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China hoarding building blocks to recovery, U.S. charges

The United States and Europe say China is strategically hoarding many of the vital building blocks of industrial production as tough economic times inflame global trade tensions.

The Obama administration and the European Union launched sweeping World Trade Organization complaints Tuesday, alleging that China is using export controls to give its manufacturers cheap access to the key raw materials used in products ranging from aluminum and steel to solar cells, pharmaceuticals and microchips.

The formal U.S. and European requests for talks in their dispute with China - the first step in a WTO case - highlight the growing friction between the world's industrial superpowers as the recession clobbers global manufacturing and sends unemployment soaring.

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"We are deeply troubled that this appears to be a conscious policy to create unfair advantages for Chinese industries," U.S. Trade Representative Ron Kirk told reporters in Washington. "Now, more than ever, we must fight against this kind of domestic favouritism." Mr. Kirk accused the Chinese of putting "a giant thumb" on the scales of free trade to give its own manufacturers the edge at the expense of everyone else.

They are not alone.

In spite of a widely publicized pledge by leaders of the Group of 20 countries not to put walls around their economies, protectionism is steadily infiltrating the global economy.

This is happening not just in China, but in Canada, the United States, Europe and much of the developing world.

Most industrialized countries have applied policies that can affect trade flows, including bailouts for domestic banks and auto makers, fiscal stimulus and restrictive purchasing policies, such as toughened Buy American rules in the United States.

"The G20 have more or less cheated on their promise not to raise protectionist measures in the wake of the recession," said Marc Busch, a professor of trade policy and law at Georgetown University in Washington. "It's going to be a bumpy ride." Several large developing countries, including India, Indonesia, Vietnam, Russia and Brazil, have blatantly slapped higher tariffs on goods and employed other means to limit imports.

A World Bank report identified nearly 50 trade-distorting measures - about half of those in the developing world - that are putting the nascent economic recovery at risk.

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Among the examples: Ecuador has imposed new tariffs on more than 600 items and Indonesia has dusted off an old import-derailing tactic of requiring that certain types of goods be cleared only through selected custom points at particular times.

"A clear danger to co-ordinated recovery is the politically tempting tactic of protectionism," the World Bank warned this week.

The commodities at the centre of the complaint filed with the WTO are bauxite, coke, zinc, fluorspar, magnesium, manganese, silicon metal, silicon carbide and yellow phosphorous. Coke, for example, is a type of coal used to make steel. Fluorspar is a key component in numerous industrial products, including steel, aluminum, glass and many chemicals.

In its filing, the United States alleges that China puts illegal export quotas, duties, fees and licensing requirements on these commodities.

The result is that Chinese manufacturers get preferential access to them at cheap prices, forcing the rest of the world to pay more.

"This is part of the game that gets played in China," said Peter Morici, former chief economist at the U.S. International Trade Commission and now a professor at the University of Maryland. "It's illegal and it violates WTO rules." Some analysts suggested the Chinese are doing more than just controlling exports, they're also aggressively buying up as many raw materials as possible to control international prices.

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Prof. Morici said recessions typically spawn these types of disputes because it's "easier to prove injury" amid plant closings and mass layoffs. "It's much tougher to prove in a vibrant economy," he added.

Even before the worldwide credit crunch and economic slump slashed deeply into trade volumes, China and the United States, along with other key Western trading partners, were increasingly at loggerheads, with disputes covering a wide range of goods and services.

And Beijing has become adept at using the procedures of the WTO, which it joined in 2001, to block or at least delay retaliation by aggrieved trading partners.

The United States and other developed countries thought that bringing China into the world trade fold would force it to change its behaviour and follow the rules established by the West, said Rodger Baker, senior analyst for East Asia with Stratfor, a global intelligence firm based in Austin, Tex.

But the Chinese "have figured out that this whole WTO thing is not a bad thing at all." The friction has escalated dramatically since the recession hit. China has been using its vast cash reserves to stockpile key materials for steel-making and other basic industrial production. At the same time, it has systematically blocked the export of these same building blocks from its oversupply.

As a result, world prices have been forced up. And when the recession eases, Chinese manufacturers will be free to exploit a widening cost advantage, trade watchers say.

"China is certainly doing things with respect to exports that run afoul of WTO law," Prof. Busch said.

And this is not the only Chinese action that is likely to spark a stern Western response.

One big concern is the so-called Buy China policy contained in a directive from China's powerful economic planning agency, the National Development and Reform Commission. This requires that local governments not discriminate against domestic manufacturers when doling out lucrative procurement contracts as part of the country's vast stimulus spending.

"If this is the tip of the iceberg, and China is trying to relevel the playing field that tilted in favour of foreign firms within the Chinese economy - which is part of the rationale for Buy China - then we'll invariably see more disputes," Prof. Busch said.

Gary Hufbauer, a former top U.S. Treasury official, agreed that China appears to be breaking WTO rules and the pledges it made when it joined the organization.

Cases involving export controls are relatively rare and this one could "set an important precedent," said Mr. Hufbauer, a senior fellow at the Washington-based Peterson Institute for International Economics. But he said China is unlikely to back off willingly and it could take up to three years to get a final ruling.

Right now, Beijing's tactics are not having much of an impact on Western competitors, Mr. Baker said. "But if there's a pickup in global consumption, the Chinese are way ahead of the game."

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About the Authors
National Business Correspondent

Barrie McKenna is correspondent and columnist in The Globe and Mail's Ottawa bureau. From 1997 until 2010, he covered Washington from The Globe's bureau in the U.S. capital. During his U.S. posting, he traveled widely, filing stories from more than 30 states. Mr. McKenna has also been a frequent visitor to Japan and South Korea on reporting assignments. More

Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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