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Bush steps up to China

An unusual US tariff on a subsidized Chinese import also challenges communist power in Beijing.

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For all the market freedoms that China enjoys, the Communist Party still keeps a grip on basic industries and finance. Last Friday, the US challenged that Marxist idea of state control over the core economy: It set penalties on a Chinese import heavily subsidized by Beijing.

Such a US move might seem minor in comparison to the ballooning trade with China. After all, it simply slaps duties of about 10 to 20 percent on only one product: high-gloss paper. But it is expected to be the start of more US actions against subsidized goods from China – many of which have taken a wrecking ball to US industries and helped eliminate hundreds of thousands of manufacturing jobs.

With this concrete step, the Bush administration has reversed longstanding US policy that treated China as a nonmarket economy, or the kind in which the government's hand is so strong and opaque that it's difficult to calculate subsidies. These days, however, the state largely uses loans to control hundreds of semipublic enterprises, which makes its role more transparent while still distorting global markets. These loans, which still help the party stay in power, are often not repaid, which has left the government with an estimated $1 trillion in bad debts.

This US action may also put a noisy end to the quiet economic diplomacy of Treasury Secretary Henry Paulson. Last fall he launched an effort to persuade Chinese leaders into taking such pro-market steps as freeing up currency controls. But the two sides need not stop such talks.

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