UPDATE 3-U.S. panel nixes duties in landmark case vs China

(updates with Commerce official comment, more detail)

By Doug Palmer

WASHINGTON, Nov 20 (Reuters) - The U.S. International Trade Commission on Tuesday struck down proposed duties on glossy paper imports from China in a landmark case that had prompted the U.S. Commerce Department to change a decades-old policy.

The trade panel voted 5-1 that U.S. industry was not materially injured by low-priced glossy paper from China, South Korea and Indonesia -- even though the Commerce Department had determined the imports were being sold at subsidized and unfairly low prices in the U.S. market.

A Commerce Department official, speaking on the condition he not be identified, said the trade commission's vote was only a temporary setback to Bush administration efforts to broaden the tools it can use against unfair Chinese trade practices when they occur.

But it was bitter news for NewPage Corp NWP.N, the Dayton, Ohio, paper manufacturer that filed the case last year.

"We're really disappointed. We disagree with the outcome," said Amber Garwood, NewPage vice president for communications. "We're going to take a look at it and decide what to do next."

The company's glossy paper is used in art books, high-end magazines, textbooks and annual reports. Imports from the three countries totaled about $627.1 million in 2006, compared to $355 million in 2004, with China accounting for most of the rise.

At issue in the case against China was whether it was appropriate to impose "countervailing duties" against countries still classified as non-market economies under U.S. trade law.

The Commerce Department had refrained from doing that for decades, partly on the grounds it was too difficult to determine subsidy levels in countries where the government had control over most of the economy.

But in a preliminary ruling in March, the Commerce Department said that policy no longer made sense in regard to China. The decision delighted lawmakers and industry groups who had been pushing the Bush administration to make that change to help reverse the massive U.S. trade deficit with China.

U.S. UNDETERRED BY WTO CHALLENGE

The Commerce Department announced its final decision in the glossy paper case in October, hitting China with countervailing duties ranging up to 44.25 percent and additional anti-dumping duties of up to 99.65 percent. It set lesser penalties on glossy paper from South Korea and Indonesia.

But U.S. trade law gives the ITC the final word on duties, based on whether it finds that the imports have have materially injured, or threaten to materially injure, U.S. producers.

The trade panel voted 4-1 in December 2006 to approve a preliminary injury finding against the three countries. But upon final examination, it reversed that decision on Tuesday.

Beijing has challenged the Commerce Department decision to apply countervailing duties against China in a case at the World Trade Organization as a violation of trade rules.

But since the glossy paper case, the Commerce Department has launched six more anti-subsidy investigations against Chinese-made products, including circular steel pipe, rectangular pipe and tube, laminated woven sacks, off-the-road tires, raw flexible magnets and lightweight thermal paper.

The ITC vote on Tuesday overturns the glossy paper case, but won't stop the Commerce Department from imposing countervailing duties in the other probes, the Commerce official said.

Altogether the Commerce Department has begun 17 new countervailing and anti-dumping investigations against China this year, although in many cases the same product faces both probes.

"We're not singling out China. We investigate subsidy and dumping wherever they occur," the Commerce official said. (Editing by Bill Trott)