[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
                    H.R. 1229, THE NONMARKET ECONOMY 
                        TRADE REMEDY ACT OF 2007 

=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON TRADE

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 15, 2007

                               __________

                           Serial No. 110-24

                               __________

         Printed for the use of the Committee on Ways and Means


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                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California       JIM MCCRERY, Louisiana
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM MCDERMOTT, Washington            DAVE CAMP, Michigan
JOHN LEWIS, Georgia                  JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts       SAM JOHNSON, Texas
MICHAEL R. MCNULTY, New York         PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee            JERRY WELLER, Illinois
XAVIER BECERRA, California           KENNY HULSHOF, Missouri
LLOYD DOGGETT, Texas                 RON LEWIS, Kentucky
EARL POMEROY, North Dakota           KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio          THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California            PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut          ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois               JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon              DEVIN NUNES, California
RON KIND, Wisconsin                  PAT TIBERI, Ohio
BILL PASCRELL, JR., New Jersey       JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama

             Janice Mays, Chief Counsel and Staff Director

                  Brett Loper, Minority Staff Director

                                 ______

                         SUBCOMMITTEE ON TRADE

                  SANDER M. LEVIN, Michigan, Chairman

JOHN S. TANNER, Tennessee            WALLY HERGER, California
JOHN B. LARSON, Connecticut          JERRY WELLER, Illinois
EARL BLUMENAUER, Oregon              RON LEWIS, Kentucky
BILL PASCRELL, JR., New Jersey       KEVIN BRADY, Texas
SHELLEY BERKLEY, Nevada              THOMAS M. REYNOLDS, New York
JOSEPH CROWLEY, New York             KENNY HULSHOF, Missouri
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also, published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.























                            C O N T E N T S

                               __________
                                                                   Page

Advisory of March 7, 2007, announcing the hearing................     2

                               WITNESSES

The Honorable Pete Visclosky, Representative in Congress from the 
  State of Indiana and Chairman of the Congressional Steel Caucus     8

                                 ______

The Honorable David M. Spooner, Assistant Secretary for Import 
  Administration, International Trade Administration, Department 
  of Commerce....................................................    14

                                 ______

John Comrie, Q.C., Director of Trade Policy, Government Affairs, 
  and Communications, IPSCO Steel and IPSCO Tubulars, Lisle, 
  Illinois.......................................................    30
David Phelps, President, American Institute for International 
  Steel, on behalf of Consuming Industries Trade Action Coalition    37
Usha C. V. Haley, Ph.D., Professor of International Business and 
  Director of the Global Business Center, University of New 
  Haven, New Haven, Connecticut..................................    43
Daniel L. Porter, Partner, International Trade Group, Vinson and 
  Elkins LLP.....................................................    54
James C. Hecht, Partner, International Trade Practice, Skadden, 
  Arps, Slate, Meagher and Flom LLP..............................    60

                       SUBMISSIONS FOR THE RECORD

Columbia Forest Products, statement..............................    68
Erik O. Autor, letter............................................    68
Nucor Corporation, letter........................................    70
Retail Industry Leaders Association, statement...................    72
Society of the Plastics Industry, letter.........................    73
Southern Shrimp Alliance, Inc., letter...........................    75
Zygmunt Jablonski, statement.....................................    75


                    H.R. 1229, THE NONMARKET ECONOMY
                        TRADE REMEDY ACT OF 2007

                              ----------                              


                        THURSDAY, MARCH 15, 2007

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                     Subcommittee on Trade,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 1:03 p.m., in 
room 1100, Longworth House Office Building, the Honorable 
Sander M. Levin (Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

HEARING ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

              Trade Subcommittee Chairman Levin Announces

                   a Hearing on the Nonmarket Economy

                        Trade Remedy Act of 2007

March 7, 2007

By (202) 225-6649

    Ways and Means Trade Subcommittee Chairman Sander M. Levin today 
announced the Trade Subcommittee will hold a hearing on the application 
of countervailing duties to unfairly subsidized and injurious imports 
from nonmarket economy countries, with a focus on H.R. 1229, the 
``Nonmarket Economy Trade Remedy Act of 2007.'' The hearing will take 
place on Thursday, March 15, in the main Committee hearing room, 1100 
Longworth House Office Building, beginning at 1:00 p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from the invited witness only. 
However, any individual or organization not scheduled for an oral 
appearance may submit a written statement for consideration by the 
Committee and for inclusion in the printed record of the hearing.
      

FOCUS OF THE HEARING:

      
    The purpose of the hearing is to examine whether to apply 
countervailing duties to unfairly subsidized and injurious imports from 
nonmarket economy countries such as China. It will focus on H.R. 1229, 
the ``Nonmarket Economy Trade Remedy Act of 2007,'' introduced by 
Representatives Artur Davis (D-AL) and Phil English (R-PA) on February 
28, 2007.
      

BACKGROUND:

      
    The countervailing duty law provides for the assessment of import 
duties in an amount equivalent to the amount of the subsidy received on 
that imported product. For more than 20 years, the U.S. Department of 
Commerce (``Commerce'') has refused to apply the U.S. countervailing 
duty law to unfairly subsidized and injurious imports from ``nonmarket 
economy'' countries such as China. Commerce has reasoned that 
government intervention in the economy of non-market economy countries 
is so pervasive that meaningful comparisons between subsidized and 
market-determined prices are not possible. The Federal Circuit affirmed 
this practice in 1986 in Georgetown Steel Corp. v. United States. Under 
its current practice, Commerce imposes countervailing duties on 
subsidized and injurious imports only from market economy countries.
      
    In October 2006, a petition was filed requesting the initiation of 
a countervailing duty investigation, based on allegations of injurious 
subsidized imports of coated free sheet (CFS) paper from China. On 
November 21, 2006, Commerce announced its decision to initiate a 
countervailing duty investigation. (See 71 Federal Register 68546, Nov. 
27, 2006.) However, according to the Office of the U.S. Trade 
Representative and Commerce, ``[i]n initiating this investigation, 
Commerce has not decided that the CVD law applies to NME countries. 
Instead, based on the petitioner's arguments, Commerce has determined 
that it is appropriate to revisit the question[.]'' (See Subsidies 
Enforcement Annual Report to the Congress, February 2007.) Thus, it 
remains unclear whether, and how, Commerce intends to apply 
countervailing duty law to nonmarket economy countries. The Government 
of China has appealed Commerce's initiation of a countervailing duty 
investigation to the U.S. Court of International Trade and is 
requesting a preliminary injunction. The Court has not yet ruled on 
that request, although it did deny China's motion for a temporary 
restraining order that would have prevented Commerce's investigation.
      
    The most commercially significant nonmarket economy country is 
China. U.S. exports to China in the first 11 months of 2006 were more 
than $50 billion, up from $42 billion in all of 2005, and up from just 
$19 billion in 2001, the year China acceded to the World Trade 
Organization (``WTO''). Notwithstanding this substantial growth in U.S. 
exports, the U.S. goods trade deficit with China in 2006 is expected to 
approach one-quarter of a trillion dollars--the largest trade deficit 
in U.S. history. China accounts for roughly 12 percent of total U.S. 
trade and one third of the total U.S. goods trade deficit with the 
world. (At the same time, U.S. imports from other East Asian countries 
have fallen $10 billion between 2001 and 2005.)
      
    It is widely recognized that China has a large number of subsidy 
programs that distort the Chinese market and trade with the United 
States. In 2006, China submitted a long-overdue subsidies notification 
to the WTO. China identified over 70 subsidy programs (including some 
subsidies that appear to be prohibited under WTO rules), but even that 
notification was incomplete. On February 2, 2007, the Office of the 
U.S. Trade Representative requested WTO dispute settlement 
consultations, the precursor to convening a dispute settlement panel, 
with China concerning certain prohibited subsidies.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
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2007. Finally, please note that due to the change in House mail policy, 
the U.S. Capitol Police will refuse sealed-package deliveries to all 
House Office Buildings. For questions, or if you encounter technical 
problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
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    1. All submissions and supplementary materials must be provided in 
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noted above.
                                 

    Chairman LEVIN. Mr. Herger and I understand there may be 
votes in about 10, 15 minutes, so let's try to do this.
    We'll give our opening statements and then see. If 
possible, our distinguished colleague from Indiana can get his 
statement in, and then we'll recess and come back.
    I want to make a few opening remarks, because I do think 
it's important that there be some background to this hearing on 
why I think, and why many others do, that action is long 
overdue.
    The first point I would make, it's there, it's 
unassailable, relates to the trading relationship with China 
and our relationship, how unbalanced it is, and I think 
unsustainable.
    One only has to look at the trade deficit figures.
    In 2006, our trade deficit in goods was more than $232 
billion, a 177 percent increase since 2000, and just look at 
the trade surplus figures China has worldwide. The first two 
months, the last two months, 39.7 billion.
    So, I think that's point number one.
    I think secondly that the legislation that has been 
introduced by Mr. Davis and Mr. English is one of the steps 
that can help bring about a more balanced trade relationship 
and more balanced rules of competition.
    Thirdly, about the application of countervailing duty (CVD) 
law to nonmarket economies.
    The Department of Commerce hasn't applied this for more 
than 20 years, and I know there's been a difference of opinion 
as to its application, and actually, I remember somewhat 
vaguely that we in Congress tried to change that on several 
occasions during the last 20 years.
    Now, the Department of Commerce is saying that it will look 
into this issue, and yet the application of CVD is being 
challenged in the courts by China.
    So, it seems to me this point is that Congress really needs 
to make it clear.
    The next point I would make, I think it's unassailable, the 
extent of the subsidies of China: textile industry, steel 
industry, petrochemical industry, high-tech industry, forestry, 
machinery, copper, non-ferrous metals--on and on.
    This list might be even longer if China had complied with 
its World Trade Organization (WTO) obligations.
    It committed when it acceded to the WTO, and we debated 
that issue very much right here. It agreed to provide a 
subsidies report to the WTO in 2002 and it failed to do so 
2003, 2004, 2005, and then finally in April of 2006, it 
provided a report, incomplete.
    The next point I want to make, we should remember when we 
crafted Permanent Normal Trade Relations (PNTR), we asked for 
an annual review of China's obligations of its meeting its 
commitments within the WTO, and really, it failed to make that 
a meaningful annual review, and I do fault the Administration 
for failing to press China to do so.
    The next point. When China acceded to the WTO, it agreed to 
eliminate all of its prohibited subsidies--those are export 
subsidies and import substitution subsidies--and yet the 
failure of China to submit its reports doesn't explain the 
inaction for all these years by the Administration to use these 
WTO mechanisms.
    So, a case has been brought, I think it's long overdue.
    So, we're going to hear from Mr. Visclosky, I think talking 
mostly about the steel industry.
    Also, I think we're going to need to consider the 
semiconductor industry.
    I have in my statement, which I think you may have a copy 
of, an example of how China has been subsidizing in that case 
the semiconductor industry of its country.
    [The information follows: PENDING]
    Chairman LEVIN. So, this bill really merits our 
Subcommittee's serious attention, and I appreciate, Mr. Davis 
and Mr. English, your introducing it, and your hard work on it.
    This bill doesn't seek to, in quotes, ``bash'' a trading 
partner, but really, to try to make sure that the same rules 
apply to them as they do to everybody else, some balanced rules 
that provide for effective competition, and I emphasize that, 
balanced rules that bring about effective competition.
    We'll perhaps discuss today or later on the provision in 
the bill for the role of Congress, and I simply urge there be 
serious consideration of it. It's not an effort to micromanage, 
it's an effort to make sure that Congress in this vital and 
other vital areas has a role.
    So, I look forward with my colleagues to the testimony, and 
now I yield to the Ranking Member, Mr. Herger, for his opening 
remarks.
    Mr. HERGER. Thank you, Chairman Levin.
    Before remarking on H.R. 1229 specifically, let me first 
recall a hearing this Subcommittee held on China last month.
    Witnesses and Members at that meeting, me among them, 
stressed the importance of U.S. trade with China. Specifically, 
I urged that we look at our economy as a whole and balancing 
interests of import-sensitive industries with the interests of 
U.S. industries that need imports to stay competitive.
    At the same time, I noted my great displeasure with China's 
slow pace of reform with respect to ending unfair subsidies.
    I urged the USTR to increase pressure and I was delighted 
to learn earlier this week that China has agreed to terminate a 
Central Bank subsidy program that gave large Chinese exporters 
discounted loans.
    This was one of the subsidies captured in the WTO dispute 
settlement, preceding USTR has recently begun, but we can still 
do more, and that is why we are here today.
    The bill we are discussing this afternoon, H.R. 1229, would 
apply countervailing duties to nonmarket economies. The 
prospect of countervailing duties will further increase 
pressure on all nonmarket economies, including China, to cease 
providing unfair subsidies to their domestic industries.
    For this reason, I very much want to support this bill.
    At the same time, however, we must also pay attention to 
what I referred to earlier as the balance. We cannot lose sight 
of the legitimate needs of U.S. manufacturers here on our own 
soil, a community that depends on foreign imports of inputs to 
compete with foreign firms and to keep the prices of consumer 
products down, which in turn increases our purchasing power and 
results in real income for American workers and families.
    Further, our response to nonmarket economy subsidies must 
be in accordance with the U.S. law and our international 
obligations, particularly if we expect our trading partners to 
do the same.
    Maintaining free and fair trade with nonmarket economies 
requires painting in small, deliberate strokes, not broad 
brushes.
    There are three aspects of H.R. 1229 that, in my view, may 
be too broad.
    First, the proposed legislation makes no mention of the 
possibility that domestic subsidies may be double counted when 
nonmarket economy countervailing duty cases are brought in 
conjunction with anti-dumping cases.
    As the General Accounting Office has concluded, we need to 
provide the Department of Commerce with the authority to 
identify and correct instances of such double counting so that 
imports are not unfairly taxed. Without such explicit 
authority, Commerce has no means to address a known inequity in 
the process.
    Second, Commerce uses data from within the subsidizing 
country to measure the benefit of unfair subsidies using third 
country data only if data from the subsidizing country is 
unreliable.
    Contrary to these rules, H.R. 1229 creates an irrefutable 
presumption that data from within China is unreliable and 
inappropriately requires Commerce to use benchmarks from 
outside of China.
    We don't want to hand China an easy opportunity to sue us 
in the WTO.
    Third, H.R. 1229 requires that Congress consider a 
privileged approval resolution before Commerce is able to 
graduate a country from nonmarket to market economy status.
    While I agree that congressional consultation during the 
graduation process is important, the procedure that H.R. 1229 
proposes is cumbersome and unusual, given Commerce's technical 
expertise in this complicated field.
    I look forward to discussion on these issues this 
afternoon, and am eager to work together to ensure that H.R. 
1229 accomplishes the goal of free and fair trade with 
nonmarket economies.
    As we move forward, though, it is critical that we maintain 
our focus on the U.S. economy as a whole and balance the 
interests of U.S. industries that compete against imports with 
the interests of those that need them to remain competitive.
    Thank you.
    Chairman LEVIN. Thank you very much.
    Mr. Davis and Mr. English, if you would just briefly 
comment, if you like, and then Mr. Visclosky, and I think we 
can wrap this up and leave with. We've timed it three minutes 
to vote when there's sunshine outside.
    Mr. Davis.
    Mr. DAVIS. Thank you, Mr. Chairman.
    I will be brief, given Mr. Visclosky's time and the fact 
that we have a vote on.
    I'll simply make two quick observations.
    The first one, we're having an ongoing conversation and 
debate about how we build a consensus around trade in this 
economy, and Mr. Levin has been such a thoughtful, eloquent 
part of that debate.
    It strikes me that it is impossible to build any consensus 
around trade unless we have a strong commitment to enforcement. 
That is what our consumers expect, it's what our producers 
expect, and frankly, it's what this institution expects.
    That's all the core of this bill tries to do, to strengthen 
our commitment to enforcement to say that if rules apply to one 
set of countries, they need apply to another, and it leads to 
the second point that I want to make, and the last point that I 
want to make.
    Every now and then, I'll pick up my editorial page and I'll 
read the Wall Street Journal or some other entity, and they 
will say that this kind of bill or this kind of measure is 
protectionist, and they'll say that all the steel industry 
wants is extra protections.
    Let me just briefly describe protectionism to you:

           It's $1.67 billion worth of State financing for 
        renovations at paper mills.
           It is $22.5 million worth of grants going to 
        industries for capacity expansions.
           $7.25 billion going to fund bargain rate subsidized 
        loans to State-owned steel enterprises.

    The practitioners of what I've just described--not the 
United States Government, but the Chinese government. That's 
protectionism. All we're trying to do is to give us a 
reasonable, simple tool to address it and to stop it.
    I'll yield back, Mr. Chairman.
    Chairman LEVIN. Thank you for your eloquence.
    Mr. English.
    Mr. ENGLISH. Mr. Chairman, I would like to first of all 
thank Mr. Davis for leading on this legislation this year, and 
I would like to thank you for your prompt response in moving 
forward.
    My hope, and I hope this dovetails into what Mr. Davis just 
said, which I fully support, that we can examine this issue 
objectively without any attempt to put it into political 
context, that we need to get into the details and recognize why 
this is good trade policy, to strengthen our trade laws, why 
it's broadly beneficial to the consensus we need to build on 
trade policy, and why it's helpful not just to specific 
industries, but to the overall performance of our economy.
    I would simply say that last year, in the last Congress, 
because of what was going on on trade policy, our attempt to 
move similar legislation was not successful, but this year, on 
the details, I think we have an opportunity to go in with a 
clean slate and to consider the merits of this issue and see if 
we can give domestic producers and the Administration the tool 
that they need to confront some of the trade practices that 
have been eroding our manufacturing base.
    I want to salute you particularly, Mr. Chairman, for being 
willing to be a leader on this, and I thank you for the 
opportunity to participate.
    Chairman LEVIN. Thank you very much, Mr. English.
    Mr. Visclosky, we welcome you as a distinguished activist 
colleague, and as chair of the caucus, of the Steel Caucus, and 
we have your bipartisan letter signed by 32 Members. So, take 
over.
    Mr. VISCLOSKY. Mr. Chairman, thank you very much.
    As I understand, my entire testimony will also be entered 
into the record?
    Chairman LEVIN. It will be.

 STATEMENT OF THE HONORABLE PETER J. VISCLOSKY, REPRESENTATIVE 
             IN CONGRESS FROM THE STATE OF INDIANA

    Mr. VISCLOSKY. Over and above the bipartisan letter signed 
by 32 members of the Steel Caucus, of which Mr. English is vice 
chair, we would ask that two additional addenda be added for 
the record, and that's two sheets detailing the 45 steel 
companies that entered into bankruptcy between the years 1997 
and 2004.
    Chairman LEVIN. It's so ordered. Thank you.
    [The information follows: PENDING]
    Mr. VISCLOSKY. I would thank you, Mr. Mr. Herger, and the 
Members of the Subcommittee for, one, holding a hearing on this 
very important issue, and secondly, for allowing me to testify, 
to express my strong support for H.R. 1229, the Nonmarket 
Economy Trade Remedy Act of 2007, and to thank my colleague, 
Mr. Davis, for his leadership, as well as Mr. English, as the 
lead co-sponsor.
    I firmly believe that while H.R. 1229 will provide U.S. 
manufacturers with a crucial line of defense against illegally 
subsidized imports, I am also here to encourage your 
Subcommittee to look beyond countervailing duties, to the 
issue, among others, of foreign currency manipulation, in order 
to address fully the problems we face today.
    Since 2000, the year China was granted permanent normal 
trade relations, the good-paying jobs of over 3 million 
American industrial workers have disappeared.
    Over that same period of time, 23 percent of the domestic 
steel employment has been eliminated.
    Since 1997, at the beginning of China's production 
explosion of the last ten years, 45 steel companies have gone 
into bankruptcy.
    These are statistics. On the front page of the business 
section of the Washington Post today, there are details about 
foreclosures in those areas hardest hit.
    I would note that the States of Michigan, Ohio, and Indiana 
are highlighted as areas with the greatest rate of sub prime 
loan foreclosures. They also suffer from the high unemployment 
rates. This is a human tragedy that has been allowed to occur.
    From my perspective, as our jobs are being shipped overseas 
to China, the Chinese have enchanted this Administration with 
dialogue, just as the sirens tempted Ulysses with their song. 
We are defenseless as long as we are under their spell.
    What I would like to emphasize is the word dialogue.
    Mr. HERGER. alluded to the hearing that was held last month 
by your Subcommittee on February 17th.
    That day, Timothy P. Stafford, assistant U.S. trade 
representative for China, testified. I am going to just read 
two sentences of his testimony, but listen carefully:

       ``While we have filed this WTO case, we continue to 
engage in dialogue with the Chinese on their use of subsidies.
       These discussions are happening both at the sector 
specific level--for example, a recently created steel dialogue 
under the Joint Commission on Commerce and Trade (JCCT) is 
enabling a conversation among governments and industries of 
both sides as well as inc connection with our broader economic 
dialogues, including the strategic economic dialogue.''

