U.S.-China Trade
Commerce Faces Practical and Legal Challenges in Applying Countervailing Duties Gao ID: GAO-05-474 June 17, 2005Some U.S. companies allege that unfair subsidies are a factor in Chinese success in U.S. markets. U.S. producers injured by subsidized imports may normally seek countervailing duties (CVD) to offset subsidies, but the United States does not apply CVDs against countries, including China, that the Department of Commerce classifies as "nonmarket economies" (NME). In this report, GAO (1) explains why the United States does not apply CVDs to China, (2) describes alternatives for changing this policy, (3) explores challenges that would arise in applying CVDs, and (4) examines the implications for duty rates on Chinese products.
The current Commerce policy of not applying CVDs to NME countries (including China) rests on two principles advanced in 1984 and confirmed by a federal appeals court. These are that Commerce (1) lacks explicit authority to do so, and (2) cannot arrive at meaningful conclusions regarding subsidies in such countries due to government intervention in the economy. Commerce could reclassify China as a market economy or individual Chinese industries as "market oriented" and apply CVDs against China as a market economy. Commerce has criteria for such determinations, but said that China is unlikely to satisfy them in the near term. It could also reverse its 1984 position and apply CVDs without any change in China's NME status. However, absent a congressional grant of authority, such a decision could be challenged in court, with uncertain results. World Trade Organization (WTO) rules do not explicitly preclude either alternative. Commerce would face challenges, regardless of the alternative adopted. Chinese subsidies remain difficult to identify and measure. Employing third-country information or "facts available" may help, but would not eliminate these difficulties. Commerce lacks clear authority to fully implement China's WTO commitment on use of third-country information in CVD cases. It is unclear whether, on a net basis, applying CVDs would provide greater protection than U.S. producers already obtain from antidumping duties. CVDs alone tend to be lower than antidumping duties. If Commerce grants China market economy status, both CVDs and antidumping duties could be applied simultaneously, but required methodological changes could well reduce antidumping duties. It is not clear whether CVDs would compensate for these reductions. Regardless of China's status, some duties might need to be reduced to avoid double counting of subsidies. Commerce lacks clear authority to make such corrections when domestic subsidies are involved.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-05-474, U.S.-China Trade: Commerce Faces Practical and Legal Challenges in Applying Countervailing Duties
This is the accessible text file for GAO report number GAO-05-474
entitled 'U.S.-China Trade: Commerce Faces Practical and Legal
Challenges in Applying Countervailing Duties' which was released on
June 17, 2005.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to Congressional Committees:
June 2005:
U.S.-China Trade:
Commerce Faces Practical and Legal Challenges in Applying
Countervailing Duties:
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-05-474]:
GAO Highlights:
Highlights of GAO-05-474, a report to congressional committees:
Why GAO Did This Study:
Some U.S. companies allege that unfair subsidies are a factor in
Chinese success in U.S. markets. U.S. producers injured by subsidized
imports may normally seek countervailing duties (CVD) to offset
subsidies, but the United States does not apply CVDs against countries,
including China, that the Department of Commerce classifies as
’nonmarket economies“ (NME). In this report, GAO (1) explains why the
United States does not apply CVDs to China, (2) describes alternatives
for changing this policy, (3) explores challenges that would arise in
applying CVDs, and (4) examines the implications for duty rates on
Chinese products.
What GAO Found:
The current Commerce policy of not applying CVDs to NME countries
(including China) rests on two principles advanced in 1984 and
confirmed by a federal appeals court. These are that Commerce (1) lacks
explicit authority to do so, and (2) cannot arrive at meaningful
conclusions regarding subsidies in such countries due to government
intervention in the economy.
Commerce could reclassify China as a market economy or individual
Chinese industries as ’market oriented“ and apply CVDs against China as
a market economy. Commerce has criteria for such determinations, but
said that China is unlikely to satisfy them in the near term. It could
also reverse its 1984 position and apply CVDs without any change in
China‘s NME status. However, absent a congressional grant of authority,
such a decision could be challenged in court, with uncertain results.
World Trade Organization (WTO) rules do not explicitly preclude either
alternative.
Commerce would face challenges, regardless of the alternative adopted.
Chinese subsidies remain difficult to identify and measure. Employing
third-country information or ’facts available“ may help, but would not
eliminate these difficulties. Commerce lacks clear authority to fully
implement China‘s WTO commitment on use of third-country information in
CVD cases.
It is unclear whether, on a net basis, applying CVDs would provide
greater protection than U.S. producers already obtain from antidumping
duties. CVDs alone tend to be lower than antidumping duties. If
Commerce grants China market economy status, both CVDs and antidumping
duties could be applied simultaneously, but required methodological
changes could well reduce antidumping duties. It is not clear whether
CVDs would compensate for these reductions. Regardless of China‘s
status, some duties might need to be reduced to avoid double counting
of subsidies. Commerce lacks clear authority to make such corrections
when domestic subsidies are involved.
CVDs Are Not Currently Applied against NME Countries:
[See PDF for image]
[End of figure]
What GAO Recommends:
GAO recommends that Commerce clarify its ability to measure Chinese
subsidies and the methodologies it might use in doing so. If (1)
Commerce changes China‘s NME status or (2) Congress decides to
authorize application of CVDs to China as an NME, Congress may wish to
authorize Commerce to (1) implement China‘s WTO commitment on third-
country information in CVD cases and (2) make corrections to avoid
double counting.
Agency officials thought some of GAO‘s suggested actions unnecessary.
GAO maintains they are prudent in light of Commerce‘s lack of explicit
authority in this area and to prepare for potential CVD cases.
www.gao.gov/cgi-bin/getrpt?GAO-05-474.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Loren Yager at (202) 512-
4347 or yagerl@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Legal and Practical Obstacles Have Prevented Application of CVDs to
China:
Department of Commerce Could Act to Allow Application of CVD Law to
China:
Challenges Would Remain in CVD Actions against China:
Uncertain Whether Applying CVDs Would Result in Increased Protection:
Conclusions:
Recommendations for Executive Action:
Matters for Congressional Consideration:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: CVDs and Antidumping Duties under WTO Rules and U.S. Law:
WTO Agreement Provides General Rules:
U.S. Procedures Reflect WTO Rules:
Countervailing Duties Usually Applied in Tandem with Antidumping
Duties:
Appendix III: Comments from the Department of Commerce:
GAO Comments:
Appendix IV: GAO Contact and Staff Acknowledgments:
Table:
Table 1: Former NME Countries Reclassified as Market Economy Countries:
Figures:
Figure 1: Current NME Countries:
Figure 2: U.S. Countervailing Duties and Companion Antidumping Duties,
1995-2004:
Figure 3: Outline of the U.S. Process for Making CVD Determinations:
Figure 4: Results of 72 CVD Petitions, 1995-2004:
Figure 5: How Are Antidumping Duties Determined?
Figure 6: U.S. CVD Orders against All Countries and Antidumping Duty
Orders against Market Economies, Other NME Countries, and China, 1996-
2004:
Abbreviations:
CVD: countervailing duty:
ITC: International Trade Commission:
NME: nonmarket economy:
USTR: Office of the United States Trade Representative:
WTO: World Trade Organization:
Letter June 17, 2005:
The Honorable Richard C. Shelby:
Chairman:
The Honorable Barbara A. Mikulski:
Ranking Minority Member:
Subcommittee on Commerce, Justice, and Science:
Committee on Appropriations:
United States Senate:
The Honorable Frank R. Wolf:
Chairman:
The Honorable Alan B. Mollohan:
Ranking Minority Member:
Subcommittee on Science, the Departments of State, Justice, and
Commerce, and Related Agencies:
Committee on Appropriations:
House of Representatives:
Imports from China have grown rapidly over the last decade, from a
total value of about $42 billion in 1995 to over $196 billion in
2004.[Footnote 1] While the prices of these Chinese goods are often
lower than U.S. prices and therefore benefit consumers, this growth has
presented a major challenge for U.S. producers that compete with
Chinese products in the U.S. market.
Some U.S. companies adversely affected by this growth have alleged that
unfair Chinese government subsidies have been an important factor in
Chinese companies' success in the U.S. market. U.S. officials have
expressed concern about Chinese subsidies in bilateral and multilateral
meetings. However, while U.S. producers injured by subsidized imports
may normally seek imposition of countervailing duties (CVD) to offset
the competitive advantages that these subsidies confer, U.S. CVD laws
are not currently applied against countries--including China--that the
United States classifies as "nonmarket economy" (NME) countries.
Various parties, including U.S. industry representatives, some trade
attorneys, and the U.S.-China Economic and Security Review Commission,
have advocated taking steps to make CVDs available against Chinese
products. Congress is currently considering legislation that would
explicitly authorize CVD actions against NME countries.[Footnote 2]
Nonetheless, the implications of such steps have not been fully
explored.
In light of increased concern about China's trade practices, the
conference report on fiscal year 2004 appropriations legislation
requested that GAO monitor the efforts of U.S. government agencies
responsible for ensuring free and fair trade with that
country.[Footnote 3] In subsequent discussions with staff from the
House Appropriations Committee's Subcommittee on Science, the
Departments of State, Justice, and Commerce, and Related Agencies, we
agreed to provide a number of reports on relief mechanisms available to
U.S. producers that are adversely affected by unfair or surging
imports, and on the manner in which the mechanisms have been applied to
China.[Footnote 4] In this report, we:
* explain why the United States does not currently apply CVDs to
imports from China,
* describe alternative courses of action available to the Department of
Commerce that would lead to application of CVDs to Chinese-origin
imports,
* explore the challenges that Commerce would face in applying these
alternatives, and:
* examine the potential impact that applying these alternatives would
have on the rates of duty applied to Chinese products.
To address our objectives, we reviewed applicable U.S. laws and
regulations and World Trade Organization (WTO) agreements, including
relevant portions of the agreement through which China acceded to WTO
membership in 2001. We conducted a literature search and reviewed
relevant scholarly and legal analyses, Department of Commerce
determinations, and decisions by U.S. courts and the WTO Dispute
Settlement Body. We consulted with trade and legal policy experts from
the U.S. government, private sector trade associations, consulting and
law firms, and academic institutions, as well as representatives of the
WTO, the government of China, and other governments. Finally, we
assembled and analyzed statistical information on numbers of CVD orders
applied by the United States over the last decade and duty rates
applied in these cases. For comparison, we assembled equivalent
information for antidumping duties applied on similar products over the
same period. We conducted our work from January 2004 through April 2005
in accordance with generally accepted government auditing standards.
Appendix I contains a more detailed description of our scope and
methodology.
Results in Brief:
U.S. producers that believe themselves injured by subsidized Chinese
imports have not been able to obtain relief through CVD actions because
China is considered a nonmarket economy country (NME) under U.S. law
and practice. In two 1984 cases, the Department of Commerce declined to
make CVD determinations for NME countries on the grounds that it lacked
explicit legal authority to impose CVDs on NME countries and that, as a
practical matter, it could not arrive at economically meaningful
conclusions regarding subsidies in such countries--and therefore could
not rationally apply the CVD laws. Commerce based the latter finding on
its conclusion that, in such countries, government intervention in the
economy is so pervasive that meaningful comparisons between subsidized
and market-determined prices are not possible. A federal appeals court
subsequently upheld Commerce's determinations.
