U.S.-China Trade: Eliminating Nonmarket Economy Methodology Would Lower Antidumping Duties for Some Chinese Companies
Published: 2006-01-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: U.S. companies adversely affected by unfair imports may seek a number of relief measures, including antidumping (AD) duties. The Department of Commerce (Commerce) classifies China as a nonmarket economy (NME) and uses a special methodology that is commonly believed to produce AD duty rates that are higher than those applied to market economies. Commerce may stop applying its NME methodology if it finds that China warrants designation as a market economy. In light of increased concern about China's trade practices, the conference report on fiscal year 2004 appropriations requested that GAO review efforts by U.S. government agencies responsible for ensuring free and fair trade with that country. In this report, the last in a series, GAO (1) explains the NME methodology, (2) analyzes AD duties applied to China and compares them with duties applied to market economies, and (3) explains circumstances in which the United States would stop applying its NME methodology to China and evaluates the potential impact of such a step. Commerce agreed with our findings, commenting that our report provides timely and helpful information on the NME methodology and its application to China.
section_title: What GAO Found
paragraphs: Commerce's methodology for calculating AD duties on nonmarket economy products differs from its market economy approach in that (1) since NME prices are unreliable, it uses price information from surrogate countries, like India, to construct the value of the imported products and (2) it limits eligibility for individual rates to companies that show their export activities are not subject to government control. Companies that do not meet the criteria or do not participate in Commerce investigations receive "country-wide" rates. China has been the most frequent target of U.S. AD actions. On 25 occasions, Commerce has applied duties to the same product from both China and one or more market economy. China (NME) duties were over 20 percentage points higher than those applied to market economies, on average. This is because average China country-wide rates were over 60 points higher than comparable market economy rates. Individual China company rates were similar to those assigned to market economy companies, on average. Commerce can declare China a market economy if the country meets certain criteria, thus ending the use of surrogate price information and country-wide rates in China AD actions. These changes would have a mixed impact. Duties would likely decline for Chinese companies not assigned individual rates. Individual company rates would likely diverge, with those that do not cooperate with Commerce receiving rates that are substantially higher than those that do cooperate. In any case, it appears that the actual trade impact of the NME methodology will decline as the portion of total export trade conducted by Chinese companies assigned individual rates increases and as the country-wide rates that largely account for the comparatively high average rates applied to China decline in importance.

section_title: Letter
paragraphs: Imports from China have grown rapidly over the last decade, from a total  value of about $42 billion in 1995 to over $196 billion in 2004. 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  Chinese success in the U.S. market has come partly as a result of unfair  trade practices.
U.S. companies that are adversely affected by unfair imports from China  (or other countries) may avail themselves of a number of relief measures,  including antidumping (AD) duties. The United States has classified China  as a “nonmarket economy” (NME) country since 1981 and employs a  special NME methodology to calculate AD duties on unfairly traded  products from that country. This methodology is commonly believed to  result in duty rates that are significantly higher than those applied to  market economy countries.
In light of increased concern about China’s trade practices, the conference  report on fiscal year 2004 appropriations legislation requested that GAO  monitor the efforts of U.S. government agencies responsible for ensuring  free and fair trade with that country. In subsequent discussions with staff  from the House Appropriations Committee’s Subcommittee on Science,  State, Justice, and Commerce and Related Agencies, we agreed to provide a  number of reports on import relief mechanisms and the manner in which  these mechanisms have been applied to China. To date, we have issued  three such reports, focusing on textile safeguards, safeguards applicable to  other products, and countervailing duties.
This fourth and final report on China import relief mechanisms focuses on  AD duties. In this report, we   explain the special methodology that the United States employs to  calculate AD duties on products from China and other NME countries,  analyze the application of AD duties to China over the last 25 years and  compare the duty rates applied to Chinese products with the duty rates  applied to products from market economy countries, and  explain the circumstances in which the United States would stop using  its NME methodology to calculate AD duties on Chinese products and  evaluate the potential impact of this step.
To conduct our review, we examined applicable U.S. laws and regulations  and World Trade Organization (WTO) agreements, including relevant  portions of the agreement through which China acceded to WTO  membership in 2001. We reviewed scholarly literature and consulted with  trade and legal policy experts from the U.S. government, private sector  trade associations, consulting and law firms, and academic institutions, as  well as representatives of the WTO, the government of China, and other  governments. In order to analyze U.S. application of AD duties to China and  compare the duties applied to China with those applied to market economy  countries, we used information from the Department of Commerce  (Commerce) and the U.S. International Trade Commission (ITC), including  notices of Commerce determinations appearing in the Federal Register, to  construct a database on all U.S. antidumping investigations from 1980  through 2004. We verified this database to the official sources. Our analyses  focused on the 68 AD duty orders that Commerce issued against Chinese  products during this period and especially on the 25 cases in which  Commerce also imposed duties on the same products from market  economy countries. We performed additional (multivariate regression)  analyses to determine the extent to which duty rate variations could be  attributed to differences between China and these other countries, or to  other factors, such as the type of product involved. Appendix I contains a  detailed description of our scope and methodology.
We conducted our work from June 2005 through December 2005 in  accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: Dumping refers to a type of international price discrimination wherein a  foreign company sells merchandise in a given export market (for example,  the United States) at prices that are lower than the prices that the company  charges in its home market or other export markets. When this occurs, and  when the imports have been found to materially injure, or threaten to  materially injure, U.S. producers, U.S. law permits application of  antidumping duties to offset the price advantage enjoyed by the imported  product.
Any domestic industry that believes it is suffering material injury, or is  threatened with material injury, as a result of dumping by foreign  companies may file a petition requesting imposition of AD duties.  Interested domestic industries file petitions simultaneously with  Commerce and ITC. If Commerce determines that the petitioning parties  meet certain eligibility requirements, ITC determines whether the  domestic industry has suffered material injury as a result of the alleged  dumping (or is threatened with material injury). While ITC is completing  its work, Commerce conducts an investigation to establish the duty rates, if  any, that should be applied.
To determine the duty rates to apply in an antidumping investigation,  Commerce identifies (1) the foreign product’s export price entering the  U.S. market and (2) its “normal value.” Commerce then compares these  prices to determine whether—and by how much—the product’s export  price is less than its normal value. AD duty rates are based on these  differences, which are called dumping margins.