    The guy mentioned dialogue four times in two sentences, 
alluded to a conversation and discussion.
    In the meantime, I reference Members' attention to the 
chart that I have provided.
    I am concerned about the abject lack of urgency the 
Administration attaches to this problem.
    Mr. English was current and present and chairing the Steel 
Caucus last June when we had a hearing, and Mr. Jaime Estrada, 
deputy assistant secretary for manufacturing for the United 
States Department of Commerce, testified.
    When Mr. English, I, and others were complaining about the 
lack of enforcement and protection for steel, Mr. Estrada had 
the audacity to say, ``Well, we have countervailing duties,'' 
and when asked by the caucus, do they apply China, and this was 
a China steel specific hearing, he said, ``Well, no.'' Who is 
the fool here?
    Look at the chart. On March 24, 2005, the Administration 
launched their steel dialogue.
    Steel exports by metric tons in January of 2006 were 
312,000 tons. By March, we had our first steel dialogue.
    By June of 2006, we had the caucus hearing and the dialogue 
was referenced again.
    In July of 2006, when imports went up from 371,000 tons to 
526,000 tons, perhaps the Administration talked to China. 
Perhaps when exports went up again to the United States in 
September of 2006, the Administration chatted with China.
    We did have a second dialogue with China in October of last 
year, and imports again increased to the United States. They've 
gone up 65 percent in the last 12 months.
    Fortunately, from my perspective, no further dialogues are 
scheduled. As we meet today, they're killing us, these 
dialogues, but there was a consultation on February 12th.
    I would implore the Committee to give careful consideration 
to the legislation that has been introduced by Mr. Davis and 
Mr. English and also ask that you seriously consider other 
options so that we can ensure it is a fair, level playing field 
for American workers.
    [The prepared statement of Mr. Visclosky follows:]
          Prepared Statement of The Honorable Pete Visclosky,
        Representative in Congress from the State of Indiana and
               Chairman of the Congressional Steel Caucus
    Thank you Chairman Levin, Ranking Member Herger, and Members of the 
Subcommittee for the opportunity to testify before you with respect to 
the first critical step in what I hope will be comprehensive trade law 
reform. H.R. 1229, the Nonmarket Economy Trade Remedy Act of 2007, is a 
good first step, but we need to do more. The American steel industry 
faces unprecedented challenges from countries like China, which compete 
unfairly in the global marketplace. Too many good-paying American 
manufacturing jobs have been shipped overseas, and the steelworkers I 
represent need comprehensive legislation to address the growing threat 
posed by China.
    My appearance here today as Chairman of the Congressional Steel 
Caucus, a bipartisan group of 107 Members of Congress, should 
underscore the broad-based support for fair-trade measures like H.R. 
1229 in the House. Our colleague, Representative Phil English, who is 
the Vice-Chairman of the Steel Caucus and a Ways and Means Committee 
Member, would attest to this as well. But while I firmly believe that 
H.R. 1229 will provide U.S. manufacturers with a crucial line of 
defense against illegally subsidized imports, I am also here to 
encourage this Subcommittee to look beyond Countervailing Duties, to 
the issue of foreign currency manipulation, in order to address the 
full problem we are facing today. My message, simply put, is that if we 
are to maintain a manufacturing base in the United States, we must have 
zero tolerance for unfair and illegal trade. We must fight back on many 
fronts, from China's subsidization activities to their continued 
manipulation of their currency. The imminent challenges facing the 
steel industry cannot wait to be addressed.
    As the Representative for the Indiana's First Congressional 
District, I am proud of the contribution my own district makes to the 
nation's economy in the production of steel. In 2005, 17,588 people 
worked in steel-related jobs in Lake and Porter Counties. In 
perspective, those steelworkers make up over 75 percent of Indiana's 
steel workforce, and over 11 percent nationwide.
    I am very encouraged by the legislation introduced by Rep. Artur 
Davis and Rep. English. In my opinion, H.R. 1229 is one of the most 
important proposals for the steel industry that has received serious 
consideration in recent years. That is why, earlier this week, I 
submitted a letter to the Chairman and Ranking Member of the full 
Committee, Rep. Rangel and Rep. McCrery, a copy of which I will submit 
with my testimony today. This letter expressed the support of 32 
Members of the Steel Caucus for the prompt consideration of H.R. 1229.
    As this Subcommittee knows, H.R. 1229 would improve the tools 
available to U.S. manufacturers in order to defend against illegal 
imports. The most important of these tools is the application of 
Countervailing Duties (CVD) to Nonmarket Economies. CVD law provides 
for the assessment of import duties in an amount equivalent to the 
amount of the subsidy received on that imported product. When we in the 
steel community talk about nonmarket economies, we usually talk about 
China. As this Subcommittee was made aware during its February 15, 
2007, hearing on trade with China, there are very clear reasons for 
this attention.
    Over the last ten years, Chinese crude steel production more than 
quadrupled, growing from an estimated 100 million Metric Tons (MT) in 
1996 to approximately 420 million MT in 2006. In other words, China has 
built the equivalent of three entire American steel industries, in 
terms of annual steel production, in just ten years. China's share of 
world steel production, which was estimated to be one-eighth in 1996, 
mushroomed to over one-third in 2006. This industrial growth is 
unprecedented in history.
    It is no coincidence that these increases in steel production have 
come during periods of immense government subsidization of China's 
steel industry. This issue is perhaps the most crucial problem facing 
the global steel industry, as well as many other industries, today. 
Reports, some from the Chinese government itself, detail preferential 
loans, debt forgiveness, raw material market subsidies, energy 
subsidies, and direct government ownership of steel companies.
    As you know, just last year, China finally submitted its subsidies 
notification to the World Trade Organization (WTO)--four years late and 
certainly lacking in forthrightness with regard to disclosure of 
subsidies. Still, the report identified over 70 subsidy programs, 
which, coupled with lax labor and environmental standards and the 
manipulation of their currency, amount to warfare on American steel 
workers.
    How can our steel industry respond to these attacks? The President 
rejected the recommendations of the International Trade Commission 
(ITC) in all four petitions that have come to him under the China-
specific Section 421 safeguard since the year 2000. Countervailing 
Duties, a trade remedy proven to be effective against the subsidization 
of products such as steel, have been rendered useless against China by 
our own Department of Commerce in repeated cases over the last 20 
years. However, the world has changed a lot since the 1984 ``Georgetown 
Steel'' case, and our trade policies should reflect that. For example, 
China's accession to the WTO in 2001 required the adoption of the WTO 
Agreement on Subsidies and Countervailing Measures, as well as the 
adoption of more specific definitions of subsidies in the WTO. 
Obviously, as evidenced by the four-year delay on their WTO subsidies 
report, these obligations have not been taken seriously by China.
    What is so discouraging to me is how long it has taken for the 
Executive Branch to take action on these blatant violations. As our 
jobs are being shipped overseas, the Chinese have enchanted the 
Administration with ``dialogue,'' just as the Sirens tempted Ulysses 
with their song. Like Ulysses, we are defenseless against Chinese 
imports unless we take real, concrete actions to stop our ship from 
crashing against the rocks. While I welcome the recently filed WTO 
petition by the U.S. Trade Representative and the potential 
investigation by the Department of Commerce into CVDs on coated paper 
from China, I am alarmed by the lack of urgency to their efforts.
    Of course, this lack of concern has resulted in winners and losers, 
so let's talk about that. Since 2000, the year China was granted 
permanent normal trade relations, the good-paying jobs of over 3 
million American industrial workers have disappeared. Over that same 
time period, 23 percent of the domestic steel employment has been 
eliminated. Since 1997, at the beginning of China's production 
explosion of the last ten years, 45 steel companies have gone into 
bankruptcy, as this chart, which I submit for your reference, details.
    Indiana has been hit particularly hard by this recent downswing. 
While nearly 24,000 Hoosiers work in steel-related jobs today, this is 
just a fraction of the jobs held not that long ago. Indiana has lost 
about one out of every four steel mill jobs in the state since 
President Bush took office, with heart-breaking consequences. Each lost 
job has meant lost wages, lost health care, and lost retirement 
benefits for a family. Communities are losing their residents as people 
must move on. It is clear that American workers have absorbed the brunt 
of the Administration's trade agenda.
    While H.R. 1229's CVD provisions are crucial, several other 
provisions of this measure will prove useful in improving the Congress' 
ability to influence trade policy. The measure would create a new 
mechanism in which Congressional approval would be required to 
implement a decision by Commerce to ``graduate'' a country from 
nonmarket to market economy status. This is important for several 
reasons. Under existing law, the executive branch has sole authority to 
determine when a nonmarket economy country meets the criteria of a 
market economy under U.S. antidumping duty law. I am concerned by the 
pressure China is already applying on the President to prematurely 
graduate them to market economy status, both for symbolic value and to 
reduce the margins they are subject to on antidumping orders as a non-
market economy. This pressure could become even greater if 
countervailing duties are applied upon passage of H.R. 1229.
    For an example of this, we need only to look back to 2002, when 
President Bush graduated Russia from nonmarket to market economy status 
not long after the September 11 attacks. Much of Russia's economy was 
still centrally controlled, but the President granted this status 
anyway. We cannot allow American workers to be sold out for political 
advantage. By adding an up-or-down vote in Congress, this process would 
be no different than the ``Fast-Track'' authority that the President 
already has. This Administration's failure to address the growing 
threat and manipulation of the marketplace by the Chinese is yet 
another reason why comprehensive trade legislation is needed.
    Further, H.R. 1229 would direct the International Trade Commission 
(ITC) to conduct an annual study of Chinese government intervention to 
promote investment, employment, and exports. The ITC would be directed 
to submit its findings to Congress every year through 2017. This 
information will be vital to the Congress as we continue to improve our 
defenses against illegally subsidized imports.
    My testimony would not be complete without addressing another major 
issue that I have touched on already regarding the problems that China 
poses to our manufacturing base. This issue is currency manipulation. I 
am a cosponsor of H.R. 782, the Ryan/Hunter Fair Currency Act of 2007, 
which would help to eliminate the unfair advantage that Chinese 
producers have gained due to their government's daily manipulation of 
their currency. This problem has grown to be so massive that 
economists, such as Dr. Peter Morici of the University of Maryland, 
believe the Yuan could be undervalued by 30 to 50 percent. While the 
Steel Caucus has endorsed the provisions of H.R. 1229, the Nonmarket 
Economy Trade Remedy Act of 2007, I must recommend that this 
Subcommittee work to expand this measure to address the problem of 
currency manipulation, which acts as a weight around the neck of every 
American manufacturer.
    I am impressed by the foresight shown by today's steel companies in 
America. They have seen the challenges on the horizon, and they have 
continued to use their profitability to improve efficiencies and their 
product mix as they prepare for difficult times ahead. They are 
focusing on high-value products. They are making the investments 
necessary to remain competitive.
    However, American steelmakers continue to lose their market to 
Chinese companies that, despite having higher energy and raw material 
costs per ton of steel and lower worker productivity than U.S. steel 
producers, are somehow able to offer cheaper steel. How is this 
possible? Subsidies and currency manipulation make up the difference. 
These companies cannot compete with our steel industry on a level 
playing field.
    I know we have the most efficient, productive, and skilled steel 
industry in the world. But even with that edge, our producers cannot 
prevail in a contest where only they have to play by the rules. If our 
companies cannot count on a level playing field, then U.S. 
manufacturing has no long-term future.
    Now is the time to strengthen our trade laws. We are too late to 
save the 45 bankrupt mills I mentioned. However, if we can get out 
ahead of this next major crisis with sound policy, including H.R. 1229 
and currency manipulation reform, then we will have done our best for 
the workers who are counting on us. Thank you again for the opportunity 
to appear before this Subcommittee today.

                                 

    Chairman LEVIN. Thank you, very, very much, Mr. Visclosky, 
for your dedicated efforts.
    We stand in recess.
    How many votes do we have? Two? Two votes.
    Well, two votes means 15 minutes, hopefully not more.
    Mr. VISCLOSKY. Mr. Chairman, thank you very much.
    Chairman LEVIN. Thank you very much.
    [Recess.]
    Chairman LEVIN. My apology. It was an unexpected series of 
events.
    The Appropriations Committee was trying to finish the 
supplemental, and so we held open the vote for, it must have 
been 30 minutes, because they needed to finish and get the bill 
out today so it could be brought up next week. As you know, it 
has some important provisions in it.
    I think ordinarily, we would not have waited for the 
Appropriations Committee to finish, but it was decided to do 
so.
    So, my apology. I said semi-humorously I wasn't sure if it 
would be 15 or 20 minutes, and it was an hour.
    Let me just check.
    [Pause.]
    Chairman LEVIN. All right. Let's begin.
    Again, we'll make sure that all of the information, all the 
testimony is well distributed.
    Let me say, some have asked is there a scheduled date for 
markup on this bill, and the answer is there isn't, except 
there's a strong desire to move it.
    So, there will be further opportunity for the full 
Committee to consider this, and I urge everybody to make sure 
that there's the fullest interchange between yourselves and 
Members of this Committee, because I do think that it's likely 
that there will be action in the foreseeable future.
    All right.
    Kevin, welcome.
    So, we'll continue with David Spooner, who is assistant 
secretary for import administration, International Trade 
Administration (ITA), Department of Commerce.
    Again, my apology to you, as well as to the others.
    Proceed, if you would.
    Mr. BRADY. Mr. Chairman, if I may interrupt for just one 
moment.
    Chairman LEVIN. Absolutely.
    Mr. BRADY. I apologize. The delay in those last votes has 
caused me to head to the airport.
    Could I have unanimous consent to introduce into the record 
a letter from General Motors dealing with the countervailing 
duty law in our Committee's review of this legislation?
    Chairman LEVIN. Absolutely.
    Mr. BRADY. Thank you.
    Chairman LEVIN. It's so entered.
    [The information follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    

    Chairman LEVIN. Mr. Spooner.

    STATEMENT OF THE HONORABLE DAVID M. SPOONER, ASSISTANT 
   SECRETARY FOR IMPORT ADMINISTRATION, INTERNATIONAL TRADE 
          ADMINISTRATION, U.S. DEPARTMENT OF COMMERCE

