U.S.-China Trade
Challenges and Choices to Apply Countervailing Duties to China Gao ID: GAO-06-608T April 4, 2006Some U.S. companies allege that unfair subsidies are a factor in China's success in U.S. markets. U.S. producers injured by subsidized imports may normally seek countervailing duties (CVD), but the United States does not apply CVDs against countries, including China, that the Department of Commerce classifies as "non-market economies" (NME). In this testimony, which is based on a June 2005 report (GAO-05-474), GAO (1) describes the options for applying CVDs to China, (2) the challenges that would arise, and (3) examines the likely results of applying CVDs on Chinese products.
There are two alternative paths for applying CVDs to China. First, Commerce could determine that China is no longer a nonmarket economy and apply CVDs against China as a market economy. Commerce has criteria for such determinations but stated that China is unlikely to satisfy them in the near term. Second, it could reverse its 1984 position, which was confirmed by a federal appeals court, and apply CVDs without changing China's NME status. However, absent a clear congressional grant of authority, such a decision could be challenged in court, with uncertain results. The House of Representatives passed legislation that would grant this authority in July 2005, and companion legislation was introduced in the Senate. 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 the use of third-country information in CVD cases. Making CVDs available against China would give U.S. producers an explicit import relief measure that targets unfair government subsidies. However, on a net basis, applying CVDs might not 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, required methodological changes would reduce antidumping duties for some companies. 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.
GAO-06-608T, U.S.-China Trade: Challenges and Choices to Apply Countervailing Duties to China
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Testimony:
Before the U.S.-China Economic and Security Review Commission:
United States Government Accountability Office:
GAO:
For Release on Delivery Expected at 9:00 a.m. EST:
Tuesday, April 4, 2006:
U.S.-China Trade:
Challenges and Choices to Apply Countervailing Duties to China:
Statement of Loren Yager, Director, International Affairs and Trade:
GAO-06-608T:
GAO Highlights:
Highlights of GAO-06-608T, testimony to the U.S.-China Economic and
Security Review Commission:
Why GAO Did This Study:
Some U.S. companies allege that unfair subsidies are a factor in
China‘s success in U.S. markets. U.S. producers injured by subsidized
imports may normally seek countervailing duties (CVD), but the United
States does not apply CVDs against countries, including China, that the
Department of Commerce classifies as ’non-market economies“ (NME). In
this testimony, which is based on a June 2005 report (GAO-05-474), GAO
(1) describes the options for applying CVDs to China, (2) the
challenges that would arise, and (3) examines the likely results of
applying CVDs on Chinese products.
What GAO Found:
There are two alternative paths for applying CVDs to China. First,
Commerce could determine that China is no longer a nonmarket economy
and apply CVDs against China as a market economy. Commerce has criteria
for such determinations but stated that China is unlikely to satisfy
them in the near term. Second, it could reverse its 1984 position,
which was confirmed by a federal appeals court, and apply CVDs without
changing China‘s NME status. However, absent a clear congressional
grant of authority, such a decision could be challenged in court, with
uncertain results. The House of Representatives passed legislation that
would grant this authority in July 2005, and companion legislation was
introduced in the Senate. 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 the use of third-country
information in CVD cases.
Making CVDs available against China would give U.S. producers an
explicit import relief measure that targets unfair government
subsidies. However, on a net basis, applying CVDs might not 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, required methodological
changes would reduce antidumping duties for some companies. 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.
Two Paths to Apply Countervailing Duties to China:
Market Economy Path:
- China must meet criteria for market economy status
- Antidumping duties for some Chinese companies would be reduced
Both:
- Chinese subsidies difficult to identify and measure
- Countervailing duties tend to be lower than antidumping duties
NME Path:
- Commerce lacks explicit authority to use third- country information,
- Commerce‘s authority could be challenged with uncertain results
- Potential double counting of domestic subsidies, without clear
Commerce authority to make adjustments.
Source: GAO
[End of table]
What GAO Recommends:
In its 2005 report, GAO recommended that Commerce report on its ability
to measure Chinese subsidies and the methodologies it might use to do
so. Also, GAO suggested that Congress may wish to clarify Commerce‘s
authority in several respects if CVDs are to be applied to China.
Agency officials thought GAO‘s recommendations were 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-06-608T.
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]
Mr. Chairman and Members of the Commission:
I am pleased to be here today to contribute to the discussion related
to China's Industrial Subsidies and the Impact on U.S. and World
Markets. We appreciate the Commission's role and are pleased to be able
to contribute to your efforts.