To establish a product’s export price, Commerce generally refers to the  prices charged in actual sales of that product to purchasers in the United  States. To establish its normal value, Commerce generally refers to the  prices charged for the product in the exporting company’s home market. In  the event that the product is not sold in the exporter’s home market,  Commerce may refer to prices charged for the product in another export  market or construct a normal value based on costs of production in the  exporting country, together with selling, general and administrative  expenses, and profit. The two agencies make preliminary and, after  additional investigation, final determinations as to whether injury has  occurred (ITC) and the size of the duty, if any, that should be imposed  (Commerce). When warranted, Commerce issues “duty orders” instructing  Customs and Border Protection to apply duties against imported products  from the countries under investigation. Both ITC and Commerce publish  their decisions in the Federal Register.
Since AD duties address unfair pricing practices, and pricing decisions are  generally made by individual companies, Commerce generally calculates  and assigns AD duty rates on an individual company basis. As a result, AD  investigations generally produce a number of individually determined,  company-specific rates, reflecting differences in the extent to which  companies have dumped their products—that is, exported them at less  than their normal value. In addition, AD duty orders also generally specify  a duty rate for other companies that have not been assigned an individually  determined rate.
In principle, Commerce bases its AD duty determinations on information  obtained from interested parties—including foreign producers and  exporters. Commerce obtains needed information from foreign companies  by sending them questionnaires and following up with additional questions,  as needed, and with on-site visits.
However, both U.S. law and WTO rules recognize that, in some cases,  officials charged with completing these investigations will be unable to  obtain sufficient information. In such cases, Commerce officials apply facts  available to complete their duty determinations. This may include  secondary information, subject to corroboration from independent  sources.
Moreover, if Commerce finds that an interested party, such as a foreign  company under investigation, “has failed to cooperate by not acting to the  best of its ability to comply with a request for information” then, in  selecting among the facts available, Commerce may apply an inference that  is adverse to the interests of that party. In applying adverse inferences,  Commerce can use (among other things) information contained in the  petition filed by the domestic industry seeking imposition of AD duties, the  results of a prior review or determination in the case, or any other  information placed on the record.
This authority provides an incentive for foreign companies to provide the  information that Commerce needs to complete its work. For example, in a  1993 case that involved two Brazilian companies, one company attempted  to cooperate in the investigation but nonetheless was unable to provide the  information that Commerce needed, while the other declined to provide  any information at all. Commerce used facts available to determine that the  first company should be subject to a duty rate of 42 percent. For the second  company, Commerce selected adverse inferences from among the facts  available and applied these to calculate a duty rate of 109 percent.
section_title: Commerce Employs a Special Methodology to Calculate China AD Duties
paragraphs: The methodology that Commerce employs in NME cases differs from  Commerce’s usual (market economy) approach in two key ways. First,  rather than rely entirely on information from the exporting country itself to  establish a product’s normal value, Commerce uses price information from  surrogate countries to construct these values. Second, rather than consider  all companies eligible for individually determined duty rates, Commerce  requires NME companies to meet certain criteria to be considered eligible  for such rates. Commerce generally employs different approaches to  calculate duty rates for companies that do and do not meet these criteria.
subsections: section_title: AD Calculations for NME Products Employ Third Country Information
paragraphs: In AD investigations involving products from NME countries, U.S. law  requires Commerce to use a special methodology to calculate duty rates in  view of the absence of meaningful home market prices and information on  production costs. When a product from China or another NME country is  the target of an AD investigation, Commerce officials use price information  and financial data from an appropriate market economy country to  construct a normal value for the product under investigation. India is the  most commonly used surrogate for China.
To apply this methodology, Commerce (1) identifies and quantifies the  factors of production (e.g., various raw materials) used by the NME  producers, (2) identifies market prices for each factor in a surrogate  country; (3) multiplies volume times cost for each factor; and (4) adds the  results, together with a reasonable margin for selling, general and  administrative expenses, and profit (based on surrogate country financial  data), to produce a constructed normal value. The dumping margin—and  consequently the AD duty rate—is then determined by comparing this  normal value with the NME company’s export price to the United States.
section_title: NME Companies Must Meet Certain Criteria to Be Considered Eligible for Individual Duty Rates
paragraphs: While all companies from market economy countries are eligible for  individually determined or weighted average AD duty rates, companies  from China and other NME countries must pass a separate rates test to be  eligible for such rates. This test requires NME companies to meet two  closely related criteria: they must demonstrate that their export activities  are free from government control both in law and in fact. To provide a  basis for deciding whether companies meet these criteria, Commerce  requires these companies to submit information regarding   whether there are restrictive stipulations associated with an individual  exporter’s business and export licenses,  any legislative enactments decentralizing control of companies,  any other formal measures decentralizing government control of   whether export prices are set by or subject to approval by the  government,  whether the company has authority to negotiate and sign contracts,  whether the company has autonomy in selecting its management, and  whether the company retains the proceeds of its export sales and makes  independent decisions regarding disposition of profits or financing of  losses.
section_title: Commerce Employs Different Approaches to Determine Duty Rates for Eligible and Ineligible NME Companies
paragraphs: As shown in figure 1, Commerce uses fundamentally different approaches  to calculate duty rates to be applied against companies that do and do not  pass the separate rates test.
As shown in figure 1, Commerce treats companies from China and other  NME countries that pass Commerce’s separate rates test like market  economy countries when assigning duty rates. When practical, Commerce  fully investigates and establishes individually determined duty rates for  each eligible NME company, just as it does for each market economy  company. To the extent that fully investigated NME companies cooperate  with Commerce, they receive rates based on the information that they  provide. As explained in the background section of this report, Commerce  uses facts available, and may use adverse inferences, to calculate duty rates  when the companies under investigation cannot or will not provide the  information that Commerce needs.
