U.S.-China Trade: Challenges and Choices to Apply Countervailing Duties to China
Published: 2006-04-04T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: 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. 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. 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.
subsections: section_title: Background
paragraphs: 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.
subsections: section_title: WTO Agreement Provides General Rules
paragraphs: 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, 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.”
section_title: China Made Additional WTO Commitments
paragraphs: 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.
section_title: U.S. Procedures Reflect WTO Rules
paragraphs: Under U.S. law, 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. 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.
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.
section_title: Countervailing Duties Usually Applied in Tandem with Antidumping Duties
paragraphs: The United States has imposed CVDs with some regularity, on a variety of  products from a variety of countries. 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.
section_title: Options Available to the Department of Commerce to Apply CVDs Against China
paragraphs: 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.
subsections: section_title: The Department of Commerce Does Not Apply CVD Law to China as an NME Country
paragraphs: 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. Commerce has  classified China as an NME country since 1981.
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.  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. 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.
section_title: Department of Commerce Could Act to Apply CVD Law
paragraphs: 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.
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 “f  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.” The Uruguay Round Agreements Act, 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.”
section_title: Commerce Would Face Challenges in Applying CVDs against China
paragraphs: 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.
subsections: section_title: Chinese Subsidies Remain Difficult to Identify and Assess
paragraphs: Several trade experts stated that, even in the best of circumstances, it can  be quite difficult to identify and quantify subsidy benefits. 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.
section_title: Commerce Does Not Have Explicit Authority to Implement China’s WTO Commitment Regarding Third-Country Information in CVD Cases
paragraphs: 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). 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 with  authority to implement such measures.
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.
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.
section_title: It Is Uncertain Whether Applying CVDs Would Result in Increased Protection
paragraphs: 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.
subsections: section_title: CVD Rates Tend to Be Lower Than Antidumping Duties
paragraphs: 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.
Under the WTO subsidies agreement and U.S. law, CVD rates are limited to  the levels required to offset the amount of the subsidies. 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.
section_title: Change in Methodology May Lower Antidumping Duties:
paragraphs: 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.
section_title: Adjustments Required to Avoid Double Counting of Export Subsidies
paragraphs: 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.” 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. 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.
section_title: Commerce Lacks Clear Authority to Adjust for Potential Double Counting of Domestic Subsidies
paragraphs: 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.
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. 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.
section_title: Conclusions
paragraphs: 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.
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.
section_title: Related GAO Products
paragraphs: 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.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.