United States Government Accountability Office

GAO Testimony 

Before the U.S.-China Economic and 

Security Review Commission 

U.S.-CHINA TRADE 

Challenges and Choices to 

Apply Countervailing Duties 

to China 

Statement of Loren Yager, Director 

International Affairs and Trade 

For Release on Delivery

Expected at 9:00 a.m. EST 

Tuesday, April 4, 2006

 

GAO-06-608T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

April 2006

U.S.-CHINA TRADE

Challenges and Choices to Apply 

Highlights of GAO-06-608T, testimony to Countervailing Duties to China 

the U.S.-China Economic and Security 

Review Commission 

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 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. 

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 thirdcountry 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 Both NME Path

o China must meet criteria 

for market economy 

status

o Antidumping duties for 

some Chinese 

companies would be 

reduced 

o Chinese subsidies difficult 

to identify and measure 

o Countervailing duties tend 

to be lower than

antidumping duties 

o Commerce lacks explicit 

authority to use thirdcountry information 

o Commerce’s authority 

could be challenged with 

uncertain results 

o Potential double counting 

of domestic subsidies, 

without clear Commerce

authority to make

adjustments

Source: GAO 

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. 
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.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.2

 My statement today is drawn mainly from our June 2005 report 

 1

See Appendix 1 for a list of related GAO products. 

2

See GAO-05-295T. 

Page 1 GAO-06-608T 
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.

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.3

 World Trade Organization (WTO) rules do not explicitly preclude 

either alternative. 

Summary 

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 

 3

See H.R.3283, S.1421. 

Page 2 GAO-06-608T 
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. 

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. 

Background 

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 

Page 3 GAO-06-608T 
imposes an outright ban on some types of subsidies,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.”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 

 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. 

Page 4 GAO-06-608T 
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 stateowned 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,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.7

 The U.S. International Trade Commission 

(ITC) and the Department of Commerce share investigative and decisionmaking 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 

 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). 

Page 5 GAO-06-608T 
this information to establish appropriate duty rates for each known 

exporter or producer.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.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. 

 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). 

Page 6 GAO-06-608T 
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 

0

5

10

15

20

25

30

35

Antidumping duty orders - other NME countries

Antidumping duty orders - China

Antidumping duty orders - market economies

All CVD orders

1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: Federal Register.

Fiscal year

Number of cases

Page 7 GAO-06-608T 
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. 

Options Available to 

the Department of 

Commerce to Apply 

CVDs Against China 

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.10 Commerce has 

classified China as an NME country since 1981.11

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.12

In its 1984 determinations, the Department of Commerce also concluded 

 1019 U.S.C. §1677(18). 

11Final Determination at Less Than Fair Value: Natural Menthol from the People’s Republic 

of China, 46 Fed. Reg. 24614, May 1, 1981. 

1249 Fed. Reg. 19370, 19374 (May 7, 1984). 

Page 8 GAO-06-608T 
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.

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.14

Alternatively, CVD law could be applied to China while it remains 

classified as an NME country. Congress could pass legislation now under 

 13801 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). 

14Commerce 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 marketoriented 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. 

Page 9 GAO-06-608T 
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.”

15 The Uruguay Round Agreements Act,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.”17

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. 

Commerce Would 

Face Challenges in 

Applying CVDs 

against China 

 15801 F.2d 1308, 1318 (Fed. Cir. 1986). 

16Pub. L. No. 103-465, 108 Stat. 4809, adopted Dec. 8, 1994. 

17The 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). 

Page 10 GAO-06-608T 
Several trade experts stated that, even in the best of circumstances, it can

be quite difficult to identify and quantify subsidy benefits.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. 

Chinese Subsidies Remain 

Difficult to Identify and 

Assess 

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 

 18WTO 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.

Page 11 GAO-06-608T 
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 thirdcountry 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 thirdcountry information in antidumping cases. Congress passed legislation—

commonly referred to as section 421—implementing the second (involving

application of safeguard measures).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 cases20 with 

authority to implement such measures.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 

 19Section 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. 

