On February 3, 2020, the Department of Commerce published a final rule that amends the regulations for countervailing duty investigations to allow the imposition of duties on countries that undervalue their currencies. Publication of the final rule follows a May 28, 2019, notice of the proposed rule. The regulation will go into effect on April 6.
Pursuant to global rules established under the World Trade Organization (WTO) agreements, U.S. law has long provided for administrative determinations of whether imports of specified products from particular countries benefit from government subsidies, and the imposition of "countervailing duties" to offset those subsidies. Countervailing duty investigations usually are initiated through a petition process by U.S. industries, and involve two major components: (i) a review conducted by the International Trade Commission (ITC) to evaluate whether the subject imports are causing or threatening injury to the U.S. industry producing the same product and (ii) an analysis by the Commerce Department to determine the extent, if any, to which the imported products are subsidized. Commerce calculates a weighted average subsidy percentage, which is used as the basis to impose tariffs on the imported products.
There are over 100 existing countervailing duty orders on a variety of products—such as steel pipe, olives, rubber bands and quartz countertops—from a number of countries. Countervailing duty actions, along with antidumping investigations (a similar type of administrative process that involves allegations of sales made in the United States at lower prices than in the country of the exporter), are a major tool used by U.S. industries to limit imports.
The types of government programs typically found to be countervailable subsidies include tax breaks, government grants and infusions of capital, loans at below-market rates, and the provision of inputs and other resources for less than their market value. For a government subsidy to be countervailable, however, it must be "specific"—meaning that it is limited to specific industries or geographic regions—and not generally available to all.
The new regulations introduce a new type of government program that can be deemed a subsidy: the undervaluation of currency rates.
Commerce Explains Its Benefit Analysis for Undervalued Currencies
The final rule creates a new provision to address currency undervaluation. Under the rule, Commerce normally will make an affirmative finding of currency undervaluation "only if there has been government action on the exchange rate that contributes to an undervaluation of the currency."
To determine undervaluation, Commerce will consider the gap between the country's real effective exchange rate (REER) and the "equilibrium" REER, which is the rate that achieves an external balance over the medium term that reflects "appropriate policies." In assessing whether government action contributed to undervaluation, Commerce "will not normally include monetary and related credit policy of an independent central bank or monetary authority." In addition, the regulations allow Commerce to consider a foreign government's degree of transparency regarding actions that could alter the exchange rate. Thus, the language of the regulation suggests that Commerce is more likely to find undervaluation as a result of government action where a government either controls or interferes with monetary policies set by a central bank or where Commerce believes a country is not sufficiently transparent in the setting of exchange rate policies.
Upon an affirmative finding of currency undervaluation, Commerce will calculate the benefit as the difference between (i) the nominal, bilateral U.S. dollar rate consistent with the equilibrium REER, and (ii) the actual nominal, bilateral dollar rate during the relevant time period. The amount of benefit will then be the amount of domestic currency the foreign exporter received in exchange for U.S. dollars and the amount of domestic currency it would have received absent the difference. Importantly, Commerce indicated it will not consider whether an undervalued exchange rate increased a foreign exporter's costs for imported components used to make the products at issue.
The regulation requires Commerce to seek input from the Treasury Department. Commerce expects to place Treasury's evaluation on the record and allow parties to submit factual information to rebut, clarify or correct Treasury's assessment. Notably, under the Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA), Treasury is required to submit to Congress a semiannual report on foreign exchange policies of major U.S. trading partners that have engaged in persistent one-sided intervention in the foreign exchange market. The final rule makes clear that Commerce views Treasury's mandate under the TFTEA as separate and distinct from Commerce's mandate to evaluate undervaluation for CVD purposes.
It is unclear whether Commerce will view itself as bound by Treasury's assessment or whether it will only be of persuasive value, allowing Commerce to depart from Treasury's evaluations and conclusions.
Expanding the Concept of Specificity
In order for a subsidy to be countervailable, it must be "specific," meaning it is limited to an enterprise or industry or a group of enterprises or industries. The new rule expands the definition of "specificity" for purposes of currency undervaluation to provide that "enterprises that buy or sell goods internationally" can now be considered as a "group" of enterprises or industries for purposes of determining specificity. The regulation labels enterprises that import or export as the "traded goods sector of the economy."
This amendment will be critical in the use of the undervalued currency regulation, as it will allow Commerce to find that all exporters and importers of a country can be considered a limited group that can serve as a basis for finding that a subsidy is "specific." This amendment in particular may become controversial, as it arguably departs from Commerce's past practice, prior understandings of the governing statute, and WTO obligations.
Although the final rule is not expressly targeted at any country, it reflects prior criticism of China in particular. Under the Economic and Trade Agreement Between the United States of America and the People's Republic of China (US-China Phase I Trade Deal), signed on January 15, 2020, China made commitments to achieve and maintain a market-determined exchange rate regime and to strengthen underlying economic fundamentals. In fact, Treasury recently declared that China is not a currency manipulator.
Nonetheless, as discussed above, Treasury's evaluation will not necessarily shield China from having its currency evaluated in countervailing duty investigations. Anticipating such a result, China has also stated that it will consider countervailing duties imposed on the basis of an alleged undervalued currency to be a breach of the US-China Phase I Trade Deal that would jeopardize potential Phase II negotiations.
In any event, it should be expected that such allegations of currency undervaluation will become a regular feature of countervailing duty investigations involving a number of countries.
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