Sunday, April 01, 2007

Chinese Paper Chase: NewPage, the CVD regime, and John Snow

The application of the CVD (countervailing duty) regime to China over the price of coated paper is a big thing.

Anti-dumping penalties—the preferred mechanism in the past—made assumptions about Chinese costs and made the call that U.S. prices were below cost i.e. dumping.

The countervailing duty regime is an assertion that Chinese prices are so low because the Chinese government is subsidizing Chinese exporters.

And that means big, punitive industry-wide sanctions.

In the narrow sense, the CVD call is, I think, unfounded. The Chinese government doesn’t hand out checks to papermakers.

This decision probably finds its justification in the broader structural and political sense—that China’s exchange rate regime is a de facto subsidy to Chinese industry.

So if the CVD holds up in the final decision, there will be a swarm of complaints and CVD will probably apply to everything. Literally everything.

So it’s no surprise that the stock market sagged in response to a threat that the price of Chinese goods would rise 10%--20%--the countervailing duties awarded in the paper case.

Of course, despite Commerce’s assertion that this was just U.S. due process and not a matter for negotiation, there will undoubtedly be negotiation a.ka. a game of chicken, as the New York Times reports:

Although the tariffs imposed by the decision today are effective immediately, the action is subject to review by the Commerce Department, and a formal decision is due in October. But 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.

The decision, however, is certain to become a focus of talks in the “strategic economic dialogue” begun by Mr. Paulson last September. The first meeting of top Chinese and American cabinet members to discuss a range of economic issues was in December, and another is due in Washington in May.

Mr. Paulson’s effort is aimed at getting China to move on a number of issues, including the suspected manipulation of its currency, that Washington regards as unfair.

I was very interested that a U.S. paper company would push such a theoretical, policy-heavy case—and a case that, if subsidies were narrowly understood, would probably have no merit.

But there was broad-based support for the move, again per the Times:

The NewPage complaint was backed in separate filings by leaders of several industries, including steel. The ruling on Friday was hailed by several groups critical of current trade policies, from manufacturers to labor unions to environmental groups, none of which have been very complimentary toward the administration on these issues in the past.

The steelworkers union—which represents most paperworkers—put its shoulder to the wheel.

Even the Sierra Club piled on, supporting NewPage's complaint with the sort of airy-fairy anti-business logic that would normally have Bush administration regulators spitting out their cigars with indignation:

The Sierra Club wants the Commerce Department to treat lax enforcement of environmental laws in foreign countries as a "subsidy" that the U.S. could counter with duties on imports.

So we’re looking at a complaint in which the importers’ lobby a.k.a. Walmart + is being countered by manufacturers + unions + environmentalists + nativist Republicans + China-bashing Democrats.

The Chinese probably regard this as serious business.

Why was NewPage leading the charge?

There’s an interesting answer.

NewPage, which filed the complaint, is a brand new company, a debt-laden creature that lumbered onto the papermaking scene by purchasing the coated-paper assets of MeadWestvaco.

It’s losing money ($20 million in the 4th Quarter) and, in a normal world, its $1.7 billion in debt would be seen as the explanation for its financial woes.

And it would not be regarded as the poster child for beat-on American mom-and-pop industries.


In fact, if you turned it around and looked at the way CEOs in debt-laden companies prefer to evaluated—EBITDA (Earnings Before Income Tax, Depreciation, and Amortization a.k.a. not taking into account the crazy stuff the investment bankers did), NewPage would have made $56 million in the 4th Quarter, a tidy payday, again not exactly an advertisement for government relief—or an indictment of Chinese dumping.

But NewPage has a special identity.

It is the creature of Cerberus Investments, an investment outfit run as of October 2006 by...

...John Snow, ex-Secretary of the Treasury, the go-to guy for browbeating the Chinese government on exchange rates before he handed the hot potato over to Henry Paulson.

Cerberus, in addition to financing the buyout of MeadWestvaco’s assets, also provided the company with its new President and COO, Rick Willett, and CFO, Jason Bixby.

Hmmmmm...


Wonder if there was any coordination there.

And in the best Bush tradition of “doing well by doing good”, Cerberus Investments holds interests in a raft of U.S. rust belt industries, such as Formica Corp., GDX Automotive, GMAC, and Guilford Mills, that should do very well if the countervailing duty craze spreads (although, to be fair, they do hold stakes in apparel and retailing companies that might take it on the chin under the CVD regime).

Cerberus also has a Taipei office (and no China office), something that the Chinese will no doubt note with some disgruntlement.