China CVD: Time to Unscramble the Eggs

Yesterday, the WTO's Appellate Body delivered a pretty significant smackdown on the United States in its dispute with China over the US imposition of anti-dumping (AD) duties and countervailing duties (CVDs) on Chinese imports.  The decision follows a string of losses by China at the WTO.  It naturally left the Chinese government quite pleased and the US Trade Representative "deeply troubled," and it's certainly a significant ruling that should have substantial ripple effects.  But it's not the haymaker that some breathless news reports would have you believe - at least, it doesn't have to be.  So let's first go over the decision and then discuss why it's a big deal but not a HUGE deal.

Before we get started, it's important to note that the Appellate Body is basically the "Supreme Court" of the global trading system.  It's decisions are final - there is no appeal, and now all that's left for the United States to do is to figure out how (or, in some unfortunate cases, whether) it will conform its laws or practices to the AB's ruling.  According to that ruling's conclusions, the United States in the four China AD/CVD investigations at issue:

• Erroneously deemed certain Chinese state-owned enterprises to be "public bodies", thus automatically treating the entities as the Chinese government" for the purpose of measuring "government" subsidies;

• Correctly measured the "benefit" conferred by certain Chinese financial contributions, thereby qualifying them as "subsidies" that may be disciplined under the US CVD law;

• Correctly found certain Chinese subsidies to be "specific" and thus countervailable (i.e., deserving of remedial tariffs on the imports receiving those subsidies); 

• Erroneously calculated (by "double counting") the total anti-dumping and countervailing duties to be simultaneously applied to investigated imports from China, which is designated as a "non-market economy" (NME) under the US anti-dumping law.

For us trade lawyers, all of these conclusions are pretty important because they will significantly affect many countries' future CVD actions against China and many other countries.  But for policy purposes, the last conclusion - double counting - is the one that (I assume) sent USTR into "deeply troubled" conniptions, and should have pretty serious implications for US-China trade relations, particularly the two dozen or so completed AD/CVD investigations that relied on the United States' WTO-inconsistent methodology to impose duties on Chinese imports into the US.  But it's not - I repeat, NOT - the death knell for AD/CVD actions against China that some misguided folks have reported.

But before I get into all that, let's define "double counting" and lay out what the AB actually decided.  As I've previously explained, the Department of Commerce's (DOC's) NME AD methodology (and any resulting AD duties) address and remedy the effects of China's subsidies on the subject imports, yet its current CVD methodology offsets these exact same subsidies, thus imposing duties on Chinese imports in excess the level of dumping and/or subsidization that's actually occurring.  In short it "double counts" the subsidies and thus imposes more than "remedial" tariffs on the investigated Chinese imports.  In the WTO case at hand, the AB overturned the Panel's conclusions that the US "double counting" methodology didn't violate WTO rules and instead ruled that double counting was inconsistent with Article 19.3 of the WTO's Subsidies (SCM) Agreement, which requires that countervailing duties be levied in "appropriate amounts":

582. In sum, based on all of the above, we consider that the Panel erred in its interpretation of Article 19.3 of the SCM Agreement and failed to give meaning and effect to all the terms of that provision. Under Article 19.3 of the SCM Agreement, the appropriateness of the amount of countervailing duties cannot be determined without having regard to anti-dumping duties imposed on the same product to offset the same subsidization. The amount of a countervailing duty cannot be "appropriate" in situations where that duty represents the full amount of the subsidy and where anti-dumping duties, calculated at least to some extent on the basis of the same subsidization, are imposed concurrently to remove the same injury to the domestic industry. Dumping margins calculated based on an NME methodology are, for the reasons explained above, likely to include some component that is attributable to subsidization.

583. We, therefore, reverse the Panel's interpretation of Article 19.3 and, in particular, its findings that "the imposition of anti-dumping duties calculated under an NME methodology has no impact on whether the amount of the concurrent countervailing duty collected is 'appropriate' or not" , and that Article 19.3 of the SCM Agreement does not address the issue of double remedies. We find instead that the imposition of double remedies, that is, the offsetting of the same subsidization twice by the concurrent imposition of anti-dumping duties calculated on the basis of an NME methodology and countervailing duties, is inconsistent with Article 19.3 of the SCM Agreement.