Imports of goods from China have grown rapidly over the last decade,
rising to more than $242 billion in 2005 and making China the second
largest foreign supplier of the U.S. market after Canada. 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 the success of Chinese companies 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 (CVDs) to offset the price advantages that these subsidies
confer, U.S. CVD laws are not currently applicable against countries--
including China--that the Department of Commerce classifies as non-
market economy (NME) countries. Various parties--including U.S.
industry representatives, some trade attorneys, and this commission--
have advocated taking steps to make CVDs available against Chinese
products.
Today I will focus my remarks on three issues, after providing some
background on CVD and antidumping duties under WTO and U.S. law. First,
I will describe the policy options currently available for applying
CVDs against China. Second, I will discuss the challenges of doing so.
Finally, I will summarize the likely results of applying CVDs to
Chinese imports.
A number of the studies we have performed for the Congress address
important aspects of U.S.-China trade relations.[Footnote 1] We have
stated in prior testimony before this Commission that U.S. government
efforts to ensure that China complies with its WTO commitments will
require a sustained approach.[Footnote 2] My statement today is drawn
mainly from our June 2005 report U.S.-China Trade: Commerce Faces
Practical and Legal Challenges in Applying Countervailing Duties (GAO-
05-474). The scope and methodology for our work, which was conducted
from January 2004 to June 2005 in accordance with generally accepted
government auditing standards, is detailed in an appendix to that
report.
Summary:
Commerce could choose one of two paths to apply U.S. CVD laws to China.
The current Commerce policy of not applying CVDs to countries with non-
market economies (including China) rests on two principles advanced in
1984 and confirmed by a federal appeals court. These were 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. Following the first path,
Commerce could, when appropriate, 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 Commerce officials said that China is unlikely to
satisfy them in the near term. Following the second path, Commerce
could reverse its 1984 position and apply CVDs without any change in
China's NME status. However, the appeals court ruling raises serious
doubt about Commerce's ability to make such a change without a clear
grant of authority from Congress and such a decision could be
challenged in court, with uncertain results. The House passed
legislation that would grant this authority in July 2005, and companion
legislation was introduced in the Senate.[Footnote 3] World Trade
Organization (WTO) rules do not explicitly preclude either alternative.
If Commerce were to apply CVDs against China, it 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 the 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 challenges at least
partially by using third-country information to create benchmarks as
part of its methodology 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 use of third-country information in CVD cases against
China, as provided for in China's WTO commitments.
Making CVDs available against China would give U.S. producers an
explicit import relief measure that targets unfair government
subsidies. Nonetheless, it is unclear whether, on a net basis, applying
CVDs would provide greater protection than U.S. producers already
obtain indirectly in the form of antidumping duties calculated using
the NME methodology. 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. However, required
methodological changes would mean that AD duties would likely decline,
especially for Chinese companies not assigned individual rates.
Individual company rates would likely diverge, with those that do
cooperate with Commerce receiving rates that are substantially lower
than those that do not cooperate. 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 is required to reduce duties to avoid double counting when
export subsidies are involved. However, Commerce lacks clear authority
to make such corrections when domestic subsidies are involved.
As a result, in our 2005 report we made recommendations for Commerce to
analyze and report to Congress on its ability to measure Chinese
subsidies and what methodologies it might use to do so. We also asked
Congress to consider clarifying Commerce's authority to use third-
country information in CVD cases and to make corrections to avoid
double counting of domestic subsidies.
Background:
As explained below, WTO rules provide disciplines on subsidies and
countervailing measures used by China, the United States, and other WTO
members. China accepted additional commitments in this area when it
joined the WTO in 2001. U.S. procedures for countervailing duty actions
reflect WTO rules. Such CVD actions are usually applied in tandem with
antidumping duties.
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 4] 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 suffered. These duties are intended to offset the price
advantages that the subsidy confers on the imported product and, more
broadly, to encourage governments that maintain subsidies to eliminate
them. The subsidies agreement requires that the investigating
authorities quantify the value of the subsidies provided and limit the
level of duty imposed to that value.
To facilitate identification of subsidies and the 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 5]
China Made Additional WTO Commitments:
China made additional commitments regarding industrial subsidies as
part of its agreement to join the WTO. China agreed, upon WTO
accession, to terminate all subsidies on exports, as well as the
subsidies conditioned upon the use of either domestic goods or export
performance. China listed 24 subsidy programs in the accession
agreement and agreed to eliminate 3 programs upon accession. The 24
programs include direct subsidies given by central and local
governments to money-losing state-owned enterprises and many other
types of indirect subsidy programs. Indirect subsidies include loan
priorities, preferential tariffs, tax breaks given to firms encouraged
by the government because of their location, export performance (amount
of exports), and use of local resources for the products they make.