    Mr. SPOONER. Thank you, Chairman Levin and Congressman 
Brady and other Members of the Subcommittee, for inviting me to 
discuss the Nonmarket Economy Trade Remedy Act of 2007 
introduced by Representatives Davis and English.
    I appreciate the opportunity to share with you the 
Department of Commerce's views on this bill, particularly as it 
relates to the application of the countervailing duty law to 
China and other nonmarket economy countries.
    China's remarkable economic growth in recent years makes it 
one of the most important engines of the world economy outside 
of the United States. In trade terms, China represents one of 
the fastest-growing markets for U.S. goods and services.
    Our exports to China, which for the most part are high-
value-added products, totaled $55 billion in 2006, growing at a 
rate of 
32 percent from the previous year. That makes China our fourth 
largest export market.
    To help ensure continued and increased growth of U.S. 
exports to China, the United States is working proactively to 
identify and seek the removal of barriers to U.S. exports.
    Unfair subsidies inside China distort trade conditions for 
U.S. producers and exporters. The Chinese press is rife with 
examples of subsidies given to various sectors.
    China clearly employs subsidies. The question is, what 
domestic and international strictures we can use to discipline 
them.
    At the Commerce Department, we are charged with the 
enforcement of U.S. trade remedy laws, including our domestic 
anti-subsidy law, the countervailing duty law.
    Let's make no mistake about it, subsidies exist in China 
and are distorting the playing field. There is no legal bar to 
Commerce's application of the CVD law to nonmarket economies, 
including China, and we will do so if presented with the 
appropriate facts.
    As you know, countervailing a nonmarket economy poses 
unique challenges, such as calculating benchmarks for subsidy 
programs.
    Moreover, applying U.S. CVD law to countries like China 
that are classified as nonmarket economies for anti-dumping 
purposes raises complex issues of policy and methodology which 
could have implications for other aspects of Commerce's trade 
remedies practice.
    Nevertheless, current law allows us to countervail China. 
Indeed, as you know, Mr. Chairman, we are now conducting a 
countervailing duty investigation of coded free sheet paper, 
glossy paper, from China, that dates from last fall.
    The petition in that investigation was filed by NewPage 
Corporation, which testified before I believe this Subcommittee 
in February.
    We will be announcing our preliminary determination in the 
glossy paper investigation by April 2nd, so it would be 
inappropriate for me to comment upon the specific merits of 
that investigation at this time.
    For more than 20 years, indeed throughout four 
Administrations, Commerce has maintained a policy of not 
applying our CVD law to countries that we have classified as 
nonmarket economies for anti-dumping purposes.
    The basis for this policy was the 1984 Georgetown Steel 
decision in which the court affirmed that Commerce has the 
discretion to decide whether or not to apply the CVD law to 
nonmarket economies (NME).
    Since then, Commerce has had a practice of not applying the 
CVD law to NME countries, including China, and the anti-dumping 
law has been a commonly used instrument to address unfair trade 
practices on the part of Chinese producers and exporters.
    Our decision to conduct the CVD investigation in the glossy 
paper case in no way reverses our decision, reaffirmed just 
last August, to treat China as a nonmarket economy under the 
anti-dumping law.
    The glossy paper investigation represents the first CVD 
petition for China received by Commerce since 1991. The present 
investigation, therefore, provides us with an opportunity to 
review our longstanding policy of not applying the anti-subsidy 
law to nonmarket economies.
    Given the complex legal and policy issues involved in our 
upcoming decision on December 15th, we requested public comment 
on the issue. We received over 50 responses, including comments 
from Senators, House Members, National Association of 
Manufacturers (NAM), and other industry groups.
    The majority of the commenters cited concerns about the 
growing problem of Chinese government subsidies and the adverse 
impact that they have on U.S. producers and workers.
    As such, the majority of commenters encourage Commerce to 
apply the CVD law to imports from China.
    We are in the process of carefully reviewing all these 
submissions and other relevant information on the record before 
making our preliminary determination in the glossy paper case.
    We are committed to identifying and addressing unfair 
subsidies in all countries, including China. That is a top 
priority for us.
    We will not hesitate to use the tools at our disposal to 
discipline China's use of unfair subsidies.
    Make no mistake about it. If we can formulate a methodology 
for countervailing nonmarket economies, we will not give any 
country a free pass when it comes to illegal and distortive 
subsidies.
    Commerce has always maintained, and we believe the courts 
have agreed with us, that we have the authority to apply the 
CVD law to NME countries. However, if Congress would like to 
affirm Commerce's authority, as the House did in 2005, and as 
H.R. 1229 does, we would welcome this opportunity to work with 
you, Mr. Chairman, and other Members of the Committee.
    Thank you for giving me this opportunity to testify before 
you on this topic today.
    [The prepared statement of Mr. Spooner follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chairman LEVIN. Thank you very much.
    Let's proceed in this order.
    I know Mr. Davis has another markup, so why don't you go 
first instead of me, and then, Mr. Herger, you'll go next, and 
then I'll come after you.
    Mr. Davis.
    Mr. DAVIS. Thank you, Mr. Chairman.
    Mr. Secretary, I apologize to you. I have a markup, 
literally in another Committee, so I'm trying to squeeze out 
some time before I have to go cast a few votes.
    Let me, and I don't suspect I'll take the full 5 minutes, 
but let me focus on one aspect of your testimony.
    You mentioned that one of the reasons that the 
Administration has not been so keen on applying countervailing 
duties is that there are remedies available on the dumping 
front. I think you said that in your testimony.
    I wanted to challenge that premise.
    Obviously, dumping is a problem in its own right, and there 
are remedies available to deal with dumping, but if I 
understand it correctly, subsidies are a different kind of 
problem, a different species of problem.
    Among other things, subsidies violate the WTO standards. I 
don't think there's any dispute about that.
    In addition to that, subsidies obviously cause market-
distorting effects which are perhaps, in kind, they may play 
out in the same way that dumping does, but they are different.
    So, explain to me again why it would be injurious to have 
this extra set of tools to use.
    Mr. SPOONER. Thank you, Congressman Davis.
    I actually agree, I think. I hope I didn't imply, I 
certainly didn't mean to imply that applying the CVD law to 
China would be unnecessary.
    While it's true that we've been aggressive about applying 
the anti-dumping law to China--I think 25 percent of all cases 
now are on Chinese imports--you're right, the CVD law addresses 
an entirely different type of unfair trade practice.
    The reason it has been, frankly, until now, when we have 
this ongoing investigation in the glossy paper case that 
we've--the reason it's taken until now to launch an 
investigation has, frankly, to a certain degree, been simply 
because we haven't had a petition until last fall.
    Mr. DAVIS. Would countervailing duties or the possibility 
of applying countervailing duties itself be a bargaining chip 
for the United States in our dealings with China?
    Mr. SPOONER. That's a good question, Congressman.
    I hope I put this well.
    We have to use all the tools in the toolbox. I mean, 
Congressman, Chairman Levin in his--I'm sorry, it was Mr. 
Visclosky, in his something, was essentially saying, I think, 
although I hesitate to paraphrase a Member, that we shouldn't 
only have dialogue, that we should enforce, as well.
    Frankly, I agree with that. We should have ongoing 
dialogue, ongoing diplomacy with the Chinese, such as we do in 
the steel dialogue, but if we show a willingness to enforce our 
law as we should, I think that complements our dialogue.
    Mr. DAVIS. Have you reviewed--I assume that you've reviewed 
the bill that Mr. English and I have introduced?
    Mr. SPOONER. Yes, sir.
    Mr. DAVIS. Do you agree with me that there's nothing in 
that bill that speaks to the currency devaluation issue?
    Mr. SPOONER. Yes, sir.
    Mr. DAVIS. Mr. Chairman, I will yield back.
    Chairman LEVIN. Thank you so much for your hard work and 
your coming, and don't miss votes. That's why we held open the 
last vote for 45 minutes.
    Mr. Herger, our Ranking Member.
    Mr. HERGER. Thank you, Mr. Chairman.
    Mr. Spooner, I believe that Commerce should consult with 
Congress prior to revoking a country's nonmarket economy 
status, but I believe that requiring an Act of Congress first 
is unprecedented.
    Do you have plans to revoke China's nonmarket economy 
status in the next year, or even within the next five years; 
and what changes will you need to see in China in order to 
entertain doing so?
    Mr. SPOONER. I can assure you, Congressman Herger, that I 
don't.
    Indeed as you know, just last August, Commerce reaffirmed 
China's status as a nonmarket economy, and when we did so, we 
issued, I think it was an 84-page memorandum describing the 
reasons for our decision, and the memo is rife with ways in 
which China has yet to jump over the hurdle, so to speak, 
including the free flow of labor within China, distortions 
within China's banking sector, problems with the rule of law in 
China.
    All those things, among others, would have to be rectified 
before we were to consider graduating China to market economy 
status.
    Mr. HERGER. Thank you.
    You mentioned in your testimony that it's important for any 
bill applying the CVD law to China to be crafted with 
appropriate precision, not only to ensure consistency with our 
international obligations, but also to avoid unintended 
consequences for existing provisions of U.S. CVD law.
    Could you elaborate?
    Mr. SPOONER. Thank you, Congressman Herger.
    I think briefly, at least with respect to our domestic law, 
it's more USTR than Commerce that evaluates our WTO 
consistency, but I had two, perhaps, specific drafting 
questions, at least.
    One was the way in which the portion of the bill which 
would require a congressional motion of approval or disapproval 
with market economy decisions.
    Under law, we have to decide our cases under very certain 
rigid timelines and it's unclear from the bill whether or not 
that disapproval motion would make us miss our deadlines, so to 
speak.
    I think another question we had was whether that provision 
amounts to--represents a desire on behalf of the drafters to 
take a second look at Commerce's analysis in market economy 
decisions or whether--I hope I put this well--it represents a 
desire to sort of put aside what Commerce is supposed to look 
at when we do market economy evaluations and have Congress 
consider other factors which aren't--which Commerce isn't 
supposed to look at.
    Mr. HERGER. Could you please tell us the criteria that you 
use in determining whether to use information from a nonmarket 
economy in an anti-dumping investigation?
    Do you routinely exercise your discretion to disregard such 
information and use surrogate data if that information is not 
adequate?
    Mr. SPOONER. We do routinely do so, yes, sir.
    Indeed, when we designate an economy to be a nonmarket 
economy, as we do with China, in every dumping case, we go 
outside of China and use surrogate country values.
    Mr. HERGER. Thank you.
    Thank you, Mr. Chairman.
    Chairman LEVIN. Thank you very much, Mr. Herger, for your 
questions.
    I want to really focus on where we go from here, but I must 
say, when you say in your testimony, you repeated it, Mr. 
Spooner, that the reason there hasn't been any action by 
Commerce is because no petition was filed, it's hard to expect 
that a petition be filed when there's a policy that the 
petition will be discarded.
    So, I don't really think that is a convincing rationale. I 
think instead, there has been a policy decision, because it 
could be reversed without the need for a petition.
    I think as the nonmarket economies grew in this world of 
ours, in this economic world, there was a need to revise the 
policy when you had the power. This is somewhat before your 
time.
    So, I want to focus on the future, but I think it isn't 
wise to use what I think is kind of an irrational excuse for 
what I think was an increasingly irrational policy.
    Secondly, let me just mention, on the--and we're going to 
work together on this, so I say that somewhat gently, but 
there's a lot of feeling about this, especially as China began 
to be a major, major competitor.
    Let me just say a word about the congressional disapproval 
provision.
    I hope we'll work with you on it. You answered Mr. Herger's 
salient question that--I don't know if you wanted to commit 
yourself for five years; I don't think anybody can do that. I 
think if one looks back at the history of how we handled the 
Soviet Union's position, I don't know that--and I haven't gone 
back over the papers, but my guess is that there were fairly 
elaborate documents talking about the hurdles that had to be 
jumped by the Soviet Union, or maybe that's not the correct 
terminology, the practices that had to be remedied before we 
could take that action, and yet the action was taken.
    I would hope we could focus on the role of Congress on 
decisions of importance like this.
    It does reflect, I think, a strong feeling that there has 
to be a major change in the role of Congress not to negotiate 
but to be sure that we are active, meaningful partners.
    Let me just ask you then one last thing.
    It relates to an issue that has been raised here, and the 
so-called double counting issue.
    So, let me ask you whether you think that this is an issue 
regarding the application of CVDs and anti-dumping duties to a 
nonmarket economy and its methodology; do you see this as an 
issue?
    Mr. SPOONER. Thank you, Mr. Chairman.
    Frankly, as you know, the Government Accountability Office 
(GAO) report did a--I'm sorry--the GAO did a report two years 
ago on difficulties that Commerce might encounter in applying 
the CVD law, and they identified this double counting issue as 
something that might be an issue for Commerce. Frankly, I 
wouldn't go so far.
    Whether or not we face double counting should we apply the 
CVD to China will be a very fact-intensive, case by case thing, 
and frankly, I think we will just have to see in the context of 
a specific case whether or not we face double counting, and 
then go to the next step of if so, how do we address it.
    Of course, we would work closely with you to figure out how 
to do so.
    Chairman LEVIN. Are you saying that there isn't any overall 
basic issue of double counting?
    Mr. SPOONER. We just haven't seen it yet. We haven't----
    Chairman LEVIN. As you've worked on these issues, you 
haven't seen it?
    Mr. SPOONER. Yes, sir.
    Chairman LEVIN. Okay, thank you.
    Mr. SPOONER. Sure. I should say, sir, as we do our market 
economy decisions, I can promise you--I should have conveyed 
this to Congressman Herger--that we would consult closely with 
Congress, and particularly Members of this Committee.
    Chairman LEVIN. All right.
    So, as you leave, as I understand it, you say case by case, 
so do I correctly assume that you don't see a need for a 
specific provision in this bill on double counting?
    Mr. SPOONER. We--Commerce I believe would prefer to wait 
until we had some hands-on experience should we apply the CVD 
law to China before we crafted the legislative fix, should we 
need one.
    Chairman LEVIN. So, I think your answer is no?
    Mr. SPOONER. Yes, sir.
    Chairman LEVIN. Thank you. There's no need for such a 
provision.
    All right. Mr. English, welcome. Glad you were able to 
rejoin us, after that long, long hiatus on the floor.
    Mr. ENGLISH. I unfortunately did.
    Mr. Spooner, thank you for your testimony.
    I think I'm on the same wavelength as the Chairman on the 
issue of double counting.
    If I could just revisit this, on the next panel, my 
understanding is that we're going to hear from a member of the 
Washington Trade Bar that cites a 2005 GAO report stating that 
Department of Commerce doesn't currently have the legal 
authority to devise a methodology for applying countervailing 
duty law to nonmarket economies, which takes into account the 
theoretical practice of double counting.
    Is that an accurate characterization of the GAO and is it 
fair to say that is not Commerce's position?
    Mr. SPOONER. Yes, sir, it's fair to say that that is not 
Commerce's position.
    The GAO report, if I remember it correctly, stated that 
Commerce does not have the explicit statutory authority to 
apply the CVD to China, and it's been our longstanding claim 
that we have the implicit statutory authority to do so.
    Indeed, the key portion of the statute, which is amended in 
Section 1(a) of H.R. 1229, refers to all countries, not just 
market economy countries.
    Mr. ENGLISH. I guess that's probably, given the fact that 
you are pursuing the coated paper case now, probably about as 
far as we need to go on that, although do you feel that the 
language of the bill, as we've tried to craft it, gives you 
adequate authority to go forward with the coated paper case 
without interruption, bearing in mind, and I understand this 
may have been brought up while I was on the floor, but Mr. 
Davis was very careful, I think, to draft this legislation to 
not disrupt the current Commerce activities, and in fact, the 
retroactivity provision, which I understand is also criticized 
in some later testimony in the next panel, is intended simply 
to provide for continuity.
    Is that your appreciation of the language?
    Mr. SPOONER. For the most part, Congressman English, I 
think that's the case.
    There's one provision of H.R. 1229 which may impact our 
practice, and I can't comment as to whether it would impact our 
glossy paper analysis.
    Should we decide to countervail China, rather nonmarket 
economies, under current law, we can--our job is basically to 
figure out, to do the math, as--would be to do the math as best 
we can, and that might involve looking at benchmarks within 
China under appropriate circumstances, or it could involve 
looking outside China.
    There's one portion of H.R. 1229 which would require 
Commerce to look outside China under all circumstances that we 
might want to work with the Committee on.
    Otherwise, I think it would affirm our authority.
    Mr. ENGLISH. Let me just say, Mr. Spooner, I'm delighted 
that you're here to testify.
    I also want to express, since the Administration has been 
criticized at this hearing, in that there are some deep policy 
differences on the question of China trade, I for one am 
grateful that the Administration is pursuing the coated paper 
case.
    I think this is an important, groundbreaking initiative, 
and essential, if we are to get China to operate within the 
rules-based framework that we had always understood was the 
intent of bringing them into the WTO.
    I'm--with that, Mr. Chairman, I'm grateful for the 
opportunity to have asked these questions, and I'll yield back 
my time.
    Chairman LEVIN. Thank you. Thank you for your salient 
questions.
    Mr. Meek, do you wish to interrogate, or catch your breath?
    Mr. MEEK. Are we talking about--you said interrogate. Are 
we----
    Chairman LEVIN. Mr. Spooner.
    Mr. MEEK. Are we in China or are we in the United States? 
No? Okay. All right. Great.
    Mr. Spooner, I--actually, I walked in from the vote, and I 
left my folder, but I know you may be familiar with the bill 
that Representative Ryan is sponsoring, and there's a lot of 
discussion about what China does with its dollar that works 
against U.S. companies.
    You probably addressed this a little earlier, and I 
apologize, Mr. Chairman, for coming in a little delayed.
    This is a major, major concern that I think overall, 
hurting trade, and hurting the outlook on trade that so many 
Americans met with some level of enthusiasm, thinking that it 
would be good for U.S. business and it would be good for small 
businesses, and now finding, U.S. businesses are finding that, 
as relates to competition, that they're at a disadvantage 
because they keep moving, changing the rules in China as 
relates to the dollar and subsidizing companies there.
    I say all of that in a global sense, to say that being on 
the Subcommittee on Trade, being from South Florida, where we 
have hopefully, if we can resurrect a free trade agreement 
(FTA) experience down there, and also being the financial 
center for the Americas and the music capital and music 
capital, what have you, it's like a doormat for trade.
    Now we're having political problems. So, many Members of 
Congress have been elected, especially in the last cycle, 
running against China, running against trade agreements.
    I came to talk in a very detailed way about the China bill, 
but--that Mr. Ryan has, and is also sponsored in the Senate, 
but I wanted to hear some of your feelings on what can be done.
    Mr. SPOONER. Thank you, Congressman.
    I suppose what's commonly referred to as the Ryan bill, or 
the Hunter-Ryan bill would, if I remember correctly, stipulate 
that China's currency practices are--fit the definition of a 
subsidy that would be countervailable [sic] under our domestic 
law.
    I frankly can't comment on whether or not the 
Administration supports the bill. We sort of prepped today for 
H.R. 1229.
    I can tell you that, should Commerce be presented with a 
set of facts or a petition in which the alleged activity meets 
the definitions of a subsidy under our domestic law, that it be 
a government policy that provides a specific benefit to an 
industry, that harms U.S. producers, we would do what we could 
to countervail it.
    Mr. MEEK. Well, I--that bill is almost the embodiment of 
what--especially being--if you're from Ohio or South Carolina 
or any of these States that have been heavily affected by 
trade, then you would be for this, be for the Ryan bill.
    I think that it would be good if you all can continue to 
have good dialogue on where you can come together, because I 
think something is going to happen in the 110th Congress. The 
will and the desire is there to make it happen.
    Mr. Chairman, I just wanted to come because I know that 
that legislation may very well be coming before either our 
Subcommittee or our Committee if we decide to take it on, and 
it's something that is, in my opinion, technical, because I've 
read the bill and, as you know, Congressman Ryan and I work 
very closely together.
    He reminds me every day that he's an appropriator and he's 
more important than I am. So, I----
    Chairman LEVIN. Don't buy that.
    Mr. MEEK. I don't buy it. I just told him on the 
Appropriations Committee he has maybe 80-something Members. I 
said, ``I know all of the Members on my Committee. Do you?''
    So, we just leave it like that.
    It's such a--putting all jokes aside, it's such a technical 
and serious piece of legislation, so many lives have been 
affected by it, I just wanted to come to ask you today, and 
your staff, to hopefully work with us on something that can 
hopefully level the playing field.
    Thank you, Mr. Chairman.
    Chairman LEVIN. Thank you for raising it. It isn't the 
subject matter today, but it is very much related, Mr. Meek.
    Our Subcommittee has been talking to the Financial 
Services, the appropriate Subcommittee, and we may well hold a 
joint hearing between our two Committees.
    So, I think you're right, the currency issue is inescapably 
before us.
    Mr. MEEK. We're just trying to build the will and desire 
here in the halls of Congress to deal with it and deal with it 
in a very appropriate way that won't hurt our efforts in China, 
but won't continue to hurt U.S. companies here.
    Thank you.
    Chairman LEVIN. All right. Well, I think that's it, Mr. 
Spooner. Thank you very, very much, and again, thank you for 
your patience.
    Mr. SPOONER. Thank you.
    Chairman LEVIN. All right. The next and last panel will 
come forth.
    I'll introduce the panel as you're being seated.
    I think we'll take them in this order:

           John Comrie, who is director of trade policy, 
        government affairs, and communications for IPSCO Steel 
        in Illinois.
           David Phelps, who is president of the American 
        Institute for International Steel.
           Usha Haley, who is an assistant professor of 
        management and director of the Global Business Center, 
        University of New Haven, New Haven, Connecticut.
           Daniel Porter, who is a partner in the International 
        Trade Group, Vinson & Elkins.
           James Hecht, who is a partner, international trade 
        practice, at the firm of Skadden Arps.

    Let me, as you begin, and if you would, in that order, 
thank you for providing the testimony as the rules provide but 
are not always implemented, and that is, you were able to 
submit them, I think, in each case yesterday, and that gave us 
a chance last night and this morning to read them over.
    My guess is that many of the Members, if not all, having 
had this material, were able to take a look at it, and surely 
their staffs were, before this hearing.
    So, thank you very much for coming. Thank you very much for 
your patience.
    We now await eagerly your testimony.
    Mr. Comrie.

    STATEMENT OF JOHN COMRIE, QC, DIRECTOR OF TRADE POLICY, 
 GOVERNMENT AFFAIRS AND COMMUNICATIONS, IPSCO STEEL AND IPSCO 
                   TUBULARS, LISLE, ILLINOIS

