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Counting once, counting twice: the precarious state of subsidy regulation.

Subsidy regulation is in a precarious state. While it has been so ever since the conception of the current subsidy regulation regime, the recent disputes between the United States and China over the "double counting" or "double remedies" of subsidies have threatened the mere functionality of the current regime. This Article argues that the double counting controversy reveals the self-contradictions of the current subsidy regulation regime as to the fundamental question of why subsidies" need to be regulated. These self-contradictions make it impossible to devise a coherent solution to the double counting problem within the framework of the current subsidy regulation regime and sharpen the need for fundamental reforms of the current regime. This Article puts forward a reform proposal that will solve the double counting problem and, more importantly, will help restore the intellectual foundation of the current subsidy regulation regime.
INTRODUCTION

I. THE BASIC FRAMEWORK OF THE CURRENT SUBSIDY REGULATION REGIME...

II. GENESIS: THE CONCURRENT APPLICATION OF ANTIDUMPING AND
    COUNTERVAILING DUTY LAWS TO NONMARKET ECONOMIES
    A. Nonmarket Economies
    B. Antidumping Duties and NMEs
    C. The Applicability of U.S. Countervailing Duty Law to NMEs

III. DOUBLE COUNTING: A COMPLEX LEGAL LANDSCAPE
    A. The Double Counting Hypothesis
    B. The Scant Legal Framework Regarding Double Counting
    C. Different Views on Double Counting
       1. The Department of Commerce
       2. The Court of International Trade
       3. WTO Dispute Settlement Panel
       4. WTO Appellate Body
       5. Federal Circuit
       6. Congress
       7. The Department of Commerce on Remand
       8. The Saga Continues

IV. THE SUBSIDY PASS-THROUGH PRESUMPTION: ECONOMIC FALLACIES
    A. The Behavioral Impact of Subsidies
    B. The Price Impact of Subsidies

V. THE SUBSIDY PASS-THROUGH PRESUMPTION: INTERNAL INCONSISTENCIES
    A. The "Injury" and "Adverse Effects" Requirements: Behavioral
       Impact of Subsidies Required
    B. The Identification and Measurement of Subsidies: Behavioral
       Impact of Subsidies Irrelevant
    C. Upstream Subsidies: No Presumption of Subsidy Pass-Through

VI. THE CASE FOR FUNDAMENTAL REFORMS OF THE CURRENT SUBSIDY
REGULATION REGIME
   A. The Impossibility of a Coherent Approach to the Double Counting
      Controversy
   B. Conflicting Rationales for Subsidy Regulation
      1. The Efficiency Rationale
      2. The Entitlement Rationale
   C. A Renewed Call for a Country-Specific Safeguard
      1. The Questionable Case for Subsidy Regulation
      2. A Renewed Call for a Country-Specific Safeguard

VII. CONCLUSION


INTRODUCTION

In 1791, in his historic report to the U.S. Congress on the state of manufacturing in the United States, Alexander Hamilton accused Great Britain of subsidizing the exportation of certain products and proposed to impose special duties on those products to countervail the British subsidies. (1) Approximately a century later, in 1890, Congress adopted Hamilton's idea by enacting the first countervailing duty legislation in the world (2) to offset subsidies conferred by several continental European countries on the exportation of beet sugar. (3)

Fast-forwarding another century, since the early 2000s, the United States has been embroiled in a series of high-stakes disputes with China over each other's subsidy practices. Since November 2006, the United States has initiated investigations into Chinese subsidies for thirty-one categories of products, including steel, tires, paper, solar panels and wind towers, and imposed countervailing duties to offset most of them. (4) In retaliation, China launched investigations into U.S. subsidies for four categories of products: electrical steel, chicken, automobiles, and solar-grade polysilicon, and imposed countervailing duties for three of them. (5) On September 17, 2012, the United States and China escalated their subsidy disputes by filing a complaint against each other at the World Trade Organization (WTO). (6)

The latest subsidy disputes between the two largest economies in the world are taking place against the backdrop of heightened concerns about jobs and economic growth in the wake of the 2008-2009 global financial crises. (7) The political significance of the issue was on vivid display when President Barack Obama, on the same day as the United States brought its WTO action against China, told a campaign rally in Ohio that "[the Chinese subsidies] are subsidies that directly harm working men and women on the assembly lines in Ohio and Michigan and across the Midwest." (8) Referring to the Chinese subsidies, President Obama vowed that "[w]e are going to stop it. It is not right, it is against the rules, and we will not let it stand." (9)

Despite the clear-cut case made for subsidy regulation in the political discourse, the intellectual case for subsidy regulation has been much less clear. From an economic point of view, some subsidies are considered good and some are considered bad. (10) Some subsidies affect the interest of producers in other countries and some do not. (11) Indeed, scholars have long debated the proper rationales for subsidy regulation and the extent to which the current subsidy regulation regime reflects those rationales. (12)

The weak intellectual foundation of the current subsidy regulation regime has resurfaced in the current U.S.-China subsidy disputes, to the point of threatening the functionality of the regime. One of the most contentious issues in the U.S.-China subsidy disputes is whether, because of the status of China as a "nonmarket economy," (13) the same Chinese subsidies are being counted or remedied not once, but twice, by the United States. Since 2006, in what has become a legal drama full of suspense and intrigue, the U.S. Department of Commerce, the U.S. Court of International Trade, a Dispute Settlement Panel and the Appellate Body of the WTO, the U.S. Court of Appeals for the Federal Circuit, and the U.S. Congress have each weighed in on the so-called "double counting" or "double remedies" issue. (14) Yet six years into the litigation, a satisfactory solution to the double counting conundrum has eluded the administrative, judicial, legislative, and dispute settlement bodies that have examined the issue. With the dispute heading into new rounds of briefings and rulings both domestically and internationally, (15) a protracted legal battle over the issue appears to be only beginning.