Among the three programs that China agreed to eliminate, two were
related to subsidies to the automobile sector, and the other was the
central government's program to give budgetary subsidies to money-
losing state-owned enterprises. China also committed to treating other
subsidies given to state-owned enterprises as subsidies to private
enterprises and subjecting them to WTO disciplines. Furthermore, China
agreed not to invoke certain articles in the Agreement on Subsidies and
Countervailing Measures that make determination of "actionable"
subsidies more difficult to establish against developing countries.
Given China's present level of economic development and reform, some
WTO members were concerned about the potential for China to maintain or
raise industrial subsidies, especially to state-owned enterprises. Some
members also raised concerns that China's reporting on subsidies in the
WTO negotiations was incomplete. In response, China agreed to work
toward full notification and acknowledged that subsidies are sometimes
difficult to identify.
U.S. Procedures Reflect WTO Rules:
Under U.S. law,[Footnote 6] 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 7] The U.S.
International Trade Commission (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 the size of the CVD to
impose. 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 8]
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 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.
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 9] From 1995 through
2004, U.S. domestic industries petitioned the Department of Commerce
and the ITC for 72 CVD investigations against 43 different products
from 25 countries. Thirty-six of these investigations (50 percent)
resulted in application of CVDs. 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.
Dumping occurs when a foreign company sells merchandise in a given
export market (for example, the United States) at prices 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.
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 1 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 1 shows that even among market
economy countries, the United States imposes CVDs much less frequently
than antidumping duties.
Figure 1: 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]
[End of figure]
Options Available to the Department of Commerce to Apply CVDs Against
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. Commerce (or Congress) could take one of two paths to apply
U.S. CVD law to China. First, they could change China's NME status to a
market economy status in whole or in part and allow Commerce to apply
U.S. CVD law to China on a country or industry basis. Alternatively,
they could decide that CVD law could be applied to China while it
remains classified as an NME country. WTO rules, including relevant
provisions of China's WTO accession agreement, do not explicitly
preclude the United States from pursuing either alternative.
The Department of Commerce Does Not Apply CVD Law to China as an NME
Country:
The policy not to apply CVD law 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 were (1) from a legal perspective, 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 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 10] Commerce has classified China as an NME country
since 1981.[Footnote 11]
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 12] In its 1984 determinations, the Department of
Commerce also 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.
The U.S. Court of Appeals for the Federal Circuit upheld Commerce's
decision in Georgetown Steel Corp. v. United States.[Footnote 13] In
upholding Commerce's position in this matter, the Court of Appeals
found that governments with nonmarket economies 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 Apply CVD Law:
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. Commerce,
for example, recently granted Ukraine market economy status. We detail
the criteria for making such determinations, which include currency
convertibility, in our report. However, Commerce officials observed
that it may be difficult for China to meet these criteria in the near
term. Furthermore, they noted that Chinese representatives have not yet
officially requested that Commerce review their country's NME status
under U.S. law.[Footnote 14]
Alternatively, CVD law could be applied to China while it remains
classified as an NME country. Congress could pass legislation now under
consideration to apply countervailing duties to NME countries. Commerce
could reverse its 1984 position to do this; however, we believe that
absent a clear grant of authority from Congress, such a reversal could
be challenged in court. The results of such a challenge would be
uncertain. The Court of Appeals upheld Commerce's position, but the
court also appeared to make its own findings. The court emphasized that
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 15] The Uruguay Round Agreements
Act,[Footnote 16] 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 17]
Commerce Would Face Challenges in Applying CVDs against China:
Although 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 18] In joining the WTO, China specifically agreed 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.
Commerce officials told us that despite 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 the 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
because the Chinese government heavily influences allocation of credit
by favoring some industries over others, it is uncertain how to
quantify the subsidy benefits conferred through this process. In
addition, some attorneys and Commerce officials have said that lack of
adherence to generally recognized accounting standards and unreliable
bookkeeping among Chinese companies can make accurate identification
and measurement of subsidy benefits extremely difficult.
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 Commerce would face.
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. 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. This provision has no
expiration date and does not differentiate between China as a market or
a nonmarket economy. 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.
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.
