Using WTO countervailing duty law to combat illegally subsidized Chinese enterprises operating in a nonmarket-economy: deciphering the writing on the wall.

• Author: Lynam, Garrett E.

The complications that will arise under WTO countervailing duty law if the U.S. launches countervailing duties against China for illegally subsidizing nonmarket-economy enterprises are overlooked and gravely problematic. Although the WTO's countervailing duty law should clearly prescribe how its Members can use the surrogate approach when launching countervailing duties against nonmarket-economies, it has failed to do so. With regard to China, only twenty-eight ambiguous words in China's WTO Accession Protocol provide legal guidance for navigating a complex issue in international trade law: how can the WTO's Members use the surrogate approach when launching countervailing duties against China for illegally subsidizing nonmarket-economy enterprises?

1. INTRODUCTION

   Imagine that Joe Smith is the owner and operator of an U.S. manufacturing firm that produces widgets. Historically, Joe's business thrived. Joe thought he was well positioned for the future, but his sales recently fell when a Chinese competitor invaded his segment of the U.S. market with low-priced Chinese widgets. Bewildered by the Chinese competitor's ability to sell at such rock-bottom prices, Joe approaches a consulting firm and discovers that the Chinese competitor driving him out of business likely receives subsidies (1) from the Chinese government. These subsidies enable Joe's competitor to export its widgets cheaply and therefore put Joe at a competitive disadvantage. Incensed that his competitor receives such a boost from its government, Joe appeals to the Department of Commerce (DOC). The DOC's representative, Mr. Tyler, reveals that Joe's Chinese competitor operates in a nonmarket-economy (NME) and receives subsidies from the Chinese government in violation of China's obligations to the World Trade Organization (WTO). (2)

   Mr. Tyler explains that the DOC has two tools to help Joe: antidumping duties and countervailing duties (CVDs). Mr. Tyler tells Joe that the DOC has historically launched only anti-dumping duties against China for the illegal subsidization of Chinese NME enterprises (3) because the DOC is unsure how to legally calculate CVDs in such a context. (4) Mr. Tyler explains that this legal uncertainty stems from the fact that NMEs are an anomaly in trade remedy law. Mr. Tyler further clarifies that in order to launch CVDs against China for illegally subsidizing Joe's competitor, the U.S. investigatory agencies must first compare the Chinese fair market value (FMV) of Joe's competitor's widgets to the FMV that those widgets sell for in the U.S. This comparison allows the DOC to calculate the difference in price and apply a duty to eliminate the price difference. (5) Mr. Tyler then explains that since Joe's competitor comes from NME China, its widgets lack a Chinese FMV. (6) Thus, Mr. Tyler explains that the DOC must select a substitute FMV--a procedure known as the surrogate approach--and substitute this proxy for the indeterminable Chinese FMV. (7)

   Mr. Tyler tells Joe how the DOC controversially began launching CVDs against China in 2007. (8) Additionally, Mr. Tyler tells Joe that the surrogate approach has since caused profound problems for the DOC in CVD proceedings brought against China because the U.S. Court of International Trade expresses skepticism about how the DOC estimates price difference. (9) However, Mr. Tyler assures Joe that the DOC will soon iron out these problems. He promises Joe that it will be only a matter of time before the DOC gains the U.S. Court of International Trade's full approval to launch crippling CVDs against China for illegally subsidizing NME enterprises.

   This hypothetical illustrates the current outlook of the DOC towards launching CVDs against China for illegally subsidizing NME enterprises. However, Mr. Tyler is short-sighted if he concludes that the DOC's methodologies for launching CVDs against NME China must only appease the U.S. Court of International Trade. Even if the DOC gains the Court of International Trade's approval to launch CVDs against NME China, the DOC must still align its pursuit of illegally subsidized NME enterprises with the U.S.' WTO obligations. The overlooked complications that will arise under WTO CVD law if the DOC uses the surrogate approach when launching CVDs against China for the illegal subsidization of NME enterprises are gravely problematic. (10) Although WTO CVD law should clearly explain how Members can use the surrogate approach in CVD proceedings against China, it has failed to do so. Only twenty-eight ambiguous words in China's WTO Accession Protocol (11) provide legal guidance for navigating how Members can use the surrogate approach when launching CVDs against NME China.