    Mr. COMRIE. Thank you very much, Mr. Chairman.
    It's my pleasure to be here this afternoon.
    Mr. Chairman, and Members of the Committee on Ways and 
Means Subcommittee on Trade, my name is John Comrie and I am 
the director of trade policy and communications at IPSCO.
    I appreciate the opportunity to testify in support of H.R. 
1229, the Nonmarket Economy Trade Remedy Act of 2007, as 
introduced by Representative Arthur Davis and Phil English.
    I am testifying today on behalf of IPSCO, but I believe 
that my views are shared by the U.S. steel pipe and tube 
manufacturing industry, the Greater U.S. steel industry, and 
the many employees that are affected by unfairly traded imports 
from nonmarket economy countries, particularly the People's 
Republic of China.
    I am here as a member of a company and a member of an 
industry that competes successfully against any in the world, 
as long as all producers are playing by the same rules.
    As one of North America's leading steel plate and pipe 
producers, IPSCO is uniquely positioned within the marketplace 
for long-term sustainable growth.
    Despite being a well-managed and highly efficient global 
competitor, more and more IPSCO finds itself being undercut by 
Chinese-produced oil country tubular goods (OCTG) pipe products 
that are crucial for oil and gas exploration.
    Neither the Chinese steel nor the pipe industry has natural 
resource advantages over anything in the U.S. industry, and in 
fact, has to overcome several such disadvantages.
    China's government subsidies have been central to the 
building of the Chinese steel industry.
    The combination of pervasive State ownership, direct and 
indirect subsidies, other government support, and a 
longstanding development policy based on targeted exports 
allows Chinese OCTG pipe products to be produced and sold below 
their actual value.
    As my testimony today only can provide a brief summary of 
China's government subsidies to its steel industry, I would 
like to direct you to my written testimony for a more complete 
statement.
    In 2006, China produced 423 million metric tons of steel 
which was more than the United States, the European Union, and 
Japan combined.
    In recent years, capacity expansion efforts have 
increasingly been directed toward higher value-added steel 
products, such as corrosion resistant steel and OCTG.
    The extraordinary and unprecedented expansion of China's 
steelmaking capacity is a function of decisions by government 
planners coupled with the mobilization of massive resources to 
carry them out.
    In 1990, China's steel industry was technologically 
lagging, inefficient, and incapable of satisfying the country's 
rapidly growing demand for steel.
    Therefore, in the mid-1990s, the Chinese government decided 
to promote the steel industry as a national priority.
    The steel enterprises, implementing the government's 
expansion plans, were overwhelmingly government owned. Many 
were poorly suited to be self-sustaining steel producers. 
Financing of these enterprises was mainly derived from 
government investments and loans.
    Thus, it was not surprising that, by the end of the 1990s, 
many Chinese steel mills had fallen into dire financial 
straits.
    In the United States, such a situation would have resulted 
in bankruptcy, liquidation, or at least mill closures.
    In China, however, failing enterprises continued to expand 
capacity based on government write-offs of bad debt and 
additional injections of State-sponsored capital.
    The Chinese government's financial support to the steel 
industry has countless more aspects, all of which are detailed 
in my written testimony.
    The enactment of H.R. 1229 is essential to ensuring free 
and fair trade. The legislation would ensure that our nation's 
fair trade laws are uniformly applied to all prohibited trade 
subsidies, regardless of the country of origin.
    The bill would make clear that the countervailing duty laws 
shall be applied to nonmarket economies.
    It would recognize the importance of congressional 
consideration of whether a country's nonmarket economy status 
should be revoked without unduly burdening Commerce's ability 
to administer our nation's trade laws.
    Finally, it would require the International Trade 
Commission (ITC) to undertake a comprehensive study of China's 
use of unfair and injurious subsidies.
    Finally, Mr. Chairman, I'd like to conclude my remarks 
based on a couple of my own personal experiences.
    I have for some time, like many others, been trying to 
understand what is going on in China. It's obviously a major 
force in the world.
    I have been to Beijing, I've participated in the U.S.-China 
steel dialogue.
    My company has hired a prominent Washington trade firm to 
make an investigation of subsidies in the steel and the OCTG 
industry, and we have made many efforts to try and understand 
what's going on in China.
    This bill would provide the opportunity to bring cases 
which would lead to serious investigations by the Department of 
Commerce.
    These investigations will gather information that only a 
Government agency can obtain. Nothing in this bill prejudges 
the results of those investigations.
    Finally, the bill provides for annual updates on that 
information.
    All of those actions would help solve this issue of 
transparency.
    It is the underlying feature of the bill, is that it would 
promote an openness of what's going on in China. It would allow 
people around the world, and particularly in this country, to 
understand what's going on in China.
    Thank you for providing me the opportunity to testify 
today. I am happy to respond to any questions the Members of 
the Committee may have.
    [The prepared statement of Mr. Comrie follows:]
   Prepared Statement of John Comrie, Q.C., Director of Trade Policy,
        Government Affairs, and Communications, IPSCO Steel and
                    IPSCO Tubulars, Lisle, Illinois
    Mr. Chairman and Members of the Committee on Ways and Means 
Subcommittee on Trade, my name is John Comrie and I am the Director of 
Trade Policy and Communications at IPSCO. I appreciate the opportunity 
to testify in support of H.R. 1229, the Nonmarket Economy Trade Remedy 
Act of 2007, as introduced by Representatives Artur Davis and Phil 
English on February 28, 2007. I thank Representatives Davis and English 
for introducing this important legislation and Chairman Sandy Levin for 
calling this hearing today.
    I am testifying today on behalf of IPSCO, but I believe that my 
views are shared by the U.S. steel pipe and tube manufacturing 
industry, the greater U.S. steel industry and the tens of thousands of 
the workers directly and indirectly affected by unfairly traded imports 
from nonmarket economy countries, particularly the People's Republic of 
China (``China''). I am here as a member of a company and a member of 
an industry that competes successfully against any in the world, as 
long as all producers are playing by the same rules. I am here to 
request your assistance in leveling the playing field and supporting 
the domestic steel industry and its employees at what they do best, 
compete and win.
    Both Goldman Sachs and steel industry associations describe IPSCO 
as one of North America's leading steel plate and pipe producers. Due 
to its state-of-the-art facilities, management experience, and focus on 
high quality, low-cost production, IPSCO is considered to be uniquely 
positioned within the marketplace for long term sustainable growth. 
Although IPSCO started as a Canadian company, by relocating our 
headquarters to Chicago, Illinois in 1999, building two modern steel 
mills in Alabama and Iowa and acquiring The NS Group in 2006, IPSCO 
cemented its long standing dedication and investment in the health and 
vitality of this critical U.S. industry as well as the entire U.S. 
economy. Currently, IPSCO owns and operates 16 mills and plants 
throughout the central states of Minnesota, Iowa, Nebraska, Okalahoma, 
Kentucky, Alabama, Arkansas, Pennsylvania, and Texas. Each day in these 
states, more than 2800 people provide the labor necessary for IPSCO to 
operate. The jobs as well as other businesses indirectly dependant upon 
IPSCO leads to an additional 20,000 U.S. jobs using the multiplier of 
7:1 commonly associated with the steel industry. We have invested more 
than $1 billion in our U.S. facilities over the past ten years and this 
year again, plan to make major capital improvement expenditures to 
insure IPSCO remains the globally competitive company it is today. 
IPSCO is a proud and active member in each of the communities in which 
it operates, contributing significantly both financially and as 
volunteers to community based organizations.
    Despite being a well managed and highly efficient global 
competitor, more and more, IPSCO finds itself being undercut by Chinese 
produced oil country tubular goods (``OCTG''), pipe products that are 
crucial for oil and gas exploration. Since 2002, Chinese exports of 
OCTG pipe to the United States increased by approximately 1000%.\1\ 
This is despite the fact that China has no natural advantages with 
regard to steel production. In fact, China must overcome several 
natural disadvantages including the high cost of energy and a shortage 
of water resources. As I will explain later, the combination of 
pervasive state ownership, direct and indirect subsidies, other 
government support, and a long standing development policy based on 
targeted exports allows Chinese OCTG pipe products to be produced and 
sold below their actual value. The resulting playing field is neither 
level nor fair.
---------------------------------------------------------------------------
    \1\ According to Chinese Customs Statistics, 2002-2006 Chinese OCTG 
exports to the United States grew by 843%. U.S. import data show 
imports of Chinese OCTG pipe grew by 1083% for the same period.
---------------------------------------------------------------------------
    In accepting China into the WTO, provisions were incorporated to 
address surges of Chinese products into the U.S. market, notably 
Section 421. The domestic pipe and tube industry put forth a very 
strong Section 421 case before the International Trade Commission and 
the ITC approved the industry's position. Unfortunately, however, the 
Administration declined to provide relief. With such discretionary 
authority built into the statute, obtaining relief under Section 421, 
no matter how strong the case, is entirely uncertain.
    The simple fact is that highly efficient and industry leading 
producers such as IPSCO can only counter the subsidies our Chinese 
counterparts receive with actions under U.S. fair trade laws. WTO-
sanctioned trade remedy laws must be allowed to operate effectively to 
properly offset these subsidizes and discourage future market-
distorting subsidization by governments in nonmarket economies, 
including China.
Government Subsidies Have Been Central to the Building of the Chinese 
        Steel Industry
    Since 1990, China has been the site of the largest expansion of 
steelmaking capacity in history, the sheer scale of which defies 
superlatives. In 1990, China produced 66 million metric tons of steel, 
or less than the United States, the European Union or Japan. Sixteen 
years later, in 2006, China produced 423 million metric tons--a more 
than six fold increase over 1990, and more than the United States, the 
European Union (the ``EU'') and Japan combined produced. The China Iron 
and Steel Association (``CISA''), which has always underestimated 
output growth in the past, is projecting that Chinese steel production 
will surpass 470 million metric tons in 2007 and perhaps be as high as 
480 million metric tons. In recent years, capacity expansion efforts 
have increasingly been directed toward higher value-added steel 
products, such as corrosion-resistant sheet and OCTG.
    The extraordinary and unprecedented expansion of China's 
steelmaking capacity is a function of decisions by government planners, 
coupled with the sustained will and the mobilization of massive 
resources to carry them out. In 1990, China's steel industry was 
technologically lagging, inefficient, fragmented, and incapable of 
satisfying the country's rapidly growing demand for steel, and China 
was dependent on imports for many of its steel needs. The central 
government decided to promote the steel industry as a national 
priority, manifested in the Ninth Five Year Plan (1996-2000) and in 
subsequent plans. Promotion of the steel industry was also emphasized 
in the five-year plans of many of China's provinces and municipal 
governments--in many cases specifying particular production lines which 
were to be established or expanded, steel products whose production was 
to be increased, and types of equipment which were to be installed. For 
example, in 2006, the 11th Five Year Plan for the Inner Mongolia 
Autonomous Region provided that ``in the iron and steel industry [we 
shall] accelerate the Hexi Industrial Area . . . focus on promoting the 
projects including the 3 million metric tons automobile sheet project 
of BaoTou Steel, the 2 million metric tons seamless steel project of 
Huaye Special Steel, the 2 million metric tons special seamless steel 
project of Mengfeng. . . .'' \2\
---------------------------------------------------------------------------
    \2\ Inner Mongolia Autonomous Region Developmental Reform 
Commission, 11th Five Year Plan on Regional Economic Development of 
Huhehaote, BaoTou, and Erdos in Inner Mongolia Autonomous Region 
(posted July 17, 2006) (translation from Chinese).
---------------------------------------------------------------------------
    The steel enterprises which were expected to implement the 
government's expansion plans were themselves overwhelmingly government 
owned, and, in cases like that of Tianjin Pipe, China's largest 
producer of OCTG, were expressly created as ``key projects'' by the 
government for the specific purpose of producing strategically 
important steel products. Financing of these projects was derived from 
equity infusions by government investment corporations; low interest 
loans from government banks, and foreign loans utilizing Chinese 
central, regional and local government development entities as 
financial intermediaries. Typically, in 2000 the State Administration 
of the Metallurgy Industry (``SAMI'') announced plans to spend over $6 
billion ``to ensure that the steel industry can compete in world 
markets after China enters the World Trade Organization. . . . Nearly 
28 billion yuan ($3.4 billion) of the spending will be in the form of 
low interest bank loans.'' \3\ The government is in effect, through the 
various enterprises which it owns and controls, both the borrower and 
the lender, and not surprisingly under such circumstances, the 
expansion of China's steel industry has never faltered for shortage of 
capital.
---------------------------------------------------------------------------
    \3\ Gong Zhengzheng, ``Steel Gets Support for Upgrades,'' China 
Daily Business Weekly (March 12, 2000).
---------------------------------------------------------------------------
    From a market-based economic perspective, many of China's 
steelmaking expansion projects were irrational--poorly sited, unsuited 
to actual market demands, and unlikely to ever be self-sustaining. By 
the end of the 1990s many new or expanded mills had fallen into 
financial difficulty and a vast portfolio of loans which had been made 
to such entities became ``nonperforming,'' e.g., the enterprises were 
no longer able to make principal and interest payments on the basis 
that had been established when the loan was made. For a private company 
in a market economy, such a situation is an existential crisis which 
often culminates in bankruptcy, liquidation, and the closure of a mill. 
In China, however, failing enterprises continued to invest heavily and 
expand capacity. Government banks wrote off massive quantities of bad 
debt, and when doing so threatened their own solvency, themselves 
received injections of capital from the government. Pursuant to so-
called ``debt-to-equity swaps,'' banks transferred their bad loans to 
state-owned asset management corporations, which converted ``debt'' to 
``equity.'' Because in virtually all of these cases the government--
through one or another subordinate entities--owned the enterprises both 
before and after the ``swaps,'' it is unclear what, if anything, it 
gained by these transactions; the enterprises however, had their debts 
erased and were in a position to resume borrowing in order to carry out 
the next phase of expansion. One of China's largest steel producers, 
Anshan Iron and Steel, fell into ``dire straits'' in the late 1990s as 
a result of losses and a heavy debt burden, but the government and 
government banks ``continue[d] to supply it with resources and 
capital.'' Anshan continued to invest heavily in expansion and 
modernization with ``state banks . . . providing most of the funds for 
the modernization drive.'' \4\
---------------------------------------------------------------------------
    \4\ ``Friends in High Places,'' Far Eastern Economic Review (April 
29, 1999) p. 68.
---------------------------------------------------------------------------
    National and local governments have used financial incentives to 
induce mergers of steel mills to create enterprises of larger scale. In 
1999 the government announced that the Industrial and Commercial Bank 
of China (the ``ICBC'') would ``play an important part in restructuring 
the metallurgy industry by adjusting its credit policies,'' including 
``debt-equity swaps, writing off non-performing loans and granting 
closed-end credit to boost restructuring of the industry.'' The ICBC 
was to give ``special support'' to mergers involving Bao Steel, Anshan 
and Shougang Steel to ``sharpen their competitive edges in the 
international market and help one or two of them claw to the world top 
500 companies list.'' \5\ The mergers, unlike consolidations of private 
companies, were often not undertaken on the basis of management 
initiative but command-style decisions by government officials. 
According to one study on the mergers, ``the companies concerned had to 
go along with the plans of the central administration, [and therefore] 
sought to anticipate the wishes of the government, which in any case 
would have been imposed on them.'' \6\ In 2000 executives of Baosteel 
reported that Chinese Premier Zhu Rongji had compelled the company to 
absorb the Shanghai Yichang Sheet Company and ``instructed Baosteel to 
make Yichang profitable.'' To sweeten the transaction the State Council 
(led by Zhu) provided $83 million in low interest loans.\7\
---------------------------------------------------------------------------
    \5\ ``Bank Set to Support Industry Restructuring,'' China Daily 
(December 7, 1999).
    \6\ Jean-Francois Huohet, ``Concentration and the Emergency of 
Corporate Groups in Chinese Industry,'' China Perspectives (May-June 
1999) p. 16.
    \7\ ``Gearing Up for Battle,'' Asiaweek (December 22, 2000); ``A 
Profile of the Steel Industry in China,'' Metal Bulletin (February 
2000).
---------------------------------------------------------------------------
    Government decisions and government financial support are providing 
the basis for an extraordinary expansion of capacity in China's OCTG 
industry. China has become a net exporter of OCTG products in recent 
years as production has rapidly outpaced domestic consumption. Yet a 
number of its OCTG producers are significantly expanding capacity. Like 
China's steel industry generally, the OCTG sector is dominated by 
majority state-owned enterprises, which account for over two-thirds of 
China's OCTG production. The central and many regional governments have 
concluded that because of its relationship to the energy sector, OCTG 
is a ``strategic'' or ``pillar'' industry warranting priority support.
    Tianjin Pipe, China's largest producer of OCTG with nearly 30 
percent of China's OCTG capacity, illustrates the close relationship 
between governments and the OCTG industry. Although, Tianjin Pipe is 
owned by a number of organizations, virtually all of the owners are 
governmental organizations. Tianjin Pipe was conceived as the so-called 
``Big Seamless Pipe'' project during the Eighth Five Year Plan in the 
early 1990s; its establishment was the ``strategic decision of the 
Party and State'' to end China's dependence on OCTG for the domestic 
energy industry. Tianjin Pipe was capitalized entirely by debt arranged 
under various government auspices. Particularly important was the role 
of the Tianjin International Trust Investment Corp. (``TITIC''), a 
municipal government entity which borrowed hard currency abroad and 
reloaned the funds to local industrial projects including the ``Big 
Seamless'' project. By 1998-99, fully 40 percent of all of TITIC's 
outstanding loans were extended to one enterprise, Tianjin Pipe. TITIC, 
although a governmental entity, suffered a downgrading of its credit 
rating, in large part because of its exposure to its loans to Tianjin 
Pipe, which by the mid-1990s was on the verge of default. The City of 
Tianjin resolved the problem with injections of funds into Tianjin 
Pipe, enabling it to continue to service its debt to TITIC (itself an 
instrumentality of the City of Tianjin).
    By the mid-1990s Tianjin Pipe was burdened with over $1 billion in 
debt and was losing money on its operations. Nevertheless the 
government decided that it should continue to expand by opening a 
second production line, with officials pointing out that ``oil casing 
[OCTG] is a strategic product.'' The government agreed to inject 4 
billion yuan into the company (about $450 million). The company pressed 
ahead with expansion, ultimately becoming the largest producer of OCTG 
in China. In 2003 an official of the Tianjin Municipal Government said 
in a speech to the Tianjin Municipal Peoples' Congress that

           It is necessary for the steel pipe company [Tianjin Pipe] to 
        continue to develop new products, expand the scale of 
        production, and build itself into a large comprehensive 
        enterprise that ranks side by side with three other top steel 
        pipe manufacturing enterprises of the world.\8\
---------------------------------------------------------------------------
    \8\ ``Government Work Report Delivered by Dai Xiangbong at the 
First Session of the 14th Tianjin Municipal Peoples' Congress on 
January 18, 2003'' reproduced in Tianjin Ribao (January 27, 2003).

    In 2006, Tianjin Pipe announced plans to expand capacity to enable 
it to triple its annual output by the end of 2008.
    Direct financing from state-owned banks, investment corporations, 
or financial intermediaries represent only one aspect of government 
financial support to the steel industry. Many steel enterprises fall 
into arrears on their tax payments and the national and regional 
governments periodically forgive the arrearages. The government plays 
an active role in among other things controlling the prices of raw 
materials to the steel industry to the industry's advantage; grants are 
provided by the central government to defray interest payments and to 
pay for energy and raw materials. A sweeping array of local benefits, 
including concessional rents and utilities rates, are available to 
steel enterprises which are located in designated industrial parks. The 
central government has periodically intervened in the market when steel 
prices have fallen, encouraging and in some cases imposing cartel 
arrangements on the steel industry to stabilize and lift prices.\9\
---------------------------------------------------------------------------
    \9\ ``China's Iron and Steel Pricing Agreement,'' Gendai Chuyokai 
(September 2000).
---------------------------------------------------------------------------
Enactment of the Nonmarket Economy Trade Remedy Act of 2007 Is 
        Essential to Ensuring Free and Fair Trade
I. Application of Countervailing Duties to Nonmarket Economies
    First, H.R. 1229 would make clear in our nation's fair trade laws 
that the countervailing duty laws shall be applied to nonmarket 
economies. The legislation would ensure that our nation's fair trade 
laws are uniformly applied to all prohibited trade subsidies, 
regardless of the country of origin. This relief is vital to the 
ability of U.S. manufacturers and producers to effectively compete on a 
level playing field against unfairly-traded imports, particularly from 
nonmarket economies such as China.
    In 1984, the administering authority for our nation's fair trade 
laws, the U.S. Department of Commerce (``Commerce''), made a policy 
decision to forgo application of countervailing duties to nonmarket 
economies based on its perceived definition of a ``subsidy'' as any 
action that distorts the market process. Based on that definition, 
Commerce determined it was impracticable to identify a specific subsidy 
in a nonmarket economy. The U.S. Court of Appeals for the Federal 
Circuit in Georgetown Steel subsequently upheld Commerce's policy 
decision, but emphasized that the policy is completely discretionary; 
it is not required by international law, U.S. statutory law, or even 
Commerce's own regulations. The court simply deferred to the rationale 
of the administering authority.
    In the twenty plus years since Commerce's flawed policy decision, 
there have been changes in U.S. and international law and market 
conditions that now mandate the application of countervailing duties to 
nonmarket economies. In 1994, the World Trade Organization (the 
``WTO'') Agreement on Subsidies and Countervailing Measures (the ``SCM 
Agreement'') established a clear and administrable definition of 
``subsidy'' that encompasses nonmarket economies. Specifically, the SCM 
Agreement states that a countervailable ``subsidy'' shall be deemed to 
exist if an administering authority makes all of the following 
findings: (1) there is a financial contribution by a government or 
public body, (2) in the form of an income or price support, (3) where a 
benefit is conferred, (4) to a specific enterprise or industry. This 
standard has been enacted into U.S. law as part of the Uruguay Round 
Agreements Act.
    Based on the correct standard for the finding of a ``subsidy,'' 
Commerce's original rationale has been completely contradicted. A 
countervailable subsidy is not defined by the effects it has on a 
nonmarket economy, but instead is defined by the actions taken by the 
exporting government. It is no wonder that Canada has used the SCM 
Agreement standard to apply countervailing duties to China without 
revoking China's nonmarket economy status for several years now.
    Commerce itself has recognized the flawed rationale of its 1984 
policy. In 1991, Commerce initiated a countervailing duty investigation 
of electric fans from China. Recently, in November 2006, Commerce 
initiated another countervailing duty investigation against China, this 
time for imports of coated free sheet paper. As part of its 
investigation, Commerce has stated that it currently is reevaluating 
its policy of excluding nonmarket economies from our nation's 
countervailing duty laws. While we commend Commerce for undertaking 
this initiative, the time for Commerce's deliberation is over due. It 
is time for Congress to act.
    Fundamentally, no country or industry should be automatically 
exempt from our nation's fair trade laws. If an exporting country--
market or nonmarket--is unfairly subsidizing its manufacturers to the 
injury of a U.S. domestic industry, Commerce must apply countervailing 
duties to remedy this injury. Countries like China should not be 
allowed a free pass from the U.S. fair trade laws simply because of its 
nonmarket economy status.
    Specifically for China, H.R. 1229 would establish a method for 
determining the benchmark from which Commerce would be able to identify 
and quantify China's prohibited trade subsidies. So long as China 
remains a nonmarket economy, the bill would require Commerce to presume 
that the terms and conditions prevailing in China are not practicable 
for the identification and calculation of a countervailable benefit. As 
such, Commerce would be required to use the terms and conditions 
prevailing outside China. By looking to the terms and conditions 
prevailing outside China, Commerce will be able to better quantify the 
benefits received by Chinese manufacturers and exporters.
    The bill also takes into consideration the fact that China will be 
allowed market economy status by December 11, 2016, as agreed upon in 
China's WTO accession protocol. When China reaches market economy 
status, the bill will allow Commerce to take into account the 
possibility that the terms and conditions prevailing in China at that 
time may not be the appropriate benchmark. While Commerce is directed 
to first consider China's prevailing market conditions, the bill gives 
Commerce the authority to look outside China if the situation so 
warrants. This authority is vital because an artificial deadline 
established by the WTO is by no means an accurate indication of China's 
true market economy conditions.
II. The Importance of Congressional Approval
    Second, H.R. 1229 would recognize the importance of Congressional 
consideration of whether a country's nonmarket economy status should be 
revoked without unduly burdening Commerce's ability to administer our 
nation's fair trade laws. The bill requires any final determination by 
Commerce to revoke a nation's nonmarket economy status to have the 
approval of Congress through a joint resolution. Specifically, the 
President must notify this Committee and the Senate Committee on 
Finance no later than ten days after the publication of Commerce's 
final revocation determination in the Federal Register. Congress must 
then introduce a joint resolution approving or disapproving Commerce's 
final revocation determination.
    Like the President's fast track authority, the bill has an 
expedited debate and approval process. Amendments to the joint 
resolution and motions to postpone consideration are not allowed. There 
is a defined and expedited period for committee and floor 
consideration. Thus, the President can rest assured that Congress will 
not be able to unduly delay the revocation of a nation's nonmarket 
economy status. The involvement of Congress is purely to ensure that 
Commerce has made the right decision with respect to our nation's fair 
trade laws.
    The importance of Congressional approval for revocation of 
nonmarket economy status is most evident in the current situation with 
China. Even though China agreed to be classified as a nonmarket economy 
for a period of fifteen years after its accession to the WTO in 2001, 
the Chinese government has shown an eagerness to reach market economy 
status well before 2016. As we have shown today, China's efforts to 
gain market economy status are entirely premature, as it has yet to 
adhere to true market economy principles. China continues to provide 
subsidies to its steel exporters, it engages in currency manipulation, 
and it has not maintained necessary and appropriate labor and 
environmental standards. Despite all this evidence, there is 
considerable concern that China may be able to gain market economy 
status without undergoing true market reforms.
    Thus, it is imperative for Congress to consider the decision of 
whether to allow China market economy status. As today's hearing 
proves, open and transparent discussions will lead to a more reasoned 
decision on trade issues involving China. U.S. manufacturers, workers 
and other concerned citizens should be allowed to voice their opinions 
on the devastating impact of Chinese imports on the U.S. economy, and 
these views must be taken into consideration if and when Commerce seeks 
to revoke China's nonmarket economy status. In no uncertain terms, the 
market economy status of a country is fundamental to the effective 
enforcement of our nation's fair trade laws.
III. A Comprehensive Study of China's Use of Subsidies
    Finally, H.R. 1229 would require the U.S. International Trade 
Commission (the ``Commission'') to undertake a comprehensive study of 
China's use of unfair and injurious subsidies. The study would catalog, 
and whenever possible quantify, the practices and policies that China's 
central, provincial and local governments use to support and influence 
the decisions of Chinese manufacturers and industries. The Commission 
must report the results of its study to Congress and the public no 
later than nine months after the date of enactment of this bill, and 
annually there afterwards.
    Critics of this bill have argued that it would be difficult to 
pinpoint the level of China's prohibited subsidies. The Commission's 
study and report would assuage these concerns by providing a systematic 
catalog of how China uses government intervention to promote 
investment, employment and exports. As we have shown, China has an 
established policy of providing prohibited subsidies to Chinese steel 
exporters and other industries. But our research efforts are limited; 
no one U.S. manufacturer or industry can track every subsidy China 
provides to its manufacturers and exporters. Thus, it is imperative 
that the U.S. government undertake an annual and comprehensive study of 
the terms and conditions prevailing in China. Only by holding the 
Chinese government accountable for its actions will China finally 
decide to undertake true market reforms.
    Thank you for providing me the opportunity to testify today. I am 
happy to respond to any questions the Members of the Committee may 
have.