Commerce could take either of two paths to applying U.S. CVD laws to
China. First, Commerce could, when appropriate, make administrative
determinations that reclassify China as a market economy or individual
Chinese industries as "market oriented" in character. This would permit
Commerce to take CVD action against China on a country or industry
basis. Commerce has criteria in place for making both types of
determinations. However, Commerce officials stated that it may be
difficult for China to meet these criteria in the near term. Second,
Commerce could reverse its 1984 position and process CVD actions
against China without changing that country's NME status. However,
absent a clear congressional grant of authority, such a decision by
Commerce could be challenged in court, with uncertain results. WTO
rules, including China's WTO accession agreement, do not explicitly
preclude either of these alternatives. Moreover, the agreement contains
provisions that permit application of third-country information in CVD
actions against China and that may facilitate such actions against
state-owned enterprises.
Commerce would face substantial challenges in determining appropriate
CVD levels against Chinese products. Chinese subsidies remain difficult
to identify and quantify--largely because of the structure of the
Chinese economy and a lack of transparency in the country's subsidy
regime. Commerce has no directly relevant experience and little
guidance in place to indicate how it would proceed. It may be able to
overcome these difficulties--at least partially--by using third-
country information to create benchmarks for measuring subsidy benefits
or by employing "facts available" to complete cases in which foreign
parties cannot or will not provide needed information. However, these
approaches would not fully resolve the methodological challenges that
would face Commerce. Moreover, under current U.S. law, Commerce lacks
explicit authority to fully implement China's commitment regarding use
of third-country information in CVD cases.
Making CVDs available against China would give U.S. producers access to
import relief measures that explicitly target unfair government
subsidies. However, it is unclear whether applying CVDs would result in
levels of protection for U.S. producers that are higher than those
already applied in the form of antidumping duties. While the magnitude
of any CVDs that might be applied to China has yet to be determined,
CVDs alone tend to be lower than antidumping duties. Both types of
duties could be applied simultaneously. However, for two reasons,
simultaneous application could well result in reduced antidumping
duties on Chinese products, and it is unclear whether application of
CVDs would compensate for these reductions. First, designating China as
a market economy would require Commerce to abandon its NME methodology
for calculating antidumping duties on Chinese products. If made, such a
change is widely expected to lead to lower antidumping duty rates.
Second, regardless of whether China is designated a market economy,
simultaneous application of CVDs and antidumping duties could, at least
in some cases, require corrections to avoid "double counting"--that is,
imposing two sets of duties to compensate for the same unfair trade
practice. Commerce is required to reduce duties to avoid double
counting when export subsidies are involved. However, the full
implications of double counting are unclear because Commerce does not
have clear legal authority to make adjustments for domestic subsidies.
In order to provide Congress and the Department of Commerce with better
information, we recommend that the Secretary of Commerce analyze and
report to Congress on:
* Commerce's ability to identify and measure subsidy benefits at the
present time, based on Commerce's knowledge of significant Chinese
subsidy programs; and:
* broadly applicable methodologies that Commerce might employ to
complete CVD actions against Chinese products, if called upon,
including how it might respond to potential double counting of domestic
subsidy benefits.
In the event that Commerce changes China's NME status or Congress
decides to adopt proposed legislation that would explicitly authorize
Commerce to apply U.S. CVD laws to NME countries, including China,
Congress may wish to consider adopting legislation to provide Commerce
clear authority to (1) implement China's WTO commitment regarding use
of third-country information in such cases, and (2) make corrections to
avoid double counting domestic subsidy benefits when applying both CVDs
and antidumping duties to the same products from NME countries, taking
into account Commerce's analyses on this topic.
The Department of Commerce provided written comments on a draft of this
report, which are reprinted in appendix III. Commerce disagreed with
one of our recommendations, believing that reporting on methodologies
that it would employ to complete CVD actions against China would be
speculative and might prejudge the results of future cases. Regarding
our matters for congressional consideration, Commerce cited some
authority to apply third-country information and asserted that double
counting of domestic subsidies may not occur and may be difficult to
correct. In response, we clarified and elaborated upon our discussion
of the legal issues involved. While agreeing that Commerce should not
attempt to specify how it would proceed in specific sets of
circumstances, we continue to believe that it would be instructive for
Commerce to report broadly on how it might apply CVD law to China. We
also maintain that it would be prudent for Congress to enact
legislation that would fully authorize Commerce to implement China's
WTO commitment on using third-country information in CVD cases and
correct for any double counting of domestic subsidies that may occur in
the event that CVD law is applied to China as an NME country.
The Department of Commerce also provided technical comments on a draft
of this report, as did the Office of the United States Trade
Representative (USTR) and the International Trade Commission (ITC). We
took these comments into consideration and made revisions throughout
the report as appropriate to make it more accurate and clear.
Background:
The WTO Agreement on Subsidies and Countervailing Measures establishes
general international rules regarding the types of subsidies that
exporting countries may and may not maintain and procedures that
importing countries may employ to counter injurious subsidy practices.
U.S. trade law generally reflects the agreement's provisions. The
United States applies CVDs with some regularity--almost always in
tandem with the other major mechanism for providing relief from
unfairly traded imports: antidumping duties. However, CVDs are
requested and applied much less frequently than antidumping duties.
Appendix II provides additional background information on WTO subsidy
rules and relevant U.S. laws, explains antidumping actions in more
detail, and provides more detail about how frequently CVD and
antidumping actions are sought and duties actually imposed.
Legal and Practical Obstacles Have Prevented Application of CVDs to
China:
The U.S. government does not apply its CVD laws against China because
the Department of Commerce classifies China as an NME country and has
adopted a policy against taking CVD actions against countries so
designated. This policy rests upon two principles, first advanced in
two 1984 Department of Commerce decisions and subsequently upheld by
the U.S. Court of Appeals for the Federal Circuit. These principles are
(1) from a legal standpoint, Commerce does not have explicit authority
to apply CVDs against NME countries; and (2) as a practical matter,
Commerce cannot arrive at economically meaningful conclusions regarding
subsidies in such countries.
The Department of Commerce Classifies China as an NME Country:
The Department of Commerce classifies China, as well as Vietnam and a
number of former Soviet republics, as NME countries. Under U.S. trade
law, Commerce may classify any country that does not operate on market
principles "so that sales of merchandise in such country do not reflect
the fair value of the merchandise" as an NME country.[Footnote 5]
Commerce has classified China as an NME country since 1981.[Footnote 6]
Figure 4 shows the countries that Commerce currently classifies as
NMEs.
Figure 1: Current NME Countries:
[See PDF for image]
Note: Commerce has made market/nonmarket economy determinations only
when called upon. Commerce has never been called upon to rule on the
market/nonmarket status of some countries that one might expect to find
in a list of current or former nonmarket economies.
[End of figure]
Commerce Determined That It Lacks Authority to Apply Countervailing
Duty Law to NME Countries:
U.S. trade law does not contain any explicit prohibition against
applying CVDs to NME countries. Nonetheless, the Department of Commerce
determined in 1984 that it did not have explicit legal authority to
apply CVDs to such countries. Commerce set forth its conclusions on
this matter in rulings denying CVD protection against carbon steel wire
rods from Poland and Czechoslovakia (which were then considered NME
countries).[Footnote 7] Commerce observed that, even though Congress
had addressed unfair trade remedies in both the Trade Act of
1974[Footnote 8] and the Trade Agreements Act of 1979[Footnote 9] and
revised U.S. countervailing duty law on both occasions, it had not
given any indication that CVD law should be applied against these
countries. Instead, Congress provided two other remedies--antidumping
duties and safeguard measures--to address unfair trade practices by NME
countries. The U.S. Court of Appeals for the Federal Circuit upheld
Commerce's decision in Georgetown Steel Corp. v. United
States.[Footnote 10]
Commerce Unable to Measure Subsidy Benefits in NME Countries:
In its 1984 determinations, the Department of Commerce concluded that
it cannot measure subsidy benefits in NME countries. In explaining this
conclusion, Commerce observed that, in market economy countries,
markets generate prices that can be used to measure the impact of
government subsidies. However, in NME countries, government
intervention in the economy is so pervasive that one cannot make
meaningful comparisons between market-determined prices and those that
have been distorted by government intervention. Commerce summarized the
methodological problems it faced in these cases as follows:
"We believe a subsidy (or bounty or grant) is definitionally any action
that distorts or subverts the market process and results in a
misallocation of resources. . . . In NMEs resources are not allocated
by a market. With varying degrees of control, allocation is achieved by
central planning. Without a market, it is obviously meaningless to look
for misallocation of resources caused by subsidies. There is no market
process to distort or subvert—. It is this fundamental distinction--
that in an NME system the government does not interfere in the market
process but supplants it--that has led us to conclude that subsidies
have no meaning outside the context of a market economy."[Footnote 11]
In upholding Commerce's position in this matter, the Court of Appeals
found in Georgetown Steel that in nonmarket economies the governments
control their trading entities by determining where, when, and what
they will sell, and upon what terms. When no market exists, subsidies
cannot be found to distort market decisions.
Department of Commerce Could Act to Allow Application of CVD Law to
China:
Commerce could take either of two paths to applying U.S. CVD law to
China. First, Commerce could use its administrative authority to change
China's NME status in whole or in part. This would allow Commerce to
apply U.S. CVD law to China on a country or industry basis. However,
Commerce officials observed that it may be difficult for China to meet
these criteria in the near term. Alternatively, Commerce could reverse
its 1984 position and decide that CVD law could be applied to China
while it remains classified as an NME country. However, absent a clear
grant of authority from Congress, such a reversal could be challenged
in court. The results of such a challenge are uncertain. WTO rules,
including relevant provisions of China's WTO accession agreement, do
not explicitly preclude the United States from pursuing either
alternative. Moreover, China's WTO accession commitments (1) permit use
of third-country information in CVD cases and (2) could facilitate
Commerce adjudication of CVD actions against state-owned enterprises in
that country.
Commerce Could Change China's NME Status in Whole or in Part:
The Department of Commerce has administrative authority to reclassify
NME countries as market economy countries, or individual NME country
industries as "market oriented" in character, provided that the country
as a whole or the industries in question meet certain criteria.
Commerce Could Reclassify China as a Market Economy Country:
Department of Commerce officials explained that countries classified as
NMEs may ask that their status be reviewed either within the context of
an ongoing import relief case or as an independent matter. Commerce has
responded to a number of requests for such reviews, granting some
countries (such as Russia and Estonia) market economy status while
classifying others (such as Vietnam) as nonmarket economies.[Footnote
12] Table 1 shows former NME countries that Commerce has determined
merit reclassification as market economy countries.
Table 1: Former NME Countries Reclassified as Market Economy Countries:
Country: Romania;
Year of Commerce decision: 2003.
Country: Lithuania;
Year of Commerce decision: 2003.
Country: Estonia;
Year of Commerce decision: 2003.
Country: Russia;
Year of Commerce decision: 2002.
Country: Kazakhstan;
Year of Commerce decision: 2002.
Country: Latvia;
Year of Commerce decision: 2001.
Country: Hungary;
Year of Commerce decision: 2000.
Country: Czech Republic;
Year of Commerce decision: 2000.
Country: Slovakia;
Year of Commerce decision: 1999.
Country: Poland;
Year of Commerce decision: 1993.
Source: Department of Commerce.
[End of table]
In making decisions on such matters, U.S. trade law specifies that
Commerce shall take into account the following factors:
* the extent to which the country's currency is convertible into the
currency of other countries,
* the extent to which wage rates are determined by free bargaining
between labor and management,
* the extent to which joint ventures or other investments by foreign
firms are permitted,
* the extent of government ownership over the means of production,
* the extent of government control over the allocation of resources and
enterprises' price and output decisions, and:
* other factors that Commerce considers appropriate.[Footnote 13]
In April 2004, the United States and China established a Structural
Issues Working Group under the auspices of the U.S.-China Joint
Commission on Commerce and Trade.[Footnote 14] Among other things, this
group is examining issues relevant to China's desire to be classified
as a market economy country under the criteria set forth in U.S.
antidumping law.[Footnote 15] U.S. officials involved with the group
have observed that substantial additional reform will have to take
place (e.g., in improving respect for labor rights and reducing or
abandoning controls on currency convertibility) before China can expect
to be declared a market economy country under the criteria listed
above.