This Article argues that the double counting issue implicates the very core of the current subsidy regulation regime and brings to the forefront long-running debates over the justifications for regulating subsidies. (16) This Article contends that the double counting analyses by both sides of the dispute are misguided, as they are based on a theoretical premise that is both economically false and internally inconsistent. More importantly, this Article demonstrates that the double counting issue reveals the self-contradictions of the current subsidy regulation regime as to the behavioral impact of subsidies and adds urgency to the need for a systemic overhaul of the regime. It is as if engineers had tried all possible means to fix a crack on the walls of a building, only to find that the crack was caused by foundational problems and could not be fixed without tearing down the building altogether. This Article scrutinizes the foundational problems of the current subsidy regulation regime and proposes a blueprint for fundamental reforms of the regime.

The Article proceeds as follows. Part I provides an overview of the current subsidy regulation regime. Part II examines the origin of the double counting controversy. Part III discusses the double counting hypothesis and the different views on double counting on the part of the various bodies involved in the dispute. Part IV demonstrates that the theoretical presumption thought to give rise to the double counting issue--the subsidy pass-through presumption--is wrong from an economic point of view. Part V argues that the current subsidy regulation regime is internally inconsistent as to the behavioral and price impacts of subsidies. Part VI makes the case for fundamental reforms of the current subsidy regulation regime and proposes to replace countervailing duties with a country-specific safeguard. Part VII concludes.

I. THE BASIC FRAMEWORK OF THE CURRENT SUBSIDY REGULATION REGIME

U.S. law has taken an essentially laissez-faire approach to subsidies granted by domestic authorities. (17) At the federal level, the U.S. Constitution grants to Congress the power to tax and spend "for the general Welfare of the United States." (18) This power has been broadly construed to allow Congress to "authorize expenditure of public moneys for public purposes not limited by the direct grant of legislative power found in the Constitution." (19) As for state subsidies, the Supreme Court has invalidated discriminatory state taxes on out-of-state products on "Dormant Commerce Clause" grounds, (20) but has held that state subsidies that do not resemble discriminatory taxes are permissible. (21)

In contrast to the lax regulation of domestic subsidies, the use of subsidies has been subject to stringent disciplines in international trade. The imposition of countervailing duties to offset the effect of foreign subsidies was first authorized in the United States in 1890 for one specific product--beet sugar, (22) and was soon made generally available, under the Tariff Act of 1897, for all products that benefited from foreign subsidies aimed at encouraging exports. (23) The Tariff Act of 1922 further expanded the scope of countervailing duties to cover not just foreign export subsidies, but also foreign domestic subsidies, i.e., foreign subsidies aimed at encouraging the domestic production, manufacture, or distribution of merchandise in countries in which the subsidies are granted. (24) In 1930, the basic statutory framework of what is known today as countervailing duty law took shape under section 303 of the Tariff Act of 1930. (25) These early countervailing duty statutes all used the term "bounty or grant" to refer to subsidies, but left that term undefined. (26)

In 1947, the imposition of countervailing duties was brought under multilateral discipline upon the entry into force of the General Agreements on Tariffs and Trade (GATT). (27) Specifically, under Article VI of GATT 1947, GATT signatory countries are allowed to impose countervailing duties on an imported product, but are not allowed to levy countervailing duties "in excess of an amount equal to the estimated bounty or subsidy determined to have been granted, directly or indirectly, on the manufacture, production or export of such product in the country of origin or exportation...." (28) But like the earlier U.S. countervailing duty statutes, GATT 1947 still left the term "bounty or subsidy" undefined. (29)

The fledgling subsidy regulation regime under GATT 1947 underwent significant changes in the late 1970s when GATT signatory countries negotiated and concluded a Subsidies Code as part of the GATT Tokyo round negotiations. (30) The Subsidies Code placed additional limitations on the ability of GATT signatory countries to levy countervailing duties by requiring a demonstration of the "injury" of subsidized imports before countervailing duties could be applied. (31) The Subsidies Code also took a significant step forward in the direct regulation of subsidies: It prohibited the use of export subsidies for all products other than certain primary products, (32) and authorized GATT signatory countries to initiate dispute settlement proceedings against export subsidies before the GATT. (33) Recognizing the social and economic goals that domestic subsidies may promote, (34) the Subsidies Code stopped short of placing an outright ban on the use of domestic subsidies as it did in the case of export subsidies. (35) It did, however, authorize a GATT signatory country to challenge a domestic subsidy directly before the GATT if the subsidy causes "injury to its domestic industry, nullification or impairment of benefits accruing to it under the General Agreement, or serious prejudice to its interests." (36) But like GATT 1947, the Subsidies Code did not define the term "subsidy," (37) other than providing illustrative examples of both export subsidies (38) and domestic subsidies. (39)