Next, the AB found that DOC was under an affirmative obligation to ensure that its AD/CVD methodology for China and other NMEs didn't result in double-counting:

602. In the same way, therefore, as an investigating authority is subject to an affirmative obligation to ascertain the precise amount of the subsidy, so too is it subject to an affirmative obligation to establish the appropriate amount of the duty under Article 19.3. This obligation encompasses a requirement to conduct a sufficiently diligent "investigation" into, and solicitation of, relevant facts, and to base its determination on positive evidence in the record. We recall our finding above that, among the factors to be taken into account by an investigating authority, in establishing the "appropriate" amount of countervailing duty to be imposed, is evidence of whether and to what degree the same subsidies are being offset twice when anti-dumping and countervailing duties are simultaneously imposed on the same imported products. We also recall that such double remedies are "likely" when the concurrent anti-dumping duties are calculated on the basis of an NME methodology.

The AB then ruled that DOC had totally flubbed its affirmative WTO obligation by not even trying to prevent double counting from occurring; thus, its AD/CVD determinations were inconsistent with Article 19.3:

604. Thus, the USDOC made no attempt to establish whether or to what degree it would offset the same subsidies twice by imposing anti-dumping duties calculated under its NME methodology, concurrently with countervailing duties. We recall that, in the investigations at issue, the USDOC dismissed China's claim of double remedies on the ground that inter alia it had no statutory authority to make adjustments in the context of countervailing duty investigations. Therefore, the USDOC did not initiate any examination of whether double remedies would arise in the four investigations at issue and refused outright to afford any consideration to the issue or to the submissions pertaining to the issue that were presented to it.

605. In our view, by declining to address China's claims concerning double remedies in the four countervailing duty investigations at issue, the USDOC failed to fulfil its obligation to determine the "appropriate" amount of countervailing duties within the meaning of Article 19.3 of the SCM Agreement.

Finally, the AB concluded (emphasis mine):

606. Consequently, we find that, in the circumstances of the four sets of anti-dumping and countervailing duty investigations at issue, by virtue of the USDOC's imposition of anti-dumping duties calculated on the basis of an NME methodology, concurrently with the imposition of countervailing duties on the same products, without having assessed whether double remedies arose from such concurrent duties, the United States acted inconsistently with its obligations under Article 19.3 of the SCM Agreement.

The AB also found that this violation resulted in consequent violations of Article 10 and 32.1 of the Subsidies Agreement, and it recommended that the WTO Dispute Settlement Body "request the United States to bring its measures, found in this Report, and in the Panel Report as modified by this Report, to be inconsistent with the SCM Agreement, into conformity with its obligations under that Agreement." (This request includes the inconsistent US determinations on "public body" also mentioned above.)

So now that we have that out of the way, let's examine the possible implications of the AB's ruling.  As noted above, they're pretty big:

• Assuming the the United States decides to comply with the AB's ruling (and not simply accept Chinese retaliation), DOC will need to go back and amend its existing determinations in the four AD/CVD investigations at issue in order to ensure that they are consistent with the AB's ruling.  This means that DOC will have to develop a new AD/CVD methodology that somehow addresses the double counting issue (and "public body"), and the US re-determinations will almost certainly be scrutinized by the WTO to ensure that they comply with the AB's ruling.

• As mentioned above, the AB's ruling (again, assuming the US decides to comply) should eventually affect the dozens of other AD/CVD investigations that have been initiated against China since the US first decided to apply its CVD law to NME imports back in 2006.  Although none of those cases was specifically challenged here, each involved the same illegal double counting methodology (or, more precisely, the lack of any methodology).  So it seems quite likely that, assuming the US doesn't voluntarily amend all of these determinations and recalculate (and refund!) existing duties, China will challenge these determinations at the WTO based on the AB's ruling in this case.  And it should win.