20This interagency group, which is headed by the Commerce Department, is the Committee 

for the Implementation of Textile Agreements. 

21See 7 U.S.C. 1854 and Exec. Order 11651, 37 Fed. Reg. 4699 (Mar. 3, 1972), as amended. 

Page 12 GAO-06-608T 
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 thirdcountry information in such cases against foreign countries in general.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. 

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. 

It Is Uncertain 

Whether Applying 

CVDs Would Result in 

Increased Protection 

 22Commerce 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. 

Page 13 GAO-06-608T 
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.

CVD Rates Tend to Be 

Lower Than Antidumping 

Duties 

Page 14 GAO-06-608T 
Figure 2: U.S. Countervailing Duties and Companion Antidumping Duties, 1995-2004 

0 10 20 30 40 50 60 70 80 90

Steel wire strand (India) 2003

Pigment (India) 2003

Hard red spring wheat (Canada) 2002

Uranium (France) 2001

Sulfanic acid (Hungary) 2001

Steel wire rod (Canada) 2001

Steel wire rod (Brazil) 2001

PET Film (India) 2001

Steel flat products (Thailand) 2000

Steel flat products (South Africa) 2000

Steel flat products (Indonesia) 2000

Steel flat products (India) 2000

Honey (Argentina) 2000

Steel plate (Indonesia) 1999

Steel plate (India) 1999

Steel plate (France) 1999

Steel beams (Korea) 1999

Steel products (Brazil) 1998

Steel plate in coils (South Africa) 1998

Steel plate in coils (Italy) 1998

Stainless steel sheet (Korea) 1998

Stainless steel sheet (France) 1998

Steel plate in coils (Belgium-Lux) 1998

Pasta (Turkey) 1995

Pasta (Italy) 1995

D-RAMS (Korea) 2002

Uranium (Germany) 2001

Uranium (Netherlands) 2001

Uranium (United Kingdom) 2001

Stainless steel bar (Italy) 2001

Softwood lumber (Canada) 2001

Steel flat products (Argentina) 2000

Steel plate (Korea) 1999

Steel plate (Italy) 1999

Stainless steel sheet (Italy) 1998

Steel wire rod (Italy) 1997

Product (country) year

Duty rate (percentage)

Countervailing (CVD) rates

Antidumping (AD) rates

Source: GAO analysis of Department of Commerce data.

Cases in 

which 

AD rates 

were 

greater than 

CVD rates

Cases in 

which 

CVD rates 

were 

greater than 

AD rates

Note: This figure compares “all others” duty rates. See GAO-05-474 for more detail. 

Page 15 GAO-06-608T 
Under the WTO subsidies agreement and U.S. law, CVD rates are limited to 

the levels required to offset the amount of the subsidies.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.24

 23See article 19 of the WTO Agreement on Subsidies and Countervailing Measures, and 19 

U.S.C. §1671(a). 

24GAO, 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.) 

Page 16 GAO-06-608T 
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.”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.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. 

Adjustments Required to 

Avoid Double Counting of 

Export Subsidies 

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. 

 25WTO General Agreement on Tariffs and Trade, art. VI.5. 

2619 U.S.C. §1677a(c)(1)(C). 

Page 17 GAO-06-608T 
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.27

Economists, trade law practitioners, and Commerce officials we consulted 

disagreed on whether, in practice, antidumping duties derived using thirdcountry information effectively offset all of the subsidy benefits enjoyed 

by Chinese exporters.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 

 27In 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. 

28For 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. 

Page 18 GAO-06-608T 
fault with Commerce’s decision making would have to prove that there 

was actual double counting. 

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. 

Conclusions 

Furthermore, Commerce lacks clear authority under U.S. law to either 

fully implement China’s WTO commitment regarding the use of thirdcountry 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 

Page 19 GAO-06-608T 
counting has in fact occurred, taking into account Commerce’s analyses of 

this issue prepared in response to our recommendation above.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. 

 29We 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. 

Page 20 GAO-06-608T 
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. 

Page 21 GAO-06-608T 
Page 22 GAO-06-608T 

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. 

Page 23 GAO-06-608T (320418) 
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