The watershed moment in subsidy regulation came in 1994, when the GATT Uruguay round negotiations led to the establishment of the WTO. (40) The WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement), (41) one of the agreements concluded upon the establishment of the WTO, laid out the framework of the current multilateral subsidy regulation regime. One of the most significant developments under the SCM Agreement is that it provides, for the first time, a definition of the term "subsidy." (42) Under the SCM Agreement, a subsidy exists if three criteria are met: First, there is a "financial contribution" by a government or public body; (43) second, a benefit is thereby conferred; (44) and third, the subsidy is "specific to an enterprise or industry or a group of enterprises or industries." (45)

As for the mechanisms for subsidy regulation, the SCM Agreement inherited the Subsidies Code's two-pronged approach. The first prong allows WTO members to levy countervailing duties on subsidized imports, subject to restrictions imposed by the SCM Agreement. (46) As in the case of the Subsidies Code, the SCM Agreement requires a demonstration of "injury" before countervailing duties could be applied. (47) This prong, which relies on the unilateral imposition of countervailing duties, will be referred to as the "unilateral prong" or the "countervailing duty prong" in this Article. The second prong of the subsidy regulation regime under the SCM Agreement is the direct regulation of certain subsidies. In this regard, the SCM Agreement distinguishes export subsidies, which are subject to an outright ban, (48) from domestic subsidies, which are impermissible only if they cause "adverse effects" to the interests of other WTO members through "injury to the domestic industry of another [WTO] Member, nullification or impairment of benefits accruing directly or indirectly to other [WTO] members under GATT 1994 .... [or] serious prejudice to the interests of another [WTO] member." (49) For both export and domestic subsidies, the SCM Agreement authorizes WTO members to initiate dispute settlement proceedings before the WTO Dispute Settlement Body. (50) This prong will be referred to in this Article as the "multilateral prong" or the "WTO prong."

II. GENESIS: THE CONCURRENT APPLICATION OF ANTIDUMPING AND COUNTERVAILING DUTY LAWS TO NONMARKET ECONOMIES

To understand what the double counting issue is and why it reveals the fundamental vulnerabilities of the current subsidy regulation regime, a discussion of the developments leading up to the emergence of the issue is in order. As this Article will explain, the root cause of the double counting controversy can be traced back to the concurrent application of antidumping and countervailing duties to imports from the so-called "nonmarket economies."

A. Nonmarket Economies

Under U.S. law, a nonmarket economy (NME) (51) is defined as "any foreign country that the administering authority determines does not operate on market principles of cost or pricing structures, so that sales of merchandise in such country do not reflect the fair value of the merchandise." (52) U.S. law authorizes the U.S. Department of Commerce (DOC) to conduct NME determinations. (53) U.S. law requires consideration of several factors in determining whether a country should be designated as an NME, including the convertibility of currency, the determination of wages by free bargaining, government restrictions on foreign investment, government ownership or control of the means of production, and government control over the allocation of resources and over the price and output decisions of the enterprises. (54) Once a country is designated as an NME, that designation remains in effect until revoked by the DOC. (55)

B. Antidumping Duties and NMEs

The question of how the United States should handle cheap imports from NMEs was first addressed under antidumping law. By way of background, U.S. antidumping law subjects imports from foreign countries to potential antidumping duties if they are being sold or are likely to be sold in the United States at less than their "fair value" (56) and if they cause or threaten to cause material injury to a domestic industry or materially retard the establishment of a domestic industry. (57) In determining whether imports are being sold or are likely to be sold at less than their fair value, the DOC, the agency charged with antidumping determinations, (58) makes a "fair comparison" between the prices at which imports are sold in the United States and their "normal value." (59) In cases involving imports from market economies, the "normal value" of imported merchandise is the sale price of the foreign like product in the exporting country or in third countries, (60) or the "constructed value" of the imported merchandise defined as the sum of the costs, expenses, and profits in producing the imported merchandise. (61)

For imports from NMEs, however, U.S. antidumping law uses prices from third countries instead of prices from NMEs to determine normal value. Codifying DOC practices in the 1960s in antidumping cases concerning imports from certain Eastern European countries, the Trade Act of 1974 enacted a special surrogate country method for determining the "normal value" (or "foreign market value," the statutory term then used for "normal value") of imports from NMEs.(62) Under the Trade Act of 1974, the DOC was authorized to substitute either the prices of the same or similar merchandise sold in a "non-state-controlled economy" or the constructed value of the same or similar merchandise in a non-state-controlled economy for the home or third-country market price of the NME merchandise. (63) The rationale for the surrogate country method, as stated in the legislative history of the Trade Act of 1974, was that in state-controlled economies, "the supply and demand forces do not operate to produce prices, either in the home market or in third countries, which can be relied upon for comparison." (64) The 1988 Omnibus Trade and Competitiveness Act modified the surrogate country method, requiring the foreign market value of NME merchandise to be calculated solely on the basis of the value in a surrogate market economy of the factors of production utilized in producing the merchandise, plus expenses and profits. (65) Those factors of production include, but are not limited to, labor, raw materials, energy and other utilities, and capital. (66)

