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. 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. 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. 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. 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. 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. 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. 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) 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. The following are GAO’s comments on the Department of Commerce’s letter dated December 8, 2005. 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. 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.

Summary: 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. 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.