Tuesday, August 10, 2010

The "China CVD" Mess Just Keeps Getting Messier

Since the US Department of Commerce in 2007 changed 20 years of settled policy and decided to start imposing anti-subsidy (countervailing) duties on imports from China, there have been dozens of CVD cases (and resulting remedial tariffs) against Chinese imports of steel, textiles, chemicals and other products.  A new decision from the US Court of International Trade, however, calls all of those cases into question and could have broader implications for congressional efforts to attack China's currency policy.

Or it could be pretty meaningless.  Either way, US-China trade relations just got even messier.

Last week, CIT Chief Judge Jane Restani issued an important decision (PDF) in the case of GPX Int'l Tire Corp. v. United States, essentially ruling that the US Department of Commerce could not concurrently apply countervailing duties (CVDs) and antidumping (AD) duties to imports from China, as long as China continues to be designated a "non-market economy" under the US antidumping law.  The CIT decision was the second appeal of a DOC determination that imports of offroad tires from China were unfairly subsidized and dumped in the US market.  In the first appeal, Restani ruled that DOC's AD/CVD determination was illegal under US law because it resulted in extra (and thus punitive) duties on the Chinese tire imports through a process known as "double counting."  This is pretty complicated stuff, but Restani does a very good job summarizing double counting in her latest opinion:
Although the court recognizes that “the exact effect of subsidies on price is difficult to measure,” it also acknowledges that “[t]here is an assumption that CVD remedies equalize the competitive playing field, by raising the price of the good when it is exported into this country.” In NME-designated countries, however, Commerce also “compares a subsidy-free constructed normal value (essentially using information from surrogate countries) with the original subsidized export price to calculate the AD margin.” Thus, any resulting NME AD margin in theory also captures the competitive advantage that subsidies may provide because the constructed NV is subsidy-free, and presumably higher than a subsidized NV, while the U.S. price presumably reflects in some way the price-lowering benefits of the subsidies. Thus, the margin is greater than it would be if subsidies were reflected on both sides of the comparison. These methodologies, therefore, when used concurrently, result in a high likelihood of double counting because they effectively counteract the same behavior twice.
In short, DOC's NME AD methodology (and any resulting AD duties) already accounted for (and remedied) the effects of China's subsidies on the subject imports, so to again remedy these subsidies in the form of CVDs was to impose duties on Chinese imports in excess the level of dumping and/or subsidization that's actually occurring.  Such "double counting" is an express violation of US law (and WTO rules, by the way).  Restani therefore remanded the case, giving DOC a second chance to fix its methodological mistakes in a "remand redetermination."

As Restani now explains, DOC's second efforts were, ahem, less-than-stellar:
In its remand order, the court presented Commerce with a choice between two alternatives. Commerce could either “reasonably . . . do all of its remedying though the NME AD statute, as it likely accounts for any competitive advantages the exporter received that are measurable,” or it could “apply methodologies that make such parallel remedies reasonable.”  In its remand redetermination, however, Commerce proposes guarding against double counting by merely offsetting CVD against NME AD after it uses its regular methodologies to calculate the CVD and NME AD margins. The court notes that with this offset, the combination of the CVD margin and the NME AD cash deposit rate will always equal the unaltered NME AD margin.  This result, therefore, renders concurrent CVD and AD investigations unnecessary because the same remedial price adjustment can otherwise be obtained by merely conducting an NME AD investigation.  
Restani then explained that DOC's "new approach" is still illegal because it (a) imposes unreasonable burdens on foreign exporters; and (b) expressly violates US law:
As GPX and Starbright suggest, it is not reasonable to “force[] foreign parties to spend many months and large sums of money to go through an investigation, the end result of which is to calculate a CVD margin, but then to eliminate that CVD [margin] because it has been offset by some parallel investigation.”  Perhaps even more importantly, the offset that Commerce now advances is inconsistent with 19 U.S.C. § 1677a, which lists the specific offsets to export price and constructed export price that are permissible [under US antidumping law].  Accordingly, the court holds that the offset does not comply with the statute and is also unreasonable due to the expense associated with conducting an additional investigation that is essentially useless.
Obviously frustrated with DOC's new AD/CVD approach, Restani concluded that DOC must stop trying to concurrently impose antidumping and countervailing duties on the subject tire imports from China and instead may only pursue AD (NME) duties:
Despite the court’s instruction that “[i]f there is a substantial potential for double counting, and it is too difficult for Commerce to determine whether, and to what degree double counting is occurring, Commerce should refrain from imposing CVDs on NME goods until it is prepared to address this problem through improved methodologies or new statutory tools,” Commerce stubbornly adheres to the position that it does not have discretion to do so.  Commerce maintains that it is statutorily required to apply CVD law if it determines that a country is providing a countervailable subsidy.  As the court has previously explained, this interpretation of [US law] is misguided. Rather, Georgetown Steel “makes clear that Commerce need not apply CVD law to the same goods that are subject to NME AD calculations.”  Commerce, therefore, is not statutorily required to apply CVD law under 19 U.S.C. § 1671.
In its remand redetermination, Commerce identified what it believed to be the only three procedural options remaining after GPX. There is no indication in the language used that this list was intended to be anything other than exhaustive. The court, therefore, accepts this list as a tacit admission that, at this time, it is too difficult for Commerce to determine, using improved methodologies, and in the absence of new statutory tools, whether and to what degree double counting is occurring.  In accordance with the court’s remand instructions, the only option remaining for Commerce is not to apply CVD law to Starbright’s NME goods.  Accordingly, the court remands this matter to Commerce with instructions to forego the imposition of CVD law on Starbright’s merchandise at issue.
Oh. Snap.  As Reuters helpfully explains, Restani's broad decision could, if left untouched on appeal or through congressional intervention, have quite significant implications for US trade remedies policy because it would (i) invalidate all existing AD/CVD orders currently in place against Chinese imports; and (ii) raise serious questions about ongoing AD/CVD investigations of all NME imports.  (Vietnam is also designated an NME).  But that's a huge "if" - there's very little doubt that DOC (and/or domestic petitioners) will appeal the CIT's decision to the US Court of Appeals for the Federal Circuit (CAFC), and even if the CAFC upholds Restani's opinion, Congress would almost certainly intervene to give DOC the necessary authority to impose concurrent AD/CVD remedies on NMEs.  And until all of the litigation is settled, DOC will very likely continue to act as if nothing happened, so last week's CIT decision will probably have little, if any, immediate impact on US trade remedies cases, except for a few appeals of recent AD/CVD determinations on Chinese imports (which wouldn't be resolved for at least a year or so, depending on the judge assigned to each).