C. The Applicability of U.S. Countervailing Duty Law to NMEs

While providing a special methodology for imports from NMEs under the antidumping law, Congress did not enact any special legislation on the application of the countervailing duty law to NMEs. in the early 1980s, domestic industries in the United States began petitioning for the imposition of countervailing duties on imports from NMEs. (67) The DOC, the agency also charged with countervailing duty determinations, (68) blocked these initial efforts. In a decision issued in the first batch of countervailing duty investigations on NME imports, the DOC determined that the countervailing duty law did not apply to NMEs because bounties or grants--the statutory terms then used for subsidies--could not be identified in such economies. (69) in the course of making this determination, the DOC defined a subsidy as "any action that distorts or subverts the market process and results in a misallocation of resources, encouraging inefficient production and lessening world wealth." (70) Because allocation of resources is achieved in an NME by central planning, not by supply and demand, there is "no market process to distort or subvert" in such economy. (71) This distinction led the DOC to conclude that "subsidies have no meaning outside of the context of a market economy." (72)

In a landmark opinion, Georgetown Steel Corp. v. United States, (73) the U.S. Court of Appeals for the Federal Circuit affirmed the DOC's refusal to apply the countervailing duty law to imports from NMEs. According to the court, there was a fundamental difference between the nature of a subsidy in a market economy and the nature of economic incentives provided by the state to exporting entities in an NME. Since the state controlled the pricing decisions of the exporting entities in an NME, "unlike the situation in a competitive market economy, the economic incentives the state provided to the exporting entities did not enable those entities to make sales to the United States that they otherwise might not have made." (74) The governments of NMEs, therefore, could not provide exporters with the kind of bounty or grant for which Congress prescribed the imposition of countervailing duties. (75)

Despite the Federal Circuit's opinion in Georgetown Steel, petitioners continued their efforts to reverse the DOC's policy of not applying the countervailing duty law to imports from NMEs. In November 2006, petitioners filed a request for countervailing duty investigation on imports of coated free sheet (CFS) paper from China. (76) In March 2007, the DOC published a memorandum discussing whether the analytical elements of the Federal Circuit's Georgetown Steel opinion are still applicable to China's present-day economy. (77) The DOC pointed out in the memorandum, referred to as the Georgetown Steel Memo below, that China's economy today is "significantly different" from the "Soviet-style" economies of the early 1980s that were at issue in Georgetown Steel. (78) The DOC noted that unlike the Soviet-style economies, China's economy today shares many of the characteristics of a market economy. (79) It is now possible, therefore, to determine whether the Chinese government "has bestowed a benefit upon a Chinese producer (i.e., the subsidy can be identified and measured) and whether any such benefit is specific." (80) Following its analyses set out in the Georgetown Steel Memo, the DOC determined that the Chinese CFS paper producers were subsidized by the Chinese government within the meaning of the countervailing duty law. (81)

While stating that market forces in China are sufficiently developed to permit the identification and measurement of subsidies, the DOC also held that "market forces in China are not yet sufficiently developed to permit the use of prices and costs in that country for the Department's dumping analysis." (82) As a result, the DOC still designates China as an NME for antidumping purposes and still employs its NME methodology for determining normal value in antidumping proceedings involving imports from China. (83)

III. DOUBLE COUNTING: A COMPLEX LEGAL LANDSCAPE

The U.S. decision to apply the countervailing duty law in conjunction with the antidumping law to imports from China "opened the Pandora's box" in world trade. (84) Since the CFS paper case, the DOC initiated concurrent antidumping and countervailing duty investigations concerning thirty Chinese products and made positive antidumping and countervailing duty determinations for most of them. (85)

One legal issue that has proven particularly enigmatic is the potential double counting or double remedies of subsidies when imports are simultaneously subject to countervailing duties and antidumping duties calculated using an NME surrogate country methodology. As this Article will discuss, the current subsidy regulation regime provides scant guidance on how to analyze the double counting issue, and the administrative, judicial, legislative, and dispute settlement bodies involved in the dispute have offered conflicting views on the issue.

A. The Double Counting Hypothesis

Although there are divergent views as to whether subsidies are indeed being double-counted in concurrent NME antidumping and countervailing duty cases, there appears to be a consensus on why the double counting of subsidies in such cases might occur. According to what could be referred to as the "double counting hypothesis," a subsidy will be counted twice when the DOC imposes countervailing duties to offset the subsidy, and then compares a subsidy-free normal value derived from a surrogate country with the subsidized export price to calculate the amount of antidumping duties. Figure 1 below illustrates the potential double counting of subsidies in such scenario.

In Figure 1, N represents the normal value of the merchandise subject to concurrent antidumping and countervailing duty investigations. P is the export price of the merchandise. The dumping margin for the merchandise, therefore, is a = N-P. Now the government of the exporting country confers a subsidy in the amount of s on the merchandise. According to the double counting hypothesis, the exporter will reduce the export price pro rata as a result of the subsidy. For the sake of simplicity, suppose that the export price decreases by the same amount as the subsidy, s, from P to P'. In market economy cases, the decrease in the export price will not lead to a corresponding increase in the dumping margin, because the normal value of the merchandise will also decrease by s, from N to N'. That is because the normal value in market economy cases is based on the actual prices or costs prevailing in the exporting country, (86) and those prices and costs will decrease by the same amount as the amount of the subsidy. After the conferral of the subsidy, the dumping margin in market economy cases is b = N'-P', which is the same as a, the dumping margin before the conferral of the subsidy.

