Bombshell: CAFC Rules US CVD Law Cannot Apply to China & Other "Non-Market Economies"

Well, this was unexpected.  Today, the US Court of Appeals for the Federal Circuit (CAFC) affirmed a decision from the lower US Court of International Trade (CIT) that the Commerce Department's current method of applying countervailing and anti-dumping duties on imports from China and other "non-market economies" (NMEs) like Vietnam was invalid because it led to "double counting."  I've previously commented on the CIT decision - GPX Int’l Tire Corp. v. United States - and it was a pretty big deal.  But it was somewhat limited because it applied to only Commerce's methodology for applying anti-dumping and countervailing duties simultaneously on the same NME-origin product.

The CAFC, on the other hand, went a whole lot further than the CIT, finding that, under current US law, "government payments cannot be characterized as 'subsidies' in a non-market economy context, and thus that countervailing duty law does not apply to NME countries."  So instead of ruling on the discrete "double counting" issue, the CAFC essentially said that the entire CVD law doesn't apply to Chinese and other NME imports.

That's an even bigger deal.

I'll likely get further into the weeds of the CAFC decision later, but here's the gist.  In the 1986 case Georgetown Steel Corp. v. United States the CAFC agreed with Commerce that the US CVD law didn't apply to NMEs (in that case, Czechoslovakia).  However, in the 2007 investigation of Coated Free Sheet Paper from China (full disclosure: I represented the Chinese exporters in that case but no longer represent any Chinese exporters or the Chinese government), Commerce ruled that Georgetown Steel didn't apply to Chinese imports because China's economy was totally different from the Soviet-style economies to which Georgetown Steel applied.  Since then, dozens of CVD petitions have been filed by US producers and unions, and duties have been imposed in almost all cases, including off-road tires.  GPX appealed that decision to the CIT, and, after several remands, the CIT issued the aforementioned decision.

In this case, the CAFC essentially found that Congress had "ratified" Georgetown Steel's CVD/NME prohibition because legislative history of trade laws passed in 1988 and 1994 showed that Congress (i) was well aware that the CAFC's decision constituted "existing law"; and (ii) did not wish to alter this "existing law" to apply CVDs to imports from NMEs.  So Congress knew about the CAFC decision and didn't do anything to change it, thereby "ratifying" the CVD/NME prohibition into US trade law.  The CAFC thus concluded:

[I]n amending and reenacting the trade laws in 1988 and 1994, Congress adopted the position that countervailing duty law does not apply to NME countries.  Although Commerce has wide discretion in administering countervailing duty and antidumping law, it cannot exercise this discretion contrary to congressional intent. We affirm the holding of the [CIT] that countervailing duties cannot be applied to goods from NME countries. As we concluded in Georgetown Steel, if Commerce believes that the law should be changed, the appropriate approach is to seek legislative change.

In short, Commerce violated existing US law by applying CVDs to imports from China and other NMEs since 2007, and if Commerce wants to apply CVDs to NME imports, then Congress has to pass a new law, overruling Georgetown Steel.

So why is this a big deal?  Well, according to the latest figures from Commerce, CVDs are currently being imposed on 23 different Chinese imports into the US, totaling billions of dollars in annual trade.  There's also one CVD order on imports from Vietnam, and there are a few pending CVD investigations against China and/or Vietnam, including the highly controversial case on Chinese solar panels.  And according to the CAFC - the second highest US court for trade cases - Commerce violated US law in every single one of the finished cases and has no authority to impose CVDs on NME goods in new or pending investigations until Congress amends the law.

Oof.

So what happens to all of these CVD orders and investigations?  Well, it seems somewhat likely that Commerce and/or the domestic industry will appeal the CAFC's decision to the Supreme Court if only to keep all of the existing orders in place for a while, but the chances of the Supreme Court hearing the case (via a writ of certiorari) seem pretty low.  Chief Justice Roberts' court is notoriously stingy about granting cert, especially on highly technical stuff like this.  It's not impossible, but I definitely wouldn't bet on it.

But say there's no appeal (or the SCOTUS denies cert), then what?  Sure, Congress can - and almost certainly will - amend US law to expressly allow for the imposition of CVDs on NME imports, and any such legislation would pass by big bi-partisan margins because both trade remedies measures and anti-China measures have broad congressional support (hooray bi-partisanship... sigh).  But can the existing orders remain in force or the pending investigations stay pending?  The CAFC's decision is much broader and more fundamental than the lower CIT's decision which only applied to DOC's methodology.  If the CIT ruling had merely been affirmed, then DOC could have theoretically kept the orders in place and merely recalculated the duties.  The CAFC, however, ruled that existing US law prohibits any and all imposition of CVDs on NME imports.  So if/when Congress amends US CVD law, can it be applied retroactively to previously-decided (or initiated) cases that were, according to the CAFC, fundamentally contrary to US law?

I know that there are some pretty significant loopholes regarding the Constitution's express ban on ex post facto laws, but even if the Congressional amendment of US CVD law were not found to be an unconstitutional ex post facto law, it would seem that it could still run up against a pretty reasonable challenge by US importers.  For example, would they deserve to reimbursed for all of the duties illegally collected on affected Chinese goods since 2007?  I (clearly) have no idea, but I'll bet that we're going to find out soon enough.

And what will the CAFC's decision do to the United States' ongoing implementation of the WTO Appellate Body's ruling in DS379 that Commerce's simultaneous application of anti-dumping duties and countervailing duties in four US investigations of Chinese goods violated WTO rules?  That implementation process is well underway, and Commerce's "Section 129" decision there is due in late February 2012.  The CAFC's decision could make that process - and China's scrutiny of it - even more complicated, wouldn't you think?

(And, of course, there's the proposed US legislation and angry campaigning politicians targeting China's currency practices via the US CVD law.  Oops.)

What a mess.  Clean-up is not going to be easy, unless, of course, the United States did the rational thing and simply designated China a "market economy" and began applying a standard, perfectly legal AD/CVD methodology in current and future investigations of Chinese imports. [UPDATE: See this earlier blogpost on why granting ME status for China should be a no-brainer.]

Unfortunately, that outcome seems far less likely than another few years of confusion, litigation and market uncertainty.