For more than two decades, the US Department of Commerce has exempted China and other non-market economies (NMEs) from the US countervailing duty law, which provides for the imposition of tariffs on imports benefiting from foreign subsidies. But with increased imports from China, continued difficulties faced by American manufacturing and increased congressional attention to US-China trade policy, the Commerce Department has changed its position.

On March 30, 2007, acting on a petition filed in October 2006, the Department of Commerce preliminarily imposed duties on Chinese coated free sheet paper, which is used for writing, printing and other graphic purposes. Duties on the imported paper products range from 10.90 to 20.35 percent to offset several PRC subsidy programs, including tax breaks, debt forgiveness and low-cost loans. This preliminary decision comes only days after the US Court of International Trade in New York refused to grant China’s request to enjoin the Commerce from proceeding with the case. A final determination is expected to be issued by the Department of Commerce on June 13, 2007, although this deadline can be postponed to mid-October.

Pending House and Senate Legislation

The Commerce action comes at a time when the US Congress has ratcheted up pressure on the Administration to address the massive trade deficit with China and to more vigorously enforce US trade laws. Both the House and Senate have introduced bipartisan legislation that would require Commerce to reach the very result and more. On March 1, 2007, Rep. Artur Davis (D-AL) and Rep. Phil English (R-PA) introduced House Bill 1229, The Non-Market Economy Trade Remedy Act of 2007. Three weeks later, on March 22, 2007, senators Susan Collins (D-ME), Evan Bayh (D- IN), Carl Levin (D-MI), Lindsey Graham (R-SC), Thad Cochran (R-MS), Olympia Snowe (R-ME), Tom Harkin, (D-IA), Debbie Stabenow (D-MI), Richard Durbin (D-IL) and Charles Schumer (D-NY) introduced Senate Bill 974, the Stopping Overseas Subsidies (SOS) Act.

The House and Senate bills similarly revise the US countervailing duty statute so that it expressly applies to NMEs. The bills also specifically state that amendments to the statute would apply to all petitions filed on or after October 1, 2006, thereby grandfathering the coated free sheet paper case. Moreover, they require the Department of Commerce to use alternative methodologies (presumably detrimental) when determining subsidy levels in China. In addition, the bills require any decision by the Department of Commerce to remove NME status from China, or any other country, to be approved by the Congress through joint resolution.

Lastly, the bills require the US International Trade Commission to prepare a report within nine months of enactment examining how the PRC uses government intervention to promote investment, employment and exports. Specifically, the agency is to examine: 1) privatization and private ownership, 2) nonperforming loans, 3) price coordination, 4) selection of industries for targeted assistance, 5) banking and finance, 6) utility rates, 7) infrastructure development, 8) taxation, 9) restraints on imports and exports, 10) research and development, 11) worker training and retraining and 12) rationalization and closure of uneconomic enterprises. The agency then will be required to update the report each year until 2017. The initial report and all annual updates will be made available to the public.

Going Forward

The Commerce decision to use the countervailing duty law against Chinese imports is significant. All future trade remedy cases against China and other NMEs are likely to include subsidy allegations in addition to standard antidumping claims. The application of the countervailing duty law to NMEs will also have important implications for the calculation of antidumping rates in those cases.

Although Commerce has stated that it appreciates there may be a problem with double counting resulting from applying both anti-subsidy and anti-dumping remedies, the agency has not revealed the methodologies it will follow to avoid such results. It can be anticipated that whatever methods the agency eventually adopts will be challenged on appeal by domestic and foreign interested parties at the Court of International Trade. In the meantime, the decision to allow countervailing duty remedies to be applied to NMEs provides American industry with an additional weapon to combat unfair trade.

For additional information on these and other trade issues, contact Arent Fox’s international trade practice.