In both NME and market economy cases, Commerce may limit the number  of companies it fully investigates when it is faced with a large number of  companies. In such situations, Commerce generally calculates individual  rates for the companies that account for the largest volume of the subject  merchandise. In market economy cases, Commerce then calculates a  weighted average of these rates and applies the resulting “all others” rate to  companies that it has not fully investigated. Commerce does not routinely  calculate weighted average duty rates in NME cases. However, when the  number of NME companies eligible for individually determined rates  exceeds the number that Commerce can fully investigate, Commerce  calculates a weighted average rate and informs Customs of the companies  entitled to this rate.
subsections: section_title: Other NME Companies Receive Country-Wide Duty Rates
paragraphs: In cases involving China or other NME countries, Commerce calculates a  country-wide duty rate for companies that could not (or did not attempt to)  pass Commerce’s separate rates test. In NME cases, Commerce assumes  that all exporters and producers of a given product are subject to common  government control and that all of these companies should, therefore, be  subject to a single country-wide duty rate. Commerce begins its NME  antidumping investigations by requesting information from the government  of the country in question and from known producers and exporters. If  Commerce cannot identify all relevant producers and exporters, or if one  or more of the identified companies refuses to cooperate in the  investigation, Commerce relies on adverse inferences to calculate a  country-wide rate. Commerce then instructs Customs to apply the country- wide rate against shipments from any company other than those  specifically listed as eligible for an individually determined or weighted  average rate.
section_title: Commerce Has Applied AD Duties to China Frequently at Varied Rates
paragraphs: Over the last 25 years, the United States has applied AD duties against  Chinese products more often than against products from any other country.  While AD duty rates have varied widely, on average the rates assigned to  Chinese products have been higher than the rates assigned to the same  products from market economy countries. We found that this is  attributable primarily to the comparatively high country-wide rates applied  to Chinese companies not eligible for individually determined or weighted  average rates. When Commerce has calculated rates for individual Chinese  companies, the average rates assigned to these companies have not been  substantially different from those assigned to market economy companies.
subsections: section_title: China Has Been the Most Frequent Target of U.S. Antidumping Orders
paragraphs: Over the last 25 years, Commerce has both considered and actually applied  AD duties against China more often than against any other country. From  1980 through 2004, Commerce processed 1,046 AD petitions and issued 455  AD duty orders. One hundred and ten of these petitions (11 percent) and 68  of these orders (15 percent) focused on China—both are the largest  number against any U.S. trade partner.
The number of orders applied to China varied from year to year. For  example, Commerce issued no AD duty orders against China in 1998 but  issued 9 in 2003. Commerce had 272 orders in place as of December 31,  2004. Fifty-five of these (20 percent) apply to China. As figure 2 shows, this  is also the highest percentage of any country. As shown in table 1, these  duty orders have targeted a wide variety of products but have been  concentrated in chemicals and plastics, metal products, and agricultural  products.
Italy (13 orders) Brazil (14 orders)
Taiwan (17 orders)
South Korea (19 orders)
Japan (29 orders)
All others (53 orders)
section_title: China, Market Economy Rates Varied Widely
paragraphs: Over this 25 year period, Commerce issued duty orders against the same  products from China and at least one market economy country on 25  occasions. In 18 of these cases, Commerce calculated individual rates for  companies from China and at least one market economy country. Fifteen of  these cases involved more than one market economy country. In all, the  orders applying to these 25 products contained a total of 243 individual,  weighted average, and country-wide duty rates. Appendix II provides  detailed information on the rates applied in each of these cases, as well as  another 43 cases that we identified wherein Commerce applied duty rates  to China but not to any market economy country.
These rates varied a great deal—both among the orders applied to different  products and within the orders applied to the same products. Overall, these  duty rates varied from zero to 218 percent for China and from zero to about  244 percent for market economy countries. Figure 4 shows the extent to  which duty rates applied to a single product can vary.
section_title: Overall, China Rates Were Higher Than Market Economy Rates
paragraphs: The average AD duty rates imposed on Chinese (NME) exporters over the  last 25 years have been significantly higher than those imposed on market  economy exporters of the same products. Taking all rates into  consideration (including those calculated for individual companies,  weighted averages of these rates, and country-wide rates applied to China)  the average rate applied to Chinese companies in the 25 cases we examined  was about 67 percent—over 20 percentage points higher than the average  rate of 44 percent applied to market economy companies. As figure 5  shows, the overall average rates applied against China were higher for 18 of  the 25 products in which there were AD orders against both China and at  least one market economy.
section_title: Difference in Average Rates Due Primarily to High China Country-Wide Rates
paragraphs: The difference between average China and average market economy duty  rates was due primarily to the fact that the NME country-wide duty rates  applied to China were substantially higher than the comparable all-others  duty rates applied against market economy countries. In contrast, the  individually determined duty rates assigned to Chinese companies in these  cases were not substantially different, on average, from the individually  determined rates assigned to market economy companies.
subsections: section_title: Country-Wide Duty Rates Substantially Higher Than Market Economy All-Others Rates
paragraphs: On average, the country-wide rates applied to China in these 25 cases were  substantially higher than the comparable all-others rates applied to market  economy countries. The country-wide duty rates applied against China  averaged about 98 percent—over 60 percentage points higher than the  average 37 percent all-others duty rate applied to market economy  exporters of the same products. Figure 6 shows that the China country- wide rate was higher than the market economy all-others rate in 21 of 25  cases. As explained below, this difference was due largely to the use of  different methodologies to calculate country-wide and all-others rates.
Country-wide rates were nearly always equal to or higher than the highest  individually determined rate applied to any Chinese company, due to  application of adverse inferences. According to Commerce, NME country  governments themselves have never provided the information that  Commerce needs to establish an appropriate country-wide duty rate. In  addition, Commerce officials stated that, in most cases, participating NME  companies have accounted for only a portion of known exports to the U.S.  market from their country, indicating that others had not come forward. In  most cases, therefore, Commerce has used adverse inferences to determine  country-wide rates. For example, in its investigation of carbazole violet  pigment, Commerce assigned three fully investigated Chinese companies  individually determined rates of about 6, 27, and 45 percent. However, since  other known Chinese producers did not respond to Commerce’s request for  information, Commerce used adverse inferences to determine that all other  Chinese producers should be subject to an NME country-wide rate of about  218 percent.
In contrast, the comparable market economy all-others rates were lower  than the highest individual company rates assigned in any given case (if  more than one other individual rate was assigned). This is because, as  discussed earlier, Commerce generally calculates all-others rates by  averaging individually determined rates—excluding those derived entirely  through application of facts available and those that are de minimis or zero.