                                 

    Chairman LEVIN. Thank you.
    Mr. Phelps.

STATEMENT OF DAVID H. PHELPS, PRESIDENT, AMERICAN INSTITUTE FOR 
   INTERNATIONAL STEEL (AIIS) AND MEMBER OF THE BOARD OF THE 
      CONSUMING INDUSTRIES TRADE ACTION COALITION (CITAC)

    Mr. PHELPS. Good afternoon.
    I'm Dave Phelps, president of the American Institute for 
International Steel and a member of the board of the Consuming 
Industries Trade Action Coalition, CITAC.
    CITAC's membership includes American manufacturers and 
retailers in a wide variety of industrial and consumer goods, 
from auto parts to household items.
    We do not condone trade-distorting subsidies, neither AIIS 
nor CITAC, but any legislation or policy choice that affects 
competitiveness should consider the impact on consuming 
industries.
    CITAC strongly opposes putting consuming industries in the 
United States at risk with H.R. 1229.
    The bill before you would put American businesses and 
workers in jeopardy for the following reasons:

           First. It is fundamentally unfair to U.S. consuming 
        industries. The bill offers no guidance to the Commerce 
        Department in calculating subsidies in NMEs.
           Since Commerce cannot fairly and accurately 
        calculate subsidies in nonmarket economy situations, 
        the Department has declined to calculate them in the 
        past.
           We are opposed to a sudden change in policy that 
        would inevitably harm consuming industries in the 
        United States.
           Two. The WTO Subsidies Agreement prohibits double 
        counting, but the bill fails to address double 
        counting. Indeed, as we read 1229, double counting is 
        practically required.
           Three. H.R. 1229 would require congressional 
        approval before the U.S. Government could declare that 
        China's economy has graduated from NME status.
           This requirement would turn what is now a technical 
        and economic analysis done by the Department of 
        Commerce into a political exercise.
           Four. The bill creates an irrefutable presumption 
        that information within China is not reliable.
           This is unacceptable, because we have no assurances 
        that information external to China is any more 
        reliable.
           We urge the Subcommittee to insist on the use of 
        reliable information internal to the country under 
        investigation and to require accuracy above 
        retribution.
           Five. Application of CVDs to nonmarket economies is 
        probably WTO-illegal.
           We believe that the WTO accession protocol with 
        China does not permit the United States to impose CVDs 
        on China while simultaneously treating that country as 
        a nonmarket economy.
           We, as well as China, must abide by our WTO 
        commitments.
           Six. Our current trade remedy laws contain 
        fundamental inequities that often cause more harm than 
        benefit. In our view, expanding existing trade remedy 
        law is counterproductive until those inequities are 
        taken care of.
           For example, under current law, consuming industries 
        and the public interest play no role whatsoever in 
        determining whether ADs and CVDs are imposed.
           The addition of countervailing duties to nonmarket 
        economy cases, given the uncertainty of data and 
        methodology for determining appropriate duties, will 
        inevitably lead to excessive taxation of American 
        industry.
           This is a burden that our economy cannot afford in 
        today's global marketplace.
           We do not believe that American industry is under 
        assault from deliberate dumping and subsidies.
           In fact, the domestic steel industry posted all-time 
        record profits in 2006, a year that posted record 
        imports and record imports for companies in the 
        domestic steel industry themselves.
           Therefore, from the perspective of the consuming 
        industries, we have a duty to all U.S. industries to 
        calculate fairly and accurately these duties while 
        determining equally carefully that the duties we decide 
        to impose are in fact in the public interest.
           We see significant reform in trade remedy laws 
        needed, including:

                   One. Industrial consumer standing. That's 
                H.R. 1127.
                   Adoption of prospective duty assessment so 
                that importers know at the time of entry the 
                amount of the definitive duty.
                   Abolition of the unfair practice and illegal 
                WTO practice of zeroing in anti-dumping 
                investigations and reviews.

           Seven. Finally, U.S. anti-dumping law already 
        provides adequate remedies for U.S. producers who 
        believe they are injured by imports from China.
           The duties on steel products that are currently in 
        place due to these nonmarket economy cases range on hot 
        rolled coils from 65 to 90 percent, clearly high enough 
        to knock them out, completely out of the market, and on 
        plate, as high as 129, almost 129 percent.

    In conclusion, we must make sure that trade remedy laws do 
not create more harm to the United States than benefit.
    Given the inequities of our current trade remedy law and 
practice particularly with regard to U.S. consuming industries, 
the imposition of countervailing duties on China and Vietnam, 
the two major nonmarket economies with whom we trade 
extensively, would not be in the best interests of the U.S. 
economy. I would be happy to answer any questions you may have. 
Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. Phelps follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chairman LEVIN. Thank you very much.
    Dr. Haley, welcome. Your turn.

      STATEMENT OF USHA C. V. HALEY, PH.D., PROFESSOR OF 
 INTERNATIONAL BUSINESS AND DIRECTOR, GLOBAL BUSINESS CENTER, 
        UNIVERSITY OF NEW HAVEN, NEW HAVEN, CONNECTICUT

    Dr. HALEY. Thank you, Chairman Levin, Members of the 
Committee, for the opportunity to provide my testimony in 
support of the Nonmarket Economy Trade Remedy Act of 2007.
    My statement specifically focuses on on-the-book and off-
the-book subsidies undertaken by the Chinese government in 
violation of its WTO commitments, the abilities of these 
subsidies to distort free markets and to hamper U.S. companies, 
and the remedial application of countervailing duties.
    Why China?
    China is the largest nonmarket economy. China is the 
nonmarket economy with the greatest commercial influence on the 
United States.
    The U.S. trade deficit with China is the largest in trade 
history, and is growing. Pervasive subsidies seep through 
China, distorting markets and resulting in the misallocation of 
resources.
    The WTO requires annual notification from members on 
subsidies they maintain and encourages additional needed 
information on subsidies.
    On April 13, 2006, China submitted an overdue subsidies 
notification to the WTO in which it identified 78 subsidy 
programs from 2001 to 2004.
    Table 1 in my written testimony specifically identifies the 
breakdown. However, for this presentation I have identified a 
top ten list of the beneficiaries of these subsidies in China's 
2006 notification.
    Foreign invested enterprises and foreign equity joint 
ventures, and agriculture and animal husbandry top the list. 
There are also several industry specific subsidies, including 
those aimed at integrated circuits, tea, copper refining, 
casting, forging, dies, and machine tools, specifically.
    China's notification of its subsidy programs is incomplete. 
Generally, it concentrates on foreign invested enterprises and 
ignores local producers.
    It also concentrates on the central government's programs 
and ignores provincial and municipal governments' programs.
    It ignores most of the export and import substitution 
subsidies that I list in my testimony, and it provides no data 
or statistics on the amounts of subsidies or the effects on 
trade.
    My research over the last eight years has shown that the 
Chinese government uses at least 15 types of different 
subsidies, and in my written testimony I identify a list of 
them, ranging from free to low-cost loans to the undervalued 
currency, and I can just go over a few examples here.
    Free to low-cost loans is one subsidy. Half of all bank 
loans go to State-Owned Enterprise (SOEs). Most of these loans 
will never be repaid.
    If the borrowers cannot pay back the subsidized loans, the 
banks convert the debt into equity in the SOEs or domestic 
companies.
    Asset injections is another example. The SOE's parent 
companies, usually municipal governments or ministries, provide 
them with opportunities to acquire State-run businesses such as 
toll bridges at highly preferential terms.
    Labor controls provide yet another example. The government 
exercises various methods to control employees, including the 
``dang'an'' or employment dossier, and to reduce labor costs 
through injection of part-time and migrant workers.
    The government also provides exemptions from mandatory 
worker benefits contributions to companies that satisfy certain 
export performance requirements.
    On and on.
    Lack of transparency reduces our ability to gauge the 
effects of subsidies.
    It also reduces our abilities to gauge the true efficiency 
and productivity of Chinese labor.
    It reduces the ability of U.S. manufacturers to prove 
dumping.
    It magnifies the weaknesses of China's statistical system.
    It reduces the credibility of the SOE's books, some of 
which have at least four different sets of books.
    Lack of transparency specifically affects China's gross 
domestic product (GDP) figures; statistics generated by the 
National Statistics Board (NSB); sensitive data, such as those 
dealing with debt or foreign direct investment (FDI); 
statistics in private and service sectors; some economic and 
industrial data that the Chinese government classifies as state 
secrets; unemployment statistics; and statistics on non-
performing loans (NPLs).
    The 11th Five-Year Plan that has been revealed indicates 
that subsidies will flow into integrated circuits and software; 
new-generation networks; advanced computing; biomedicine; civil 
airplanes; satellite applications; high-performance and new 
materials, subsidies will also go into controversial sectors 
such as stem cells, gene therapy, and genetically modified 
crops; traditional U.S.-dominated industries, including 
software, semi-conductors, and space exploration; and renewable 
energy sources, such as solar, hydro, and wind power.
    Subsidies are very difficult to understand and unravel, 
primarily because they are politically motivated--rather than 
economically motivated--and so they promote exports of 
inefficient domestic industries.
    They're also guided by the need to control SOEs more 
effectively rather than to increase their profits.
    They stem from long and mid-range plans as well as from 
mistakes. Though very difficult to unravel, they are clearest 
for global champions, such as PetroChina, and they are 
different at central, State, and local levels.
    One example of the market distortion effects of subsidies 
is evident in the profits of foreign companies operating there.
    Our research has shown that only one-third of the foreign 
invested enterprises in China have ever made a profit there.
    United States companies operating in China had lower profit 
margins than in their global operations.
    In 2004, total China earning for U.S. foreign affiliates, 
including all sources of profits, was $8.2 billion.
    In 2004, U.S. foreign affiliates earned $7.1 billion in 
Australia, $8.9 billion in Taiwan and South Korea, and $14.3 
billion in Mexico, with much smaller economies.
    Five U.S. companies accounted for a third of the equity 
profits, showing that they're highly concentrated.
    Comparisons can be made between subsidized and market-
determined prices. Despite China's opacity, benchmarks, 
physical activity indices, and independent surveys can provide 
independent estimates of some subsidies.
    Several corporations engage in these activities.
    WTO provisions require that China divulge more information 
on the magnitude and effects of its subsidies.
    What will countervailing duties do in China, and with 
China?
    Countervailing duties will probably underestimate the 
amounts required to offset China's pervasive subsidies. 
However, small and medium-sized enterprises will find 
countervailing duties less onerous and more accessible than 
anti-dumping measures.
    Countervailing duties will also give U.S. companies an 
explicit import relief measure that targets unfair government 
subsidies.
    Countervailing duties therefore provide a credible and 
cost-effective way to offset some of China's subsidies and to 
level the competitive playing field. Half a loaf is better than 
no bread.
    Thank you.
    [The prepared statement of Ms. Haley follows:]
      Prepared Statement of Usha C. V. Haley, Ph.D., Professor of
  International Business and Director of the Global Business Center, 
            University of New Haven, New Haven, Connecticut
    Thank you Trade Subcommittee Chairman Levin and honorable Members 
of the Committee on Ways and Means, for the opportunity to address such 
a distinguished and thoughtful group. I am a business professor and 
researcher who has studied nonmarket economies for close to three 
decades. My testimony stems from research that I have conducted over 
the last eight years on China's business environments, some of which 
has been published in my book, The Chinese Tao of Business: the Logic 
of Successful Business Strategy (John Wiley & Sons).
    My statement specifically focuses on on-the book and off-the book 
subsidies undertaken by the Chinese government in violation of its 
World Trade Organization (WTO) commitments, the abilities of these 
subsidies to distort free markets and to hamper U.S. companies, and the 
remedial application of countervailing duties (CVDs).
    China remains the largest nonmarket economy and the one with the 
greatest commercial influence on the USA. Trade with China comprises 12 
percent of U.S. total trade. Yet, the equation appears highly 
unbalanced. U.S. exports to China in the first 11 months of 2006 
exceeded $50 billion, up about 20 percent from the previous year and up 
over 163 percent from 2001 when China joined the WTO. Conversely, the 
U.S. goods trade deficit with China in 2006 should reach one-quarter of 
a trillion dollars--the largest trade deficit in U.S. history. U.S. 
imports from China have risen since China joined the WTO; 
simultaneously, imports from other East Asian countries have dropped 
$10 billion, hinting that Chinese products enjoy a highly-subsidized 
cost advantage.
    The WTO requires annual notification from members on subsidies they 
maintain and encourages additional, needed information on subsidies. On 
April 13, 2006, China submitted an overdue subsidies notification to 
the WTO in which it identified 78 subsidy programs from 2001-2004. The 
WTO also specifies that members should provide sufficient information 
``to enable other members to evaluate the trade effects and to 
understand the operation of notified subsidy programs.'' China's report 
stated that several central government ministries and agencies 
distributed and monitored subsidies, and extensive legislation in China 
supported the subsidies. Yet, surprisingly, no statistical data existed 
in China to assess the trade effects of any subsidy or even the total 
annual amounts budgeted to these subsidies. Table 1 identifies the 
stated beneficiaries of China's subsidy programs from 2001-2004: 
Foreign-Invested Enterprises (FIEs)/Foreign Equity Joint Ventures and 
Agriculture/Animal Husbandry appear as the primary beneficiaries.
    China's overdue notification of its subsidy programs to the WTO 
remains incomplete. Generally, the subsidy notification:

          Concentrates on subsidies to FIEs to invest in key 
        strategic Chinese sectors and ignores most subsidies that 
        reduce local producers' operating and production costs vis-a-
        vis foreign producers;
          Concentrates on subsidy programs supported by the 
        central government and ignores all programs offered by 
        provincial and municipal governments or the Peoples Liberation 
        Army (PLA) in China;
          Ignores the subsidy effects of maintaining a cheap 
        currency, as well as subsidies in several sectors including 
        Commercial Banking lending policies or other financial 
        preferences.

    China's refusal to adhere to WTO compliance efforts stems in part 
from its inability to accept the key WTO principles of market access, 
non-discrimination and national treatment. Additionally, market 
mechanisms in China remain undeveloped, making its trade regime 
unpredictable and opaque. Although China implemented some key reforms, 
it has continued to use an array of industrial policy tools to promote 
or to protect favored sectors and industries, and these tools at times 
collide with China's WTO obligations.
    Industrial subsidies in China derive from governmental dominance of 
the economy and from various factors including the central, provincial 
and municipal governments' strategic goals, patronage, and corruption. 
The subsidies include direct and indirect components that affect top 
and bottom lines of industrial operations, distort markets and 
misallocate resources.
Forms of Subsidies
    State subsidies primarily flow into State-Owned Enterprises (SOEs) 
although some well-connected private firms also benefit from indirect 
subsidies such as Special Market Information. Currently, the state 
controls about half the industrial output and SOEs still account for 35 
percent of urban employment. Almost all of China's heavy industry and 
much of its technology lies in governmental hands. The government 
controls about a third of China's economy through SOEs in key sectors 
such as defense and utilities. The State Owned Assets Supervision and 
Administration Committee (SASAC) directly manages the top 190 or so 
SOEs, the biggest of which have international stock-market listings.
    Subsidies exist in all industries that the Chinese state and 
provincial governments considered economically or militarily strategic, 
including Resource Extraction, Steel, Computing, Software, R&D, 
Environmental Services and Conservation, Integrated Circuits and Autos.
    The subsidies exist in various forms, including those directly 
affecting international trade such as:

        (a)  Export subsidies for FIEs and SOEs that meet certain 
        export performance requirements. FIEs accounted for about 60 
        percent of China's exports of manufactured goods in 2005. The 
        vast majority of FIEs that exported goods from China have 
        corporate ties to countries neighboring China.
        (b)  Import-substitution subsidies that discourage purchases of 
        foreign products by providing generous incentives for companies 
        in China for buying domestic products rather than imports from 
        the USA or other countries.

    The Chinese central and provincial governments support both on-the-
book and off-the book subsidies for domestic companies. Off-the book 
subsidies are far more pervasive and influential but also far more 
difficult to measure and to ascertain. Subsidies include:

        1.  Free to Low-cost Loans: The government exercises a vice-
        like grip on banks, stock markets and bond issuance and these 
        translate to the ability to make grandiose loans. The most 
        extreme statistics in the financial sector deal with loans 
        outstanding. In three years from 2002 to 2004, loans increased 
        by 58 percent, or $785 billion. In 2003, new lending equaled 
        almost one quarter of gross domestic product (GDP). A credit 
        binge fueled this latest boom. Half of all bank loans go to 
        SOEs. Most of these loans will never be repaid. Huawei for 
        example, has a $10 billion credit line from China Development 
        Bank. Besides automatic roll-over of unpaid principal and 
        interest, state-owned banks offers discounted lending rates to 
        SOEs and domestic companies that satisfy certain export 
        performance requirements . If the borrowers cannot pay back the 
        subsidized loans, the banks convert the debt into equity in the 
        SOEs or domestic companies.
        2.  Asset Injections: The SOEs' parent companies, usually 
        municipal governments or ministries, provide their proteges 
        with opportunities to acquire state-run businesses, such as 
        toll bridges, at highly preferential terms which help pay down 
        their costs. The governments also transfer ownership of shares 
        and facilities between SOEs at below-market or no-cost levels. 
        For example, in January 2005, Hubei province's government 
        transferred at no cost a 51 percent stake in Ercheng Iron and 
        Steel, a local steel producer with a production capacity of 3 
        million tons a year, to another state-owned producer, Wuhan 
        Iron and Steel.
        3.  No Break-even: Poor book-keeping practices, and lax bottom-
        line considerations, grant SOEs freedom from the need to make 
        profits, or to break even. ``Pure state-controlled 
        enterprises'' have no disclosure requirements.
        4.  Subsidized Purchases: SOEs can purchase their components 
        and raw materials below cost and directly from each other, 
        affecting the competitiveness of certain sectors in the global 
        economy. This tradition propelled the Chinese motorcycle 
        industry's ability to buy control of virtually all Indian 
        motorcycle companies short of Bajaj and turn them into 
        assemblers of Chinese components.
        5.  International Bargaining Power: Beijing has used its 
        enormous buying power to intercede for its SOEs with foreign 
        suppliers and to reduce acquisition costs for raw materials. In 
        2006, the Chinese government attempted to influence 
        negotiations between Chinese steel companies and global 
        suppliers of iron ore by making clear that the government 
        ``would take necessary measures if prices were unacceptable and 
        unreasonable''. In 2005, China imposed export restrictions on 
        coking coal, causing extensive disruptions in world markets and 
        artificially lowering Chinese steel companies' manufacturing 
        costs. The Chinese government has also secured contracts and 
        exploration rights abroad for its SOEs.
        6.  Labor Controls: The government exercises various methods to 
        control employees including the dang'an or employment dossier; 
        and to reduce labor costs through injection of part-time and 
        migrant workers and the use of prison labor. The government 
        also offers exemptions from mandatory worker-benefit 
        contributions to companies that satisfy certain export 
        performance requirements
        7.  Tax Breaks: Many SOEs avoid taxation or reduce it through 
        tax breaks (although this can backfire if a company's 
        management loses favor). Income-tax reductions and refunds are 
        available to companies that satisfy certain export performance 
        requirements and that purchase Chinese-made equipment and 
        accessories rather than imports
        8.  Energy and Land Subsidies: The state subsidizes gasoline 
        and electricity. Currently, Beijing tightly controls the price 
        of both gasoline and electricity at well below their true 
        economic levels. The state also offers free land and utilities 
        to SOEs and companies in key strategic sectors.
        9.  Tariff and VAT Exemptions: The state offers Value-added tax 
        (VAT) and tariff exemptions to companies that satisfy certain 
        export performance requirements. The state also offers VAT 
        refunds to companies that purchase Chinese-made equipment and 
        accessories rather than imports
        10.  Sectoral Credit Allocation: The Chinese economy speeds up 
        or slows down on a sector-by-sector basis on credit allocations 
        by Beijing. Some sectors such as automotive, steel, ethylene 
        and metals' smelting have come off the boil. Others sectors 
        such as coal, railways and utilities are still getting huge 
        infusions of policy-mandated credit. Very high levels of 
        bureaucratic interference characterize credit allocations and 
        industrial-project approvals in China and the state banking 
        system does not allow the market to price capital.
        11.  Stock Listings: SOEs and Collectives form over 93 percent 
        of the listing of approximately 1200 companies on China's 
        Shanghai and Shenzhen Stock Exchanges. Provincial governments 
        pressure government regulators to discriminate against private 
        companies and give the precious slots to their ailing state 
        dinosaurs. Indeed, private companies without state connections 
        cannot obtain a listing on any Chinese stock exchange
        12.  Cheap Technology: China runs a deficit on its technology 
        trade with the rest of the world and FIEs control 80 percent of 
        technological imports and exports in China. The Chinese have 
        made little progress in either basic research or advanced 
        design in vital industries. Despite this institutional flaw, 
        SOEs such as Huawei owe much of their success to lax 
        enforcement of laws governing the theft of intellectual 
        property.
        13.  Control over Distribution Channels: Provincial and 
        municipal governments control distribution channels to allocate 
        and to manage market share, to protect favored industries from 
        competition and to shape investment patterns. Regulations on 
        distribution incorporate considerable ambiguities leading to 
        both legitimate differences in interpretation and considerable 
        legal efforts to find loopholes. Central and provincial 
        governments routinely use this ambiguity to confer privileges 
        on favored companies or industries, and to withhold normal 
        rights from companies or industries as a form of protectionism. 
        Local administrators have been known to seize goods being 
        transported and to refuse transportation of goods through their 
        jurisdictions. Administrative guidance from various and 
        competing sources can override the basic laws or regulations 
        either explicitly or unofficially. Provincial or municipal 
        governments may interfere with the national limits on 
        distribution by their generosity (to lure investment or to meet 
        local goals) or restrictions (to protect local interests). 
        Guanxi with local army officials assumes particular importance 
        for distribution. Some estimates suggest that the PLA controls 
        distribution of goods for up to about 80 percent of the Chinese 
        population. Its control over manufacturing facilities also 
        makes the PLA China's largest and most diversified manufacturer 
        of industrial and consumer goods.
        14.  Special Market Information: Relevant information for 
        strategic decisions comes at a premium price in China and often 
        includes what we in the USA would consider Insider Information. 
        In China, the central government deliberately controls and 
        disseminates information that it considers of strategic 
        importance. When restrictions on distribution insulate foreign 
        or Chinese companies from their customers, they also cannot 
        undertake direct market research and have to rely on less-
        sophisticated surrogates. For example, General Motors' (GMs') 
        interns in Beijing have scoured the capital's streets to find 
        out who is buying their cars after the intermediaries get them, 
        so that GM can build guanxi with the buyers.
        15.  Undervalued Currency: The Chinese government's deliberate 
        undervaluation of the yuan makes U.S. products more expensive 
        for Chinese consumers who therefore purchase fewer of them. 
        Conversely, China's undervalued currency also makes Chinese 
        products cheaper in the USA, and therefore U.S. consumers 
        purchase more of them, contributing to the record-high and 
        still-growing U.S. trade deficit. The undervalued Chinese 
        currency harms U.S. competitiveness and encourages the 
        relocation of U.S. manufacturing overseas while discouraging 
        investments in U.S. exporting industries. By some estimates, 
        China's continued linkage of the yuan to the U.S. dollar 
        provides Chinese steel exports with subsidies of 27-40 percent 
        and imposes an effective, parallel tax on steel imports.

