi can be contacted at [email protected].

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