The Chinese government regards recognition as a market economy among
its trading partners as a desirable diplomatic goal. While
acknowledging that this change in status may result in the United
States (and other countries) applying countervailing duties, Chinese
officials we spoke with emphasized the political value of their country
being officially declared a "market economy." Other trade experts
pointed out that Chinese officials may also be seeking this change
because they believe it would generally result in lower antidumping
duties being assessed against Chinese products.[Footnote 16]
China has actively sought change in its status among its trading
partners. A number of them, including Singapore and Malaysia, have
declared China to be a market economy. However, in June 2004, the
European Union officially declined a Chinese request for designation as
a market economy. In making this decision, the EU acknowledged that
China had made progress, but concluded that much remained to be done in
reducing state interference in the economy, improving corporate
governance and the rule of law, and bringing the banking sector under
market rules.[Footnote 17] Department of Commerce officials informed us
that Chinese representatives have not yet officially requested that
Commerce review their country's NME status under U.S. law.
Commerce Could Classify Individual Chinese Industries as Market
Oriented:
The Department of Commerce could also designate individual Chinese
industries as "market oriented" and thus as eligible for application of
CVDs. In a 1992 CVD decision involving imported oscillating and ceiling
fans from China, Commerce determined that, short of finding that an
entire country merits designation as a market economy, Commerce can
find specific industries within such countries to be "market oriented"
in character.[Footnote 18] Commerce stated that certain criteria,
developed earlier in the context of an antidumping case (also against
China),[Footnote 19] would have to be met for an industry to be found
market oriented. The industry in question must be characterized by the
following:
* virtually no government involvement in setting prices or amounts to
be produced,
* private or collective ownership, and:
* market-determined prices being paid for all significant inputs,
whether material or nonmaterial, and for all but insignificant
proportions of all the inputs accounting for the total value of the
product.
Commerce justified application of these criteria to determine whether a
CVD investigation should proceed by observing that if the Chinese fan
industry met the criteria just described, then Commerce could rely on
prices and costs to producers in that industry to provide accurate
measures of value. Commerce concluded that, if the prices and costs in
a sector of an NME were market determined, then the practical concerns
cited by the Court of Appeals in Georgetown Steel would not arise and
Commerce could apply U.S. CVD law.[Footnote 20]
To date, Commerce has not accepted any claim that an NME country
industry should be designated as market-oriented in character. Commerce
officials observed that, as a practical matter, the criteria for
designation as a market-oriented industry may be difficult for
producers operating in a nonmarket economy to satisfy. In any event,
Commerce has not received a CVD petition involving a market-oriented
industry claim since the early 1990s. In a few cases, Chinese companies
have responded to antidumping cases, in part, by requesting designation
as a market-oriented industry. Commerce has denied these requests--
primarily on the grounds that the Chinese companies in question
submitted information that was insufficient or provided too late in
Commerce's process to allow an informed decision.[Footnote 21]
Commerce Could Apply CVD Law against NME Countries, but There Are Legal
Obstacles to Such Action:
Since there is no explicit statutory bar to applying CVDs to NME
country products, Commerce could make an administrative determination
to apply such duties to China and other NME countries. Some legal
experts have taken the position that Georgetown Steel merely upheld
Commerce's decision that it could not apply CVD law to NME countries,
and that Commerce could therefore change its policy so long as the
change could be defended as reasonable. Commerce officials told us that
it might be possible for parties in a particular case to present new
legal positions that would permit it to apply CVDs against an NME
country product without a change in current law. They added, however,
that in the absence of an actual case, it was hard to say whether or
how this would occur.
While Commerce could reverse its 1984 position, the Court of Appeals'
Georgetown Steel ruling raises serious doubt about Commerce's ability
to make such a change without a clear grant of authority from Congress.
The Court of Appeals did uphold Commerce, but the court also appeared
to make its own findings. The court emphasized that recent trade
legislation showed that Congress had intended that any selling by NME
countries at unreasonably low prices should be dealt with under the
antidumping law, and that there was no indication that Congress had
intended or understood that the CVD law would also apply. The court
stated, in addition, that "[i]f [antidumping law] is inadequate to
protect American industry from such foreign competition (resulting from
sales in the United States of merchandise that is priced below its fair
value) . . . it is up to Congress to provide any additional remedies it
deems appropriate."[Footnote 22] The Uruguay Round Agreements
Act,[Footnote 23] adopted in 1994, made important changes in U.S. CVD
law but did not add any language authorizing CVD actions against NME
countries. Moreover, the Statement of Administrative Action
accompanying the Act acknowledged that the Georgetown Steel ruling
stood for "the reasonable proposition that the CVD law cannot be
applied to imports from nonmarket economy countries."[Footnote 24]
Although Members of Congress introduced legislation to make U.S. CVD
law explicitly applicable to NME countries in 2004, and again in 2005,
these bills did not gain approval. Consequently, a Commerce decision to
reverse the position it adopted in 1984 and allow CVD actions against
NME countries could very well be challenged in court. The results of
such a challenge are uncertain.
WTO Agreements Are Silent on NME Issue in CVD Actions:
WTO subsidy and countervailing duty rules do not address the issue of
NME status in CVD proceedings. The WTO Agreement on Subsidies and
Countervailing Measures does not discuss market/nonmarket economy
designations in general and, more specifically, does not address the
question of whether members can bring CVD actions against NME
countries. The CVD provisions in China's WTO accession agreement are
similarly silent.[Footnote 25] Thus, we believe that these rules (1) do
not explicitly restrict the United States from continuing or ceasing to
apply NME status to China on either a countrywide or industry-specific
basis and (2) do not explicitly preclude bringing CVD actions against
countries that are classified as NMEs.
Accession Agreement Permits Use of Third-Country Information to
Calculate Countervailing Duties:
While WTO rules allow members to apply alternate methodologies--not
based strictly on information from within the exporting country--to
calculate antidumping duties in certain cases,[Footnote 26] the
organization's rules do not make explicit provision for applying third-
country information in CVD cases. However, China's WTO accession
agreement specifically permits application of third-country information
in CVD determinations. The agreement states that countries attempting
to identify and quantify subsidy benefits in China may encounter
special difficulties because "prevailing terms and conditions in China
may not always be available as appropriate benchmarks." In such
situations, the agreement allows other member countries to employ
"terms and conditions prevailing outside China" to generate benchmarks
that can be used to measure subsidy benefits and establish appropriate
CVDs. The agreement does require, however, that before considering
application of information from outside China, member countries should
first seek to use adjusted information from China itself.[Footnote 27]
This provision has no expiration date and does not differentiate
between China as a market or a nonmarket economy.[Footnote 28]
Accession Agreement May Facilitate Actions against State-Owned
Enterprises:
China's WTO accession agreement contains another provision that may
facilitate application of CVDs in some cases involving state-owned
enterprises.[Footnote 29] WTO members may only apply CVDs when the
subsidies in question can be shown to be "specific to an enterprise or
industry or group of enterprises or industries."[Footnote 30]
Determining whether a particular subsidy meets this test can be
challenging. For example, a government loan program directed
specifically at providing below-market financing to enable fishermen to
acquire boats and equipment might be considered specific, and thus
actionable. On the other hand, a program that provides below-market
financing to many types of small businesses, including some fishermen,
might not be considered specific, and thus not open to application of
CVDs.[Footnote 31]
China's accession agreement provides that subsidies benefiting state-
owned enterprises will be regarded as specific if, among other things,
such enterprises are the "predominant" recipients or receive
"disproportionally large amounts" of such subsidies.[Footnote 32] This
may facilitate application of CVDs in some circumstances because it may
make it difficult for China to argue that such subsidies are generally
available, and thus not actionable. Instead, members may regard them as
specific to state-owned businesses without regard for the sector in
which they operate.[Footnote 33]
Challenges Would Remain in CVD Actions against China:
While Commerce could proceed with CVD actions against China, it would
continue to face substantial practical challenges in identifying
Chinese subsidies and determining appropriate CVD levels. Commerce
could employ third-country information or "facts available" to complete
China CVD actions. However, these approaches would not eliminate the
challenges that such actions would present. Moreover, Commerce lacks
explicit legal authority to implement China's WTO commitment allowing
other members to employ third-country information in CVD actions
against China.
Chinese Subsidies Remain Difficult to Identify and Assess:
Several trade experts stated that even in the best of circumstances, it
can be quite difficult to identify and quantify subsidy
benefits.[Footnote 34] In joining the WTO, China specifically agreed to
eliminate all prohibited subsidies upon accession and to provide the
organization with information on all of its subsidies as called for in
the WTO subsidies agreement. Some trade experts we spoke with believed
that sufficient information could be obtained to understand and
estimate the benefits derived through Chinese subsidies. However, U.S.
government officials and other trade experts said that it remains
particularly difficult to obtain substantive information about Chinese
subsidies. For example, USTR has observed the following:
"It is difficult to identify and quantify possible export subsidies in
China because of the lack of transparency in China's subsidy regime.
Chinese subsidies are often the result of internal administrative
measures and are not publicized. U.S. subsidy experts are currently
seeking more information about several Chinese programs and policies
that may confer export subsidies. Their efforts have been frustrated in
part because China has failed to make any of its required subsidy
notifications since becoming a member of the WTO."[Footnote 35]
Commerce officials told us that even though there has been substantial
reform in China, underlying features of the Chinese economy continue to
make it difficult to identify appropriate benchmarks for measuring
subsidies. For example, according to USTR, most Chinese subsidies are
believed to be provided through that country's financial system.
However, some trade experts stated that government control over the
banking system in China makes it difficult to identify market-
determined rates of interest that could be used as benchmarks to
determine whether, or to what extent, particular companies or
industries are benefiting from credit subsidies. U.S. government and
private sector analysts added that while the Chinese government heavily
influences allocation of credit--favoring some industries over others-
-it is uncertain how to quantify the subsidy benefits conferred through
this process. In addition, while some attorneys who have represented
Chinese companies disagreed, Commerce officials and attorneys who have
represented U.S. firms said that lack of adherence to generally
recognized accounting standards and unreliable bookkeeping among
Chinese companies can make accurate identification and accurate
measurement of subsidy benefits extremely difficult. Some Commerce
officials and trade experts also said that unlike most market
economies, which are national, China's economy is fragmented into five
or six regions, each with its own pricing. Thus, even if an industry
were declared to be market oriented, it would be difficult to evaluate
the subsidy benefits accruing to the national industry as a
whole.[Footnote 36]
Third-Country Information or "Facts Available" May Be Useful, but Would
Not Fully Resolve Challenges:
Commerce may find employing third-country information or "facts
available" helpful in completing China CVD actions. However, these
approaches would not fully resolve the challenges that would face
Commerce.
Commerce has not attempted to develop methodologies or procedures for
determining CVDs against products from nonmarket economies--based
either on information from within the country itself or from a third
country. Nonetheless, Commerce officials stated that, if required, they
would endeavor to apply existing guidance and conduct an investigation
that would withstand analytical and legal scrutiny.