• Finally, the AB's ruling could - could - effectively end DOC's messy 5-year "CVD NME" experiment altogether.  As you'll recall, the US Court of International Trade (CIT) has already ruled that DOC's CVD NME methodology, as applied in a case against Chinese offroad tires (which was also one of the cases at issue in the WTO dispute), violated US law.  That case is currently under appeal at the Court of Appeals for the Federal Circuit, and if the CAFC upholds the CIT's very aggressive decision, you'll now have both the US courts and the WTO's Appellate Body finding major problems with DOC's current CVD NME policy (which, again, has been followed in many completed and pending AD/CVD investigations against China and other NMEs like Vietnam).  The result of all of these adverse rulings could be one of three things: (i) DOC adopts a new CVD NME methodology that dramatically limits (or offsets altogether) the concurrent application of anti-dumping and countervailing duties against Chinese and other NME imports (although the CIT seemed to preclude this option); (ii) DOC no longer allows for concurrent AD/CVD investigations of NME imports; or (iii) DOC deems China to be a "market economy" and thus uses standard AD/CVD methodologies in all future cases.  This last option seems pretty unlikely because domestic petitioners just love the NME methodology, but it's actually the simplest and most reasonable solution (especially when you consider the silly fact that Russia is a "market economy," while China isn't).  Regardless of the (hypothetical) option chosen, however, the end result would be pretty much the same: the diminished (or eliminated) value of petitioners' shiny new CVD NME weapon against Chinese imports. 

That said, the AB's ruling should not be overstated for two big reasons, both of which I mentioned above:

• Most obviously, the AB's ruling did not rule that DOC was absolutely prohibited from conducting concurrent AD and CVD investigations against China or other NMEs.  All the AB said was that double counting violated WTO rules, and that DOC's "imposition of anti-dumping duties calculated on the basis of an NME methodology, concurrently with the imposition of countervailing duties on the same products, without having assessed whether double remedies arose from such concurrent duties" was WTO-inconsistent.  In short, DOC ran into trouble because it didn't even try to prevent double counting in its AD/CVD investigations of Chinese imports.  Thus, DOC could perfectly comply with the AB's ruling where it developed a methodology that (i) "assesses whether double remedies arose from concurrent AD/CVD duties" and, where such double remedies are indeed found, (ii) removes any instances of double counting.  This, of course, is easier said than done, but there are some pretty smart folks over at DOC, and I'm confident that they could develop such a methodology if their bosses in the White House were absolutely determined to keep the AD/CVD NME process alive.  China certainly could challenge this new methodology at the WTO or in US courts, but both bodies are pretty deferential to such administrative minutiae.  (They're not so deferential where, such as here, DOC doesn't even try to adopt a methodology to avoid the legal problems raised.)  As noted above, this approach wouldn't perfectly comply with the CIT's aggressive ruling, but, even assuming the CAFC upholds it, Congress could always intervene to make this approach legal under US law (thereby mitigating the court rulings).

• Second, in the (unlikely, I think) event that DOC decides not to create a fancy AD/CVD NME methodology, it still could allow for an anti-dumping or countervailing duty investigation to proceed against Chinese (or other NME) imports.  Such an "independent" approach would avoid the double-counting issue altogether, maintain the AD NME methodology, and still let certain US petitioners attack Chinese subsidies through CVD cases.

Of course, neither of these approaches will change the fact that DOC likely has to re-do all of those completed AD/CVD determinations against Chinese imports that were based on its faulty double counting.  That's a lot of omelet-unscrambling.  And, as noted above, neither contemplates the easiest and most logical approach to solving the problems raised by the Appellate Body and the CIT - simply designating China a market economy and applying a standard, perfectly legal AD/CVD methodology in future investigations of Chinese imports.

But hey, this is what happens when bad trade politics trumps good trade policy: you get messy rulings that require ample administrative clean-up.  As I said at the time of the CIT ruling against double counting:

[B]ack in 2006-07 when my colleagues and I litigated the first US AD/CVD investigation of Chinese imports (on coated paper), one of our main arguments against a big and sudden change to DOC's longstanding CVD/NME policy was the serious can of worms (note: not a legal term) that would be opened for both US trade law and US-China trade relations. We argued that any CVD/NME changes should be slow, deliberate, and pursuant to formal notice-and-comment procedures in order to avoid endless litigation and unnecessary trade frictions. Our warnings, obviously, were ignored. Now, with two adverse CIT cases, an "illegal" DOC remand redetermination, a pending WTO case, messy congressional currency/CVD legislation and hearings, and more than two dozen completed CVD cases which rely on an "illegal" DOC methodology, I hate to say "I told you so," but......

Well, that "pending WTO case" is now yet another strike against the United States' existing China CVD policy.  And the "I told you sos" are only getting louder.