As explained below, WTO rules provide disciplines on subsidies and countervailing measures used by China, the United States, and other WTO members. China accepted additional commitments in this area when it joined the WTO in 2001. U.S. procedures for countervailing duty actions reflect WTO rules. Such CVD actions are usually applied in tandem with antidumping duties. The WTO Agreement on Subsidies and Countervailing Measures defines a subsidy as a financial contribution by a government or any public body within a WTO member that confers a benefit. While the agreement imposes an outright ban on some types of subsidies, most types are not completely prohibited but are classified as actionable under certain conditions. Actionable subsidies are those that are specific—i.e., benefit a specific enterprise, industry, or group of enterprises or industries—and cause adverse effects to the interests of another WTO member, such as injury to their domestic industries. According to the WTO, members may impose CVDs when they (1) identify subsidized imports, (2) determine that a domestic industry is suffering injury, and (3) establish a causal link between the subsidized imports and the injury suffered. These duties are intended to offset the price advantages that the subsidy confers on the imported product and, more broadly, to encourage governments that maintain subsidies to eliminate them. The subsidies agreement requires that the investigating authorities quantify the value of the subsidies provided and limit the level of duty imposed to that value. To facilitate identification of subsidies and the evaluation of their trade effects, the agreement requires WTO members to provide the organization with annual notifications on all of the specific subsidies they maintain and to provide additional information on any of these programs when requested. The agreement specifies that member states should provide sufficient information “to enable other Members to evaluate the trade effects and to understand the operation of notified subsidy programs.” China made additional commitments regarding industrial subsidies as part of its agreement to join the WTO. China agreed, upon WTO accession, to terminate all subsidies on exports, as well as the subsidies conditioned upon the use of either domestic goods or export performance. China listed 24 subsidy programs in the accession agreement and agreed to eliminate 3 programs upon accession. The 24 programs include direct subsidies given by central and local governments to money-losing state-owned enterprises and many other types of indirect subsidy programs. Indirect subsidies include loan priorities, preferential tariffs, tax breaks given to firms encouraged by the government because of their location, export performance (amount of exports), and use of local resources for the products they make. Among the three programs that China agreed to eliminate, two were related to subsidies to the automobile sector, and the other was the central government’s program to give budgetary subsidies to money-losing state- owned enterprises. China also committed to treating other subsidies given to state-owned enterprises as subsidies to private enterprises and subjecting them to WTO disciplines. Furthermore, China agreed not to invoke certain articles in the Agreement on Subsidies and Countervailing Measures that make determination of “actionable” subsidies more difficult to establish against developing countries. Given China’s present level of economic development and reform, some WTO members were concerned about the potential for China to maintain or raise industrial subsidies, especially to state-owned enterprises. Some members also raised concerns that China’s reporting on subsidies in the WTO negotiations was incomplete. In response, China agreed to work toward full notification and acknowledged that subsidies are sometimes difficult to identify. Under U.S. law, CVDs may be imposed against subsidized imports from other WTO members when a U.S. industry is materially injured or threatened with injury or the establishment of an industry in the United States is materially retarded. The U.S. International Trade Commission (ITC) and the Department of Commerce share investigative and decision- making responsibility in CVD cases. The ITC determines whether there is material injury or threat thereof to the domestic industry by reason of the subject imports. Commerce determines whether the foreign country is providing a countervailable subsidy, and, if so, the size of the subsidy and the size of the CVD to impose. To make these determinations, Commerce solicits information from exporting country governments and from individual producers and exporters of the subject merchandise and applies this information to establish appropriate duty rates for each known exporter or producer. Commerce will dismiss petitions that (1) do not allege the elements necessary for imposition of a duty and contain information “reasonably available to the petitioner” in support of these allegations, or that (2) have not been filed by or on behalf of the domestic industry concerned. The information to be submitted must address, among other things, the nature of the subsidies provided to the foreign producers, the competitive benefits that these subsidies bestow, and