While the United States employs "surrogate" or third-country
information to calculate antidumping duties on imports from China and
other NME countries, CVD cases against China would raise issues that
Commerce analysts do not face in antidumping cases and that may not be
resolved by use of third-country information. For example, it may be
difficult to separate specific (and therefore countervailable)
subsidies from those that are generally available (and therefore not
countervailable).[Footnote 37] In addition, identifying reasonable
benchmarks (such as market-determined capital costs) in third countries
will only provide Commerce with a starting point for calculating CVD
rates that should be applied to Chinese products. After establishing
such benchmarks, Commerce would then face significant challenges in
quantifying, for example, the capital or utility costs that are
actually being paid by Chinese companies under investigation, so that
analysts can determine the difference between unsubsidized and
subsidized costs.
Commerce also has the authority to employ facts available to overcome
difficulties in calculating subsidy benefits and corresponding CVD
rates. Commerce normally obtains information from U.S. companies
seeking relief and also from foreign companies and government agencies
alleged to be benefiting from or providing subsidies. However, U.S. law
grants Commerce authority to make determinations based on facts
otherwise available when foreign sources cannot or will not provide
needed information.[Footnote 38] Commerce might be able to complete
some China CVD cases by applying this approach. However, Commerce
officials pointed out that their authority to employ facts available is
subject to certain limitations.[Footnote 39] The extent to which
Commerce would employ this approach in China CVD cases is uncertain.
Commerce Does Not Have Explicit Authority to Implement China's WTO
Commitment Regarding Third-Country Information in CVD Cases:
Existing U.S. laws do not provide Commerce with clear authority to
fully implement China's WTO commitment allowing members to use third-
country information to identify and measure Chinese subsidy benefits.
In joining the WTO, China made commitments regarding four import relief
measures that other members may apply against imports from China. As
already noted, even before China joined the WTO, U.S. trade law
specifically allowed for implementation of the first of these
commitments--application of third-country information in antidumping
cases. Congress has passed legislation--commonly referred to as section
421--implementing the second (involving application of safeguard
measures).[Footnote 40] While Congress did not adopt legislation to
implement China's third import-relief commitment (regarding textile
safeguards), the U.S. interagency group responsible for processing
textile safeguard cases[Footnote 41] believes that existing legislation
provides it with authority to implement such measures.[Footnote 42]
In contrast, U.S. trade law was not amended to explicitly authorize
Commerce to implement China's fourth commitment, regarding application
of third-country information in CVD cases, and does not otherwise
clearly state that Commerce may apply third-country information in such
cases against foreign countries in general. Commerce regulations do
provide for application of third-country information to CVD cases--but
only in some circumstances.[Footnote 43] The most explicit provision
covers only subsidies that impact goods and services used in producing
the allegedly subsidized imports.[Footnote 44]
This lack of clarity raises a question about whether Commerce could
currently apply this commitment, even if it were to decide to
reclassify China as a market economy or specific Chinese industries as
market oriented in character. Department of Commerce officials said
they had not yet decided whether Commerce could fully apply the
commitment in the absence of authorizing legislation.
Uncertain Whether Applying CVDs Would Result in Increased Protection:
Making CVD procedures available to U.S. producers that believe they are
injured as a result of unfairly subsidized Chinese imports would
provide a mechanism for taking actions that specifically target Chinese
government subsidies. However, it is unclear whether, on a net basis,
applying CVDs to China would result in overall levels of protection for
U.S. products that are higher than those already applied through
antidumping duties. CVDs could be applied alone or in tandem with
antidumping duties. CVDs alone generally tend to be lower than
antidumping duties. For two reasons, simultaneous application of both
types of duties could well result in reduced antidumping duties, and it
is unclear whether application of CVDs would compensate for such
reductions. First, designating China as a market economy would require
a change in the methodology used to calculate companion antidumping
duties that is widely expected to lead to lower duty rates. Second,
regardless of whether China is designated as a market economy, some
companion antidumping duties might need to be reduced to avoid double
counting subsidy benefits. Each of these considerations introduces an
element of uncertainty about the magnitude of the total level of
protection that would be applied to Chinese products; each may result
in combined rates that are lower than might be expected.
CVD Rates Vary, but Tend to Be Lower Than Antidumping Duties:
U.S. CVDs tend be lower than companion antidumping duties. This may, in
part, explain why U.S. producers seek CVDs less often than antidumping
duties. Figure 2 compares CVDs and antidumping duties imposed on the
same products over the last decade. As the figure shows, CVDs imposed
on these products varied from less than 2 percent to more than 60
percent. However, CVDs were lower than companion antidumping duties in
nearly 70 percent of the 36 cases where the United States imposed CVDs.
The average CVD rate imposed in these cases was about 13 percent, while
the average antidumping duty rate imposed was about 26 percent.
Figure 2: U.S. Countervailing Duties and Companion Antidumping Duties,
1995-2004:
[See PDF for image]
Notes: This figure compares "all others" duty rates from each new CVD
action concluded during the indicated period to the "all others"
antidumping duty rates applied to the same products. "All others" rates
are weighted averages of the individual rates assigned to the exporting
companies investigated in each case. The data is displayed according to
the year in which petitioners filed for CVD action. Comparisons
employing the highest rates issued in each case (that is, the highest
rates applied to any individual company) or the median values of the
rates applied to individual companies provide similar results. While
Commerce can, and does, change rates over time to reflect changing
circumstances, the figure does not take such changes into account.
In the three cases involving uranium from the United Kingdom, Germany,
and the Netherlands, Commerce concluded that no antidumping duty should
be applied. For more information, see 66 Fed. Reg. Reg. 65886 (Dec. 21,
2001).
Commerce ordered antidumping duties on Korean D-RAMS in 1993. However,
Commerce subsequently revoked its order, and collection of these duties
ended in 1999--prior to initiation of a CVD action on these products.
For more information, see 65 Fed. Reg. 59391 (Oct. 5, 2000).
[End of figure]
Under the WTO subsidies agreement and U.S. law, CVD rates are limited
to the levels required to offset the amount of the subsidies.[Footnote
45] For example, a company may be receiving government credit subsidies
that reduce its capital costs by 20 percent. This advantage may make a
real difference in the company's ability to compete in the
international market. However, Commerce stated that CVD rates are
calculated by dividing the total value of subsidy benefits by the total
value of an exporting company's sales. Since the subsidy just mentioned
affects only one portion of the company's balance sheet (capital costs)
the countervailing duty applied to offset this benefit may be much
lower than 20 percent. In some instances, past government intervention
and support may have been critical to an exporting industry's start-up
or survival. However, loans and nonrecurring benefits, such as equity
infusions or grants, are generally amortized over a period of years.
After several years have passed, the current value of these subsidies
may have declined to a comparatively insignificant level. U.S.
companies, therefore, may experience substantial difficulty in
competing with Chinese companies that owe their existence to favorable
government actions in the past, but find that legitimately applied CVDs
are minimal.[Footnote 46]
Change in Methodology May Lower Antidumping Duties:
Administrative actions reclassifying China as a market economy (in
whole or in part) would require Commerce to cease applying its NME
methodology for calculating antidumping duties on affected Chinese
products. This is significant because, as noted earlier, CVD actions
usually have a companion antidumping action. U.S. law allows Commerce
to employ its third-country-based methodology to calculate antidumping
duties only when the merchandise in question is being produced in
countries that it classifies as NMEs. Therefore, once Commerce
reclassified China as a market economy it could no longer apply this
methodology. Similarly, Commerce could no longer apply this methodology
to individual Chinese industries after it found them to be market-
oriented in character. After either finding, Commerce would apply its
market economy approach to calculate antidumping duties. Commerce has
never attempted to calculate antidumping duties on Chinese products
based on prices charged within China. Whether these antidumping duties
would be higher, lower, or approximately the same as those derived
through Commerce's NME approach remains uncertain.[Footnote 47]
However, if--as trade experts commonly expect--they prove to be
significantly lower than antidumping duty rates derived through
Commerce's NME methodology, then even in combination with companion
CVDs, the total level of protection applied may not be as high as that
currently applied against Chinese products.
Adjustments to Avoid Double Counting Might Lower Companion Antidumping
Duties:
If called upon to apply CVDs against Chinese products, Commerce would
have to adjust companion antidumping duty rates downward in some cases
in order to avoid "double counting"--imposing two sets of duties to
compensate for the same unfair trade practice. However, the extent of
these adjustments--and their net impact on combined duty rates to be
applied--remains uncertain.
Adjustments Required to Avoid Double Counting of Export Subsidies:
Both WTO rules and U.S. laws require adjustments in combined duty rates
to avoid double counting of export subsidies. WTO rules specify that no
product can be subjected to both antidumping and countervailing duties
"to compensate for the same situation of dumping or export
subsidization."[Footnote 48] U.S. law echoes this provision, in effect,
by requiring adjustments in antidumping duties in the event that CVDs
are applied simultaneously to counter export subsidies on the same
products.[Footnote 49]
The rationale behind these provisions is that since antidumping duties
are calculated by comparing domestic prices with export prices, such
duties already offset the price advantage that export subsidies confer
over the prices charged in the exporter's domestic market. When
imposing both countervailing and antidumping duties, Commerce adjusts
antidumping duty rates downward by any amount that is attributable to
export subsidies. Commerce would be obliged to make such adjustments
when applying both types of duties to China, regardless of whether
China remains an NME country under U.S. law.
The extent to which Commerce would have to reduce antidumping duty
rates in order to avoid double counting Chinese export subsidies is
unknown. As already noted, China agreed to cease providing export
subsidies upon joining the WTO. Some trade experts allege that China
has nonetheless continued to provide such subsidies. However, no
industry group has petitioned for application of countervailing duties
against Chinese subsidies, and U.S officials have not attempted to
quantify the benefits provided by Chinese subsidy programs in general,
or export subsidies in particular.
Implications of Double Counting Domestic Subsidies Are Unclear:
Another potential source of double counting could emerge if Commerce
were to apply CVDs to China while it retains its NME status. In such
circumstances, Commerce would continue to use third-country information
to calculate antidumping duties. While, in principle, double counting
of actionable domestic subsidies generally does not occur when analysts
employ information from exporting countries themselves to determine
duty rates, it may occur when analysts use third-country information.
However, current trade law does not make any specific provision for
adjusting antidumping duties in such situations, and the implications
of such situations arising are therefore unclear.
When an antidumping duty is calculated using the third-country-based
methodology that Commerce applies to NME countries, the normal value of
the product (the basis for calculating an antidumping duty) is based
not on Chinese prices (which might be artificially low as a result of
domestic subsidies) but on information from a country where prices are
determined by free markets. Thus, when the normal value is compared
with the export price, the difference will, at least in theory, reflect
the price advantages that the exporting company has obtained from both
export and domestic subsidies.[Footnote 50]
Economists, trade law practitioners, and Commerce officials we
consulted disagreed on whether, in practice, antidumping duties derived
through the third-country-based methodology effectively offset all of
the subsidy benefits enjoyed by Chinese exporters.[Footnote 51]
However, they generally agreed that, in theory, antidumping duties
derived in this way do offset much of the value of both export and
domestic subsidies. As a result, it appears that some double counting
of actionable domestic subsidies could occur if Commerce used third-
country information to calculate antidumping duties on the same
products against which it also applied CVDs.
Because the United States has never attempted to apply both
countervailing and antidumping duties against an NME country, the
implications of taking such an action are unknown. The relevant WTO
agreements are silent with regard to making adjustments to avoid double
counting actionable domestic subsidies, and U.S. law does not provide
Commerce with any specific authority to avoid double counting in such
situations. Therefore, Commerce officials observed that they would have
no choice but to apply both duties without making any
adjustments.[Footnote 52] While at least two U.S. courts have suggested
that double counting to compensate for the same unfair trade practice
is generally considered improper,[Footnote 53] they have not ruled on
the specific question of whether double counting of actionable domestic
subsidies, in particular, is improper. Commerce officials told us that,
theoretical arguments aside, interested parties finding fault with
Commerce's decision making would have to prove that there was actual
double counting.