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 passed
legislation--commonly referred to as section 421--implementing the
second (involving application of safeguard measures).[Footnote 19]
While Congress did not adopt legislation to implement China's third
import-relief commitment (regarding textile safeguards), existing
legislation provides the U.S. interagency group responsible for
processing textile safeguard cases[Footnote 20] with authority to
implement such measures.[Footnote 21]
In contrast, U.S. trade law was not amended with regard to applying
countervailing duties to China. Specifically, the legislation that
implemented section 421 and facilitated the United States granting
permanent normal trade relations status to China did not explicitly
authorize Commerce to implement China's fourth commitment regarding
application of third-country information in CVD cases. We found that
U.S. trade law does not otherwise clearly state that Commerce may apply
third-country information in such cases against foreign countries in
general.[Footnote 22]
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.
It Is 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 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.
CVD Rates Tend to Be Lower Than Antidumping Duties:
If CVDs were applied to China, U.S. companies may experience
substantial difficulty in competing with Chinese companies that owe
their existence to favorable government actions in the past because
legitimately applied CVDs could be minimal. U.S. CVDs vary but 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, which are currently only applied to market economies,
with antidumping duties imposed on the same products over the last
decade. 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 in which 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]
Note: This figure compares "all others" duty rates. See GAO-05-474 for
more detail.
[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
23] 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 CVD 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.
Change in Methodology May Lower Antidumping Duties:
If administrative actions reclassified China as a market economy (in
whole or in part), Commerce would have to change its 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. Based on our analysis, we believe a change to a
market economy methodology would lower AD duties for some Chinese
companies. Duties would likely decline for Chinese companies not
assigned individual rates. Individual company rates would likely
diverge, with those that do cooperate with Commerce receiving rates
that are substantially lower than those that do not cooperate. In any
case, as we explain in another report, it appears that the actual trade
impact of the NME antidumping methodology will decline. As the portion
of total export trade conducted by Chinese companies assigned
individual rates increases, the country-wide rates that largely account
for the comparatively high average rates applied to China decline in
importance.[Footnote 24]
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 25] 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 26] 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 on market economies, 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 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.
Commerce Lacks Clear Authority to Adjust for Potential Double Counting
of Domestic Subsidies:
If Commerce were to apply CVDs to China while it retains its NME
status, another potential source of double counting could emerge with
regard to another type of subsidy. In principle, double counting of
actionable domestic subsidies generally does not occur when analysts
employ information from exporting countries themselves to determine
duty rates. However, it may occur when analysts use third-country
information. 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 27]
Economists, trade law practitioners, and Commerce officials we
consulted disagreed on whether, in practice, antidumping duties derived
using third-country information effectively offset all of the subsidy
benefits enjoyed by Chinese exporters.[Footnote 28] 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 its NME methodology to
calculate antidumping duties on the same products against which it also
applied CVDs.
Commerce lacks clear authority to make such corrections when domestic
subsidies are involved. 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. As a
result, Commerce officials observed that the department would have no
choice but to apply both duties without making such adjustments. While
at least two U.S. courts have suggested that double counting to
compensate for the same unfair trade practice is generally considered
improper, they have not ruled on the specific question of whether
double counting of actionable domestic subsidies, in particular, is
improper. Commerce officials stated that, theoretical arguments aside,
interested parties finding fault with Commerce's decision making would
have to prove that there was actual double counting.
Conclusions:
Congress is considering legislation that would authorize Commerce to
apply CVDs to China as an NME country; however, substantial practical
questions about how such cases would proceed remain unanswered, and the
results that they would produce are uncertain. 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.
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.
As a result, we recommended that the Secretary of Commerce analyze and
report to Congress on Chinese subsidies and the potential
methodological approaches it might employ. Unfortunately, the Secretary
disagreed with our recommendations, saying that this would be too
speculative. He commented that it would not, therefore, be meaningful
or appropriate to prepare such a report before an actual case was filed
and that such a report could prejudge the outcome of future actions.
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, we
suggested that Congress 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 29]
In response, Commerce took the position that there is no explicit
statutory bar to its application of CVD law to NME countries and stated
that the department would carefully consider any CVD petition. We
modified our report to clarify the point 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 that
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 a change in
Commerce policy.
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;
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 China would be placed 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.
Mr. Chairman and Members of this Commission, this concludes my prepared
statement. I would like to acknowledge Adam Cowles, Assistant Director,
who helped prepare this statement and led our work on China trade
remedies. I would be happy to answer any questions that you may have.
[End of section]
Related GAO Products:
U.S.-China Trade: Eliminating Nonmarket Economy Methodology Would Lower
Antidumping Duties for Some Chinese Companies. GAO-06-231. January 10,
2006.
China Trade: U.S. Exports, Investment, Affiliate Sales Rising, but
Export Share Falling. GAO-06-162. December 9, 2005.