   The clock is ticking for the U.S. to clarify the haphazard ambiguity in China's WTO Accession Protocol. If market-economy surrogates do not exist in China after 2016 (12)--as may very well be the case--WTO trade remedy law will make it increasingly difficult for the U.S. to launch strong anti-dumping duties against China for illegally subsidizing NME enterprises. (13) Consequently, dumping law may not fully protect the U.S.' interests after 2016. Therefore, launching CVDs against China has a vital strategic advantage because, unlike with anti-dumping duties, the WTO will not narrow the use of the surrogate approach in the context of CVD law after 2016. If the U.S. hopes to launch potent CVDs to combat the illegal Chinese subsidization of NME enterprises, the U.S. needs to address the unworkably vague ambiguities in China's Accession Protocol before 2016. The time to act is now.

   This Note explains why the current WTO CVD law regarding the use of the surrogate approach in CVD proceedings launched against China for illegally subsidizing NME enterprises is unworkably vague. Given its ambiguities and dangerous brevity, WTO CVD law does not allow the U.S. to swiftly launch CVDs against China for illegally subsidizing NME enterprises. Little analysis currently exists regarding how the U.S. can launch CVDs against China for illegal NME subsidization in conformity with WTO requirements, (14) but this Note analyzes why the U.S. cannot swiftly launch such CVDs and aims to guide policy makers in revising the ambiguous WTO law. To facilitate this revision, this Note prescribes a short-term solution and identifies the long-term issues that the U.S. must lead the WTO to resolve.

   Part II discusses the fundamentals of WTO CVD and dumping law. Additionally, it explains the need for the surrogate approach when a country launches CVDs or anti-dumping duties that target a NME enterprise. Part III addresses China's economy and the existence of illegal Chinese subsidies. It emphasizes that merely classifying China as a market economy would not allow the U.S. to swiftly launch CVDs against China for illegally subsidizing NME enterprises. Part IV analyzes the surrogate approach and concludes that WTO CVD law provides little guidance for how to use the surrogate approach when launching CVDs against NMEs such as China. This lack of guidance means that WTO CVD law is haphazardly unclear as to how Members may use the surrogate approach when launching CVDs against a NME. Part V addresses how only twenty-eight words in China's Accession Protocol guide Members in using the surrogate approach when launching CVDs against China for illegally subsidizing NME enterprises. This brevity causes problems because ambiguity riddles the twenty-eight words. Part V also identifies six reasons why the U.S. should not presume that it can swiftly launch CVDs against China that target NME enterprises under the current WTO CVD law. Part V concludes by prescribing a short-term solution and identifying the issues that Members must address in order to implement a successful long-term resolution.

2. OVERVIEW OF WTO CVD AND DUMPING LAW

   1. Illegal Subsidies and WTO CVD Law

      The WTO's overarching goal is to ensure that trade flows as smoothly, predictably, and freely as possible. (15) Illegal subsidies (16) jeopardize the achievement of this goal because they often give the subsidy recipient an unfair comparative advantage. 17 Consequently, Members may take unilateral action against other Members who subsidize their exports in violation of WTO Agreements. (18) Such actions include anti-dumping duties and CVDs.

   2. The Use of Dumping Law and CVD Law to Combat Illegal Subsidies

      Both CVD law and dumping law are tools for nullifying distortions in international trade. (19) Although there are important differences between these tools, there is overlap in their application. Dumping occurs when a manufacturer sells its merchandise at a lower price in one national market than another. (20) The manufacturer may incur a loss when it dumps goods, but selling products at less than the "fair" value gives the manufacturer at least a temporary competitive advantage in international trade. (21) In comparison, CVDs seek to eliminate the competitive advantage in international trade that manufacturers gain from illegal subsidization. (22) However, since a subsidized product can sell for a lower price in one national market than another, anti-dumping duties are also an appropriate remedy for illegal subsidization. (23)

      Although anti-dumping duties are not specifically engineered to nullify illegal subsidies, the U.S. has historically used dumping law as its weapon-of-choice for combating illegal NME subsidization. (24) This is partly because of the difficulty in identifying illegal subsidy benefits in a NME, which Members must pinpoint prior to launching CVDs. (25) Alternatively stated, since a subsidy is often unidentifiable in a NME, it is easier for the investigating country to impose a duty based on an apparent price difference (e.g., via anti-dumping duties) than on an unapparent subsidy (e.g., via CVDs). Moreover, as explained in the following sections, (26) there is a very weak legal framework underscoring the applicability of CVD law to NMEs.

   3. ...