Monitoring Subsidies in China
    Lack of transparency hinders ability to monitor all forms of 
subsidy except perhaps Stock Listings. Opacity serves as a tax which

        1.  Reduces ability to determine the true efficiency and 
        productivity of China's labor and results in potentially sub-
        optimal foreign direct investment (FDI) decisions until after 
        commitments are made. Consequently, our research has shown that 
        FDI enjoys higher ROIs and ROEs across entire industrial 
        sectors in India against China, including Capital Goods; Food 
        Beverage and Tobacco; Materials; Pharmaceuticals and Biotech; 
        and, Software and Services.
        2.  Reduces the ability of U.S. domestic producers to prove 
        dumping, especially as so many of those affected are Small and 
        Medium-sized Enterprises with limited resources.
        3.  Magnifies the weakness of China's statistical system which 
        depends too much on reporting and too little on sampling; the 
        statistical system shows a systematic bias to over-report 
        growth at the bottom of the economic cycle and under-report it 
        at the top, i.e. to flatten out a much more volatile economic 
        cycle. Recently, some foreign companies have started 
        constructing their own physical-activity indices of everything 
        from freight-barge traffic to power consumption and air miles 
        flown to find true economic indicators, but the enormous 
        expense constrains companies from doing this well.
        4.  Reduces the credibility of the SOEs' books. In 2006, 
        according to SASAC, total revenues for the top 159 SOEs rose 
        20.1 percent to 8.14 trillion yuan and profits rose 18.2 
        percent to 755 billion yuan. These SOEs' net assets were worth 
        5.35 trillion yuan on total assets of 12.3 trillion yuan. Yet, 
        SOEs may keep up to four sets of accounting books--for internal 
        records, for the government, for foreigners and to know what is 
        really going on.

    Unreliability in macroeconomic data also seriously compounds the 
problem of estimating the effects of subsidies.

          For example, in February 2002, the Chinese government 
        said that China's GDP had grown by 7.3 percent in 2001, making 
        it the world's fastest-growing economy. However, only one 
        province, Yunnan, reported that its product had grown slower 
        than the national rate. Taken together, the provincial figures 
        produced a national growth rate nearly two points higher than 
        the official rate! The National Statistics Bureau (NSB) 
        conducts sample surveys and uses these to estimate national GDP 
        and growth rate. The results have invariably disagreed with 
        provincial figures. In 1995, the GDP growth rate suggested by 
        provincial data averaged three percentage points higher than 
        the figure of 10.5 percent produced by sample surveys. Opinions 
        vary about the accuracy of the central government's estimates. 
        However, in China, few scholars publicly attempt any detailed 
        justification of alternative figures because of political 
        sensitivity.
          China's NSB also lacks the capacity to collect data 
        outside normal information channels and lower-level officials 
        interfere with its surveys. The numbers generated by provincial 
        governments remain an important criterion in evaluating local 
        officials' performance, creating an incentive for statistical 
        falsification. The pressure to exaggerate statistics grew in 
        the late 1990s as Chinese officials sought to pump up the 
        economy to stave off the Asian economic slump's effects. 
        Beijing declared that the country had to grow at least 7 
        percent a year to create jobs and to forestall social unrest. 
        Not surprisingly, reported growth rates have not dipped below 
        that level since.
          Officials may also routinely underreport other 
        sensitive data such as debt numbers, unemployment or even FDI 
        to avoid tax payments and governmental scrutiny. The central 
        government's methods of ascertaining the validity of data, a 
        process it calls yasuo shuifen or ``squeezing the water,'' 
        involves sample surveys, price-index adjustments and plenty of 
        guesswork.
          Technical difficulties, such as staff reductions 
        among statistical analysts, have enhanced errors in data. No 
        comprehensive measures exist for the size of the fast-growing 
        private-business and service sectors or even for what 
        constitutes FDI.
          The Chinese government strictly controls economic and 
        industrial data and even classifies some as state secrets. 
        Routinely, Beijing has overvalued SOEs' stocks of unsold goods, 
        and underestimated inflation. Other provinces underreport 
        growth and activity: for example, Zhegiang province in Eastern 
        China may have underreported growth to conceal the rapid 
        development of private companies in its economy. Affluent 
        provinces, such as Guangdong in Southern China, may also have 
        underreported growth to avoid paying more taxes to the central 
        government. However, without more systematic data, economists 
        cannot definitively state if these factors pushed up growth or 
        even if growth occurred.
          Governmental officials downplay unemployment figures 
        to mask the suffering that economic reforms and restructuring 
        have caused. The official unemployment rate of 3.6 percent in 
        2001 excluded xiagang workers (laborers receiving small, 
        monthly stipends from former companies and not counted as 
        unemployed) that economists estimate to number about 10 
        million. The official rate also excluded farmers who left their 
        fields to work in cities, a floating population of around 150 
        million unemployed migrants. Using international standards, 
        China's unemployment rate in 2001 approximated 7.6 percent in 
        rural areas and more than 8.5 percent in the cities, well above 
        Beijing's red-flagged figure to indicate inevitable social 
        turmoil.
          The central government's debt numbers look highly 
        erroneous. The Central Bank's governor, Dai Xianlong, confessed 
        to Parliament in April 2002 that national domestic debt 
        appeared much higher than the official numbers (16 percent of 
        GDP) suggested. Dai said debt appeared closer to 60 percent of 
        GDP if one considered unfunded state-pensions' liabilities, 
        local governments' debts, and major banks' nonperforming loans 
        (NPLs). Dai's unusual candor may mask more bad news. 
        Independent economists have discovered that Dai's statistics 
        drew on China's yearbook GDP growth statistics. Debt more 
        realistically appears closer to 100 or 125 percent of GDP. The 
        Bank of China reported two different figures for its NPLs in 
        1999, one using Chinese accounting standards, another Western; 
        the latter looms 2.6 times greater than the former. Moody's has 
        openly called the books of China's ``Big Four'' banks, 
        ``meaningless.''

Subsidies for the 11th Five-Year Program Period
    I anticipate that all the subsidies that I identified will 
continue. The 11th 5-year plan specifically identifies certain 
strategically important industries that will receive state subsidies. 
These include:

        1.  Integrated circuits and software including technology for 
        90-nanometer and smaller integrated circuits
        2.  New-generation networks including digital TV networks and 
        mobile communication
        3.  Advanced computing including technology for petaflop 
        computer systems
        4.  Biomedicine including commercial production of vaccines
        5.  Civil airplane including general purpose planes and 
        helicopters
        6.  Satellite applications including meteorological, 
        oceanographic, navigation positioning and telecommunication 
        satellites
        7.  New materials including high-performance materials in 
        information biological and aerospace industries

    Researchers may have more difficulties monitoring the rate of 
subsidization as China's 11th Five-Year Plan has only two numeric 
targets: per capita GDP in 2010 must be double the 2000 figure and 
``each work unit must cut its use of energy by 20 percent of current 
levels by 2010.'' The plan fails to mention raising the price of 
electricity and gasoline, and unlike the previous ten years, sets no 
economic growth targets.
Governmental Policies behind Subsidies
    Our research has shown that despite recent deregulation efforts, 
state consumption through its SOEs dominates the Chinese economy. 
Subsidies permeate SOEs and well-connected private companies but do not 
extend to the bulk of private companies.
    The subsidies appear huge. According to a World Bank study, 51 
percent of all SOEs are losing money. Average current assets had risen 
to 319 days of annual sales, suggesting that most of the SOEs' assets 
lay in uncollectible bills or unsaleable inventory. In short, most SOEs 
were illiquid and massive injections of government money kept them 
alive.
    The state offers subsidies to specific sectors and across sectors. 
Generally, SOEs and well-connected private companies with strong 
government network connections can access subsidies. The state is more 
likely to offer subsidies to private companies that promote strategic 
development efforts. The 11th Five-Year Plan identifies the following 
foci for development:

        1.  Advanced computing
        2.  Internet
        3.  Programming
        4.  Environmental services & resource conservation
        5.  Energy production and reserves
        6.  Value-chain positioning of Chinese manufacturing
        7.  Space, satellite and space-launch related capabilities

    The state grants subsidies to companies that export, as well as to 
those that serve the domestic markets. Political rather than primarily 
economic considerations guide policies on subsidies. For example, many 
provincial governments offer subsidies as rewards to those that 
successfully manipulate government and business networks.
    SOE reforms and strategic goals also shape policies on subsidies. 
However, for China's leadership, SOE reforms do not include concerns 
about profits or privatization. The reforms do not have as their goal 
reducing the state's control over key sectors of the economy, but 
rather making that control more effective. Consequently, the policies 
aim to make SOEs efficient and big enough to have a strong 
international presence such as the FIEs do. Specifically, the Chinese 
government wants its own global stars. The SASAC, which oversees SOEs, 
has the mandate to transform 30-50 SOEs into globally competitive 
national champions by 2010. These include PetroChina, ChinaMobile, 
Sinopec, CNOOC, Baosteel, China Aluminum, Shanghai Auto, Lenovo, TCL, 
and Quingdao Haier. Korea's chaebol, rather than Japan's keiretsu 
provides the guiding model for China's policy on industrial subsidies: 
through subsidies, the state helps the national champions to diversify 
their range of businesses and to link more closely to the state.
    Some of the policies on subsidies stem from long and mid-range 
strategic plans; others derive from emergent planning and mistakes. For 
example, responding to the massive NPLs accumulated by Chinese banks in 
the 1990s, the government ordered they reduce their NPL ratios--bad 
loans as a proportion of total loans. However, this policy had 
unintended consequences. China's banks are technically insolvent but 
enjoy high liquidity. To cut NPL ratios, the banks merely increased the 
denominator of the ratios: their loans. Lending rose rapidly, driving 
growth as a side effect as NPL ratios fell from 28 percent in 2002 to 
13.2 percent at the end of 2004. Assisting the process were transfers 
of old NPLs, made before the recent credit drive, to newly minted asset 
management companies (AMCs). The largest banks shifted an initial $169 
billion in 1999-2000 and another $50 billion in 2005. The AMCs have 
become dumping grounds not just for commercial banks' NPLs but also for 
the assets of failed investment conglomerates, securities businesses 
and government-infrastructure projects. The state makes the AMCs issue 
interest-bearing bonds for which it refuses to accept explicit 
liability. Separately, Beijing has raided tens of billions of dollars 
of foreign exchange reserves to shore up banks' capital.
    Policies regarding subsidies become difficult to unravel as the 
Chinese state encompasses central and local governments, with competing 
and often conflicting agendas, and different bureaucratic and political 
factions at the national level. Subsidies and the policies behind them 
reflect this fragmentation and conflict. Thousands of warring units 
that cohabit under the umbrella of the Chinese state control the SOEs. 
Consequently, SOEs enjoy direct subsidies stemming from state 
directives and elicit varying degrees of support.
    AVIC, the national aerospace group, provides a good example of 
subsidies to an SOE serving a domestic market. Urged by Deng Xiaoping 
in 1985, AVIC had designed a civil airliner from scratch in less than 5 
years. However, it only built two planes and even China's nationalized 
airlines refused to buy them. Two decades later, AVIC has received 
several tax breaks to build a small regional jet but has no idea of its 
commercial prospects.
    Generally, despite stated policies, outsiders cannot ascertain the 
true policies that underlie subsidies. A secretive and authoritarian 
organization with unclear aims, closed to scrutiny and debate, controls 
the Chinese state. More effectively placed subsidies appear in the SOEs 
that the Beijing central government has classified as global champions. 
However, recent examples illustrate their complexity. CNOOC, whose $19 
billion bid for Unocal touched off volcanic reactions, is a Hong Kong-
listed firm 70 percent owned by an unlisted parent company, all of 
whose shares are owned by the central government agency, SASAC. Beijing 
has helped CNOOC to acquire contracts to control foreign-energy 
reserves and the company heavily relies on subsidized finance from 
SASAC. Local governments control other SOEs. These include white goods 
maker Haier (owned by the Qingdao city government), which launched an 
unsuccessful bid for Maytag, and the municipally owned Shanghai and 
Nanjing car companies that have spent the last several months picking 
through MG Rover. These companies also receive subsidies in line with 
Beijing's stated goals of creating state-owned multinationals and 
retaining domestic control over key sectors, such as car making. The 
demands of both the central government, which sets industry policy, and 
their local government overlords, whose interests may conflict with 
Beijing's industrial-policy goals, shape the subsidies the SOEs 
receive, as well as the SOEs' evolution, strategies and policies. 
Huawei, a maker of telecoms-network equipment, illustrates a third 
level of policies and subsidies. Huawei is ostensibly privately owned, 
although many of its shares are owned by the local state telecom 
authorities to whom it has sold equipment. It enjoys a $10 billion low-
interest credit line from the China Development Bank, whose mission is 
to make concessional loans in support of the state's policy goals. 
Huawei also has strong ties to China's military.
Market Distortions and Profitability of FIEs in China
    The large numbers of Chinese subsidies targeted towards drawing FDI 
(see 
Table 1) have not enhanced FIEs' profits, indicating market 
distortions, misallocation of funds and excess capacities. Few FIEs 
disclose their Chinese operations' real performance, and estimates have 
relied on business surveys and anecdotes. Our research reveals that 
only about one-third of the FIEs operating in China have ever made a 
profit there, and profits have been concentrated in the hands of a few 
companies. In addition, historically, foreign affiliates in China have 
lower profit margins than their global average.
    Despite some profitable FIEs, trends on profits have not changed 
substantially since China's entry into the WTO. For example, in 1998, a 
survey of 229 FIEs by management consultants A. T. Kearney showed that 
only 38 percent of all manufacturers were covering their operating 
costs. If the companies had included their borrowing costs, or costs of 
capital, fewer still could have claimed to have broken even.
    Another study done at the Chinese Academy of International Trade 
and Economic Cooperation showed that about one-third of the 354,000 
foreign companies operating in China in 2001 turned a profit. Yet, a 
1999 survey by the American Chamber of Commerce in China showed that, 
while 58 percent of its member companies had lower profit margins there 
than in other global operations, 88 percent had plans to expand. 
Deloitte & Touche's survey in 2002 confirmed that 90 percent of FIEs in 
China planned to expand their operations within the next three years. 
In 2003, about 424,196 FIEs, big and small, operated in China (MOFTEC). 
Michael Furst, Executive Director of the American Chamber of Commerce, 
Beijing, informed us that about two-thirds of its member companies were 
making some profits but not up to anticipated levels, while about one-
third were making losses. These figures correspond to those from 2004.
    A 2004 survey by China Economic Quarterly shows that the earnings 
of U.S. affiliates in China, which includes the affiliates' profits, 
and earnings booked through Hong Kong and Singapore, rose to $4.4 
billion. When all other sources of profit are added--including royalty 
and licensing fees and income from private services--these affiliates 
earned $8.2 billion in 2004. However, U.S. companies made $7.1 billion 
in Australia, a market of only 19 million. They earned $8.9 billion in 
Taiwan and South Korea, emerging economies with a combined population 
of 70 million, and earned $14.3 billion in Mexico. Most respondents 
could not achieve profit margins above their global average.
    A large proportion of the earnings end up with a small number of 
FIEs that enjoy lucky breaks in China's heavily regulated operating 
environment. For example, Mobile Telecommunications encountered no 
vested interests in China and contributed about half of the U.S. 
companies' mainland-reported earnings as recently as 2001. However, 
from 2002, Chinese companies, subsidized by the state, moved into 
mobile handsets and their cutthroat pricing destroyed profits in that 
sector.
    More recently, a consumer loan boom financed by state-run banks 
underwrote an explosion in car sales that dropped later like a brick--
but Volkswagen, the market leader, still earned $1.2 billion in China 
in 2003.
    Five U.S. companies, including three car makers, accounted for one 
third of equity profits that mainland affiliates reported. General 
Motors alone booked $437 million in earnings. Fast-food companies Yum 
Brands--owner of KFC--and McDonald's topped off the list. Fast-food 
companies have consistently made profits in the Chinese domestic 
economy. They face no competition from state interests and, as 
services, are less prone to intellectual property abuses. Yum Brands, 
which has 1,200 restaurants in China, and McDonald's, probably earned 
about $200 million and the U.S. car companies in excess of $500 
million--equivalent to about one-third of mainland equity income of 
$2.4 billion. These figures underline how small China's domestic 
markets may be.
    The exaggerated economic data can have significant effects on 
perceived performance and projected performance of FDI in China. The 
successful companies in our research did not rely on economic and 
industrial data. As Elmar Stachels, Managing Director of Bayer China 
Company, Ltd., told us, ``You manage by objectives, objectives that 
must be clearly stated--then determine what kind of tools you can use 
to determine if you achieved them, but stick with your objectives. 
However, if it comes to financial figures, it will be challenging. What 
good will numbers be if the base rates used for comparison of 
performance are not reliable.''
    China remains embroiled in overcapacity and excess production as 
state investment and subsidies move across sectors, and companies' 
profits correspondingly whipsaw. A year ago in the auto sector, sales 
growth for many car models dropped from three digits to less than zero 
in a few months. In steel, China flipped from a massive net importer to 
a net exporter in less than a year. In the past nine months, the global 
price of ethylene--a base constituent of plastics--dropped by half as 
Chinese production capacity expanded 35 percent this year and will 
probably double in the next few years. Soon, smelted copper will join 
the ranks: China has 2.5 million tons of annual production capacity and 
another 2.5 million tons under construction. Similarly, in stainless 
steel, China's annual production capacity approximated 2.5 million tons 
at the end of 2004. Industrial projects and subsidies will expand this 
to 10 million tons in five years.
CVDs and China
    For more than two decades the U.S. Department of Commerce 
(``Commerce'') has refused to apply the CVD law to unfairly subsidized 
and injurious imports from non-market economies such as China. Commerce 
has argued that pervasive governmental intervention hinders meaningful 
comparisons between subsidized and market-determined prices.
    Measurement issues also arise as China's opaque environment 
obstructs the identification of appropriate benchmarks. For example, 
China's financial system provides many subsidies. However, governmental 
control over banking obfuscates market-determined rates of interest 
that can provide benchmarks to gauge credit subsidies' benefits for 
companies or industries. Also, lack of adherence to generally 
recognized accounting standards and unreliable book-keeping further 
complicate our identifying subsidies' benefits. Yet, China's WTO 
accession agreement specifically permits application of third-country 
information in CVD determination and encourages requests for valid 
information from the Chinese government to understand subsidies.
    Approximate CVD rates may grossly underestimate the amounts 
required to offset China's pervasive subsidies. For example, a Chinese 
company may receive governmental credit subsidies that reduce its 
capital costs by 20 percent. This advantage may dramatically enhance 
the company's ability to compete in international markets. However, 
Commerce calculates CVD rates by dividing the total value of the 
subsidies' benefits by the total value of the exporting companies' 
sales. Since the subsidy in our example affects only one portion of the 
company's balance sheet (capital costs), the CVD applied to offset this 
benefit may fall below 20 percent. The company may also amortize loans 
and other non-recurring benefits, such as equity infusions, over 
several years, further reducing the CVD rate.
    Despite these limitations, when dealing with China and other 
nonmarket economies, CVDs, as proposed by the Nonmarket Economy Trade 
Remedy Act of 2007 offer more cost-effective, though less efficient, 
solutions for offsetting subsidies than anti-dumping provisions do. The 
CVDs represent the classic case of preferring half a loaf to no bread. 
The CVD rates to offset Chinese subsidies prescribed will probably fall 
far short of the actual subsidies. However, they do offer partial 
remedies to offset market distortions and inefficient allocation of 
resources by the Chinese government. Making CVDs available against 
China would give U.S. companies an explicit import-relief measure that 
targets unfair government subsidies. CVDs are also more accessible to 
Small and Medium-sized Enterprises in the USA that cannot afford to 
undertake anti-dumping litigation and so would provide one small step 
in our efforts to level the global playing field.
    Thank you again for providing me with this opportunity to present 
some of my research on subsidies in China, market-distortion effects on 
competitive environments and remedies offered by CVDs.