U.S.-China Trade: The United States Has Not Restricted Imports under
the China Safeguard. GAO-05-1056. September 29, 2005.
U.S.-China Trade: Commerce Faces Practical and Legal Challenges in
Applying Countervailing Duties. GAO-05-474. June 17, 2005.
U.S.-China Trade: Opportunities to Improve U.S. Government Efforts to
Ensure Open and Fair Markets. GAO-05-554T. April 14, 2005.
U.S.-China Trade: Textile Safeguard Procedures Should Be Improved. GAO-
05-296. April 4, 2005:
U.S.-China Trade: Observations on Ensuring China's Compliance with
World Trade Organization Commitments. GAO-05-295T. February 4, 2005.
U.S.-China Trade: Opportunities to Improve U.S. Government Efforts to
Ensure China's Compliance with World Trade Organization Commitments.
GAO-05-53. October 6, 2004.
World Trade Organization: U.S. Companies' Views on China's
Implementation of Its Commitments. GAO-04-508. March 24, 2004.
World Trade Organization: Ensuring China's Compliance Requires a
Sustained and Multifaceted Approach. GAO-04-172T. October 30, 2003.
GAO's Electronic Database of China's World Trade Organization
Commitments. GAO-03-797R. June 13, 2003.
World Trade Organization: First-Year U.S. Efforts to Monitor China's
Compliance. GAO-03-461. March 31, 2003.
World Trade Organization: Analysis of China's Commitments to Other
Members. GAO-03-4. October 3, 2002.
World Trade Organization: Selected U.S. Company Views about China's
Membership. GAO-02-1056. September 23, 2002.
FOOTNOTES
[1] See Appendix 1 for a list of related GAO products.
[2] See GAO-05-295T.
[3] See H.R.3283, S.1421.
[4] Export subsidies (those contingent on export performance) and local
content subsidies (those contingent on use of domestic over imported
goods) are explicitly prohibited.
[5] WTO Agreement on Subsidies and Countervailing Measures, art. 25.3.
[6] 19 U.S.C. §1671 and following.
[7] 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).
[8] 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).
[9] 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 of the Committee on
Subsidies and Countervailing Measures, G/L/711 (Geneva: Nov. 9, 2004).
[10] 19 U.S.C. §1677(18).
[11] Final Determination at Less Than Fair Value: Natural Menthol from
the People's Republic of China, 46 Fed. Reg. 24614, May 1, 1981.
[12] 49 Fed. Reg. 19370, 19374 (May 7, 1984).
[13] 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's position. See Continental Steel v. United
States, 614 F. Supp. 548, 550 (C.I.T. 1985).
[14] Commerce also has the authority to designate individual NME
industries as market oriented in character. Commerce officials noted
that on several occasions Chinese industries responding to antidumping
duty petitions have requested designation as market-oriented
industries. To date, Commerce has denied such requests--primarily on
the grounds that the Chinese companies in question submitted
information that was insufficient or was provided too late in
Commerce's process to allow an informed decision.
[15] 801 F.2d 1308, 1318 (Fed. Cir. 1986).
[16] Pub. L. No. 103-465, 108 Stat. 4809, adopted Dec. 8, 1994.
[17] 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).
[18] WTO officials observed that even the United States--where
government actions influencing the economy are comparatively well
documented--has had difficulty identifying and quantifying subsidy
information that it is required to report to the WTO.
[19] 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.
[20] This interagency group, which is headed by the Commerce
Department, is the Committee for the Implementation of Textile
Agreements.
[21] See 7 U.S.C. 1854 and Exec. Order 11651, 37 Fed. Reg. 4699 (Mar.
3, 1972), as amended.
[22] Commerce regulations do provide for application of third-country
information to CVD cases--but only in some circumstances. 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.
[23] See article 19 of the WTO Agreement on Subsidies and
Countervailing Measures, and 19 U.S.C. §1671(a).
[24] GAO, U.S.-China Trade: Eliminating Nonmarket Economy Methodology
Would Lower Antidumping Duties for Some Chinese Companies, GAO-06-231.
(Washington, D.C.:, Jan. 10, 2006.)
[25] WTO General Agreement on Tariffs and Trade, art. VI.5.
[26] 19 U.S.C. §1677a(c)(1)(C).
[27] 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.
[28] For example, some experts believe 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 be
distorted by subsidies provided by other governments.
[29] We limit this matter for congressional consideration to situations
involving NME countries because we believe that it is unlikely that
double counting problems involving domestic subsidies will arise in
companion antidumping and countervailing duty actions against market
economy countries.