Conclusions:
Despite increasing concern about Chinese government subsidies and their
adverse impacts on U.S. producers, U.S. producers may not currently
avail themselves of the U.S. government's primary tool for countering
unfair subsidies--CVDs. While the methodology that Commerce currently
employs to calculate antidumping duties on Chinese products already
results in duty rates that offset subsidy benefits to some degree,
Commerce could act to make CVDs available against China as well. It
could do this either by changing China's NME status, or by changing its
current policy and determining that it may apply CVD law against China
regardless of its NME status. However, Commerce appears unlikely to
employ the first alternative in the near future, and the Georgetown
Steel ruling raises an obstacle to employing the second, without clear
authority from Congress.
While Congress is considering legislation that would authorize Commerce
to apply CVDs to China as an NME country, substantial practical
questions about how such cases would proceed remain unanswered, and the
results that they would produce remain uncertain. The absence of such
information makes it difficult for interested Members of Congress,
prospective participants in CVD cases, and Commerce itself to gain any
perspectives on the implications of taking such actions. Commerce has
had no experience in attempting to complete CVD investigations on
Chinese products and has no specific guidance in place for how to
proceed. In particular, Commerce lacks guidance or experience in
applying third-country information to calculate CVD rates--an approach
that is explicitly permitted under the terms of China's accession to
the WTO and that Commerce may very well find necessary to employ given
lack of transparency regarding China's subsidy practices. The CVD rates
that would result from these investigations are uncertain, as are the
net effects of applying both CVDs and antidumping duties to Chinese
products.
Furthermore, Commerce lacks clear authority under U.S. law to either
fully implement China's WTO commitment regarding the use of third-
country information in CVD cases or adjust antidumping duty rates to
avoid double counting of Chinese domestic subsidy benefits. Given this
lack of clarity, it is reasonable to expect that parties objecting to
Commerce's decisions on these issues would challenge relevant aspects
of CVD decisions against China, complicating and delaying application
of such duties to products from that country. Until these issues are
clarified, policymakers will not be fully informed about the
implications of applying U.S. CVD laws to China, and Commerce will not
be prepared to implement such a change in policy.
Recommendations for Executive Action:
In order to provide Congress and the Department of Commerce with better
information about the implications of taking actions that would result
in application of U.S. CVD laws to China, we recommend that the
Secretary of Commerce analyze and report to Congress on:
* Commerce's ability to identify and measure subsidy benefits at the
present time, based on its knowledge of significant Chinese subsidy
programs; and:
* broadly applicable methodologies that Commerce might employ to
complete CVD actions against Chinese products, if called upon,
including how it might respond to potential double counting of domestic
subsidy benefits when applying both countervailing and antidumping
duties to the same products.
Matters for Congressional Consideration:
In the event that (1) Commerce changes China's NME status or (2)
Congress decides to adopt proposed legislation that would authorize
Commerce to apply U.S. CVD laws to NME countries, including China,
Congress may wish to consider adopting legislation to provide Commerce
clear authority to:
* fully implement China's WTO commitment regarding use of third-country
information in CVD cases, and:
* make corrections to avoid double counting domestic subsidy benefits
when applying both CVDs and antidumping duties to the same products
from NME countries, in situations where Commerce finds that double
counting has in fact occurred, taking into account Commerce's analyses
of this issue prepared in response to our recommendation
above.[Footnote 54]
Agency Comments and Our Evaluation:
The Department of Commerce provided written comments on a draft of this
report. These comments are reprinted in appendix III. Commerce provided
a different characterization of our finding that it did not have clear
legal authority to apply CVD law to China, taking the position that
there is no explicit statutory bar to taking such an action, and
stating that Commerce would carefully consider any CVD petition. We
modified our report to clarify that Commerce could decide, in response
to a petition, that circumstances warrant and permit a change in its
policy. However, given that Commerce determined in 1984 that it did not
have explicit legal authority to take such an action, and this was
subsequently upheld and affirmed by a federal appeals court, and later
confirmed by a 1994 statement of administrative action, we continue to
believe that there would be legal obstacles to Commerce changing its
policy.
With regard to our recommendations, Commerce did not comment on our
recommendation that it analyze and report on its ability to identify
and measure subsidy benefits in China. Commerce believed our
recommended report on the methodologies the department would employ if
called upon to apply CVDs to China would be too speculative, and
therefore not meaningful or appropriate before an actual case was
filed, and that such a report could prejudge the outcome of future
actions. We agree that specific decisions on how best to complete
individual CVD actions against China would depend upon the facts in
particular cases. We did not intend that Commerce provide detailed
discussions of how it would respond to particular sets of
circumstances. Rather, this report would provide Commerce, Members of
Congress, and potential parties to CVD cases with some general-level
guidance about how such actions might proceed. For example, such a
report could address Commerce's use of benchmark information from
within or outside China to measure subsidy benefits and application of
China's WTO commitment regarding CVD actions involving state-owned
enterprises. Providing broad commentary on such points would be
consistent with Commerce making general guidance on its antidumping
practices publicly available.[Footnote 55]
Regarding our matters for congressional consideration, Commerce cited
some legal authority for using external benchmarks in CVD cases. We
evaluated this information and added a discussion in our report. We
were not convinced that the cited authority would clearly provide for
full implementation of the special methodology in China's WTO accession
agreement. An explicit grant of authority by Congress would remove
doubt and lesson the chances for legal disputes, and therefore we
continue to believe our suggestion is prudent. Commerce also said our
suggestion that Congress provide Commerce with authority to correct any
double counting of domestic subsidies in companion CVD and antidumping
actions was not warranted or appropriate because Commerce had not yet
encountered this situation, such corrections might be too difficult,
and it would put China in a special category distinct from all other
countries. We maintain that our analysis shows that there is
substantial potential for double counting of domestic subsidies if
Commerce applies CVDs to China while continuing to use its current NME
methodology to determine antidumping duties. We believe that, in such a
situation, Commerce should be provided authority to proactively address
potential double counting, rather than waiting for it to occur and
create methodological and legal problems. Finally, we intended that our
suggestion on double counting apply to all NME countries, and have
clarified our language on this point.
The Department of Commerce also provided technical comments, as did
USTR and ITC. We took these comments into consideration and made
revisions throughout the report as appropriate to make it more accurate
and clear.
We are sending copies of this report to the Secretary of Commerce and
the United States Trade Representative, appropriate congressional
committees, and other interested parties. We will also make copies
available to others upon request. In addition, the report will be
available at no charge on GAO's Web site at [Hyperlink,
http://www.gao.gov].
If you or any of your staff have any questions about this report,
please contact me at (202) 512-4347 or [Hyperlink, yagerl@gao.gov].
Contact points for our Offices of Congressional Relations and Public
Affairs may be found on the last page of this report. GAO staff who
made major contributions to this report are listed in appendix IV.
Signed by:
Loren Yager:
Director, International Affairs and Trade:
[End of section]
Appendixes:
Appendix I: Objectives, Scope, and Methodology:
In May 2003, the House Appropriations Committee's Subcommittee on
Commerce, Justice, and State, the Judiciary, and Related Agencies held
hearings regarding U.S. government efforts to support American
businesses adversely affected by imports from China. In light of
concerns expressed at this hearing, the conference report on fiscal
year 2004 appropriations legislation requested that GAO monitor the
efforts of U.S. government agencies responsible for ensuring free and
fair trade with China.[Footnote 56] In subsequent discussions with your
staff, we agreed to respond by providing a number of reports on relief
mechanisms available to U.S. producers adversely affected by unfair or
surging imports, and the manner in which they have been applied to
China.[Footnote 57] In this report, we (1) explain why the United
States does not currently apply CVDs to imports from China, (2)
describe available alternatives for applying CVDs to Chinese-origin
imports, (3) explore the challenges that the Department of Commerce
would face in applying these alternatives, and (4) examine the
potential impact that applying these alternatives would have on the
rates of duty applied to Chinese products.
To address our objectives, we reviewed applicable U.S. laws and
regulations and World Trade Organization (WTO) agreements, including
the Agreement on Subsidies and Countervailing Measures, and China's WTO
accession agreement. We conducted a literature search and reviewed
relevant scholarly and legal analyses, Department of Commerce
determinations, and decisions by U.S. courts and the WTO Dispute
Settlement Body. We consulted with trade and legal policy experts from
the U.S. government, private sector trade associations, consulting
firms, and academic institutions; law firms with broad experience in
trade actions against China; as well as representatives of the WTO, the
government of China, and other governments concerned about Chinese
trade practices, including the European Union, Canada, New Zealand, and
Mexico.
In addition, to address our fourth objective, we obtained information
on U.S. countervailing and antidumping duty actions from 1995 through
2004 from the Department of Commerce and the U.S. International Trade
Commission. We used this data to construct our own database on
countervailing duty determinations and antidumping duties applied on
similar products over the same period. We included all countervailing
duty cases over this time period, as well as all antidumping cases in
which a petition was filed by U.S. industry for an antidumping
investigation against a similar product from the same country (e.g.,
honey from Argentina). Of the 72 countervailing duty cases from 1995
through 2004, we found only 3 in which a similar antidumping petition
was not also filed. Our database includes information on the outcome of
the investigations (e.g., whether an order was issued), the status of
the orders as of the end of 2004, the duty rates imposed in each case
that resulted in a CVD order and the antidumping duty rates imposed on
similar products. For each countervailing or antidumping duty order,
the Department of Commerce may issue several different duty rates.
These may include separate duty rates for large individual companies
(suppliers), as well as weighted average "all others" rates for smaller
suppliers. We collected all of these rates and compared the lowest and
highest separate rates, the average of all separate duty rates, and the
"all others" rates. As we report above, we found that the averages or
median rates for countervailing duties orders are smaller than similar
antidumping rates, whether comparing the lowest rates, the highest
rates, the average rates, or the "all others" rates. However, as shown
in figure 2, in some individual cases countervailing duty rates were
higher than antidumping rates. Also, future investigations may yield
different results depending on the types of products, countries, and
activities investigated. Having verified these data with the original
Federal Register notices, which provide the official U.S. government
notification of investigations and orders, we find the data to be
sufficiently reliable for analyzing the number, status, and duties (if
imposed) on U.S. countervailing duty cases from 1995 through 2004, as
well as U.S. antidumping cases on similar products.
In addition, to provide information on the growth of U.S. imports from
China, we examined official U.S. import data from the Department of
Commerce, Bureau of the Census, which we adjusted for inflation using
the end-use import price index published by Commerce's Bureau of
Economic Analysis. While U.S. data on imports from China have some
acknowledged limitations, we found them to be sufficiently reliable for
the purpose of establishing that there has been rapid growth in these
imports in recent years.
We performed our work from January 2004 through June 2005 in accordance
with generally accepted government auditing standards.
[End of section]
Appendix II: CVDs and Antidumping Duties under WTO Rules and U.S. Law:
WTO Agreement Provides General Rules:
The WTO Agreement on Subsidies and Countervailing Measures defines a
subsidy as a financial contribution by a government or any public body
within a WTO member that confers a benefit. While the agreement imposes
an outright ban on some types of subsidies,[Footnote 58] most types are
not completely prohibited but are classified as actionable under
certain conditions. Actionable subsidies are those that are specific--
i.e., benefit a specific enterprise, industry, or group of enterprises
or industries--and cause adverse effects to the interests of another
WTO member, such as injury to their domestic industries.