With regard to carbazole violet pigment, for example, Commerce  investigated not only China but also India. Commerce assigned two fully  investigated Indian companies rates of about 10 and 50 percent and weight- averaged these rates to determine that shipments from all other Indian  producers should be subject to a duty rate of about 27 percent.
section_title: Individual Company Rates in China and Market Economy Countries Not Substantially Different on Average
paragraphs: On average, there was little difference between the individually determined  rates applied to companies from China and those applied to market  economy companies. The average individually determined rate applied to  Chinese companies in these cases was 53 percent—a little less than the  average rate of 55 percent applied to market economy companies. The  median rate for Chinese companies was 42 percent—the same as the  median rate for market economy companies. Figure 7 displays the average  individual company rates assigned to Chinese and market economy  companies in the 18 cases in which Commerce assigned individual rates to  both. As the figure shows, the rates assigned to Chinese companies were  higher than the market economy rates in ten of these cases and lower in the  other eight.
Our statistical analyses provided additional support for the importance of  the country-wide rates in accounting for the overall difference between the  duty rates applied to China and to market economy countries. Using  multivariate regression analysis, we found that a number of variables, such  as the type of product involved, accounted for some of the overall variation  in duty rates. However, after accounting for the China country-wide rates  there was no statistically significant difference between the duty rates  applied to China and those applied to market economy countries. As  explained in more detail in appendix III, we found essentially the same  results when we expanded our analyses to include data on AD actions  against NMEs other than China.
section_title: Ceasing to Apply NME Methodology Would Have Mixed Results
paragraphs: In certain circumstances, Commerce may stop using its NME methodology  in China cases—and thus begin applying its market economy methodology  to determine AD duty rates against that country. Such a step would lead to  important changes in the methods that Commerce employs to determine  China AD duty rates and in the duty orders resulting from these  proceedings. These changes would have mixed results. Eliminating  country-wide duty rates would likely reduce duty levels for Chinese  companies that are not assigned individually determined rates. Individually  determined rates would likely diverge into two distinct groups, with  companies that do not cooperate in Commerce investigations receiving  rates that are substantially higher than those assigned to companies that do  cooperate. The impact of applying Chinese price information to calculate  the normal value of Chinese products would likely vary by industry. In any  case, rates would continue to vary widely based on the circumstances of  each case. While trade data that would permit analysis of the potential  trade impact of these changes is not available, it appears that the trade  significance of country-wide duty rates is declining.
subsections: section_title: Commerce May Stop Applying NME Methodology to China in Certain Circumstances
paragraphs: Commerce has administrative authority to reclassify China and other NME  countries as market economies or individual NME country industries as  market-oriented in character. Such reclassifications would end  Commerce’s authority to apply its NME methodology to such countries or  industries. Also, China’s WTO accession agreement specifies that members  may apply third-country information to calculate AD duty rates against that  country, but this provision expires in 2016.
subsections: section_title: Commerce Has Administrative Authority to Change China’s NME Status
paragraphs: Commerce has the authority to reclassify China as a market economy  country, in whole or in part. As we explained in more detail in a prior  report, U.S. trade law authorizes Commerce to determine whether  countries should be accorded NME or market economy status and specifies  a number of criteria for Commerce to apply in making such  determinations. Countries classified as NMEs may ask for a review of  their status at any time. China has actively sought market economy status  among its trading partners, and a number of them have designated China as  a market economy. However, Commerce informed us that Chinese officials  have not yet officially requested a determination as to whether their  country merits reclassification under the criteria specified in U.S. law. In  April 2004, the United States and China established a Structural Issues  Working Group under the auspices of the U.S.-China Joint Commission on  Commerce and Trade. This group is examining structural and operational  issues related to China’s economy that may give rise to bilateral trade  frictions, including issues related to China’s desire to be classified as a  market economy.
Commerce also has the authority to designate individual NME industries as  market oriented in character, but has denied all such requests to date.  Commerce determined in a 1992 case against China that, short of finding  that an entire country merits designation as a market economy, it could  find specific industries within such countries to be market oriented in  character. Commerce officials noted that on several occasions Chinese  industries responding to antidumping duty petitions have requested  designation as market-oriented industries. To date, Commerce has denied  such requests—primarily on the grounds that the Chinese companies in  question submitted information that was insufficient or was provided too  late in Commerce’s process to allow an informed decision.
section_title: China’s WTO Commitment Allowing the Use of Third- Country Information Expires in 2016
paragraphs: When joining the WTO, China agreed that other WTO members could use  third-country information to calculate normal values in antidumping  actions against Chinese companies. Specifically, China’s WTO accession  agreement provides that in determining price comparability in antidumping  investigations WTO members may use “a methodology that is not based on  a strict comparison with domestic prices or costs in China.” However, the  accession agreement also specifies that this provision will expire 15 years  after the date of the agreement—that is, by the end of 2016.
After 2016, the ability of WTO members to continue using third-country  information in AD calculations involving China would be governed by  generally applicable WTO rules, according to officials at the Office of the  U.S. Trade Representative. These rules recognize that when dumping  investigations involve products from a country that “has a complete or  substantially complete monopoly of its trade and where all domestic prices  are fixed by the state,” importing country authorities may have difficulty  making the price comparisons through which AD duty rates are normally  established. In such situations, importing countries may “find it necessary  to take into account the possibility that a strict comparison with domestic  prices in such a country may not always be appropriate.” WTO rules do  not provide any specific guidance about how this provision should be  implemented; such decisions appear to be left up to individual members.
section_title: Transition to Market Economy Methodology Would Bring Significant Procedural Changes
paragraphs: Ending application of the NME methodology to China would bring two  significant procedural changes in AD duty investigations against Chinese  products. First, such a step would eliminate NME country-wide duty rates  from China AD orders. Commerce would instead assign an individually  determined rate to every relevant Chinese producer or exporter. If the  number of companies involved were too great to allow full investigation of  all relevant companies, Commerce would apply an all-others rate—a  weighted average of the individually determined rates to all other Chinese  companies (excluding those rates based entirely on facts available or that  are de minimis or zero). However, Commerce would retain its authority to  use facts available to determine the rates that it applies to individual  Chinese companies. Second, transition to the market economy  methodology would end Commerce’s use of surrogate country information  to calculate the normal value of Chinese products. Application of the  market economy methodology would generally require Commerce to set  the normal value of Chinese products equal to their sales price in China. If  the product were not sold in China, Commerce could refer to prices  charged for the product in another export market or construct the  product’s normal value, or it could continue to construct the product’s  normal value—using factor prices from the Chinese companies under  investigation rather than from surrogate countries.
