Trade Wars and Unscrupulous Paper — Coated and Otherwise

As President Obama faces China's premier, Hu Jintao, at the G-20 summit today in Pittsburg, the recent tire tariff skirmish will undoubtedly be on the menu. And so will be the latest in trade war headlines from earlier today when "Three American paper companies, joined by the union that represents their workers, charged that unfair trade practices in China and Indonesia have cost thousands of Americans their jobs by driving down the cost of paper" as reported this morning on Forbes.com.

According to the Forbes article "From January through June of 2009, total imports of paper jumped 29% to 185,422 tons from 131,687 in the first half of 2008. Paper shipped from China and India together account for nearly 30% of the U.S. paper market, which, the petitions say, is double the market share they had last year. During the same period, the petitions estimated, covered coated paper shipments by domestic manufacturers declined by 38%." In further testimony "The three paper companies said in a statement that in China, the government helps producers by offering them low-interest loans, granting them tax subsidies and undervaluing the currency to keep prices down, among other measures. Indonesian companies, on the other hand, received government loans, timber from government-owned land, debt forgiveness and tax incentives to encourage them to boost their production, the U.S. paper firms said."

It would seem that these charges, as stated, are true and not worthy of debate but there is so much more to the dilemma. Forbes reports that "This case has a precedent -- and it's on Asia's side. Domestic companies brought the same charge against China in 2007, but it was struck down by the ITC ... [and that] The U.S. claimants must provide compelling evidence to back up their argument, according to Barringer, whose firm represented the Chinese government in the 2007 paper case, and will represent China's largest paper producer, Asia Pulp & Paper, in the current case. His firm has also been retained to represent the Chinese in their WTO appeal of the tire-tariff decision." Barringer is further quoted saying "the fact of the matter is the overwhelming cause of injury in the U.S. manufacturing industry today is decline in demand not imports." Again, all -- or at least mostly -- true. But what about Asia Pulp & Paper (China's largest paper producer)?

According to the Asia Times Online yesterday, "Asian Pulp and Paper (APP), founded in Indonesia in 1984, has drawn criticism for its logging activities, as well as for jilting investors (the firm became the largest corporate defaulter in emerging market history when it stopped payments on US$14 billion in debt in March 2001.) APP's business model is a tactically aggressive one: it turns huge profits by quickly stripping forests bare, exploiting age-old forests and indigenous peoples, and leaving town before the environmental consequences are felt. By the time communities and governments lodge complaints and lawsuits, APP has divested itself of local interests and assets.

And while "reputable" institutions in the West have abandoned APP, there are still powerful friends in China, Cambodia and Indonesia." And in accordance, as contained on Wikipedia, "Wall-Mart, Staples, Office Depot, and Woolworths Limited" have all canceled contracts with APP over the years because of their environmentally obscene practices. But APP has also developed strong relationships with US paper merchants -- through which the vast majority of paper is sold and distributed nationally.

So we have an incredibly complex web of US paper producers being squeezed out of a shrinking market by US merchants -- and other large domestic end-users who buy direct -- that import and private label much of their APP stock to realize the arbitrage gains of foreign government subsidies and currency manipulation. To say nothing of the fact that these same merchants turn a blind eye to the fact that if their end user's knew of the abominable environmental violations perpetrated in extracting the raw materials for production, that the paper might be unmarketable. It would seem that this entire debacle has less to do with petitions to the U.S. Department of Commerce and the International Trade Commission and far more relevance to improving supplier visibility in printing and advertising.

William Busch

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