According to the WTO, members may impose CVDs when they (1) identify
subsidized imports, (2) determine that a domestic industry is suffering
injury, and (3) establish a causal link between the subsidized imports
and the injury being suffered. These duties are intended to offset the
price advantages that the subsidy confers on the imported product and,
more broadly, encourage governments that maintain subsidies to
eliminate them. The subsidies agreement requires that the investigating
authorities quantify the value of the subsidies being provided and
limits the level of duty imposed to that value.
To facilitate identification of subsidies and evaluation of their trade
effects, the agreement requires WTO members to provide the organization
with annual notifications on all of the specific subsidies they
maintain and to provide additional information on any of these programs
when requested. The agreement specifies that member states should
provide sufficient information "to enable other Members to evaluate the
trade effects and to understand the operation of notified subsidy
programs."[Footnote 59]
U.S. Procedures Reflect WTO Rules:
Under U.S. law,[Footnote 60] CVDs may be imposed against subsidized
imports from other WTO members when a U.S. industry is materially
injured or threatened with injury or the establishment of an industry
in the United States is materially retarded.[Footnote 61] The ITC and
the Department of Commerce share investigative and decision-making
responsibility in CVD cases. The ITC determines whether there is
material injury or threat thereof to the domestic industry by reason of
the subject imports. Commerce determines whether the foreign country is
providing a countervailable subsidy, and, if so, the size of the
subsidy and (consequently) the size of the CVD that should be imposed.
To make these determinations, Commerce solicits information from
exporting country governments and from individual producers and
exporters of the subject merchandise and applies this information to
establish appropriate duty rates for each known exporter or
producer.[Footnote 62]
Figure 3: Outline of the U.S. Process for Making CVD Determinations:
[See PDF for image]
Notes: In addition to producers and associations of producers, U.S. law
grants unions and other recognized worker groups in affected U.S.
industries the right to submit petitions for relief. Petitions are
filed with Commerce and ITC simultaneously. Commerce may also self-
initiate investigations.
Commerce will dismiss petitions that (1) do not allege the elements
necessary for imposition of a duty and contain information "reasonably
available to the petitioner" in support of these allegations or that
(2) have not been filed by or on behalf of the domestic industry
concerned. The information to be submitted must address, among other
things, the nature of the subsidies being provided to the foreign
producers, the competitive benefits that these subsidies bestow, and
injury to the U.S. industry by reason of the subject imports.
[End of figure]
Countervailing Duties Usually Applied in Tandem with Antidumping
Duties:
The United States has imposed CVDs with some regularity, on a variety
of products from a variety of countries.[Footnote 63] From 1995 through
2004, U.S. domestic industries petitioned for 72 CVD investigations
against 43 different products from 25 countries.[Footnote 64] Thirty-
six of these investigations (50 percent) resulted in application of
CVDs.[Footnote 65] Figure 4 shows the results of these 72 petitions.
Figure 4: Results of 72 CVD Petitions, 1995-2004:
[See PDF for image] --graphic text.
Pie chart with six items.
CVDs imposed:
Orders in place - 32: 44%;
Orders revoked - 4: 6%.
CVDs not imposed:
Terminated - 28: 39%;
Not initiated - 4: 6%;
Incomplete - 3: 4%;
Suspended - 1: 1%.
Note: There are currently 57 CVD orders in place. Thirty-two of these
(as shown in the figure) resulted from petitions filed from 1995
through 2004. The remainder resulted from petitions filed prior to
1995.
[End of figure]
Generally, when petitioners seek imposition of CVDs, they also seek
imposition of antidumping duties on the same product from the same
country. In 69 of the 72 CVD cases, petitioners also requested a
companion antidumping investigation.[Footnote 66]
Dumping occurs when a foreign company sells merchandise in a given
export market (for example, the United States) at prices that are lower
than the prices charged in the producers' home market or another export
market. When this occurs, and when the imports have been found to
materially injure, or threaten to materially injure, U.S. producers,
WTO rules and U.S. laws permit application of antidumping duties to
offset the price advantage enjoyed by the imported product. As in CVD
cases, Commerce analysts establish antidumping duties for each known
producer or exporter. Figure 5 illustrates how antidumping duties are
determined.
Figure 5: How Are Antidumping Duties Determined?
[See PDF for image]
Note: As with CVDs, the Department of Commerce and ITC share
responsibility for processing antidumping actions. Commerce determines
whether and to what extent dumping is taking place, while ITC
determines whether a U.S. industry has suffered material injury as a
result. Duties may be imposed only if both agencies make positive
determinations.
[End of figure]
Petitioners requesting antidumping investigations do not always request
CVD investigations, and CVDs are, in fact, sought and imposed much less
frequently than are antidumping duties. From 1995 through 2004, U.S.
industry groups petitioned for nearly five times as many antidumping as
countervailing duty investigations (354 compared with 72). Similarly,
the United States put in place over four times as many antidumping duty
orders (156) as it did CVD orders (36).
Figure 6 shows the distribution of these countervailing and antidumping
duty orders by year for 1996 through 2004. For antidumping orders,
these are further broken down into orders against market economies,
China, and other nonmarket economies. The number of CVD orders imposed
might have been higher, and the contrast with antidumping duty orders
less pronounced, if CVDs had been available against nonmarket economies
during this period. Nonetheless, figure 6 shows that even among market
economy countries, the United States imposes CVDs much less frequently
than antidumping duties.
Figure 6: U.S. CVD Orders against All Countries and Antidumping Duty
Orders against Market Economies, Other NME Countries, and China, 1996-
2004:
[See PDF for image]
Notes: The figure shows the countervailing and antidumping duty orders
issued each year as a result of petitions submitted from 1995 through
2004. The figure does not provide data for 1995 since all of the
investigations based on petitions filed in that year remained
incomplete at the end of the year.
According to the WTO, antidumping and countervailing duties affected
less than 0.5 percent of U.S. imports in 2001. See WTO, Trade Policy
Review-United States 2004 (Geneva, 2004).
[End of figure]
[End of section]
Appendix III: Comments from the Department of Commerce:
UNITED STATES DEPARTMENT OF COMMERCE:
The Under Secretary for International Trade:
Washington, D.C. 20230:
JUN 1 2005:
Mr. Loren Yager:
Director:
International Affairs and Trade:
U.S. Government Accountability Office:
Washington, D.C. 20548:
Thank you for the opportunity to comment on the Government
Accountability Office (GAO) draft report entitled, "US-China Trade:
Commerce Faces Practical and Legal Challenges in Applying
Countervailing Duties (GAO-05-074).
Enclosed are the Department's comments on the draft report. In
addition, attachment one contains technical edits to the draft report.
We hope our comments as well as the suggested edits assist you and your
staff in addressing this important issue. If you have any questions or
concerns regarding our response, please address them to John Herrmann
at 202-482-1780.
Thank you again for requesting the Department's views on the draft
report.
Sincerely,
Signed by:
Timothy J. Hauser:
Acting:
Enclosure:
DOC Response to GAO Report on China and CVD:
The following responds to a pre-publication draft report entitled "U.S.-
CHINA TRADE: Commerce Faces Practical and Legal Challenges in Applying
Countervailing Duties" that the Government Accountability Office (GAO)
provided to the Department of Commerce for review and comment. The
draft report explains why the United States has in the past not applied
the U.S. countervailing duty (CVD) law to China, describes options for
changing this policy, and examines the challenges and implications of
such changes. The draft report makes two recommendations to the
Department of Commerce for action to be undertaken in advance of any
decision to apply the U.S. CVD law to China. In the event that a
decision is made by Congress or Commerce to begin applying the CVD law
to China, the report also urges that Congress consider legislation that
would ensure an accurate application of the CVD law to China.
At the outset we would like to comment on one of the premises that
informs the draft report. This premise is that Commerce does not now
have clear legal authority to apply the CVD law to China, and to do so
would require either new CVD legislation or the Department's
"graduation" of China to market economy status for purposes of the U.S.
antidumping laws. First, there is no explicit statutory bar against
applying the CVD law to NME countries. Similarly, it is inaccurate to
state that the Department does not currently accept CVD petitions
against China. Rather, given the ruling in Georgetown Steel, the
Department has not for some time received any CVD petitions against
China. The Department would carefully review any CVD petition against
China, as it does all CVD petitions, to ensure that all legal and
evidentiary requirements have been met, giving due consideration to any
difficulties arising from benchmark or data source concerns. Finally,
it is not correct to presume that applying the CVD law to China would
necessarily lead to China's graduation to market-economy status under
the antidumping law. While such a decision may result in China formally
requesting that it be graduated, this is not required under either U.S.
law or China's WTO accession protocol.
With respect to other issues relating to the draft report, the GAO
recommends that:
"In order to provide decision-makers in Congress and the Department of
Commerce with better information about the implications of taking
actions that would result in application of U.S. CVD laws to China, we
recommend that the Secretary of Commerce analyze and report to Congress
on Commerce's ability to identify and measure subsidy benefits at the
present time, based on its knowledge of significant Chinese subsidy
programs; and methodologies that Commerce would employ to complete CVD
actions against Chinese products, if called upon, including how it
would respond to potential counting of domestic subsidy benefits when
applying both countervailing and antidumping duties to the same
products."
With respect to the draft report's second recommendation, the
Department does not believe it would be a meaningful or appropriate
exercise to report to Congress the methodologies it would conceivably
employ to address PRC government subsidies in potential future CVD
proceedings. At best, this would amount to a speculative exercise that
would occur in the absence of a full factual record and would not be
based on any administrative experience, established practice, or
expertise in applying CVD to non-market economy countries. Of greater
concern, however, is that such a report could pre judge the outcome of
a future case. We believe the most appropriate forum in which to make
decisions on the best CVD methodology to apply would be in the context
of future cases. Applying the CVD law to China would be a challenging
exercise, but the best methodology for doing so would hinge, in part,
on the particular facts of any proceeding that may ultimately be
brought before the Department. Conducting such an analysis within the
context of an actual proceeding would also provide interested parties
with a full opportunity to participate and comment on any proposed
methodology that might be adopted by the Department. Furthermore, the
Department's determination would be subject to judicial review.
In the event that the Department should begin to apply the CVD law to
China, the draft report also recommends that Congress consider granting
the Department authority to employ third-country information in CVD
cases. The draft report states that Commerce "has never applied third-
country information in CVD cases, and moreover, does not have clear
legal authority to do so." This statement should be revised to reflect
Commerce's practice prior to issuance of the final report. In
particular, Commerce has the authority to use external benchmarks under
19 C.F.R. §351.511 of the CVD regulations in certain circumstances for
purposes of identifying or measuring a subsidy. (See, e.g., Notice of
Final Affirmative Countervailing Duty Determination and Final Negative
Critical Circumstances Determination: Certain Softwood Lumber Products
From Canada, 67 Fed. Reg. 15,545 (Apr. 2, 2002), and accompanying
Decision Memorandum; and Notice of Final Results of Countervailing Duty
Administrative Review and Rescission of Certain Company-Specific
Reviews: Certain Softwood Lumber Products from Canada, 69 Fed. Reg.
75,917 (Dec. 20, 2004), and accompanying Decision Memorandum.) Commerce
has successfully defended this methodology at the WTO with respect to
the first lumber CVD case cited above. Commerce has also used
international lending rates, such as LIBOR, to measure the benefit from
government-provided foreign-currency denominated loans or where no
comparable domestic lending rates are available in accordance with 19
C.F.R. §351.505 of the CVD regulations. (See, e.g., Final Affirmative
Countervailing Duty Determination: Certain Stainless Steel Wire Rod
from Italy, 63 Fed. Reg. 40,474 (July 29, 1998); Final Affirmative
Countervailing Duty Determination: Certain CTL arbon-Quality Steel
Plate from Italy, 64 Fed. Reg. 73,244 (Dec. 29, 1999); and Final
Results of Countervailing Duty Administrative Review: Grain-Oriented
Electrical Steel from Italy, 66 Fed. Reg. 2885 (Jan. 12, 2001).)
