U.S.-China Trade:

Commerce Faces Practical and Legal Challenges in Applying Countervailing Duties

GAO-05-474: Published: Jun 17, 2005. Publicly Released: Jun 17, 2005.

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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.

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.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Matters for Congressional Consideration

    Matter: 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.

    Status: Closed - Implemented

    Comments: The House of Representatives passed the United States Trade Rights Enforcement Act on July 27, 2005. The legislation incorporated provisions giving the administration the authority to take account of third-party information in CVD cases involving China and to ensure that any countervailable subsidy is not double counted in an antidumping order. GAO's report was cited during the Congressional debate of this legislation. The bill was referred to the Senate Committee on Finance the following day. The Senate took no further action on the bill.

    Matter: 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 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.

    Status: Closed - Implemented

    Comments: The House of Representatives passed the United States Trade Rights Enforcement Act on July 27, 2005. The legislation incorporated provisions giving the administration the authority to take account of third-party information in CVD cases involving China and to ensure that any countervailable subsidy is not double counted in an antidumping order. GAO's report was cited during the Congressional debate of this legislation. The bill was referred to the Senate Committee on Finance the following day. The Senate took no further action on the bill.

    Recommendations for Executive Action

    Recommendation: 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, the Secretary of Commerce should analyze and report to Congress on 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.

    Agency Affected: Department of Commerce

    Status: Closed - Not Implemented

    Comments: Commerce disagreed with GAO's recommendations and declined to take actions to implement them. Commerce officials believed it would be inappropriate to provide such information outside of a formal countervailing duty investigation. After GAO?s report, Commerce began to accept countervailing duty petitions against China and issued its first such ruling in October 2007. The issues that GAO identified as needing clarification were the subject of debate during the litigation of that and subsequent cases.

    Recommendation: 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, the Secretary of Commerce should 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.

    Agency Affected: Department of Commerce

    Status: Closed - Not Implemented

    Comments: Commerce disagreed with GAO?s recommendations and declined to take actions to implement them. Commerce officials believed it would be inappropriate to provide such information outside of a formal countervailing duty investigation. After GAO's report, Commerce began to accept countervailing duty petitions against China and issued its first such ruling in October 2007. The issues that GAO identified as needing clarification were the subject of debate during the litigation of that and subsequent cases.

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