section_title: Eliminating Country-Wide Rates Would Likely Reduce Duty Levels for Companies Not Assigned Individually Determined Rates
paragraphs: The elimination of country-wide duty rates against China would likely  reduce the duty rates applied to some Chinese companies. If Commerce  applied its market economy approach to China, duty rates for companies  not receiving individually determined rates would, in most cases, no longer  be determined by applying facts available. Rather, Commerce would, for  the most part, determine these rates by averaging the rates applied to fully  investigated Chinese companies, with some exclusions. The default rate for  uninvestigated Chinese companies would move, in most cases, from being  the highest rate found to the average rate found among companies that  cooperate in Commerce investigations.
Though not predictive, available evidence suggests that the all-others rates  that Commerce would apply to China under the market economy  methodology would be significantly lower than the country-wide rates  currently applied to that country. As already shown, China country-wide  rates have generally been significantly higher than the all-others rates that  Commerce has assigned to market economy sources of the same products.  As shown in table 2, the average country-wide rate for the 25 cases in which  Commerce assigned duties to both China and one or more market  economies was 98 percent, while the average market economy all-others  rate was 37 percent. The average rate assigned to individual Chinese  companies was 53 percent, and Commerce calculates all-others rates by  weight averaging individually determined rates, excluding those that are  derived entirely through application of facts available and those that are de  minimis or zero.
section_title: Individually Determined Rates Would Vary, Depending Upon Cooperation
paragraphs: A simple comparison of the average individually determined duty rates  calculated under the NME and market economy methodologies suggests  that a change in methodology would not result in any significant overall  change in duty rates applied to individual Chinese companies. For the  comparable cases, individual AD duty rates for Chinese companies  averaged 53 percent and were not substantially different from individual  market economy company rates, which averaged 55 percent.
However, a more detailed examination of the data indicates that the impact  of a change in methodology on individual Chinese company duty rates  would depend on the extent to which Commerce applies adverse  inferences to calculate these rates. The rates assigned to individual  companies under the market economy methodology fell into two distinct  groups, depending on whether the companies cooperated with Commerce  investigations. In the 25 cases that we examined in detail, about half of the  fully investigated market economy companies cooperated with Commerce.  On average, Commerce assigned a duty rate of about 17 percent to these  companies. Commerce found the other half of the fully investigated  companies uncooperative and, therefore, applied adverse inferences to  determine the duty rates to be applied to these companies. On average,  Commerce assigned a duty rate of about 77 percent to these uncooperative  market economy companies.
Though not predictive, this suggests that a change from the NME  methodology for China would result in a significant number of  (cooperative) companies receiving relatively low rates, while another  significant group of (uncooperative) companies would receive relatively  high rates. Our regression analysis confirmed the importance of adverse  inferences as a determinant of variation in duty rates. As explained in  appendix III, we found that application of adverse inferences tends to  increase duty rates by a large margin.
section_title: Impact of Applying Chinese Price Information Would Vary By Industry and Is Likely to Decline over Time
paragraphs: The impact of using Chinese price information on China AD duty rates  would likely vary from one industry to another under the market economy  methodology. Chinese prices are widely viewed as distorted to varying  degrees. Where prices for key inputs are artificially low, relying on Chinese  price information would produce an artificially low normal value. The  result would be an AD duty that is lower than would be obtained by  applying surrogate country input prices. Conversely, where Chinese prices  are artificially high, AD duty rates may be higher if based on Chinese prices.  To the extent that Chinese economic reforms bring Chinese prices more  into line with world markets, the impact of abandoning the use of surrogate  country information can be expected to decline. At any point in time,  however, the probable effect of such a methodological change in an  individual industry investigation would depend on the particular facts  applying to that industry. The net impact of changing the source of price  information on overall China duty rates cannot be estimated with  confidence.
section_title: Duty Rates Will Continue to Display Great Variation
paragraphs: Our multivariate regression analyses suggest that, regardless of changes in  methodology, there will continue to be a great deal of variation among the  AD duty rates applied to products from China and other countries. Our  analyses showed that application of country-wide duty rates to China  largely explained the difference between the overall average duty rates  applied to China and to market economy countries. Eliminating these rates  would likely have a substantial overall reducing effect on China rates.  However, a number of other factors, such as the type of product involved,  also helped to account for differences among rates overall, and these  factors will continue to have an impact on duty rates, regardless of whether  Commerce applies country-wide rates to China. Furthermore, even after  taking these factors into account, our analyses still explained only about  half of the total variation in duty rates. This means that about half of the  variation in duty rates is attributable either to idiosyncratic factors or to  systematic factors that we did not capture in any of our variables.
section_title: Trade Significance of Country-Wide Rates Appears to Be Declining
paragraphs: Available evidence suggests that the volume of trade affected by country- wide rates is declining and that, consequently, the trade impact of China  duty orders will in the future depend increasingly on the magnitude of the  individually determined rates. Commerce officials observed that in the  early 1980s it was not unusual for China AD duty investigations to produce  only a country-wide rate. However, as the Chinese economy has evolved,  individual Chinese companies have become more likely to request—and  receive—individually determined or weighted average rates. Since 1980,  Commerce has applied country-wide rates alone in only 15 of 68 Chinese  AD orders, and the last of these occasions was in 1995. The majority of all  Chinese AD orders (about 78 percent), and all such orders issued over the  last 10 years, have included at least one individual company rate.