That said, the GPX case could have more immediate ramifications for US trade policy, particularly congressional deliberations over China's currency policies.  As you may recall, the primary legislative "weapon" currently being contemplated by Congress to retaliate against China's allegedly undervalued currency (the RMB) is to allow DOC to deem currency "undervaluation" to be a countervailable subsidy under US CVD law.  Although I noted a while ago that this legislation - S.3134 (aka "Schumer-Graham") - has plenty of problems under WTO rules, I assumed back then that it would be fine under US law.  The GPX decision, however, changes that thought.

Because Schumer-Graham, as currently written, does not solve (or even address) the systemic issues raised by Chief Judge Restani with respect to AD/CVD investigations of NMEs, the legislation couldn't apply to any imports from China (or other NMEs) that are also under an antidumping investigation.  In short, if Schumer-Graham became law, a domestic petitioner could only use the law's new anti-currency weapon against Chinese imports if it filed a CVD petition alone (i.e., it filed no concurrent AD petition) because GPX would prohibit DOC from initiating concurrent CVD and AD investigations of NME imports.  Of course, as noted above DOC will probably ignore the GPX ruling until the case is final, so the agency technically could keep initiating concurrent CVD cases, but boy, does GPX make things even messier than they already were.

(Oh, and speaking of that, let's not forget that China already has a case pending at the WTO against four completed US CVD investigations, and the WTO case addresses, among other things, double counting.)

With a House hearing on China's currency scheduled for mid-September and a Senate hearing also expected in the Fall, all of this raises serious questions about how congressional currency hawks intend to explain away GPX and keep attacking China.  My guess is that they'll amend Schumer-Graham to expressly override GPX, but I'm not sure how they'll do that in a way that would withstand serious scrutiny.  Any law that expressly allowed for double-counting would very, very likely violate WTO rules, so the bill's drafters would need to find a way to avoid that obvious outcome while still empowering DOC to pursue concurrent AD/CVD investigations.  That's a tricky proposition.  Then again, considering the aforementioned WTO problems with the original Schumer-Graham bill (and the fact that currency has always been an issue of politics over substance), maybe the bill's sponsors don't really care about little things like the United States' international obligations.  Maybe they'll just steam ahead with nary a mention of little old GPX.

Oy vey.

You know, back 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......


Simon Lester said...

From Reuters regarding the DS379 case:

"One trade lawyer who asked not be identified said the United States is widely believed to have prevailed on the issue of double counting in the WTO dispute."


Scott Lincicome said...

Interesting, Simon. Thanks.

Alan Price said...

Scott: Good post, but I would add a few cautions:

First, the Court's ruling is a narrow one, and even that narrow decision has flaws in its reasoning. As you mention, the United States will almost certainly appeal to the Federal Circuit before changing its practice. And in many recent cases, the Federal Circuit has been much more likely to defer to Commerce's practices, and to reverse the Court of International Trade when necessary.

Second, the China currency issue is far broader than the issue of double-counting of AD and CVD duties, and it is certainly too early to say whether the Schumer-Graham legislation, or any other U.S. action against currency undervaluation, would violate U.S. law.

Third, while it may be "messy" for the United States to fight battles in Congress, the courts, and the WTO at the same time, it's hardly unusual for a major trade dispute. The currency issue has been brewing ever since China first pegged the yuan to the dollar. For years, it has been committed to a policy of using currency undervaluation at the expense of the rest of the world's trading community. Without substantial pressure on all fronts, it is extremely unlikely that China will take steps to reform this policy.

Alan Price
Partner, Wiley Rein LLP
Washington, DC

Scott Lincicome said...

Thanks, Alan. I agree with your first point on the CAFC's deference to DOC, and the fact that GPX II, like DS379 at the WTO, is certainly only in the early stages of ultimate resolution. I'd also agree that it's too early to tell whether Schumer-Graham violates US law. The bill's infancy and ambiguity (intentional or otherwise) makes any such conclusions rather difficult.

However, as readers of this blog well know, you and I are going to disagree (mostly) on your final point, particularly China's "commitment" to prey on the global trading community thru its currency policy. I invite you to cruise around on my blog to see more of my thoughts on the law and economics of the China currency issue, particularly its distressing politics and unsettled economics.

Regardless, I appreciate your comments.