On February 4, 2020, the Office of Enforcement and Compliance within the International Trade Administration of the U.S. Department of Commerce (Commerce) issued a Final Rule, available here, that expands the tools by which it may determine that foreign governments have provided subsidies to encourage the production and export of goods — triggering Commerce’s authority to apply countervailing duties on U.S. imports of those products.1
Commerce has done so in two significant and hotly contested ways. First, the Final Rule establishes a methodology by which Commerce will determine whether a foreign producer or exporter has benefited from foreign government policies that cause its currency to be undervalued, and to quantify any such undervaluation. Second, the Final Rule expands the definition of a “group” to include a collection of “enterprises that buy or sell goods internationally,” for the purpose of determining whether an alleged subsidy is “specific” to a “group of enterprises or industries.” This “specificity” requirement is a prerequisite to a finding by Commerce that a subsidy may be countervailed.
The two new tools established by the Final Rule will be applicable to Commerce’s administrative proceedings initiated on or after April 6, 2020.
The following is a summary of these two new tools.
Tool 1: Currency Undervaluation
Commerce has introduced the concept of currency undervaluation as a basis for the application of countervailing duties. The Final Rule adds a new section, 351.528, to Commerce’s regulations to implement this new concept.
New section 351.528 outlines a methodology that Commerce will use to determine whether a foreign currency is undervalued, and then to calculate the countervailing duties to be applied to imports in order to counteract the benefit provided by the currency undervaluation. The analysis involves three components: (i) a finding that the foreign currency is undervalued; (ii) a finding that foreign government action on the exchange rate contributed to the currency undervaluation; and (iii) a finding that a benefit was conferred on foreign producers/exporters and a quantification of the benefit in order to determine the amount of duty that Commerce will assess on U.S. imports.
- Undervaluation: Commerce intends to seek the advice and analysis of the U.S. Department of Treasury (Treasury) to determine whether a currency is undervalued. Commerce will place Treasury’s analysis on the record, and interested parties to the proceeding will have an opportunity to comment on Treasury’s analysis.
- Government Action: If Commerce finds a currency to be undervalued, it must then determine whether action by the foreign government on the exchange rate contributed to the undervaluation. In making this determination, Commerce again will rely on Treasury’s analysis. Although the Final Rule does not provide concrete examples of what may constitute “government action” for purposes of the currency undervaluation analysis, Commerce intends to exclude monetary and related credit policies of an independent central bank or monetary authority as such qualifying government action. The Final Rule also highlights that Commerce will consider the foreign government’s degree of transparency in taking such actions, and that, through its practice over time, Commerce will refine its analysis of the types of government action that will qualify. Importantly, without a finding that foreign government action on the exchange rate contributed to the undervaluation, Commerce will not make an affirmative determination with regard to any alleged undervalued currency and will not assess duties on this basis.
- Benefit: To determine whether a foreign producer/exporter benefited from undervalued currency and to what extent, Commerce first will calculate the nominal, bilateral U.S. dollar exchange rate consistent with the equilibrium “real effective exchange rate” (REER) that would have prevailed in the relevant time period. Then, Commerce will determine whether there is a difference between this equilibrium nominal, bilateral U.S. dollar rate and the actual average nominal, bilateral REER during the relevant time period.2 However, the Final Rule makes clear that Commerce preserves the authority to use a different methodology if warranted by evidence on the record in individual cases. To conduct this analysis, as with undervaluation and government action, Commerce will also rely on Treasury’s analysis.
Once it is determined that a difference between exchange rates exists, Commerce will calculate the benefit conferred on the foreign producer/exporter by calculating the difference between (a) the amount of domestic currency the respondent received from its U.S. sales during the relevant period (as reported in the data submitted by the respondent), and (b) the amount of domestic currency it should have received absent the currency undervaluation. Then, to calculate the subsidy rate to counteract the currency undervaluation, Commerce will divide the benefit by the exporter’s total sales value (in the domestic currency) during the relevant time period.
The following hypothetical illustrates the benefit calculation. Assume that Company A’s total sales value during the relevant period was US$775,000, of which US$500,000 was the total value of its U.S. sales. Company A then exchanged 20% of its U.S. dollar holdings for its U.S. sales. For this exchange, Company A therefore should have received domestic currency worth US$100,000. However, in its questionnaire responses, Company A reported that it received domestic currency worth US$105,000. The benefit then would be US$5,000. To calculate the subsidy, Commerce would divide 5,000 by 775,000, which would result in a 0.65% subsidy attributable to the currency undervaluation.
Tool 2: Expanded Definition of “Group”
The second tool introduced by Commerce in the Final Rule is an expanded definition of what constitutes a “group” for the purpose of determining whether an alleged subsidy program is “specific.”
To be countervailable, a subsidy must be “specific,” and specificity may be found to exist when the eligibility is limited to an enterprise or industry, or to a group of enterprises or industries.3 In the Final Rule, Commerce added a new subsection to its existing regulations, which explains that “enterprises that buy or sell goods internationally” (i.e., “enterprises in the traded goods sector of an economy”) may comprise a “group” for the purpose of determining the specificity of a subsidy.
The impact of this new regulatory definition is that Commerce is more likely to find a subsidy to satisfy the specificity requirement if it is expressly limited to exporters and/or importers, or if the exporters and/or importers are the predominant users of, disproportionately beneficiaries of, or are favored in the granting of the subsidy.
In discussing the comments that it received regarding the preliminary version of this regulation, Commerce rejected arguments that the composition of the “group” of “enterprises that buy or sell goods internationally” is too expansive and diverse to be considered specific. To the contrary, Commerce concluded that the expanded definition of a “group” does not contravene the U.S. statutory definition of the term “specific” or the Agreement on Subsidies and Countervailing Measures of the World Trade Organization. Commerce also relied on its existing regulations to explain that although the enterprises captured within the expanded definition of a “group” could function in a variety of different industries, “shared characteristics” among enterprises are not necessary to satisfy the definition of a “group.” Finally, Commerce noted that treating importers and exporters of goods as a group is “consistent with the international trade focus and remedial purpose of the trade remedy laws.”
1 See Modification of Regulations Regarding Benefit and Specificity in Countervailing Duty Proceedings, 85 Fed. Reg. 6031 (Dep’t of Commerce February 4, 2020) (Final Rule). In the Final Rule, Commerce addressed extensive comments that it had received in response to its proposed rule and request for comments. See Modification of Regulations Regarding Benefit and Specificity in Countervailing Duty Proceedings, 84 Fed. Reg. 24406 (Dep’t of Commerce May 28, 2019) (proposed rule).
2 This methodology is based on methodologies applied by the International Monetary Fund.
3 19 U.S.C. § 1677(5A).
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