Neither Commerce nor Customs and Border Protection maintain trade data  that would permit analysis of changes over time in the relative volume or  value of products imported into the United States under the country-wide  or various individual duty rates listed in AD duty orders. However, as figure  8 shows, the average number of Chinese companies assigned individually  determined rates (or assigned a weighted average rate) has been growing,  though there continues to be variation from year to year. For example, in  2004 Commerce placed duties on six Chinese products and in doing so  assigned individually determined or weighted average rates to 53 Chinese  companies. Anecdotal evidence suggests that along with this rise in  company interest in obtaining individual rates has come an increase in the  volume of trade covered by these rates. For example, in one recent case  Commerce fully investigated and assigned individually determined rates to  four companies accounting for more than 90 percent of Chinese exports to  the U.S. market. Commerce then assigned a weighted average of these  rates to 9 additional companies, leaving only a very small portion of all  Chinese exports to be covered by the country-wide rate.
section_title: Concluding Observations
paragraphs: On average, Commerce’s application of its NME methodology has  produced AD duties on Chinese products that are substantially higher than  those applied to the same products from market economy countries.  Changing China’s NME status—and thus eliminating the application of this  methodology—would have a variety of impacts. The duty rates applied to  companies that do not receive individual rates would likely decline.  Chinese companies that cooperate in Commerce investigations may also  receive comparatively low rates. However, the impact of these lower rates  on overall China averages may be offset, to some extent, by application of  adverse inferences to assign relatively high rates to individual Chinese  companies that do not cooperate in Commerce investigations.
The net effect of these changes cannot be predicted. Such a prediction  would require knowledge of price distortions in diverse Chinese industries,  changes in these distortions over time, pricing decisions by Chinese  companies in reaction to these changes, and decisions by U.S. companies  about whether they should seek relief. Nonetheless, while the NME  methodology is applied, it appears that the actual trade impact of using this  methodology will decline as the portion of total export trade conducted by  Chinese companies assigned individual rates increases, and as the country- wide rates that largely account for the comparatively high average rates  applied to China decline in importance.
section_title: Agency Comments and Our Evaluation
paragraphs: The Department of Commerce provided written comments on a draft of  this report. These comments are reprinted in appendix IV. Overall,  Commerce agreed with our findings, observing that the report provided  timely and helpful information on the NME methodology and its  application to China.
Commerce identified a small number of apparent errors in our database.  We re-examined our data, making corrections when necessary, and updated  our analyses; these corrections did not have any significant impact on our  findings. Commerce also made a number of technical comments, focusing  primarily on our description of its NME methodology. We took these  comments into consideration and made changes throughout the report to  insure its clarity and accuracy. We also made a number of technical  corrections suggested by the Department of Homeland Security and the  Office of the U.S. Trade Representative.
We are sending copies of this report to the Secretaries of Commerce and  Homeland Security, the International Trade Commission, the U. S. Trade  Representative, appropriate congressional committees, and other  interested parties. We also will make copies available to others upon  request. In addition, the report will be available at no charge on the GAO  Web site at http://www.gao.gov.
If you or any of your staff have any questions about this report, please  contact me at 202-512-4347 or yagerl@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on the  last page of this report. GAO staff who made major contributions to this  report are listed in appendix V.
section_title: Scope and Methodology
paragraphs: To address our objectives, we examined and summarized applicable U.S.  laws and regulations, as well as relevant World Trade Organization (WTO)  agreements. These included the Agreement on Implementation of Article  VI of the General Agreement on Tariffs and Trade 1994—commonly  known as the “antidumping agreement”—and China’s WTO accession  agreement. We conducted a literature search and reviewed relevant  scholarly and legal analyses and Department of Commerce (Commerce)  determinations. In order to corroborate and broaden our understanding,  we consulted with trade and legal policy experts from the U.S. government,  private sector trade associations, consulting firms, academic institutions,  law firms with broad experience in trade actions involving China, as well as  representatives of the WTO, the government of China, and other  governments concerned about Chinese trade practices, including the  European Union and Canada.
In order to analyze the application of antidumping (AD) duties to China and  compare duty rates applied to China with those applied to market economy  countries (our second objective) and to evaluate the potential impact of  ceasing to apply the nonmarket economy (NME) methodology to China  (our third objective), we collected information from the Department of  Commerce and the International Trade Commission, including notices of  Commerce determinations appearing in the Federal Register. We used this  information to construct a database on all U.S. AD investigations from 1980  through 2004. In addition to information on the countries and products  involved and the status of each investigation, our database included the  duty rates applied upon completion of each new antidumping investigation  against China during this period, as well as the duty rates applied against  any producers of the same products from other countries. This database is  accessible on-line at www.gao.gov/cgi-bin/getrpt?GAO-06-652SP. We  verified this database to the official sources and found the data to be  sufficiently reliable for the purposes of this report.
Our analyses focused on the 68 cases during this time period wherein  Commerce imposed AD duties on Chinese products, and especially on the  subset of 25 cases in which Commerce imposed duties against a similar  product from one or more market economy countries. Specifically, the 25  cases included all market economy cases that had the same product name  and were initiated within 1 year of an AD investigation against China. In all,  we assembled data on 303 company-specific, weighted average, and  country-wide duty rate determinations on Chinese products, and an  additional 168 duty rate determinations on market economy products.  Appendix II provides additional analyses of this data.
As part of our examination, we also performed multivariate regression  analyses to determine the extent to which duty rate variations could be  attributed to differences between China and these other countries, or to  other factors, such as the type of product involved. Appendix III provides  more information on these analyses and their results.
In addition to comparing China and market economies, we also collected  information on duty rates that Commerce applied to products from other  NME countries at the same time as it applied them to similar products from  either China or a market economy. Appendix III provides information on  the results of our analyses of this data.
We did not collect or analyze information on duty rates applied against  market economy countries in cases where no parallel action was taken  against China or any other NME country. Therefore, our analyses of market  economy duty rates are specific to the sample of market economy orders in  which a corresponding NME order was also in effect. Inclusion of other  market economy product duty rates may have produced different results.  However, we determined that the appropriate comparison between China  and market economy countries was between the 25 similar products. We  found through our regression analyses (discussed in app. III) that the  product being investigated does help explain the variation among rates and  it is, therefore, important to make an appropriate comparison. In addition,  duty rates for the 43 remaining orders against China alone followed a  similar pattern as those contained in the 25 cases where we drew  comparisons with market economy duty rates. The average country-wide  rate for these 43 orders against China was higher than the country-wide  rate for the 25 orders (118 percent compared to 98 percent), and the  average individual rate was lower (41 percent compared to 53 percent) for  the 18 orders with individual rates. These results were consistent with our  findings that the country-wide rates tend to be significantly higher than  individual rates.