The draft report also recommends that Congress consider legislative
action, should Commerce undertake CVD cases against China, to "make
corrections to avoid double-counting domestic subsidy benefits when
applying both CVDs and antidumping duties to the same products, taking
into account Commerce's analyses of these issues." We do not believe
that this legislative action is either warranted or would be
appropriate. First, given that the Department has not yet undertaken
concurrent CVD and antidumping cases against China, there is no reason
to assume that such double-counting would even exist. Second, because
U.S. law does not currently allow for any adjustments to be made to the
export price in an antidumping case for the amount of any
countervailing duties collected to offset domestic subsidies (see,
Section 772 of the Trade Act of 1930, as amended), the proposed change
would put China into a special category distinct from all other
countries when subject to concurrent antidumping and countervailing
duty investigations. Such a change seems wholly inappropriate. Finally,
we would like to point out that making such adjustments would raise
complex methodological issues, the costs of which may far outweigh the
purported equity gains of any such adjustment.
The following are GAO's comments on the Department of Commerce's letter
dated June 1, 2005.
GAO Comments:
1. We agree that U.S. trade law does not explicitly bar CVD actions
against NME countries. Also, we acknowledge that the Department of
Commerce remains open to considering petitions for CVD action against
such countries, and that Commerce could conceivably decide that the
facts in a particular case warrant and permit applying CVDs in an NME
context. We have revised the text to ensure that these points are
clearly stated.
Nonetheless, while not explicitly barring CVD actions against NME
countries, U.S. trade law also does not explicitly authorize such
actions, and both Commerce and a U.S. Court of Appeals decision have
indicated that U.S. CVD law was not intended to be applied to NME
countries. This position was also supported by the Statement of
Administrative Action accompanying the 1994 Uruguay Round Agreements
Act. Accordingly, we conclude that there would be legal obstacles to
Commerce reversing its policy and allowing CVD actions against NME
countries, including China. It is likely that, absent a clear grant of
authority, such a policy change would result in court challenges.
2. We do not presume that applying CVD law to China would require that
China be designated a market economy under U.S. antidumping law. We
assume that if Commerce applied CVDs to China without changing its
status as an NME country, it would continue to apply its NME
methodology in antidumping cases against that country.
3. We agree that completing CVD actions against China would be a
challenging exercise, and that specific decisions on how best to
complete such actions would depend on the facts at hand in particular
cases. We do not intend to suggest that Commerce provide detailed
analyses of how it would respond in case-specific circumstances.
Nonetheless, a Commerce study evaluating how it might generally proceed
in such cases would be helpful to Commerce itself and Members of
Congress in considering whether to take actions that would lead to CVD
cases against NME countries, as well as to potential parties to such
actions concerned about how to proceed in such cases. For example, such
a report could address (1) benchmark information from within or outside
China that Commerce would consider in measuring subsidy benefits, (2)
methods and approaches that could be employed to respond to potential
double counting of domestic subsidy benefits, and (3) how China's WTO
commitment regarding subsidies and state-owned enterprises might affect
specificity determinations.
We have revised the report text to make these points.
4. We acknowledge that Department of Commerce regulations do provide
for applying information from outside a subsidizing country to assist
in assessing subsidy benefits--in some circumstances--and that Commerce
has applied them in a number of cases. We have revised our report to
include information on these provisions.
Nonetheless, current U.S. law does not explicitly authorize Commerce to
fully apply China's commitment regarding the use of information from
outside China to complete CVD actions. Also, as discussed in more
detail in the body of the report, the methodologies set forth in
regulatory provisions cited by Commerce do not apply to the full range
of subsidies that might arise in a CVD case. Moreover, the methodology
in the more specific of these provisions has been questioned in a
dispute settlement case under the North American Free Trade Agreement.
5. We agree that any legislation authorizing Commerce to adjust duty
rates to avoid double counting in applying countervailing and
antidumping duties to products from NME countries should not apply only
to China. We have modified the report text to make this clear.
We disagree with Commerce's comment that legislative action on this
matter is not warranted or appropriate. We believe that sound economic
reasoning suggests that there is substantial potential for domestic
subsidies to be double counted in the event that Commerce applies CVDs
to NME country products while continuing to use third-country
information to calculate antidumping duties on those same products.
Therefore, congressional action to provide Commerce with authority to
avoid double counting in these instances would be prudent. We agree
that making such adjustments could raise complex methodological issues.
It is for this reason that we recommend that, in reporting on
methodologies for completing CVD actions against China, Commerce
include discussion on responding to potential double counting of
domestic subsidy benefits. This would allow Commerce to evaluate, among
other things, the feasibility and cost of making such adjustments and
their likely impact.
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Loren Yager, (202) 512-4347:
Staff Acknowledgments:
In addition to those named above, the following individuals made
significant contributions to this report: Adam R. Cowles, R. Gifford
Howland, Michael McAtee, Richard Seldin, Ross Tuttelman, and Timothy
Wedding.
(320326):
FOOTNOTES
[1] Both values are expressed in constant 2004 dollars.
[2] See, for example, H.R. 1216, S. 593. Similar bills were introduced
in both houses of Congress in 2004, but did not gain approval. See H.R.
3716, S. 2212.
[3] H.R. Rep. No. 108-401, at 574 (2003), accompanying the Consolidated
Appropriations Act, 2004, Pub. L. No. 108-199, 118 Stat. 3, 65.
[4] We have already published a report on textile safeguards. See GAO,
U.S.-China Trade: Textile Safeguard Procedures Should be Improved, GAO-
05-296 (Washington D.C.: Apr. 4, 2005). Forthcoming reports will focus
on other safeguard measures and antidumping duties.
[5] 19 U.S.C. §1677(18).
[6] Final Determination at Less Than Fair Value: Natural Menthol from
the People's Republic of China, 46 Fed. Reg. 24614, May 1, 1981.
[7] 49 Fed. Reg. 19370, 19374 (May 7, 1984).
[8] Pub. L. No. 93-618, 88 Stat. 1978.
[9] Pub. L. No. 96-39, 93 Stat. 144.
[10] 801 F.2d 1308 (Fed. Cir. 1986). In upholding the Department of
Commerce's position, the Court of Appeals overruled an earlier ruling
in the same case by the Court of International Trade, which had
reversed the department. See Continental Steel v. United States, 614 F.
Supp. 548, 550 (C.I.T. 1985).
[11] 49 Fed. Reg. 19370, 19374 (May 7, 1984).
[12] For details on these decisions see, for Russia, a Commerce
Department memorandum available at
http://ia.ita.doc.gov/download/russia-nme-status/russia-nme-decision-
final.htm; for Estonia, 68 Fed. Reg. 10445 (Mar. 5, 2003); and for
Vietnam, 68 Fed. Reg. 4986 (Jan. 31, 2003).
[13] 19 U.S.C. §1677(18).
[14] The commission was established in 1983 to serve as a forum for
high-level dialogue on bilateral trade issues.
[15] According to Commerce, the working group has held two meetings (in
July 2004 and May 2005).
[16] Application of Commerce's NME ("surrogate" or third-country-based)
methodology for calculating antidumping duties is widely believed to
lead to application of duties that are significantly higher than those
resulting from application of the department's standard methodology for
market economy countries. We were unable to identify any analyses
showing conclusively that this is the case. Our forthcoming report on
the application of antidumping duties to Chinese products will include
information and analyses of this question.
[17] European Union, China--Market Economy Status in Trade Defense
Investigations, memo 04/163 (Brussels, June 28, 2004).
[18] Oscillating and Ceiling Fans from the People's Republic of China,
57 Fed. Reg. 24018 (Dept. of Commerce, 1992) (final determination) and
57 Fed. Reg. 10011 (Dept. of Commerce, 1992) (preliminary
determination). In issuing these decisions, the department was
responding to an allegation from the company petitioning for relief
that, regardless of the nature of China's economy, the Chinese fan
industry operated pursuant to market principles and that U.S. CVD laws
should therefore apply.
[19] Sulfanilic Acid from the People's Republic of China, 57 Fed. Reg.
9409, 9411 (Dept. of Commerce, Mar. 18, 1992).
[20] Commerce also observed that Congress had amended U.S. antidumping
laws in 1988 to provide the department with the authority to use its
market economy methodology to calculate antidumping duties on
industries from NME countries when the available information permits.
The department stated that "this change was added in recognition of
attempts by the traditional NME countries to evolve toward market-
oriented economies" and that "Congress clearly contemplated a situation
in which a sector of an NME may be sufficiently free of NME distortion
so that the actual prices and/or costs incurred in the NME could be
used in dumping calculations and render meaningful results." Commerce
also found that, if a market-oriented industry existed, failure to
permit application of CVD law would leave affected U.S. industries at a
disadvantage. 57 Fed. Reg. 24018 (June 5, 1992).
[21] For example, the Department of Commerce recently denied such
requests by Chinese color television and bedroom furniture companies.
See 69 Fed. Reg. 20594 (Apr. 16, 2004) and 69 Fed Reg. 67313 (Nov. 17,
2004).
[22] 801 F.2d 1308, 1318 (Fed. Cir. 1986).
[23] Pub. L. No. 103-465, 108 Stat. 4809, adopted Dec. 8, 1994.
[24] The statement presented the Clinton administration's views on the
interpretation and application of the agreements resulting from the
Uruguay Round of trade negotiations, and was approved by Congress as
part of this Act. 108 Stat. 4814, 19 U.S.C. § 3511(a)(2).
[25] China's accession agreement does recognize that decisions on NME
status in antidumping actions are to be made under the national laws of
WTO members. WTO Protocol on the Accession of the People's Republic of
China, art. 15(d).
[26] General Agreement on Tariffs and Trade Annex I, Ad art. VI,
states, "[I]n the case of imports from a country which has a complete
or substantially complete monopoly of its trade and where all domestic
prices are fixed by the State, special difficulties may exist in
determining price comparability [in antidumping analyses] and in such
cases importing contracting parties may find it necessary to take into
account the possibility that a strict comparison with domestic prices
in such a country may not always be appropriate."
[27] WTO Protocol on the Accession of the People's Republic of China,
art. 15(b).
[28] China's accession agreement also affirms other WTO members' right
to apply third-country information in antidumping actions against
China. However, the agreement provides that members will cease doing so
in the event that they recognize China as a market economy, in whole or
in part. The agreement indicates further that its provisions on
applying third-country information in antidumping cases will expire in
December 2016.
[29] USTR officials stated that state-owned enterprises are believed to
be, by far, the major recipients of subsidies in China.
[30] WTO Agreement on Subsidies and Countervailing Measures, art. 2.1.
[31] See WTO, Technical Cooperation Handbook on Notification
Requirements, WT/TC/NOTIF/SCM/1, 9 (Geneva, September 1996), 6-7.
[32] WTO Protocol on the Accession of the People's Republic of China,
art. 10.
[33] According to the World Bank, state-owned enterprises now account
for less than one-quarter of China's industrial output. See the World
Bank, China: An Evaluation of World Bank Assistance (Washington, D.C.,
2004).
[34] WTO officials observed that even the United States--a country
wherein government actions that influence the economy are comparatively
well documented--has had difficulty identifying and quantifying subsidy
information that it is required to report to the WTO.
[35] USTR, National Trade Estimates Report (Washington, D.C., March
2004).
[36] While Commerce has never reached an affirmative final
determination in a CVD case against China--or any other NME country--
Canada did complete three CVD cases against China during the last year.
