Trade Remedies and Non-Market Economy: Economic Implications of US First CVD Case to China*: Trade Remedies and Non-Market Economy: Economic Implications of US First CVD Case to China* Longyue Zhao and Yan Wang November 10, 2007 Note: This paper reflects the views of the authors as professional economists. It does not represent the views of the World Bank.


Introduction: Introduction Global AD and CVD initiations The US trade remedy laws and NMEs The first US CVD case against China: major issues and implications Policy recommendations


Slide3: Summary of US Trade Remedy Laws


Slide4: Global Antidumping Initiations (1995-2006) Source: WTO


Slide5: AD Initiations by Selected Countries (1995-2006) Source: WTO


Antidumping: A growing problem in international trade : Antidumping: A growing problem in international trade “The ostensible purpose of antidumping law is to help ensure competition …. In practice, however, antidumping has strayed far from this purpose, becoming little more than an excuse for special interests to shield themselves from competition at the expense of both American consumers and other American companies.” By N. Gregory Mankiw and Phillip L. Swagel In “Antidumping: The Third Rail of Trade Policy,” from Foreign Affairs, July/August 2005


Slide7: Global Countervailing Initiations (1995-2006) Source: WTO


Slide8: CVD Initiations by Selected Countries (1995-2006) Source: WTO


Comparison of China and market economy antidumping rates for 25 products (1985-2004): Comparison of China and market economy antidumping rates for 25 products (1985-2004) Source: US GAO-06-231 53% China individual company 55% Market economy individual company 98% China country-wide 37% Market economy all-others


US Countervailing Duty Law and NMEs : US Countervailing Duty Law and NMEs US CVD law Section 303 of the Tariff Act of 1930 was applied to “any countries…” Section 701(b) of the Tariff Act of 1930 was applied to Countries under the Agreement Georgetown Steel Corp. v. United States ITA: CVD was inapplicable to NMEs: Bounties or grants within the meaning of the CVD law cannot be found in a NME. CIT: The Administration’s determination was contrary to law The Court of Appeals: Upheld the ITA’s determination Reaction in Congress 100th Congress: H.R. 3 - Trade and International Economic Policy Reform Act of 1987, passed by the House 109th Congress: H.R. 3283 – Trade Rights Enforcement Act of 2005, passed by the House on July 25, 2005 110th Congress: H.R. 1229 – Non-market Economy Trade Remedy Act of 2007, and other bills, H.R. 708, 910, 1127, 1229, and S. 364, 974


AD and CVD rates for China’s CFS paper: AD and CVD rates for China’s CFS paper Source: USDOC


Major implications: Major implications Expanding CVD to other industries Everything is a subsidy The exchange rate is countervailable


US AD and CVD investigations on China’s imports (Oct. 2006-Oct. 2007): US AD and CVD investigations on China’s imports (Oct. 2006-Oct. 2007)


Existence of countervailable subsidies : Existence of countervailable subsidies 1. Grant Program The State Key Technology Renovation Fund The Clean Production Technology Fund 2. Government Policy Lending Program 3. Income Tax Programs The “Two Free, Three Half” Program Reduced Income Tax Rates for FIEs Based on Location Local Income Tax Exemption and Reduction Program 4. VAT and Duty Exemptions VAT Rebates on Purchases of Domestically produced VAT and Tariff Exemptions on Imported Equipment 5. Domestic VAT Refunds for Companies Located in the Hainan Economic Development Zone 6. Other Subsidies


Benchmark calculation: Benchmark calculation Benchmarks for RMB-denominated loans Inflation-adjusted interest rate of 33 countries with similar per capita gross national income to the PRC Regression on a composite index of certain world Bank governance indicators. Benchmarks for foreign currency-denominated loans The one-year dollar interest rates for the LIBOR plus the average spread between LIBOR and the one-year corporate bond rates for companies wit ha BB rating.


China seeks WTO consultations on US CVD and AD decisions: China seeks WTO consultations on US CVD and AD decisions The U.S. failed to prove that the subsidies it alleged were specific to the paper industry The US failed to show that one of the government lending programs at issue conferred a benefit on the producers The US Commerce used an average of interest rates from 58 different countries in order to reach a benchmark rate The US failed to show that the preliminary affirmative determination of dumping margin


Policy Recommendations: Policy Recommendations Reviewing and Adjusting Domestic Subsidy Policies Using the WTO Dispute Settlement System Negotiating Rules in the Doha Development Agenda


Using the WTO Dispute Settlement System: Using the WTO Dispute Settlement System The DOC preliminarily determined that the GOC has a specific policy to support the paper industry based on the GOC’s documents. Loans received by the paper industries from Chinese banks, either policy banks, state-owned commercial banks, or foreign banks in China, are all considered government loans. The DOC determined that the Chinese domestic banking sector can not provide an appropriate benchmark because the Chinese banking sector doesn’t operate on a commercial basis, and a cross-country average lending rate was used as the external benchmark. In Article 10 of the Protocol on the Accession of the People’s Republic of China, it declared that “China shall eliminate all subsidy programes falling within the scope of Article 3 of the SCM Agreement upon accession,” but it is not clear if it is countervailable if China had abolished such program after its accession. The application of both antidumping and countervailing duties to China’s coated free sheet paper creates concerns about double counting using current rules.


Negotiating Rules in the Doha Development Agenda: Negotiating Rules in the Doha Development Agenda Subsidies and development policies: There are a number of proposals in discussion in the current Doha Round Negotiations on SCM Agreement. Some proposals are about prohibited subsidies. Procedures for countervailing measures: Besides the categories of subsidies, it is very important to make clear procedures for imposing countervailing duty measures, and to prevent abuses in the administration of countervailing duty laws. NME status for China: About China’s NME status, the Article 15 (d) of the Protocol on the Accession of the People’s Republic of China declared clearly that China will be treated as a market economy on December 11, 2016 for the antidumping investigations without any conditions. However, there is no such clear language written for the countervailing duty investigations.


Trade Remedies and Non-Market Economy: Economic Implications of US First CVD Case to China*: Trade Remedies and Non-Market Economy: Economic Implications of US First CVD Case to China* Longyue Zhao and Yan Wang November 10, 2007 Note: This paper reflects the views of the authors as professional economists. It does not represent the views of the World Bank.