In NME cases, however, the decrease in the export price of the merchandise presumably leads to a corresponding increase in the dumping margin, as the normal value in NME cases is based on unsubsidized prices or costs from a surrogate country and will not decrease as a result of the subsidy. In NME cases, the dumping margin after the conferral of the subsidy will be c--N- P', which is the sum of a, the dumping margin before the conferral of the subsidy, and s, the amount of the subsidy. If the importing country imposes countervailing duties in the amount of s in addition to antidumping duties in the amount of c, the subsidy will be counted twice, as the amount of antidumping duties already includes the amount of the subsidy.

[FIGURE 1 OMITTED]

B. The Scant Legal Framework Regarding Double Counting

Despite the potential for the double counting of subsidies in concurrent NME antidumping and countervailing duty cases, the current subsidy regulation regime provides scant guidance as to how to approach this issue. Article VI:5 of GATT 1994, the only WTO rule directly on point, provides that "[n]o product of the territory of any contracting party imported into the territory of any other contracting party shall be subject to both anti-dumping and countervailing duties to compensate for the same situation of dumping or export subsidization." (87) This requirement, however, only applies to export subsidies, i.e., subsidies contingent on export performance. (88) GATT 1994 and other WTO agreements do not specifically address the question of whether and how double counting should be accounted for in scenarios involving domestic subsidies. (89)

Consistent with the GATT's prohibition on the double counting of export subsidies, U.S. antidumping law requires the DOC to adjust the amount of antidumping duties when countervailing duties are applied simultaneously to offset an export subsidy on the same merchandise. (90) But like GATT 1994, U.S. antidumping law is silent on the handling of the double counting of domestic subsidies, in both market economy and NME cases. In cases involving market economies, the DOC's standard practice is not to make adjustments to the U.S. price for domestic subsidies, on the theory that in such cases, "[d]omestic subsidies presumably lower the price of the subject merchandise both in the home and the U.S. markets, and therefore have no effect on the measurement of any dumping that might also occur." (91) But prior to the application of the countervailing law to China, the DOC had not had the occasion to address the question of whether the U.S. price should be adjusted to avoid double counting domestic subsidies in NME cases.

C. Different Views on Double Counting

The lack of specific rules on the double counting issue under relevant WTO agreements and U.S. statutes leaves a legal void as to whether and how double counting should be accounted for in NME cases. Since the inception of the current round of subsidy disputes, various administrative, judicial, legislative, and dispute settlement bodies have ventured to provide their own views of the issue. This Article outlines these views below.

1. The Department of Commerce

In the CFS paper case92 and a number of subsequent parallel antidumping and countervailing duty cases concerning imports from China, (93) the government of China argued that double counting will always be a possibility whenever a product is simultaneously subject to countervailing duties and antidumping duties calculated using the DOC's NME methodology. (94) The Chinese government's argument echoed the double counting hypothesis illustrated in Figure 1 above: When a non-subsidized surrogate value is used for normal value, double counting will arise because, while the U.S. price is reduced due to the cost savings from the subsidy, the effect of the subsidy will not be reflected in the normal value. (95) The Chinese government argued that U.S. antidumping law implicitly embodies the presumption that subsidies automatically "pass through" to export prices, as seen from the statutory provision requiring adjustments to the U.S. price for export subsidies and the DOC's practice of not granting adjustments for domestic subsidies in market economy cases. (96) This subsidy pass-through presumption, the Chinese government argued, requires the DOC to adjust the U.S. prices for domestic subsidies in NME cases because domestic subsidies automatically pass through to export prices but do not reduce normal values. (97) Furthermore, the Chinese government argued that the presumption that domestic subsidies lower export prices is the whole basis of imposing countervailing duties on such subsidies. (98)

The DOC rejected all of the Chinese government's key arguments. Citing the "typically direct connection between export subsidies and exports," the DOC agreed with the Chinese government that the statutory requirement for adjustments to antidumping duties for export subsidies rests on the presumption that export subsidies automatically lower export prices, pro rata. (99) The DOC, however, dismissed as "speculative" the proposition that domestic subsidies automatically lower export prices. (100) Rejecting the Chinese government's argument that the presumption that domestic subsidies lower prices is the whole basis for imposing countervailing duties on such subsidies, the DOC argued that "[w]hile subsidies unquestionably benefit their recipients, it is by no means certain that those recipients automatically respond to subsidies by lowering their prices, pro rata, as opposed to investing in capital improvements, retiring debt, or any number of other uses." (101) Nor did the DOC find any indication in the statute or legislative history that Congress harbored any presumption about the effect of domestic subsidies on export prices. (102) Finally, the DOC denied the Chinese government's assertion that it had previously assumed that domestic subsidies fully pass through to home-market and export prices. According to the DOC, a more accurate description of its practice is that the DOC had "sometimes presumed that, whatever the effect, if any, of domestic subsidies upon the prices subsequently charged by their recipients, that effect would be the same for domestic prices and export prices." (103) Since the presumption of a subsidy pass-through was the only basis on which the Chinese government requested duty adjustments to avoid double counting, the DOC denied the request. (104)

2. The Court of International Trade

In September 2008, in the opening salvo of a protracted legal battle, a Chinese respondent in one of the concurrent antidumping and countervailing duty investigations initiated subsequent to the CFS paper case brought a lawsuit before the U.S. Court of International Trade (CIT), challenging the DOC's antidumping and countervailing duty determinations in that case. In September 2009, the CIT issued its opinion in GPX International Tire Corp. v. United States (GPX I), (105) in which it rejected the DOC's double counting analyses in the agency proceedings below.