          Table 1. China's Subsidy Notification to WTO in 2006

Primary Beneficiary of Subsidies     Total No. of     Subsidy Program ID
                                   Subsidy Programs

Foreign Invested Enterprises/                    14   1, 2, 3, 4, 5, 6,
 Foreign Equity Joint Ventures                         7, 8, 10, 11, 12,
                                                       13, 27, 58
Agriculture/Animal Husbandry                     14   29, 36, 37, 38 39,
                                                       40, 41, 42, 46,
                                                       47, 48, 49, 50,
                                                       66
Forestry/Grassland Rebuilding                     7   30, 51, 52, 53,
                                                       54, 55, 56
Welfare/Disability/Unemployment                   5   21, 24, 63, 72, 73
 Relief
Poverty Relief                                    4   15, 16, 17, 18
Disaster Relief                                   4   20, 43, 44, 45
Technology Training/Acquisition                   4   28, 31, 59, 60
Promotion of Research Institutes                  3   25, 26, 71
Environmentally Friendly                          3   19, 69, 70
 Production/Waste Management
Promotion of Small and Medium                     3   32, 33, 34
 Sized Enterprise
Food Security                                     2   61, 62
Wildlife Conservation                             2   67, 68
Training of Migrant Rural Labor                   1   35
Support of Low Profit                             1   22
 Enterprises
Support for Township Owned State                  1   23
 Enterprises
Poppy Eradication                                 1   65
HIV/AIDS Relief                                   1   74
Western Regional Development                      1   14
Support for Hi Tech/Industrial                    1   9
 Economic Zones
Promotion of Specific
 Industries:
  Integrated-Circuit                              1   57
  Tea                                             1   64
  Copper-Refining                                 1   75
  Casting/Forging                                 1   76
  Dies                                            1   77
  Machine-Tool                                    1   78



                                 

    Chairman LEVIN. Thank you very much.
    Mr. Porter.

  STATEMENT OF DANIEL L. PORTER, PARTNER, INTERNATIONAL TRADE 
                   GROUP, VINSON & ELKINS LLP

    Mr. PORTER. Good afternoon.
    My name is Daniel Porter. I'm a partner in the law firm of 
Vinson & Elkins, specializing in international trade.
    I appear today solely in my personal capacity. I am not 
appearing on behalf of the Chinese government or any other 
client.
    Rather, I am here in response to a request from the 
Subcommittee to share my personal thoughts about the bill, H.R. 
1229.
    Mr. Chairman, I appreciate this invitation and the 
opportunity to discuss these issues with you.
    My remarks today will be a brief summary of my written 
statement that was provided to the Committee yesterday.
    At the outset, I note that it is not my position that the 
U.S. Congress should not pass legislation authorizing the 
application of the U.S. countervailing duty law to nonmarket 
economies such as China.
    I fully recognize the ability and right of the United 
States to make amendments to its trade remedy laws to ensure 
that imports are fairly traded.
    That stated, I also believe that any changes to the U.S. 
trade remedy laws should be fair and not impose unreasonable or 
unwarranted restrictions on imported products.
    Like others, I see a few problems with the bill as 
currently drafted.
    The first problem is that the bill requires congressional 
approval before a country can graduate from nonmarket economy 
status to market economy status.
    If enacted, such legislation would represent the only 
instance in which Congress would become involved in the day-to-
day application of the Antidumping Duty (AD) and CVD laws. With 
all due respect, this is not the role of Congress.
    Rather, like other aspects of the AD and CVD laws, Congress 
should establish the criteria it wants to be applied and then 
instruct the responsible agency to implement that criteria.
    This is particularly true in the anti-dumping world, given 
that anti-dumping duties are assessed on a retrospective basis 
and all interested parties are permitted to appeal a Commerce 
Department final determination to the Court of International 
Trade.
    I respectfully submit that Congress should not be involved 
in the day-to-day application of trade remedy laws to 
individual cases.
    The second problem is that the current draft of the bill 
requires the Commerce Department to calculate the amount of 
benefit of the CVD rate by utilizing benchmarks outside China.
    With all due respect, such provision is not needed, not 
fair, and contrary to the provisions of China's WTO accession 
protocol.
    Mr. Chairman, such provision is not needed.
    The underlying premise of this provision, that the alleged 
control of the economy by the Chinese government makes it 
impossible ever to utilize appropriate benchmarks from within 
China to calculate the subsidy benefit is simply at odds with 
the numerous factual findings concerning the real world of 
China today.
    Over the past couple of years, there have been many studies 
demonstrating that the Chinese government has undertaken 
significant reforms to promote the introduction of market 
forces in the economy.
    Such factual conclusions indicate that there are sectors in 
the economy that operate under market principles, and therefore 
could provide suitable benchmarks for measuring the extent of 
the subsidy benefit.
    As importantly, requiring the Commerce Department to adopt 
such a presumption would be contrary to the provisions of 
China's WTO accession protocol.
    The language of Article 15(b) makes clear that before 
utilizing surrogate benchmarks and CVD cases against China, the 
United States must first make a specific factual finding that 
there are special difficulties with utilizing benchmarks in 
China.
    A requirement to find special difficulties necessarily 
implies that such finding be made on a case by case basis.
    The reason is that every case is different. Different 
products have different producers and different industries 
operating in different sectors of the economy.
    I submit that by not allowing the Commerce Department to 
make this finding on a case by case basis, the bill does not 
honor the United States' agreement made in China's WTO 
protocol.
    The third problem with the current draft of the legislation 
is that it does not prevent double counting of duties--that is, 
imposing two sets of duties to compensate for the same unfair 
trade practice in those situations in which the same exporters 
face both an anti-dumping and somebody case.
    The double counting problem stems from the special anti-
dumping rules that are applied to nonmarket economies. Very 
simply, the special anti-dumping rules that are applied to 
nonmarket economies such as China already offset much 
subsidization.
    Let me give you a quick example.
    Assume that because of subsidies a Chinese steel producer 
is able to purchase iron ore more cheaply. Rather than having 
to pay the market price of $100 of iron ore the subsidies allow 
him to incur only an $80 cost.
    However, the special anti-dumping rules that are applied to 
nonmarket economies take this into account.
    Under existing law, when calculating anti-dumping margins 
for this company, the Commerce Department is required to use 
the $100 iron ore cost, not the producer's actual cost of $80. 
The use of the higher cost results in a higher anti-dumping 
margin.
    To impose CVD duties on top of those AD duties would result 
in double counting.
    The final problem of the bill is the effective date. H.R. 
1229 states that the changes to the law shall apply to CVD 
petitions filed on or after October 1, 2006.
    Use of such a date is an obvious attempt to make legal the 
ongoing CVD case on coated free sheet paper that was filed on 
October 31, 2006.
    Mr. Chairman, such retroactive application of changes to 
the trade remedy laws is not fair to the Chinese government and 
Chinese exporters participating in the ongoing CVD case.
    To apply H.R. 1229 retroactively is equivalent to punishing 
them for acts that were legal at the time they were committed.
    It is for these reasons that retroactive legislation has 
always been looked upon with disfavor.
    Mr. Chairman, in conclusion, I want to say there is a 
simple fix to all the problems that I have identified with H.R. 
1229.
    Change H.R. 1229 to reflect the language of Section 3 of 
H.R. 3283, the bill that authorized the application of the CVD 
law to nonmarket economies that was passed by the House in the 
109th Congress.
    H.R. 3283 accomplishes the overall objective of ensuring 
that there can be CVD cases against NME countries but does so 
in a manner that is fair and that honors the U.S. obligations 
in how it will apply the AD and CVD laws.
    Mr. Chairman, that concludes my testimony. I appreciate the 
attention of the Committee, and would be happy to respond to 
any questions.
    [The prepared statement of Mr. Porter follows:]
     Prepared Statement of Daniel L. Porter, Partner, International
                   Trade Group, Vinson and Elkins LLP
    Good afternoon. My name is Daniel Porter. I am a partner in the law 
firm of Vinson & Elkins LLP specializing in international trade. I have 
represented clients in various trade remedy proceedings, including 
antidumping and countervailing duty cases, for more than 20 years. 
Currently, this work includes, among other projects, representing the 
Chinese Government in the Commerce Department's countervailing duty 
investigation on coated free sheet paper from China, and representing 
the Chinese Government, a Chinese exporter and a U.S. importer in a 
court case that seeks to stop this very Commerce Department CVD 
investigation.
    I appear today solely in my personal capacity. I am not appearing 
on behalf of the Chinese government or any other client. Rather, I am 
here in response to a request from the Subcommittee to share my 
personal thoughts about H.R. 1229. I appreciate this invitation and the 
opportunity to discuss these issues with you.
    At the outset I note that it is not my position that the U.S. 
Congress may not or should not pass legislation authorizing the 
application of the U.S. countervailing law to non-market economies such 
as China. I fully recognize the ability and right of the United States 
to make amendments to its trade remedy laws to ensure that imports are 
fairly traded.
    That stated, I also believe that any changes to U.S. trade remedy 
laws should be fair and not impose unreasonable or unwarranted 
restrictions on imported products. Said differently, while I recognize 
and appreciate the desire for U.S. producers to have a level playing 
field, I do not think it is appropriate to change the law to tilt the 
field in ways unfair to U.S. importing interests. As currently drafted, 
I believe that H.R. 1229 does not satisfy the objective of achieving a 
level playing field, but rather tilts the field the other way.
    I see four problems with H.R. 1229 as currently drafted.
Problem #1: Requiring Congressional Resolution of Approval Before 
        Allowing Termination of NME Status
    First, H.R. 1229 requires that any country designated a non-market 
economy retain that status until both the Commerce Department 
determines to revoke the non-market country designation and graduate 
the country to market economy status and Congress passes a joint 
resolution approving the Commerce Department's action.
    If enacted, this legislation would represent the only instance in 
which Congress would become involved in the day-to-day application of 
trade remedy laws to individual cases. Rather, as it has done before, 
Congress should establish the criteria it wants to be applied and then 
instruct the responsible agency to implement the criteria. It makes no 
sense for Congress to act as some sort of reviewing body to determine 
whether the Commerce Department properly applied the criteria for 
graduating a country to market economy status.
    This is particularly true in the antidumping world given that AD 
duties are assessed on a retrospective basis and all interested parties 
are permitted to appeal a Commerce Department's final determination to 
the Court of International Trade. Indeed, if this provision is passed, 
you very well could have an anomalous situation in which the Commerce 
Department decides to revoke the NME status of country, Congress 
subsequently passes a resolution approving the revocation, but then 
later the Court of International Trade rules that the Commerce 
Department original decision to revoke the NME status was not supported 
by substantial evidence on the record. Needless to say, this would be a 
rather awkward legal and procedural situation. I respectfully submit 
that Congress should not be involved in the day-to-day application of 
trade remedy laws to individual cases.
Problem #2: Requiring Third Country Benchmarks for Calculation of 
        Benefit
    The second problem is that the current draft of H.R. 1229 requires 
Commerce Department to calculate the amount of the benefit--the CVD 
rate--by utilizing benchmarks outside China. Essentially, as long as 
China continues to be designated a non-market economy country, under 
H.R. 1229 the Commerce Department is prohibited from ever using any 
benchmarks from China to calculate the subsidy benefit. With all due 
respect, such provision is not needed, is not fair, and is contrary to 
the provisions of China's WTO Accession Protocol.
    First, the underlying premise of this provision--that the alleged 
control of the economy by the Chinese Government makes it impossible 
ever to utilize appropriate benchmarks from within China to calculate 
the subsidy benefit--is at odds with numerous factual findings 
concerning the real world economy of China today. I note that in its 
comprehensive examination of the Chinese economy published last August, 
the Commerce Department itself made the following factual observations:

           ``The PRC Government has undertaken significant reforms to 
        promote the introduction of market forces into the economy.''
           ``The Department notes that China permits all forms for 
        foreign investment, e.g. joint ventures and wholly-owned 
        enterprises, in most sectors of the economy. Foreign investors 
        are free to repatriate profit and investments are protected 
        from nationalization and expropriation.''
           See Commerce Department decision memorandum, dated August 
        30, 2006, 
        re: China's status as a non-market economy prepared for its 
        antidumping investigation of Certain Lined Paper Products from 
        the People's Republic of China at p. 3.

    Such factual conclusions strongly suggest that, even if China as a 
whole does not meet the criteria for graduating to market economy 
status, there can be little question that there are sectors in the 
economy that operate under market principles and therefore could 
provide suitable benchmarks for measuring the extent of the subsidy 
benefit. There is simply no longer any basis to presume that suitable 
benchmarks can never be found in China.
    As importantly, requiring the Commerce Department to adopt such a 
presumption would be contrary to the provisions of China's WTO 
Accession Protocol. Article 15 (b) of the protocol states that when 
calculating the benefit of subsidies the relevant provisions of the WTO 
SCM agreement shall apply; however, ``if there are special difficulties 
in that application,'' the importing WTO member may then use 
alternative methodologies to identify and measure the subsidy benefit.
    It is clear from this language that the U.S. may resort to 
surrogate benchmarks only after making a specific factual finding that 
``there are special difficulties'' with utilizing benchmarks in China. 
Or stated differently, a requirement to find special difficulties 
necessarily implies that such finding be made on a case-by-case basis. 
The reason is that every case is different--different products have 
different producers in different industries operating in different 
sectors of the economy. A finding that special difficulties exist in 
one sector does not mean that the same special difficulties will exist 
in another.
    There is no question that China's WTO Protocol specifically allows 
the U.S. to utilize surrogate benchmarks in certain CVD cases when 
measuring subsidies. However, there is equally no question that in 
extracting this agreement from China, the U.S. promised that it would 
only resort to surrogate country benchmarks upon a factual finding of 
``special difficulties.'' H.R. 1229 requires the U.S. to renege on this 
specific promise.
    There is a simple fix to this problem--change H.R. 1229 to reflect 
the language of Section 3 of H.R. 3283, a bill that authorized the 
application of the CVD law to NME countries that was passed by the 
House in the 109th Congress. The language of H.R. 3283 correctly 
reflected the agreement in the China WTO Protocol. If the Congress 
takes any action on this issue, I respectfully urge the re-adoption of 
H.R. 3283.
Problem #3: No Provision To Avoid Double Counting
    The third problem with the current draft of the legislation is that 
it does not prevent double counting of duties--that is, imposing two 
sets of duties to compensate for the same unfair trade practice--in 
those situations in which the same exporters face both an antidumping 
and a CVD case.
    The double counting problem stems from the special antidumping 
rules that are applied to non-market economies. Very simply, the 
special antidumping rules that are applied to NME countries such as 
China already offset most subsidization. Specifically, under the 
special NME methodology mandated by the existing AD law the Commerce 
Department does not use Chinese producer's actual costs. Rather the 
Commerce Department restates the Chinese producer's costs based on 
information from a surrogate market-economy. Most importantly, when the 
Commerce Department restates the Chinese producer's costs, by law, 
Commerce may only use surrogate values that are subsidy free.
    To understand double counting, it is necessary to compare what 
happens in a market economy context with what happens in a non-market 
economy context when there are both antidumping duties and 
countervailing duties imposed on the same product.
    I will use raw material inputs as an example. I will also use 
``constructed value'' as an example, since the NME methodology is 
essentially a constructed value methodology which substitutes surrogate 
values or imported value inputs for actual input values. We can thus 
easily and directly compare to different rules for a market economy and 
non-market economy context.
    In a market economy context, Commerce bases constructed value on 
the foreign producer's actual costs of the raw material inputs, whether 
or not that input is subsidized. Thus, for example, assume that the 
major input is iron ore and its market value is 100 per ton. However, 
let's assume that the government in the exporting market economy 
country provides a subsidy of 20 for purchases of iron ore and, 
therefore, the export producer in fact only pays 80 for the iron ore.
    For the dumping calculation in the market economy case, the actual 
cost to export producer would be used--the raw material costs of 80. 
For the subsidy calculation, the subsidy amount of 20 would be used. 
Therefore, to the extent that constructed value and dumping margins are 
lowered by 20 because of the subsidized input, this lower cost would be 
captured by virtue of the countervailing duty imposed to offset the 
subsidy of 20 received by the producer. In market economy cases the two 
laws work in tandem, in a logical and consistent manner.
    The same facts in an non-market economy (NME) context, however, 
yield a very different result. The raw material inputs in an NME 
context are not valued based on the cost to exporter/producer, but are 
based either on a market economy surrogate value or the arm's length 
purchase price of the raw material imported from a market economy. 
Under either method, the Commerce Department is prohibited from using 
any values that reflect subsidies. Thus, in an NME case, Commerce would 
use the actual value of 100 in the above example, not the actual 
subsidized cost paid by the company. The fact that the Chinese 
exporter/producer may be receiving a subsidy of 20 on its raw material 
becomes irrelevant because by valuing the raw material at 100 the 
effects of the subsidized input are already fully offset. Thus, to use 
100 in constructing normal value in the NME context and then adding a 
subsidy of 20 would essentially double count the benefit of the subsidy 
to the NME exporter/producer.
    I note that the conclusion that the application of current AD and 
CVD laws to NME countries (as contemplated by H.R. 1229) would result 
in unfair double counting is not just my conclusion. The United States 
Government Accountability Office (GAO) reached the same conclusion 
based on its analysis of applicable laws and discussions with Commerce 
officials. Indeed, the GAO report noted that (a) Commerce officials 
admitted that if both CVD and antidumping duties are applied to NME 
countries they would have no authority, under existing law, to avoid 
double counting and (b) two U.S. courts have suggested that double 
counting to compensate for the same unfair trade practice is generally 
considered improper.'' See U.S. Gov't Accountability Office, GAO-05-
474, U.S.-China Trade: Commerce Faces Practical and Legal Challenges in 
Applying Countervailing Duties (June 2005) at pp. 27-28, and U.S. Gov't 
Accountability Office, GAO-06-608T, Testimony Before the U.S. China 
Economic and Security Review Commission (April 4, 2006) at p. 18.
    As importantly, significant U.S. companies also have expressed 
their concern about the unfairness of double-counting AD and CVD 
duties. For example, General Motors submitted the following statement 
in response to the Commerce Department's request for comments on 
whether the CVD law should be applied to non-market economies:

           General Motors takes the position that the use of anti-
        dumping and countervailing duty law and the methodologies used 
        to identify and address unfair trading practices must be fair 
        and balanced.
           With regard to the specific issue of non-market economies, 
        any advantage gained by such economies because of the 
        reluctance of the U.S. to pursue subsidy cases has clearly been 
        offset by the disadvantage that non-market economies experience 
        in antidumping cases. Since World Trade Organization rules 
        allow the use of factors of production analysis as a proxy for 
        prices in non-market economies, designation as a non-market 
        economy represents a significant penalty in anti-dumping 
        proceedings, particularly in the U.S. where factors of 
        production analysis is routinely used.
           Given this situation, we believe that industries should be 
        treated consistently in both countervailing duty and anti-
        dumping proceedings.
           See General Motors letter dated January 12, 2007 to Susan 
        Kuhbach, Senior Office Director for Import Administration, U.S. 
        Department of Commerce.

