Chinese gov't subsidizing massive forest products industry expansion.

Over the past decade, America's forest products companies have lost market share to overseas competitors armed with significant competitive benefits provided by their governments. Whether through tariffs, non-tariff barriers, currency manipulation, or subsidies, many companies have been rewarded while unprotected forest products manufacturers--such as those in the U.S.--have had increasing difficulty in the global marketplace.

The American Forest & Paper Association (AF & PA) has been a world leader in calling attention to these unfair trade practices, and pushing for global free and fair trade in forest products. Free and fair trade means that everyone plays by the same rules; that the beneficiaries of free trade are those who practice free trade, not those hiding behind government subsidies and protectionist barriers while enjoying unfettered access to their competitors' markets.

AF & PA STUDY

While progress is being made, significant work remains. A recent AF & PA study revealed that, although China has reduced its level of tariff protection, the Chinese government continues to employ an array of methods to protect state-owned manufacturing facilities and subsidize a massive expansion of pulp, paper and wood processing capacity.

The Chinese forest products industry is characterized by excess capacity in a number of product categories, yet China has set ambitious capacity expansion targets across the board. Achieving these targets requires aggressive development plans backed by central government policy directives and funding. Restructuring China's forest products industry is being accomplished through government loans or loan subsidies for technology renovation, promotion of foreign investment in state-owned enterprises, soft loans and loan forgiveness to state-owned enterprises, and selective anti-dumping investigations.

Programs include developing fast-growth, high-yield fiber plantations; aggressive finance and investment assistance; preferential tax treatment to attract foreign investment; and trade policies designed to help domestic Chinese producers. According to AF & PA, government financing and loan interest subsidies totaling US$ 1.67 billion were granted for technology renovation of 21 state-owned paper mills across China from 1998 to 2002. Additional government capacity expansion targets include 10 wood processing projects due for completion in 2005. These projects would boost wood production capacity by 2.72 million cubic meters. AF & PA also found that Chinese government policies promote exports of value-added wood and paper products through value-added tax (VAT) rebates.

Most critically, approval of new investments has been handed off to regional and local governments. This shift of authority has far-reaching effects. It expedites investment approvals and significantly improves the scope and content of favorable development schemes offered to domestic and foreign investors. Local governments have gone far beyond central government directives when offering development aid. Incentives have included tax, financing and trade measures designed to stimulate investment in their regions. Local governments have also helped domestic industry apply to the central government for further preferential assistance, including loan interest subsidies for paper firms involved in plantation projects.

These subsidies are no small matter--the central government has designated US$ 1.73 billion through 2015 to aid development of fast-growth, high-yield tree plantations. Under this government program, plantations receive low-interest loans at 90% of the standard rate with repayment terms from 10-to-15 years. Typical repayment terms are three-to-five years--certainly below market rates.

For integrated plantation/pulp/paper projects, local governments have been permitted to fast-track approvals, bypassing central government authorization. The results: a sizeable influx of foreign investment in regions where investment incentives have been particularly favorable, which drives rapid capacity expansion in wood fiber and paper products sectors.

Domestic banks play the leading role in making loans to forest products enterprises. The China Development Bank, as well as other domestic commercial banks, provides loans and loan interest subsidies primarily to the forestry sector. Other non-standard banking practices available regionally include debt forgiveness and debt-for-equity swaps, extended repayment terms, and loan interest rates even lower than central government policy.

AF & PA's report details China's systematic plan to radically expand its forest products industry with government funds. Their actions are the very definition of an unfair trade practice. AF & PA is working in Washington with the Department of Commerce and the United States Trade Representative to catalogue these subsidy practices and push for their elimination. No nation should be permitted to profit from unfair trade practices. Action must be taken now, before it is too late.

W. HENSON MOORE, AF & PA

ABOUT THE AUTHOR:

W. Henson Moore is president and CEO of the American Forest & Paper Association, Washington, D.C., USA.

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