The First Affirmative Countervailing Duty Case Against China

Tuesday, May 1, 2007 - 01:00

On March 30, 2007, in a groundbreaking decision, the United States Department of Commerce for the first time applied the countervailing duty law - or anti-subsidies law - to imports from the People's Republic of China. This decision, though preliminary, appears to mark a fundamental shift in the way the United States will counter unfair trade practices in China. For the first time, subsidies given to Chinese manufacturers or other producers may be offset by duties imposed at the United States border. The case is called Coated Free Sheet Paper from the People's Republic of China,1 and deals with unfair assistance provided by the Government of China ("GOC") to certain manufacturers of high-end paper products. The type of paper covered by the case is used for annual reports, glossy magazines, and high-end textbooks. While this particular determination covers only coated free sheet paper, the precedent the case may set will apply across the manufacturing sector and fundamentally alter the landscape of Sino-American trade.

The United States countervailing duty law (often referred to as the "CVD" law) is a trade remedy that provides that if a foreign government gives financial assistance, low-cost inputs, or other subsidies to foreign manufacturers, and the resulting imports injure a United States industry, duties will be imposed to offset the amount of the subsidization.2 Until the March 30, 2007 decision, however, the United States had never applied the CVD law to a non-market economy, including China. The rationale was that non-market economies did not really have what could be considered subsidies because the entire economy was directed by the government, and the economic distortion known as subsidization could not be isolated. Fair enough. The effect of this legal and economic position by the U. S. Department of Commerce and the courts in the past had been somewhat limited, however, because trade with non-market economy countries such as Poland, Czechoslovakia, and even Russia had been small due to intrinsic economic factors. However, trade with China, and the trade deficit with China, is enormous.3 Also, the Chinese economy itself is very different from the Soviet-style economies of the 1980s. So Commerce, in its Notice of Initiation of the Coated Free Sheet Paper case, said it would look again at its policy of not applying the CVD law to non-market economies.

China itself has also made changes in its posture in the world trading system. It joined the World Trade Organization ("WTO") in 2001, and in its accession papers agreed to be bound by subsidies disciplines, including agreeing to notify its subsidies to the WTO. China also specifically agreed to an unusual provision that says when establishing comparison benchmarks to determine the fairness of such things as loan rates or input prices in a countervailing duty case, an investigating authority could look outside of China for an appropriate comparator.

The Department of Commerce sought input broadly in reviewing whether to apply the CVD law to China, including putting out a Federal Register notice requesting public comment. The Department received comments from approximately 50 parties, the large majority of whom supported applying the law to China. Among those in support were the National Association of Manufacturers (NAM) and the AFL-CIO. Numerous individual industry representatives also supported application of the law including the American Forest & Paper Association, the American Iron and Steel Institute, Nucor, Mittal Steel USA, industry associations representing the plastics, textiles and machine tool sectors, and furniture producer groups. Agricultural producers including honey, garlic, and shrimp producers also weighed in with their support. Some parties opposed application of the CVD law to China, notably the Chinese coated free sheet paper producers and certain other U.S. importer groups.

The path to the determination in the Commerce case was not easy. On January 9, 2007, the GOC began a court action at the U.S. Court of International Trade ("CIT") to try to stop the Commerce case from even going forward. According to the GOC, Commerce's investigation was ultra vires of the countervailing duty statute because, in a 1986 decision entitled Georgetown Steel Corp. v. United States,4 the U.S. Court of Appeals for the Federal Circuit prohibited the application of the U.S. countervailing duty law to non-market economies. In fact, however, the Federal Circuit's decision in Georgetown Steel affirmed Commerce's discretion not to apply the countervailing duty law to certain non-market economies based on its decision and analysis at that time.

The CIT denied the GOC's motion for a temporary restraining order and requested briefing on the motion for a preliminary injunction. Both the United States and NewPage opposed the preliminary injunction and moved to dismiss the GOC's complaint. They argued that the CIT lacked jurisdiction, that Commerce's decision to initiate the investigation was not "final agency action" under the APA, and that the GOC failed to make the four-part showing for preliminary injunctive relief. The CIT held a hearing on January 25, 2007 and, on March 29, 2007, dismissed the GOC's complaint for lack of jurisdiction.5 The CIT held that it lacked jurisdiction at this point because the normal statutory provision for challenging Commerce's decisions at the end of a case would provide the GOC with an adequate remedy. The CIT also did not find that it was ultra vires for Commerce to apply the CVD law to China.

The Court decision came down one day before the Commerce determination, where Commerce, using its appropriate administrative discretion and looking at a very different landscape from what it saw in Soviet-style non-market economies of the mid-80's, did in fact apply the CVD law to China. Commerce Secretary Carlos Gutierrez explained:

The China of today is not the China of years ago. Just as China has evolved, so has the range of our tools to make sure Americans are treated fairly. By acting on the petition filed last October, the United States today is demonstrating its continued commitment to leveling the playing field for American manufacturers, workers, and farmers.

