The U.S. Department of Commerce announced on March 30, 2007 that they would begin imposing preliminary penalty tariffs on imports of coated freesheet paper from China, South Korea, and Indonesia. The duties vary by country and supplier, and range from 0.8% to 21.2%. The tariffs will affect 830,000 tons of offshore coated freesheet shipments into the U.S. This equates to 14% of the U.S. coated freesheet demand.

The decision by the Department of Commerce to apply U.S. subsidy laws to imports from China, in particular, alters a 23-year policy of not applying penalty tariffs, known as countervailing duties, to non-market economies. The action had the immediate effect of imposing duties on two Chinese makers of high-gloss paper, one at 10.9% and the other at 20.4%. These percentages were calculated by adding up the supposedly illegal subsidies.

The decision involved a case brought by NewPage Corporation, a Dayton, Ohio-based paper company. NewPage contended that its coated paper, used in printing glossy catalogs and annual reports, was facing unfair competition from imports by Chinese companies receiving improper subsidies from the Chinese government. As part of NewPage’s petition, the company also asked that imports from Indonesia and South Korea be reviewed for violation of trade laws.

U.S. companies have always been allowed to file antidumping cases, seeking penalty tariffs on the grounds that Chinese products were being sold in the U.S. below cost. But with this new action, they will also be able to seek penalty tariffs on the basis of improper government subsidies – from favorable loans from state-owned Chinese banks to direct government support.

The action may reflect the shift in trade politics since Democrats took control of Congress. Democrats insist that the widening American trade deficit with China, which reached a record $232.5 billion last year, or about a third of the entire trade gap, is a symbol of past policy failures, which have led to the loss of hundreds of thousands of jobs. Trade and industry officials say future actions based on the department’s new policy could lead to duties on imports of Chinese steel, plastics, machinery, textiles, and many other products sold in the U.S., if those industries seek relief and the department finds they are adversely affected by illegal subsidies.

China is expected to challenge the policy in federal court and also at the World Trade Organization, but not through imposing tariffs of its own on American goods, according to lawyers who have been representing China.

The tariffs imposed by the decision took effect immediately, but the action is subject to review by the Commerce Department, and a formal decision is due in October. The administration’s position is not expected to change unless it is ordered to do so by a court or by the World Trade Organization.