Before turning to the double counting issue, the CIT first examined whether it was lawful for the DOC to apply the countervailing duty law to China in the first place. Noting the ambiguity of both the Federal Circuit's Georgetown Steel ruling and the countervailing duty law itself as to the applicability of the countervailing duty law to NMEs, (106) the CIT stated that it "cannot say from the statutory language alone that Commerce does not have the authority to impose [countervailing duties] on products from an NME-designated country." (107)

After concluding that the DOC may have the authority to apply the countervailing duty law to NMEs, the CIT went on to hold that the DOC's interpretation and methodologies as to the concurrent application of antidumping and countervailing duties to imports from China were nonetheless "unreasonable." (108) The CIT agreed with the double counting hypothesis illustrated in Figure 1 above, stating that comparing the subsidized export price with the unsubsidized constructed normal value in calculating antidumping duties "could very well result in a double remedy." (109)

If there is substantial potential for the double counting of subsidies, as the CIT held there is in the concurrent application of NME antidumping and countervailing duties to imports from China, (110) the issue then becomes, according to the CIT, an issue about the allocation of the burden of proof. The CIT held that it was unreasonable for the DOC to require respondents to submit specific evidence to demonstrate the existence of double counting, (111) because "there is likely no way for any respondent to accurately prove what may very well be occurring." (112) The CIT held that "if it is too difficult for Commerce to determine whether, and to what degree double counting is occurring, Commerce should refrain from imposing [countervailing duties] on NME goods until it is prepared to address this problem through improved methodologies or new statutory tools." (113)

The CIT remanded the case for the DOC to either forego the imposition of countervailing duties on the merchandise at issue or adopt additional policies and procedures to adapt its NME antidumping and countervailing methodologies to account for the double counting issue. (114) In its remand determination, the DOC followed the latter route. It considered itself to have only three options left regarding the parallel application of countervailing duties and NME antidumping duties: (1) not to apply the countervailing duty law to the subject merchandise; (2) apply the market economy antidumping methodology to the subject merchandise; or (3) offset the countervailing duties against the NME antidumping cash deposit rate. (115) The DOC chose the third option, reasoning that it was the "least objectionable" one. (116)

Respondents challenged the DOC's remand determination before the CIT again. In August 2010, the CIT rejected the DOC's double counting analyses in its remand determination. In GPX International Corp. v. United States (GPX II), the CIT noted that with the DOC's offset, the combination of the countervailing duty margin and the NME antidumping cash deposit rate "will always equal the unaltered NME AD margin," making the countervailing duty investigation superfluous. (117) The CIT agreed with the respondents that it is not reasonable to force them to spend time and resources to go through a countervailing duty investigation, and then to eliminate the countervailing duty margin because it has been offset by the parallel antidumping margin. (118) The CIT further held that besides being unreasonable, the offset is also inconsistent with the antidumping law, as an offset for domestic subsidies is not among permissible offsets to the U.S. price in the calculation of antidumping duties. (119) The CIT held that given the DOC's inability to determine whether and to what degree double counting is occurring, and in the absence of new statutory tools, the only option left for the DOC is not to apply the countervailing duty law to imports from China. (120)

3. WTO Dispute Settlement Panel

Around the same time when the plaintiffs in the GPXI case filed their suit before the CIT, the government of China requested consultations with the United States at the WTO regarding the imposition of antidumping and countervailing duties by the United States on imports of four products from China in DS379. (121) Among others, China challenged the DOC's treatment of the double counting issue as being inconsistent with the United States' obligations under various WTO provisions. (122)

In its final report issued in October 2010, the WTO dispute settlement panel established to hear China's challenges (Panel) explained what it understood to be the reason for double counting. (123) In its explanations, the Panel stated the double counting hypothesis illustrated in Figure 1 above, noting that the use of an NME methodology leads to "an asymmetric dumping margin comparison between an unsubsidized normal value and subsidized export price." (124) In other words, the Panel recognized that the double counting of subsidies in concurrent NME antidumping and countervailing duty cases is at least a theoretical possibility. (125)

But after suggesting that double counting is theoretically possible, the Panel went on to hold that even if it does occur, it is not inconsistent with the relevant WTO provisions cited by China. (126) The Panel concluded that since double counting poses no concerns under WTO law, it was not necessary for it to examine whether double counting did result from the concurrent imposition of NME antidumping duties and countervailing duties in the four sets of DOC investigations at issue. (127)

4. WTO Appellate Body

China appealed the Panel's double counting analyses in DS379 to the Appellate Body of the WTO. in its final report issued in March 2011, the Appellate Body accepted the Panel's understanding of why double counting might occur. (128) However, the Appellate Body reversed the Panel's findings as to whether relevant WTO provisions prohibit double counting. Specifically, the Appellate Body held that the Panel failed to give meaning and effect to all the terms of Article 19.3 of the SCM Agreement, which requires a countervailing duty to be imposed "in the appropriate amounts in each case." (129) The Appellate Body reasoned that under Article 19.3 of the SCM Agreement, "the amount of a countervailing duty cannot be 'appropriate' in situations where that duty represents the full amount of the subsidy and where antidumping duties, calculated at least to some extent on the basis of the same subsidization, are imposed concurrently to remove the same injury to the domestic industry." (130)