The decision by Commerce triggered the contemporaneous imposition of import duties at the border, which in this case amount to 20.35 percent for one of the Chinese companies under investigation, 10.90 percent for the other company, and 18.16 percent for all other Chinese exporters of coated free sheet paper.

The subsidies found in the preliminary determination run the gamut from outright cash payments to subsidized loans and tax forgiveness. One of the largest subsidy programs identified consists of preferential loans from GOC banks to enterprises in encouraged industries such as the paper industry. Commerce also investigated numerous income tax programs for companies operating in encouraged industries or that had attracted certain minimum levels of foreign investment. Among these programs, manufacturing companies with the requisite level of foreign investment do not pay any income tax during their first two years of profitability and pay at only half the standard rate for the next three years. Commerce also found subsidy programs involving VAT rebates and tariff exemptions for the purchase of production equipment, and cash payments to companies that followed the GOC's economic plans, and for upgrading technology in order to compete with companies abroad.

In tandem with its preliminary determination, Commerce also issued a separate memorandum on the threshold issue - whether the U.S. CVD law applies to China. Commerce concluded that although the Chinese economy remained "riddled with the distortions attendant to the extensive intervention of the PRC Government," it had progressed such that it was more flexible than the Soviet-style economies of old. Unlike the economies at issue in Georgetown Steel, a subsidy in the modern Chinese economy is not simply one branch of the government giving money to another branch. Rather, the Chinese government is able to favor certain industries and enterprises over others. In addition, the right to own property and to establish private enterprises was not permitted in the Soviet economies of the 1980's. By contrast, beginning in the 1990's, China began to allow the development of private enterprise. This has resulted in an overall economy in China that presents a degree of private entrepreneurship with continued state control and guidance. Given these economic developments, Commerce reasoned it could not only identify, but also measure, subsidies provided by the Chinese government.

Looking To The Future

Commerce's decision bodes well for the United States manufacturing sector, assuming it is upheld at the final determination stage. For many years, this sector has had to compete against subsidized Chinese imports without recourse to any trade remedy law. The legal reasoning which prevented such application has now been changed, and countervailing duty cases can be pursued. In fact, many of the subsidies countervailed in the Coated Free Sheet preliminary determination - including below market interest rate policy loans, tax write-offs, and grants - are clearly available to other segments of the Chinese manufacturing base. One identifying issue is whether an industry has been labeled by the GOC as "encouraged" (which the paper industry has). If an industry is encouraged, it is easier to prove some of the elements of a countervailing duty case, such as "specificity," that is, whether the benefits are given only to a select group of favored companies. It is clear from public Chinese documents that many other industries are "encouraged" by the GOC, including the electronics, steel, textiles, and non-ferrous metals industries, light industry, chemicals, and the agricultural sector. All of these may now be subject to subsidies discipline.

The United States Department of Commerce is to be lauded for standing up for a new and important principle - the application of the countervailing duty to China. March 30, 2007 may long be remembered as the day when the United States took a significant step to revive its manufacturing base. 1 72 Fed. Reg. 17484 (April 9, 2007) (Preliminary). The case will be subject to further briefing and review, and a final determination should be reached later this year. The case was filed by NewPage Corporation, a coated free sheet manufacturer based in Dayton, Ohio, and with plants in Maryland, Kentucky, Michigan, and Maine.

2 See generally 19 U.S.C. 1671-1671h and 19 C.F.R. 351.101-351.702. A CVD investigation is started after a U.S. producer files a petition simultaneously with the Department of Commerce (which investigates subsidization) and the International Trade Commission (which determines whether there is injury to the U.S. industry). A typical case takes between 6 and 12 months to complete. Other types of subsidies which may be addressed in these cases are special tax programs, bail-outs, favorable debt/equity swaps, and loan guarantees, among others. The law also covers agricultural subsidies.

3 The United States trade deficit with China exceeded $230 billion in 2006, the largest one-year deficit the United States has ever had with one country. China has accounted for the United States' largest monthly bilateral trade deficit for 59 straight months.

4 801 F.2d 1308 (Fed. Cir. 1986).

5 Government of The People's Republic of China, Gold East Paper (Jiangsu) Company, Ltd., and Global Paper Solutions, Inc. v. United States, Slip Op. 07-50 (Ct. Int'l Trade 2007).

Gilbert B. Kaplan is a Partner in the International Trade Practice of King & Spalding in Washington, DC. He represents the petitioner, NewPage Corporation, in the countervailing duty case on coated free sheet from China. Christopher T. Cloutier is a Senior Associate at the firm and also represents NewPage in the China coated free sheet investigation.

Please email the authors at gkaplan@kslaw.com or ccloutier@kslaw.com with questions about this article.