In order to group specific products subject to AD orders into groups of  similar products, we used the Harmonized Tariff Schedule (HTS)  classifications for each product, as reported in the Federal Register  announcement of the order. The HTS is the official U.S. classification of  goods imported into the United States and includes 99 chapters covering all  goods imports. In addition, the HTS chapters are grouped into larger  sections that cover broad types of related products. The categories we used  in this report are based on these HTS sections and chapters. Specifically,  the category “Chemicals, plastics, pharmaceuticals” comprises HTS  chapters 28 through 40 (which includes all chapters under the section  “Chemical or allied industries”). The category “Steel, other metals”  comprises HTS chapters 72 through 81 (which includes most chapters  under the section “Base metals and articles of base metals” except those  chapters covering articles of base metals). The category “Agricultural  products” comprises HTS chapters 1 through 24 (which includes all  chapters under the sections “Live animals; animal products,” “Vegetable  products,” “Animal or vegetable fats, etc.,” and “Prepared foodstuffs,  beverages, spirits, and vinegar; tobacco and manufactured tobacco  substitutes”). The category “Other products” comprises all other HTS  chapters.
We conducted our work from June 2005 through December 2005 in  accordance with generally accepted government auditing standards.
section_title: Additional Information on Duty Rates Applied to China and Market Economy Countries
paragraphs: This appendix provides additional information on the antidumping (AD)  duty rate data that we assembled for this report and provides some  additional analytical information, including brief discussions of variation in  the duty rates applied to China over time, Department of Commerce  (Commerce) determinations on whether Chinese companies should be  considered eligible for individual rates, and duty rates applied to selected  market economy countries.
subsections: section_title: Duty Rates Imposed on China
paragraphs: The overall average duty rate for all 68 orders against China from 1980  through 2004 was 65 percent. This was the result of 72 country-wide rates  (on 68 products) with an average duty of 111 percent and 158 individual  company rates with an average duty of 44 percent. These rates ranged  from zero to about 384 percent (see table 3). In our analysis, we identified  25 orders against China in which there was also an order against a market  economy country on the same product put in place within 1 year from the  order against China. Table 3 shows overall average duty rates from the 25  orders against China that were matched to market economy cases and the  43 orders in which no market economy order was identified. Table 4 at the  end of this appendix provides information on each of the 68 orders against  China, and table 5 provides comparative information for each of the 25  cases in which duties were also applied against market economy  producers.
About 78 percent (53 AD orders) of the 68 AD orders included not only  country-wide rates but also individually calculated rates for at least one  Chinese company. Of these, about 54 percent (37 orders) included  company-specific rates that were lower than the country-wide rates  imposed in the same cases. With regard to nonmalleable cast iron pipe  fittings, for example, two Chinese companies submitted detailed  information and met Commerce’s criteria for assignment of individually  determined rates. Other Chinese pipe fitting companies, however, did not  provide any information. Commerce assigned the two cooperating  companies duty rates of between 6 and 8 percent—a fraction of the 76  percent country-wide duty rate applied in this case.
Only 15 orders issued against China during this period included just a  country-wide rate. Most of these orders date from the period before 1991  when Commerce had not yet begun applying its separate rates test.  However, from 1991 through 1995 Commerce issued six orders that  contained only a country-wide rate. In most of these cases, Chinese  companies failed to respond to Commerce requests for information. For  example, in one case Commerce solicited information through both the  Chinese government and the relevant Chinese industry association.  However, the industry association responded that no Chinese producer or  exporter wanted to participate in Commerce’s investigation. Commerce,  therefore, used facts available to establish a country-wide duty rate of  about 156 percent.
In 12 of the 68 orders, all the individual rates issued were equal to the  country-wide rate. In some cases, Commerce specified an individual rate  for one company and then used this rate as “facts available” to establish a  country-wide duty rate at the same level. For example, in its investigation  of refined brown aluminum oxide from China, Commerce requested  information from the government of China and more than 20 Chinese  companies. Only one of these companies responded. Commerce found that  this company qualified for its own duty rate and determined that this rate  should be about 135 percent. Commerce determined that the failure of the  other companies to provide requested information justified application of  an adverse inference to determine the country-wide rate. Since the rate  established for the lone cooperating company was higher than any of the  rates suggested in the petition requesting imposition of duties on this  product, Commerce set the country-wide rate equal to the rate applied to  the one cooperating company—135 percent.
section_title: Duty Rates against China Have Fluctuated over Time
paragraphs: We found that there was a slight tendency for duty rates applied against  Chinese products to rise over the period of our analysis, as well as to  fluctuate over time. As figure 9 shows, individual company and country- wide duty rates tended to be larger from 1992-2004 than from 1980-1991. In  addition, the individual company rates demonstrate a cyclical pattern over  time. In our regression analysis, we found that there was a small positive  trend in AD duty rates against China over time that was statistically  significant. This result is consistent with research that has shown that  overall U.S. AD margins have increased over time.
section_title: Average Duty Rates on 68 Orders against China and Subset of 25 Orders Matched to Market Economy Orders
paragraphs: Table 4 shows the duty rates on the 68 orders imposed on China between  1980 and 2004. Table 5 then shows the duty rates on the 25 orders imposed  on China in which we also found matching orders imposed on market  economies.
section_title: Regression Analysis Results
paragraphs: In order to examine the difference between duty rates applied to China and  those applied to market economy countries, we performed multivariate  regression analyses on the cases in which the Department of Commerce  (Commerce) applied duties to both China and at least one market economy  country. These involved 25 different products, affected by 25 duty orders  against China, and 54 duty orders against market economies. Multivariate  regression analysis makes it possible to examine the simultaneous effect of  several different factors on the duty rates and to determine the extent to  which these factors, taken together, explain variation in these rates. To  determine whether our analytical results for China held true for all  nonmarket economy (NME) countries, we also identified six instances in  which Commerce applied duties to a nonmarket economy other than  China, and at least one market economy country, and reran our analyses  using data for all 31 products.
Table 6 shows the results of our multivariate regression analysis of  variation in the dependent variable (the antidumping  duty rate)  attributable to the following independent variables:  China (a variable indicating whether the AD duty rate is for China or  not)  the country-wide rate (a variable indicating whether the AD duty rate is  a country-wide rate), and  year (a variable indicating the year in which the duty went into affect).