The Appellate Body next considered whether the DOC's handling of the double counting issue in the four sets of investigations at issue was consistent with Article 19.3 of the SCM Agreement. The Appellate Body first determined that the occurrence of double counting depends on "whether and to what extent domestic subsidies have lowered the export price of a product, and on whether the investigating authority has taken the necessary corrective steps to adjust its methodology to take account of this factual situation." (131) The Appellate Body then noted that in the four sets of DOC investigations at dispute, the DOC "did not initiate any examination of whether double remedies would arise in the four investigations at issue and refused outright to afford any consideration to the issue or to the submissions pertaining to the issue that were presented to it." (132) According to the Appellate Body, the DOC's failure to conduct any factual inquiries regarding double counting was inconsistent with Article 19.3 of the SCM Agreement, as the obligation to determine the appropriate amount of countervailing duties under Article 19.3 encompasses the obligation to affirmatively determine whether double counting is occurring. (133)

5. Federal Circuit

On the domestic litigation front, the United States appealed to the Federal Circuit the CIT's ruling in GPX II, which, as discussed earlier, ordered the DOC not to apply the countervailing duty law to NMEs. (134) In December 2011, in GPX International Corp. v. United States (GPX III), a three-judge panel of the Federal Circuit affirmed the CIT's GPX II ruling, albeit on a different ground than that relied on by the CIT. (135) In GPX III, while upholding the CIT's ruling that the DOC was not allowed to apply the countervailing duty law to NMEs, the Federal Circuit considered it "problematic" for the CIT to predicate its ruling on the possible occurrence of double counting, because it was unclear to what extent the statute prohibits double counting, and because the DOC had determined that "it is far from clear that double counting has in fact occurred." (136) Rather, the Federal Circuit held that the DOC was barred by the countervailing duty statute from imposing countervailing duties on imports from NMEs. (137) Citing the principle of legislative ratification, the Federal Circuit concluded that Congress ratified the DOC's policy of not applying the countervailing duty law to NMEs when it enacted amendments to U.S. trade law statutes in 1984, 1988, and 1994 without making any changes that would have altered that policy. (138)

6. Congress

By basing its decision in GPX III on its construction of congressional intent as to the application of the countervailing duty law to NMEs, the Federal Circuit essentially threw the ball to Congress. Indeed, at the end of its GPX III opinion, the Federal Circuit invited Congress to act, stating that "if [DOC] believes that the law should be changed, the appropriate approach is to seek legislative change." (139)

Congress took up the Federal Circuit's invitation. Legislation in response to the Federal Circuit's GPX III decision was quickly passed by both chambers of Congress and was signed by President Obama into law as P.L. 112-99 on March 13, 2012. (140) In an outright repeal of the Federal Circuit's ruling in GPX III, section 1 (a) of P.L. 112-99 amended U.S. countervailing duty law by adding a provision stating that, generally, "the merchandise on which countervailing duties shall be imposed under [section 701(a) of the Tariff Act of 1930] includes a class or kind of merchandise imported, or sold (or likely to be sold) for importation, into the United States from a nonmarket economy country." (141) This new provision applies retroactively to all countervailing duty proceedings initiated on or after November 20, 2006, the date the DOC's Georgetown Steel Memo was issued. (142)

Congress was mindful that by reinstating the applicability of the countervailing duty law to NMEs, it was bringing the double counting issue back into the fray. To provide the statutory authority for dealing with the double counting issue, section 2(a) of P.L. 112-99 amended the countervailing duty statute by adding a new provision that gives the DOC the authority to adjust the antidumping duty amount to take account of the double counting of subsidies if a countervailable subsidy "has been demonstrated" to lower the export price of the subject merchandise, and if the DOC "can reasonably estimate" the magnitude of the double counting of subsidies. (143) This provision applies to all countervailing duty investigations and reviews initiated on or after the enactment of the law, as well as all section 129 determinations issued on or after the enactment of the law. (144)

What section 2(a) of P.L. 112-99 is not clear about, however, is who has the burden of proof regarding double counting. P.L. 112-99 states that double counting must be accounted for if a subsidy "has been demonstrated" to lower the export price of the subject merchandise. But demonstrated by whom--the petitioner, the respondent, or the DOC? Moreover, even if the party that is required to have the burden of proof does demonstrate that a subsidy has lowered the export price of the subject merchandise, double counting will be accounted for under section 2(a) of P.L. 112-99 only if the DOC "can reasonably estimate" the extent to which the subsidy is being double counted. It appears that under this provision, the DOC does not have to account for double counting if it somehow could not reasonably estimate the magnitude of double counting. This stands in contrast with the Appellate Body's finding in DS379 that an investigating authority has an affirmative obligation to demonstrate that double counting is not occurring before it imposes countervailing duties concurrent with NME antidumping duties. (145)

7. The Department of Commerce on Remand

On the international front, on July 31, 2012, the DOC issued its revised determinations for the four sets of investigations challenged in DS379 pursuant to the procedures set forth in section 129 of the Uruguay Round Agreements Act for implementing adverse WTO rulings. (146) On August 21, 2012, the DOC officially implemented these section 129 determinations as instructed by the United States Trade Representative. (147)

In its section 129 determinations, the DOC first addressed the question of who has the burden to prove whether double counting is occurring. The DOC determined that "the burden is on a respondent to demonstrate its entitlement to a particular adjustment [to its antidumping cash deposit rate]." (148) The wording of this conclusion appears to be intentional: The DOC considered the burden of proof at issue here not the burden of proof for double counting, but the burden of proof for adjustments to the export price in antidumping proceedings. (149) In so doing, the DOC avoided directly stating that respondents have the burden to prove the existence of double counting--a stance that would be contrary to the Appellate Body's finding in DS379--while achieving practically the same outcome.