In two of these cases, Canadian officials were able to obtain
sufficient information from the Chinese government and exporting
companies to complete their analyses. Canada Border Services Agency,
Statement of Reasons: Outdoor Barbeques Originating in or Exported from
the People's Republic of China, CVD/102 (Ottawa, Dec. 3, 2004), and
Statement of Reasons: Certain Laminate Flooring Originating in or
Exported from the People's Republic of China, CVD/104 (Ottawa, June 1,
2005). In the remaining case the agency was unable to obtain sufficient
information from the Chinese government and completed its analyses by
employing "the best information available." Canada Border Services
Agency, Statement of Reasons: Certain Carbon Steel and Stainless Steel
Fasteners Originating in or Exported from the People's Republic of
China, CVD/103 (Ottawa, Dec. 24, 2004). Unlike the United States,
Canada does not differentiate between market and nonmarket economy
countries in countervailing duty actions. Canadian officials did not
employ third-country information in any of these cases. As far as we
are aware, these are the only CVD actions completed against China to
date by any WTO member.
[37] As already observed, article 10 of China's WTO accession protocol
facilitates such determinations when state-owned industries are
involved.
[38] 19 U.S.C. §1677e(a).
[39] For example, 19 U.S.C. §1677e(b) prevents the department from
applying information that is clearly adverse to the interests of an
exporter unless it determines that the exporter has failed to cooperate
with the investigation to the best of its abilities.
[40] Section 421 of the Trade Act of 1974, as amended, Pub. L 106-286,
114 Stat. 882, 19 U.S.C. § 2451. This section implements article 16 of
China's WTO protocol of accession, which authorizes other WTO members
to apply product-specific safeguards on Chinese imports that are deemed
to be causing or threatening to cause market disruption.
[41] This interagency group, which is headed by the Commerce
Department, is the Committee for the Implementation of Textile
Agreements.
[42] See 7 U.S.C. 1854 and Exec. Order 11651, 37 Fed. Reg. 4699 (Mar.
3, 1972), as amended. Nevertheless, the interagency group's authority
to process China textile safeguard cases has been challenged in court
by the U.S. Association of Importers of Textiles and Apparel, partially
on the ground that Congress did not enact legislation implementing
China's commitment. U.S. Ass'n of Importers of Textiles and Apparel v.
United States, Ct. No. 00598 (C.I.T. Dec. 1, 2004). GAO takes no legal
position on this issue.
[43] For example, according to Commerce, 19 C.F.R. § 351.505 authorizes
use of international lending rates to measure subsidy benefits from
certain loans. However, this provision only applies to loans and does
not specifically authorize use of third-country information.
[44] When no useable market-determined prices are available in the
exporting country, 19 C.F.R. § 351.511 authorizes the use of world
market prices to determine subsidy benefits for goods and services
employed in producing the exports in question. However, this provision
does not extend to subsidy benefits conveyed through other means, such
as equity investments. In its ruling on the United States application
of CVDs against Canadian softwood lumber, the WTO Appellate Body found
that information from outside the subsidizing country could be used to
measure subsidy benefits in very limited circumstances. However, it did
not make any specific findings on the U.S. regulations. WTO, United
States--Final Countervailing Duty Determinations with Respect to
Certain Softwood Lumber from Canada, WT/DS257/AB/R, paras. 77-103
(Geneva, January 2004). Several North American Free Trade Agreement
panels have also ruled on the softwood lumber CVD case and questioned
application of the methodology set forth in the U.S. regulation. North
American Free Trade Agreement Secretariat, United States--Final
Affirmative Countervailing Duty Determination: Certain Softwood Lumber
Products from Canada, File USA-CDA-2002-1904-03 (Aug. 13, 2003, and
June 7, 2004).
[45] See article 19 of the WTO Agreement on Subsidies and
Countervailing Measures, and 19 U.S.C. §1671(a).
[46] The likelihood that significant CVDs could be imposed to counter
past government support in China and other NME countries is further
reduced by a 2002 WTO dispute settlement decision that established a
rebuttable presumption that prior subsidies usually will not be
considered to have provided countervailable subsidy benefits for new,
private owners of former state-owned enterprises--provided that the
enterprise was turned over to private ownership in an arm's length,
fair market transaction. WTO, United States--Countervailing Measures
Concerning Certain Products from the European Communities, WT/DS212/AB/
R (Geneva, December 2002). Furthermore, in a countervailing duty case
involving exports from Hungary, Commerce found that subsidies provided
by a country before its status is changed from nonmarket to market
economy are not subject to U.S. countervailing duty law. Sulfanilic
Acid from Hungary, 67 Fed. Reg. 60223 (Dept. of Commerce, 2002) (Issues
and Decision Memorandum for the Final Determination at 14-15).
[47] GAO is currently engaged in an analysis of how antidumping duty
rates derived through Commerce's nonmarket economy methodology compare
with duty rates derived through the department's standard methodology.
The results of this analysis will be included in our forthcoming report
on application of antidumping duties to China.
[48] WTO General Agreement on Tariffs and Trade, art. VI.5.
[49] 19 U.S.C. §1677a(c)(1)(C).
[50] In contrast, when a market economy methodology is used, both the
normal value and the export price will, in principle, reflect the
benefits that the producer has derived from domestic subsidies.
Therefore, comparing the normal value with the export price will not
result in an antidumping duty rate that captures the benefits provided
by these subsidies; these benefits will be captured only in a CVD
investigation. Thus, domestic subsidy benefits generally would not be
double counted.
[51] For example, some of those with whom we spoke pointed out that
Commerce's analyses may not result in antidumping duties that fully
offset Chinese subsidies because the third-market values employed by
the department may, themselves, be distorted by subsidies provided by
other governments.
[52] Commerce officials identified one case involving alleged double
counting of domestic subsidies. The case involved application of
antidumping and countervailing duties against low enriched uranium from
France--a market economy country. In this case, Commerce concluded that
the information on the record did not provide a sufficient basis for
determining whether double counting had taken place. Some parties to
the case objected to Commerce's conclusion, but they did not provide
any new information that would have helped Commerce in re-examining it;
they also did not challenge Commerce's reasoning before the courts. The
determination itself may be accessed online
http://ia.ita.doc.gov/frn/0112frn/01-31509.txt. A decision memorandum
providing additional information is also available at
http://ia.ita.doc.gov/frn/summary/france/01-31509-1.txt.
[53] For example, in a CVD case involving tax subsidies, the Court of
Appeals for the Federal Circuit found that Commerce had erred in
counting both a rebate of a tax and a tax deduction in calculating the
amount of a subsidy. Similarly, in an antidumping case against Chinese
companies, the court found that Commerce had double counted a
substantial component of total freight expenses such that the results
fell "outside the limits of permissible approximation." Finally, in an
antidumping case, the Court of International Trade instructed Commerce
to reconsider its method of calculating exporter profit margins, in
part to avoid double counting. Kajaria Iron Castings PVT. LTD v. United
States, 156 F. 3d 1163, 1173-74 (Fed. Cir. 1998); Sigma Corp. v. United
States, 117 F. 3d 1401, 1407 (Fed. Cir. 1997); and Geum Pong Corp. v.
United States, 193 F. Supp. 2d. 1363, 1370 (C.I.T. 2002).
[54] We limit this matter for congressional consideration to situations
involving NME countries because we believe it unlikely that double
counting problems involving domestic subsidies will arise in companion
antidumping and countervailing duty actions against market economy
countries.
[55] U.S. trade law provides general rules for completing antidumping
actions against NME countries. 19 U.S.C. § 1667b(c). However, Commerce
has also provided additional guidance. See Department of Commerce,
Import Administration Dumping Manual, chapter 8, (Washington, D.C.,
1997). This document is available on the Internet at http://ia.ita.doc.gov/admanual/index.html.
[56] H.R. Rep. No. 108-401, at 574 (2003), accompanying the
Consolidated Appropriations Act, 2004, Pub. L. No. 108-199, 118 Stat.
3, 65.
[57] We have already published a report on textile safeguards. See GAO,
U.S.-China Trade: Textile Safeguard Procedures Should be Improved, GAO-
05-296 (Washington, D.C.: Apr. 4, 2005). Forthcoming reports will focus
on other safeguard measures and antidumping duties.
[58] Export subsidies (those contingent on export performance) and
local content subsidies (those contingent on use of domestic over
imported goods) are explicitly prohibited. Members may challenge
prohibited subsidies through the WTO's dispute settlement process and
may impose countermeasures if the member being challenged declines to
eliminate the subsidies. In contrast to CVD actions, members bringing
such complaints do not have to show that their domestic industries have
suffered adverse effects as a result of these subsidies.
[59] WTO Agreement on Subsidies and Countervailing Measures, art. 25.3.
[60] 19 U.S.C. §1671 and following.
[61] U.S. law requires an injury test when the exporting country is a
WTO member or meets certain other criteria. 19 U.S.C. §§1671(b) and
(c).
[62] Individual company rates can vary a great deal, depending upon the
facts in each case. In one recent case, for example, the Commerce
Department applied a CVD of about 17 percent to one Indian exporter of
carbazole violet pigment, but a rate of about 34 percent to another
Indian exporter of this product. 69 Fed. Reg. 77995 (Dec. 29, 2004).
[63] The United States has more CVDs in place than any other country.
According to the WTO, the United States had 57 CVD measures in place as
of June 2004. The next highest reported totals were for the European
Community (18) and Canada (10). See WTO, Report (2004) of the Committee
on Subsidies and Countervailing Measures, G/L/711 (Geneva, Nov. 9,
2004).
[64] The Department of Commerce declined to initiate investigations in
4 of the 72 cases, involving certain crude petroleum oil products from
Mexico, Iraq, Saudi Arabia, and Venezuela, because of insufficient U.S.
industry support for the petition. 64 Fed. Reg. 44480 (Aug. 16, 1999).
[65] Twenty-three of these 36 cases (64 percent) involved steel
products. Other products included pasta, honey, softwood lumber
products, low enriched uranium, and semiconductors. India was the
country most petitioned against (10 out of the 72 investigations),
while Italy faced the most positive determinations. (All six of the
investigations against Italy resulted in CVDs.)
[66] The three cases in which petitioners requested CVDs but not
antidumping duties involved laminated and hardwood flooring from Canada
(1996), carbon and certain alloy steel wire rod from Turkey (2001), and
D-RAMS (a type of semiconductor) from Korea (2002). The Department of
Commerce did order assessment of antidumping duties against Korean D-
RAMS beginning in 1993. However, this order was revoked approximately
two years prior to initiation of a CVD action against these products.
GAO's Mission:
The Government Accountability Office, the investigative arm of
Congress, exists to support Congress in meeting its constitutional
responsibilities and to help improve the performance and accountability
of the federal government for the American people. GAO examines the use
of public funds; evaluates federal programs and policies; and provides
analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO's commitment to
good government is reflected in its core values of accountability,
integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through the Internet. GAO's Web site ( www.gao.gov ) contains
abstracts and full-text files of current reports and testimony and an
expanding archive of older products. The Web site features a search
engine to help you locate documents using key words and phrases. You
can print these documents in their entirety, including charts and other
graphics.
Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as "Today's Reports," on its
Web site daily. The list contains links to the full-text document
files. To have GAO e-mail this list to you every afternoon, go to
www.gao.gov and select "Subscribe to e-mail alerts" under the "Order
GAO Products" heading.
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office
441 G Street NW, Room LM
Washington, D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm
E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Public Affairs:
Jeff Nelligan, managing director,
NelliganJ@gao.gov
(202) 512-4800
U.S. Government Accountability Office,
441 G Street NW, Room 7149
Washington, D.C. 20548:
