(Adds reaction from U.S. industry, background)
By Josephine Mason and Hallie Gu
BEIJING, Jan 11 (Reuters) - China has increased punitive tariffs on imports of a U.S. animal feed ingredient known as distillers' dried grains (DDGS) from levels first proposed last year, potentially escalating a trade spat between the world's two largest economies.
The ruling is a major victory for China's fledgling ethanol industry, which had complained the U.S. industry was unfairly benefiting from subsidies, and followed a year-long government probe.
It also deals a blow to U.S. ethanol manufacturers already bracing for Beijing's higher import taxes on their main product. DDGS are a byproduct of the corn-based biofuel that have become a key contributor to profits. The industry is pumping out record volumes of biofuel and is facing domestic political uncertainty as they wait for President-elect Donald Trump to take office.
In a final ruling, the Commerce Ministry said on Wednesday that anti-dumping duties would range from 42.2 percent to 53.7 percent, up from 33.8 percent in its preliminary decision in September. Anti-subsidy tariffs will range from 11.2 percent to 12 percent, up from 10 percent to 10.7 percent.
Beijing said it found the domestic DDGS industry had "suffered substantial harm" due to subsidised imports from the United States. China is the world's top buyer of DDGS and buys almost all of its needs from the United States, the largest exporter.
The U.S. Trade Representative did not respond to request for comment. U.S. Grains Council President and Chief Executive Officer Tom Sleight said in a statement on Wednesday the group is "deeply disappointed" by the news and by the increase in China's ethanol import tariffs from 5 to 30 percent.
The moves are "effectively stopping a growth market for U.S. farmers and ethanol producers," he said.
U.S. producers have been seeking new markets, notably China. Companies hit by the new tariffs include global traders Archer Daniels Midland Co (ADM) and Louis Dreyfus, biofuel producer Poet LLC, oil refiner and ethanol producer Valero Energy Corp and grains group Andersons Inc .
The penalty hike was larger than experts expected, and came amid growing tensions between the two countries over China's corn subsidies and its steel and aluminium exports.
Trump, who takes office on Jan. 20, has threatened to impose punitive tariffs on Chinese goods coming into the United States.
Many Chinese businesses have already started to wind back imports of U.S. DDGS since the preliminary ruling in September, switching to domestic suppliers or alternatives like soymeal.
"I don't buy DGGS from the U.S. anymore and have turned to domestic DDGS, soymeal and rapemeal," said Mr. Hu, who is in charge of buying protein in southern China for feed manufacturer New Hope Liuhe. He declined to give his first name as he is not authorised to speak to the media.
Shipments in October and November fell to 135,000 tonnes and 163,000 tonnes respectively, about a third of the total in August before the first ruling.
The new rates will take effect from Thursday and be in force for five years.
Reporting by Josephine Mason and Beijing newsroom; Additional reporting by Chris Prentice in New York and Michael Hirtzer in Chicago; Editing by P.J. Huffstutter and Andrew Hay