Then, after recounting the difficulties it encountered in conducting the factual inquiries required by the Appellate Body for the double counting analysis, the DOC determined that, with respect to input subsidies, i.e., subsidies on the inputs for manufacturing the subject merchandise, the Chinese respondents met their burden of proof to receive an adjustment to their antidumping cash deposit rates. (150) The DOC then compared the ratio of change between an aggregate-level China purchasing price index and an aggregate-level China production price index, (151) and found that sixty-three percent of the alleged input subsidies passed through to the export price of the subject merchandise. (152) As a result, the DOC subtracted sixty-three percent of the input subsidies from the export prices of the subject merchandise in calculating the respondent firms' new antidumping cash deposit rates. (153)

8. The Saga Continues

Six years after the DOC first applied the countervailing duty law to China, and after the DOC, the CIT, a WTO Dispute Settlement Panel, the Appellate Body, the Federal Circuit, and United States Congress each weighed in on the double counting controversy, an end to the dispute is still nowhere in sight. Domestically, litigation in the GPX case continues over the constitutionality of the retroactive application of P.L. 112-99. (154) International litigation over the double counting issue also continues. At the WTO Dispute Settlement Body (DSB) meeting on August 31, 2012, the United States claimed that it had brought the measures challenged in DS379 into full compliance with the DSB recommendations and rulings, (155) in apparent reference to the DOC's section 129 determinations implemented on August 21, 2012. (156) On September 28, 2012, however, China made a statement to the DSB that it did not agree with the U.S. claim that it had fully complied with the DSB recommendations and rulings in DS379. (157) Additionally, on September 17, 2012, China initiated a new WTO dispute settlement proceeding against the United States, DS449, challenging the newly enacted P.L. 112-99. (158) Among other arguments, China claimed that both the absence of legal authority under P.L. 11299 to account for double counting in proceedings initiated between November 20, 2006 and March 13, 2012 and U.S. failures to account for double counting in those proceedings are inconsistent with a number of provisions under the SCM Agreement and the WTO Antidumping Agreement. (159)

IV. THE SUBSIDY PASS-THROUGH PRESUMPTION: ECONOMIC FALLACIES

From the above analyses, it is obvious that the double counting hypothesis is premised on the presumption that a subsidy passes through to the price of the subsidized product. This subsidy pass-through presumption has been acknowledged as theoretically possible by the DOC, (160) the CIT, (161) the WTO Panel, (162) and the Appellate Body. (163) The Federal Circuit found it inappropriate for the CIT to predicate its rulings in GPXI and GPXII on double counting, but it did so without challenging the theoretical validity of the subsidy pass-through presumption. (164)

The subsidy pass-through presumption also underlies the allocation of the burden of proof for double counting. In GPX I, the CIT required the DOC to have the burden to ascertain whether and to what extent double counting was occurring because of the "substantial potential" for double counting. (165) In DS379, implicit in the Appellate Body's finding that the DOC must affirmatively investigate whether double counting is occurring is the acknowledgment that double counting is at least theoretically possible. (166)

The allocation of the burden of proof, in turn, may very well determine the outcome of a double counting dispute. As discussed earlier, both the CIT and the Appellate Body have required the DOC to conduct factual inquiries to ascertain whether double counting is occurring as a matter of fact. (167) But it could be very difficult, if not entirely impossible, to prove a causal relationship between the receipt of a subsidy and a decrease in the price of the subsidized product, as the final price of a product usually encompasses dozens or even more cost items, (168) subsidies being only one of them. As the CIT observed in GPXI, "there is likely no way for any respondent to accurately prove what may very well be happening [with respect to double counting.]" (169) Given the difficulties of proving the factual existence of double counting, the allocation of the burden of proof becomes a crucial factor in resolving double counting disputes. (170) Not surprisingly, both the United States and China attached much importance to the burden of proof issue in DS379) (171)

With so much riding on the subsidy pass-through presumption, it is curious that none of the double counting analyses offered so far has even questioned the validity of the presumption. In this Part, the Article demonstrates that the economics behind the subsidy pass-through presumption is wrong. Drawing upon economic theory of firm behavior, this Article shows that a subsidy changes the productive behavior of a subsidy recipient only if it lowers the marginal cost of production of the recipient, and a subsidy passes through to the price of the subsidized product only if the subsidy recipient has market power in the market for the subsidized product. In other words, the subsidy pass-through presumption is valid in much narrower circumstances than proponents of the double counting hypothesis have assumed it to be.
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Title Annotation:Introduction into IV. The Subsidy Pass-Through Presumption: Economic Fallacies, p. 427-451
Author:Zheng, Wentong
Publication:Stanford Journal of International Law
Date:Jun 22, 2013
Words:8270
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