injury to the U.S. industry by reason of the subject imports. The United States has imposed CVDs with some regularity, on a variety of products from a variety of countries. From 1995 through 2004, U.S. domestic industries petitioned the Department of Commerce and the ITC for 72 CVD investigations against 43 different products from 25 countries. Thirty-six of these investigations (50 percent) resulted in application of CVDs. Generally, when petitioners seek imposition of CVDs, they also seek imposition of antidumping duties on the same product from the same country. In 69 of the 72 CVD cases, petitioners also requested a companion antidumping investigation. Dumping occurs when a foreign company sells merchandise in a given export market (for example, the United States) at prices lower than the prices charged in the producers’ home market or another export market. When this occurs, and when the imports have been found to materially injure, or threaten to materially injure, U.S. producers, WTO rules, and U.S. laws permit application of antidumping duties to offset the price advantage enjoyed by the imported product. As in CVD cases, Commerce analysts establish antidumping duties for each known producer or exporter. Petitioners requesting antidumping investigations do not always request CVD investigations, and CVDs are, in fact, sought and imposed much less frequently than are antidumping duties. From 1995 through 2004, U.S. industry groups petitioned for nearly five times as many antidumping as countervailing duty investigations (354 compared with 72). Similarly, the United States put in place over four times as many antidumping duty orders (156) as it did CVD orders (36). Figure 1 shows the distribution of these countervailing and antidumping duty orders by year for 1996 through 2004. For antidumping orders, these are further broken down into orders against market economies, China, and other nonmarket economies. The number of CVD orders imposed might have been higher, and the contrast with antidumping duty orders less pronounced, if CVDs had been available against nonmarket economies during this period. Nonetheless, figure 1 shows that even among market economy countries, the United States imposes CVDs much less frequently than antidumping duties. The U.S. government does not apply its CVD laws against China because the Department of Commerce classifies China as an NME country and has adopted a policy against taking CVD actions against countries so designated. Commerce (or Congress) could take one of two paths to apply U.S. CVD law to China. First, they could change China’s NME status to a market economy status in whole or in part and allow Commerce to apply U.S. CVD law to China on a country or industry basis. Alternatively, they could decide that CVD law could be applied to China while it remains classified as an NME country. WTO rules, including relevant provisions of China’s WTO accession agreement, do not explicitly preclude the United States from pursuing either alternative. The policy not to apply CVD law rests upon two principles, first advanced in two 1984 Department of Commerce decisions and subsequently upheld by the U.S. Court of Appeals for the Federal Circuit. These principles were (1) from a legal perspective, Commerce does not have explicit authority to apply CVDs against NME countries; and (2) as a practical matter, Commerce cannot arrive at economically meaningful conclusions regarding subsidies in such countries. The Department of Commerce classifies China, as well as Vietnam and a number of former Soviet republics, as NME countries. Under U.S. trade law, Commerce may classify any country that does not operate on market principles —”so that sales of merchandise in such country do not reflect the fair value of the merchandise” —as an NME country. Commerce has classified China as an NME country since 1981. U.S. trade law does not contain any explicit prohibition against applying CVDs to NME countries. Nonetheless, the Department of Commerce determined in 1984 that it did not have explicit legal authority to apply CVDs to such countries. Commerce set forth its conclusions on this matter in rulings denying CVD protection against carbon steel wire rods from Poland and Czechoslovakia, which were then considered NME countries. In its 1984 determinations, the Department of Commerce also concluded that it cannot measure subsidy benefits in NME countries. In explaining this conclusion, Commerce observed that, in market economy countries, markets generate prices that can be used to measure the impact of government subsidies. However, in NME countries, government intervention in the economy is so pervasive that one cannot make meaningful comparisons between market-determined prices and those that have been distorted by government intervention. The U.S. Court of Appeals for the Federal Circuit upheld Commerce’s decision in Georgetown Steel Corp. v. United States. In upholding Commerce’s position in this matter, the Court of Appeals found that governments with nonmarket economies control their trading entities by determining where, when, and what they will sell, and upon what terms. When no market exists, subsidies cannot be found to distort market decisions. Commerce could take either of two paths to applying U.S. CVD law to China.