We also included a constant term. The regression involved 25 products  covered by 25 orders against China and 54 orders against market  economies and included a total of 243 duty rates (the dependent variable)  from these 79 orders.
The results show that the variable for China as the target country had a  coefficient of 3.002 percent, indicating that duty rates against China tended  to be about 3 percentage points higher than those against market  economies, on average. However, this coefficient is not statistically  significant, meaning that there was no statistically significant difference  between the rates assigned to China and market economy countries, when  the other factors in the regression are included. The coefficient for the  country-wide rate, on the other hand, shows that there is a 52 percentage  point difference between country-wide rates against China and other rates.  This result is statistically significant at above the 99 percent level. The  variable for the year of the order is also statistically significant, but it has a  small coefficient. The adjusted R-square measure shows that about 15  percent of the overall variation in duty rates is explained by the  independent variables included here.
We then included additional variables for product groups, such as  agriculture and steel, and, in separate regressions, individual product  variables for each type of product. The additional variables generally  improved the overall “fit” of the regression; the adjusted R-square measure  with the individual product variables included showed that the regression  explained between 24 and 31 percent of the overall variation in duty rates  across the sample compared with 15 percent in the regression above. Also,  certain types of products, such as agriculture products, tended to have  higher duty rates relative to other types.
Table 7 shows the regression results when individual product variables are  included. Once again the coefficient for China is insignificant, while the  coefficient for the country-wide rate is significant at the 99 percent level.  Some coefficients for individual products are significant (e.g., carbon steel  butt-weld pipe fittings), but many are not. The overall adjusted R-square  measure shows that this regression model explains about 31 percent of  total variation in the duty rates.
In order to examine the effect of applying adverse inferences and facts  available (other than adverse inferences) on the duty rates, we added  additional variables indicating when Commerce used these approaches.  The results show that application of adverse inferences is a significant  variable and has a large effect on the duty rates, but that application of  facts available (other than adverse inferences) is not. When adverse  inferences are introduced, this results in the country-wide rate variable  becoming insignificant (see table 8). However, this is likely due to the fact  that the adverse inferences variable is highly correlated with the country- wide rate. Therefore, it is not surprising that the country-wide rate is no  longer significant since the adverse inferences variable is already  accounting for much of the variation. In addition, the variable for China  once again becomes significant. As we discuss in the body of this report,  Commerce uses adverse inferences in very few determinations for Chinese  companies granted their own rates. Adverse inferences were applied in  making only 3 out of the 50 individual determinations used in this analysis.  However, Commerce used adverse inferences in nearly half of its  determinations against individual market economy companies.
Since adverse inferences are already factored into this model, as is the  country-wide rate, the remaining differences accounted for by the China  variable in table 3 are between individual (noncountry-wide) Chinese rates  and individual market economy rates in which adverse inferences are not  used. Table 8 shows that there is a statistically significant 27 percentage  point difference between these rates. However, because there are  methodological differences between the NME and market economy  methodologies for individual companies, it is not clear how often adverse  inferences would be used against individual Chinese companies should  they move to a market economy methodology. In other words, we cannot  predict the extent to which, under a market economy methodology,  individual Chinese companies would cooperate with Commerce or  Commerce would find it necessary to use adverse inferences in its  determinations against Chinese companies. It is possible that some  Chinese companies that currently have an individually determined rate  under the NME methodology would face adverse inferences under a  market economy methodology, whereas others would not. This could  produce a result similar to the market economy cases we have examined in  which the overall average (for example, 55 percent) is the result of some  companies receiving comparatively high duty rates (e.g., 77 percent) when  adverse inferences are used and others receiving comparatively low rates  (e.g., 16 percent) when adverse inferences are not used (see table 2). In any  case, these results show that there is a remaining difference between these  two groups after accounting for the use of adverse inferences and the  country-wide rate.
In order to examine whether the above results hold for all NMEs, we ran  the same regressions for a larger set of 31 products (compared with the 25  products above) in which we found matching cases between nonmarket  economies other than China and market economies. The data set on these  31 products included rates from 128 orders (26 on China, 82 on market  economies, and 20 on NMEs other than China) that contained 355 duty  rates (dependent variable).
These analyses confirmed our China-market economy only analyses but  also showed that other NME countries tend to have duty rates that are  statistically higher than market economy rates for this sample of matching  cases. (Note that the number of additional products—six—is relatively  small.) Controlling for both the NME designation and the country-wide  rate, the NME designation itself is a significant variable at the 97 percent  level of confidence with a coefficient of 23 percent (the coefficient for  China is not statistically significant). The country-wide variable is also  significant (99 percent level) and larger with a coefficient of 48 percent. As  additional variables are added for individual products, the NME  designation continued to be significant along with the country-wide rate  variable.
There may be other systematic factors not accounted for in this regression  model that would explain some of the variability not accounted for by the  variables we included. As shown in table 7, our model accounted for about  50 percent (half) of the variation in rates. Some of this variation may be  idiosyncratic and related to differences in individual companies’ practices,  other may relate to how Commerce has implemented its analysis. However,  these unexplained factors do not appear to be systematically related to  whether the case involved China or a market economy since the regression  analysis already controls for that difference.
section_title: Comments from the Department of Commerce
paragraphs: The following are GAO’s comments on the Department of Commerce’s  letter dated December 8, 2005.
subsections: section_title: GAO Comments
paragraphs: 1. We re-examined our data, making corrections as appropriate, and  updated our analyses. The report reflects these corrections, though  they did not have a significant impact on any of our findings. 2. As discussed in the report, the overall difference between the duty rates  applied to China and those applied to market economy countries is  largely explained by the application of comparatively high country- wide rates to China. Therefore, the model allows us to conclude that  elimination of the NME methodology—and thus these country-wide  rates—would result in lower duties for some Chinese companies.  Nevertheless, there would still be variation in duty rates among  companies and products due to a range of other factors.
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the individual named above, Adam R. Cowles, Monica Ghosh,  R. Gifford Howland, Michael McAtee, Richard Seldin, Ross Tuttleman,  Roberto Walton, and Timothy Wedding made significant contributions to  this report.