    I agree with the General Motors. It is essential that any 
legislation that authorizes the Commerce Department to apply CVD duties 
to non-market economy countries must take into account the special 
antidumping rules that are applied.
    Again, it is easy to fix this problem--change H.R. 1229 to reflect 
the language of Section 3 of H.R. 3283, a bill that authorized the 
application of the CVD law to NME countries that was passed by the 
House in the 109th Congress. The language of H.R. 3283 simply stated 
that the Commerce Department shall ensure that any countervailing 
duties that are applied to a non-market economy country are not double-
counted in an antidumping case against the same products. This is the 
correct approach. Again, if Congress takes any action, I respectfully 
urge the re-adoption of this language of H.R. 3283.
Problem # 4: Unfair Retroactive Application
    The final problem of H.R. 1229 is the effective date. H.R. 1229 
states that the changes to the law shall apply to CVD petitions filed 
on or after October 1, 2006. Use of such date is an obvious attempt to 
make legal the ongoing CVD case on coated free sheet paper that was 
filed on October 31, 2006.
    Mr. Chairman, such retroactive application of changes to the trade 
remedy laws is not fair. Supreme Court precedent make clear that 
retroactive application of statutes is highly frowned upon given the 
constitution's prohibition against ex post facto laws and bills of 
attainder. Moreover, the idea of retroactive application is just 
unfair. Through this effective date provision, Congress is unfairly 
targeting the Chinese lined-paper case and, with it, the respondents in 
the investigation. These respondents had relied upon the consistently 
applied 23 year interpretation that the current CVD law does not apply 
NME countries. To apply H.R. 1229 retroactively is equivalent to 
punishing them for acts that were legal at the time they were 
committed. It is for these reasons that retroactive legislation has 
always been looked upon with disfavor.
    Mr. Chairman, I urge you to correct this deficiency. As before, the 
fix can be found the language of H.R. 3283. H.R. 3282 would have 
applied only to new CVD petitions that were filed 30 days after the 
date the legislation became law.
    This concludes my testimony. I thank you for your attention. I 
would be happy to answer any questions.
                                 

    Chairman LEVIN. Thank you very much.
    Mr. Hecht.

   STATEMENT OF JAMES C. HECHT, PARTNER, INTERNATIONAL TRADE 
       PRACTICE, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP

    Dr. HECHT. Thank you. Good afternoon.
    I am Jim Hecht, and I practice in the international trade 
area at the law firm of Skadden, Arps, Slate, Meagher & Flom.
    The views I will provide today are my own and not 
necessarily those of the firm.
    I appreciate the opportunity to provide a few comments on 
H.R. 1229 and would of course be happy to answer any questions 
you might have.
    The issue of subsidies in nonmarket economy countries, and 
in particular China, has become a major focus in the trade 
policy area for some time now.
    In the past, debate on application of CVD law to NMEs has 
focused on whether subsidies can be meaningfully isolated in 
such economies. Recent events would appear to resolve that 
issue.
    In this regard, the Administration has repeatedly expressed 
strong concern at the evidence of significant subsidization in 
China impacting a range of industries.
    In acceding to the WTO, China specifically committed itself 
to abide by WTO subsidy disciplines and to eliminate prohibited 
subsidies.
    As part of its WTO obligations, China has identified and 
notified scores of subsidy program that continue to provide 
benefits to Chinese industries.
    The United States has recently requested consultations 
under the WTO dispute settlement system, with regard to nine 
prohibited subsidy programs in China.
    In light of these facts, there can be little doubt that 
subsidies in nonmarket economies can be and have been 
specifically isolated and identified, as shown by the recent 
actions of both the United States and Chinese governments, and 
as such, there would appear to be no valid legal or policy 
reason why U.S. trade disciplines in the subsidy area should 
not apply to nonmarket economies just as they do with respect 
to market economies.
    In fact, there are already clear grounds under existing law 
to apply U.S. countervailing duty provisions to nonmarket 
economies, and in this regard, the Administration is currently 
considering whether to modify its longstanding policy of not 
applying CVD rules to such economies.
    Notwithstanding the possibility of a change in the 
regulatory practice, however, there are good reasons for 
legislative action to clarify the issue.
    Legislation such as H.R. 1229 would remove legal 
uncertainty in the area, would obviate the possibility of 
future regulatory changes of policy, and would allow Congress 
to address the manner in which CVD law will be applied to 
nonmarket economies.
    One methodological issue that has been raised is the 
relationship between the CVD law and the nonmarket economy 
methodology used in anti-dumping cases, and specifically 
whether additional legislative action may be necessary to 
prevent a double assessment of duties for so-called domestic 
subsidies.
    In prior comments on the topic, the Administration has 
taken the position that requiring such an adjustment is neither 
warranted nor appropriate. In my view, that position is 
correct.
    Even aside from the obvious administrative difficulties in 
trying to undertake an additional analysis in this area, the 
theoretical concern that has been expressed with regard to 
double counting is not well founded.
    Specifically, it is not correct to say that the nonmarket 
economy dumping methodology corrects for domestic subsidies.
    Rather, it corrects for price distortions that result in 
both artificially high and artificially low input prices in a 
nonmarket economy.
    As such, there is no basis to conclude that domestic 
subsidies will be remedied through the NME dumping methodology.
    H.R. 1229 would also make a change in current law to 
require that Congress approve any graduation of a country from 
nonmarket to market economy status.
    Nonmarket economy treatment can be critical to the 
operation of U.S. trade laws, particularly where the lack of 
reliable price and cost data in a nonmarket economy makes 
application of traditional market economy rules inadequate.
    Under current law, graduation decisions are made 
unilaterally by the Administration.
    Given the importance of NME graduation decisions to U.S. 
industries and to the U.S. economy, as well as the concerns 
that have been expressed in the past by Members of Congress 
with respect to such decisions, allowing Congress to weigh in 
before the fact would make a great deal of sense.
    Again, I appreciate the opportunity to be here and would be 
happy to answer questions.
    [The prepared statement of Mr. Hecht follows:]
  Prepared Statement of James C. Hecht, Partner, International Trade 
          Practice, Skadden, Arps, Slate, Meagher and Flom LLP
    Good afternoon. I am Jim Hecht, and I practice in the international 
trade area at the law firm of Skadden, Arps, Slate, Meagher and Flom. 
The views I will provide today are my own and not necessarily those of 
the firm.
    I appreciate the opportunity to provide a few comments on H.R. 
1229, the ``Nonmarket Economy Trade Remedy Act of 2007'' and would of 
course be happy to answer any questions.
    The issue of subsidies in non-market economy countries--and in 
particular China--has been a major focus in the trade policy area for 
some time, as well as a matter of urgency for a number of potentially 
impacted U.S. industries. In this regard,

          The Administration has repeatedly expressed strong 
        concern at evidence of significant subsidization in China, 
        impacting a range of industries.
          In acceding to the WTO, China specifically committed 
        itself to abide by WTO subsidies disciplines and to eliminate 
        prohibited subsidies.
          As part of its WTO obligations, China has identified 
        and notified scores of subsidy programs that continue to 
        provide benefits to Chinese industries.
          The U.S. has recently requested consultations under 
        the WTO dispute settlement system with regard to 9 prohibited 
        subsidies programs in China.

    In light of these facts, there can be little doubt that subsidies 
in non-market economies can be, and have been, specifically isolated 
and identified--as shown by the recent actions of both the U.S. and 
Chinese governments. And as such, there would appear to be no valid 
legal or policy reason why U.S. trade disciplines in the subsidies area 
should not apply to non-market economies--just as they do with respect 
to market economies.
    In fact, there are already clear grounds under existing law to 
apply U.S. countervailing duty provisions to non-market economies. And 
in this regard, the Administration is currently considering whether to 
modify its longstanding practice of not applying CVD rules in the 
context of such economies.
    Notwithstanding the possibility of a change in regulatory practice, 
however, there are good reasons for legislative action to clarify the 
issue. Legislation such as H.R. 1229 would remove legal uncertainty in 
this area, would obviate the possibility of future regulatory changes 
of policy, and would allow Congress to address the manner in which CVD 
law will be applied to non-market economies.
    One methodological issue that has been raised is the relationship 
between the CVD law and the non-market economy methodology used in 
anti-dumping cases--and specifically whether additional legislative 
action may be necessary to prevent a double assessment of duties for 
so-called ``domestic'' subsidies. In prior comments on the topic, the 
Administration has taken the position that such an adjustment is 
neither warranted or appropriate. In my view, that position is correct. 
Even aside from the obvious administrative difficulties in trying to 
undertake an additional analysis in this area, the theoretical concern 
that has been expressed with regard to double counting is not well-
founded. Specifically, it is not correct to say that the non-market 
economy dumping methodology corrects for domestic subsidies--rather, it 
corrects for price distortions that result in both artificially high 
and low input prices in a non-market economy. As such, there is no 
basis to conclude that domestic subsidies will be remedied through the 
NME dumping methodology.
    H.R. 1229 would also make a change in current law to require that 
Congress approve any graduation of a country from non-market to market 
economy status. Non-market economy treatment can be critical to the 
operation of U.S. trade laws, particularly where the lack of reliable 
price and cost data in a non-market economy makes application of 
traditional market economy rules inadequate. Under current law, 
graduation decisions are made unilaterally by the Administration, with 
no opportunity for judicial review. Given the importance of NME 
graduation decisions to U.S. industries and the U.S. economy--as well 
as the concerns that have been expressed in the past by Members of 
Congress with respect to such decisions--allowing Congress to weigh in 
before the fact would make a great deal of sense.
    Again, I appreciate the opportunity to be here and would be happy 
to answer questions.
                                 

    Chairman LEVIN. Thank you very much, and to all of you.
    Mr. Herger.
    Mr. HERGER. Thank you, Mr. Chairman.
    I believe just about everyone recognizes that we have a 
major problem with China.
    We have a major problem in that we're dealing with this 
huge nation that's growing so rapidly, and is coming from a 
point where it did not have a free enterprise system, and we 
have problems there.
    My concern is that when we do what we do in correcting 
these problems, we not do it in a way that we lose when we get 
into a settlement fight with them in the WTO and end up 
penalizing even more some of our U.S. companies.
    So, with that in mind, Mr. Phelps, in your testimony, you 
say that the H.R. 1229 will make industries in other countries 
more competitive rather than the American industry.
    Could you elaborate on how other countries would benefit?
    Mr. PHELPS. Thank you, Congressman.
    Yes.
    CITAC's general view is, particularly in the United States, 
where we must, and steel industry people can debate this 
endlessly, we must import 20 percent, 25 percent, whatever the 
number is, of our steel every year, because the industry simply 
doesn't make enough steel, or you could say the consuming 
sector is so vibrant in the United States that we need more 
steel than is made.
    It is absolutely crucial for those companies, whether 
they're a small metal bender, a parts manufacturing operation, 
integrated with one of the big three auto companies, that they 
have to be able to get their material at prices that are 
internationally competitive.
    Without that, they are themselves put at risk for imports 
of their products.
    Our concern is, when the U.S. prices are artificially 
posted higher, that the metal benders and the parts makers and 
the people who are supplying fenders to GM, Ford, and Chrysler 
and others, simply are going to lose their business to offshore 
suppliers of those products.
    Mr. HERGER. This is my concern, that we meet this balance, 
because we have many industries that you're referring to, that 
you represent, that need these products from China, but we want 
them at the fair price, not at too high a price, not at a 
subsidized lower price, but what is the price. I mean, that's 
what this hearing is about.
    Again, Mr. Phelps, China's accession protocol says, quote:

       ``If there are special difficulties in that application, 
the importing WTO member may then use methodologies for 
identifying and measuring the subsidy benefit which take into 
account the possibility that prevailing terms and conditions in 
China may not always be available as appropriate benchmarks.
       In applying such methodologies, where practicable, the 
importing WTO member should adjust such prevailing terms and 
conditions before considering the use of terms and conditions 
prevailing outside China.''

    Close quote.
    However, H.R. 1229 changes this test to add, quote:

       ``When the administering authority has determined that 
China is a nonmarket economy country, the administering 
authority shall presume that special difficulties exist in 
calculating the amount of a benefit involving China and that it 
is not practicable to take into account and adjust terms and 
conditions prevailing in China, and the administering authority 
shall use terms and conditions prevailing outside of China.''

    Close quote.

    Mr. Phelps, how can this irrefutable presumption be 
anything but a per se violation of the WTO accession protocol?
    Mr. PHELPS. It's hard for me to see how it wouldn't be an 
illegal, or against the protocol with the WTO accession in 
China. It's hard for me to see that. I would agree with you.
    Mr. HERGER. Again, we're trying to strike this balance. We 
really want what is right. We want what is fair.
    We have many industries that depend on a competitive 
product from China. We just don't want it to be the other--we 
don't want it to be too competitive, where they're being 
subsidized, (a), and (b), we don't want to be put into a 
position where we go and we're found through a settlement 
dispute that we're penalized even more.
    Can you comment?
    Mr. PHELPS. I would agree with that.
    The fastest-growing export market for the United States 
right now is China.
    Obviously, it is in our interest--I think it went up 34 
percent, exports to China went up 34 percent. It is obviously 
in our interest to open Chinese markets even further.
    If we lose a WTO case, the very first thing they do, 
countries who win, if they retaliate, is they look at those 
export industries, and we have a lot of--we're the largest 
exporting country in the world, and they hit them with duties.
    So, I would agree, we really don't want to create more 
trouble with the WTO for U.S. exporters.
    Mr. HERGER. Exactly. Thank you, Mr. Phelps. Thank you, Mr. 
Chairman.
    Chairman LEVIN. Mr. English.
    Mr. ENGLISH. Thank you so much, Mr. Chairman. I have a 
couple of quick questions.
    First, Mr. Porter, I'd like to briefly explore a portion of 
your testimony with you to see if I can clarify your remarks on 
the so-called pretty much theoretical practice of double 
counting.
    In your testimony, you assert that H.R. 1229 is flawed 
because it contains no specific provision to, as you say, avoid 
double counting. You further cite a 2005 GAO study that claims 
Commerce has no authority under existing law to avoid double 
counting.
    You heard, I presume, Assistant Secretary Spooner 
testifying earlier that Commerce indeed does, in their view, 
have the authority to create a methodology for applying 
countervailing duty laws to nonmarket economies which would 
take into account the so-called practice of double counting.
    In the study that you cite, I believe it also contains a 
letter from Commerce to the GAO on the report.
    Commerce clearly identifies that the best way to address 
any potential methodology or implementation issues is not 
through legislation, but rather, quote, ``in the context of 
future cases,'' unquote, because determining the best 
methodology would, quote, ``hinge in part on the particular 
facts of any proceeding.''
    Now, I understand the argument that you've made here is 
that the Department of Commerce has to evaluate the case for 
third party--I'm sorry--third country data on a case by case 
basis. Yet you think Commerce shouldn't be able to make the 
call on double counting on a case by case basis.
    With that, why is it necessary for Congress to tie the 
hands of Commerce in its implementation of what is, after all, 
highly complex and difficult administration of this proposal?
    Mr. PORTER. Thank you, Congressman.
    I apologize if my statement was confusing.
    I do not think that Congress should tie the Commerce 
Department's hands on double counting.
    I think there is a, if you will, legitimate disagreement on 
the interpretation of existing U.S. law on whether, in an 
individual case, the Commerce Department can make adjustments 
to account for double counting when the subsidy at issue is a 
domestic subsidy and not an export subsidy.
    There is a specific provision in U.S. law that says you 
shall not--you shall take into account export subsidies because 
export subsidies have a direct effect on export price and, at 
least in theory, it is taken into account with respect to 
dumping.
    Since that provision just says export subsidies, if you 
will, there is a disagreement on whether Commerce in fact has 
the authority to take into account, make adjustments for any 
domestic subsidies that are double counted with respect to 
dumping.
    Congressman----
    Mr. ENGLISH. I understand your argument.
    Mr. PORTER. I'm sorry, Congressman. What I would suggest is 
the language used in Section 3 of the prior bill simply says, 
``Commerce, ensure there's no double counting.''
    Mr. ENGLISH. I'm sorry, which prior bill?
    Mr. PORTER. The one that passed the House, I think it was 
3283----
    Mr. ENGLISH. Oh, the one I wrote. Okay. I remember that 
one.
    Mr. PORTER. Okay. So, I think that provision simply says, 
``Commerce ensure there's no double counting. You have the 
authority to ensure it. We'll leave it to you to decide how to 
do that.''
    Mr. ENGLISH. I just question whether that's necessary.
    Mr. Hecht, if you would comment on that, and also, you make 
the comment in your testimony, ``Requiring a double counting 
adjustment, e.g., by always assuming the surrogate values fully 
account for NME subsidies, could easily place an NME producer 
in a better position than a similarly situated market economy 
producer and result in lower assessed unfair trade duties.'' 
You attach a chart.
    That, of course, would make Mr. Phelps happy, but do you 
want to comment on that?
    Dr. HECHT. Sure, I'd be happy to.
    I think that is the case. In a situation where Chinese 
costs happen to be higher than the surrogate values are, you're 
absolutely going to be in a situation where China would benefit 
from the use of a nonmarket economy dumping methodology.
    That really is the core insight into why this concern with 
regard to double counting is in my view misplaced.
    The GAO raised what I think is a reasonable question to 
ask, which is when you're using a surrogate value for a given 
input, if the Chinese value is subsidized, won't that surrogate 
value be 
higher?
    That's possible, but what they're not taking into account 
is you're using a whole lot of other inputs and China may have 
price distortions where their prices are much higher than the 
surrogate value.
    Mr. ENGLISH. Sure.
    Dr. HECHT. The GAO actually issued a study, a year after 
the one that's been referred to here today, where they looked 
at the nonmarket economy methodology and they specifically 
recognized in there that that could be the case, that we really 
don't know how it's going to cut. It all depends on the facts 
of a given case.
    Here it's easy enough to say that, give them authority to 
look at it, but the truth is, there is no reasonable basis to 
determine this, because Commerce does not collect nonmarket 
economy cost data when it does its analysis, and the whole 
reason you're using surrogate data is you don't have reliable 
cost data.
    So, the difficulty is, if you require this to be taken into 
account, there's no way to do that, because you don't have 
access to the information you need to do it, so it could act to 
make the law essentially ineffective. That's what the concern 
is.
    Mr. ENGLISH. Thank you, Mr. Chairman, for letting me 
inquire.
    Chairman LEVIN. Not at all, and I think your question 
highlighted the need to consider what's being said here, and to 
avoid an argument being raised, it essentially, if followed, 
would defeat the purpose of the bill.
    I don't quite understand the argument that there's a 
requirement here.
    Mr. HERGER. read from this section, from Section 2. What it 
does is create a presumption.
    I don't know how, within anybody's--well, let me put it 
this way.
    I don't see how you turn a presumption into a requirement, 
or even into a presumption that cannot be rebutted. I don't 
read the language that way.
    So, I think, Mr. Herger, we need to take another look at 
it, because what I fear is that balance can become an argument 
for inaction.
    Mr. Phelps, I mean, I hear you, and we hear these arguments 
often.
    If you simply look at the impact on the consumer, 
essentially it makes irrelevant where goods are produced or 
under what circumstances.
    You referred to artificially posted higher prices. The 
problem is that the imbalance leads to artificially posted 
higher prices by those who have an unfair advantage over our 
producers.
    I simply want to say to you, and to those you represent, 
that there is a need, and this is I think what's motivating us 
very much, to look at the impact of imbalances.
    You talk about China as a market for our exports, but--and 
we went through this with the ambassador who was here, the USTR 
ambassador. You have to look at what comes in here as well as 
what goes out.
    We have this major imbalance in trade with China, and so 
does the rest of the world, and it has all kinds of imbalances 
and all kinds of ramifications, including the ability of 
entities to use the profits from their sheltered markets to 
shelter them further.
    Dr. HALEY. Can I make a comment?
    Chairman LEVIN. Yes.
    Dr. HALEY. What I was trying to say was that the subsidies 
were motivated more by political considerations than by 
economic ones. So, we do benefit, consumers do benefit, in the 
short term.
    However, the focus of these subsidies will change over the 
next five to ten years, as they become that of technology 
acquisition, and they will pose a more strategic threat to the 
United States, especially in industries in which we are cutting 
edge.
    So, the effects on consumers is just a very minor concern. 
We have to look at subsidies in a longer term perspective.
    Chairman LEVIN. I think well said.
    Well, maybe we could carry on this discussion, I won't call 
it a dialogue----
    [Laughter.]
    Chairman LEVIN [continuing]. But why don't we do this? If 
you have any further comments, send them to us. Okay?
    We're going to be discussing, and I hope acting on this 
legislation, in the near future, because all the testimony, 
virtually all of it, I think Mr. Herger would agree, is that 
there is a major problem relating to the subsidization by 
China.
    Yes, sir.
    Mr. COMRIE. Mr. Chairman, may I make one further comment--
--
    Chairman LEVIN. Please.
    Mr. COMRIE [continuing]. Related to this topic?
    I think any consideration of this bill would be a mistake 
if it doesn't consider some aspects of the history of the steel 
industry.
    The steel industry, as I think you well know, from 1950 to 
1980, ended up with an industry that was something like 40 
percent government owned and ended up in a worldwide glut of 
steel with major ramifications to customers, major 
ramifications in this country to the steel industry.
    By the mid-1980s, many of those countries that had 
government-owned steel industries realized this was a terrible 
mistake, and they went about trying to correct it, and we've 
gone a long ways in correcting that.
    Many of those countries are market economies, but those 
countries have sort of seen the light and most of them have 
been privatized.
    So, here we are looking at China, who looks like they're 
going through exactly the same cycle again, only this time many 
times magnified, much worse, with much worse consequences 
coming down the road, and we can all see what's almost certain 
to happen.
    So, for anyone to sort of sit here and look at this bill 
and say that in some way or another the countervailing duty law 
shouldn't be used to protect the U.S. economy against this 
cycle that we've already seen happen once just doesn't make any 
sense.
    Chairman LEVIN. All right. We could discuss that. I happen 
to very much agree with it.
    Why don't we do this? We'll recess, not adjourn, so you can 
further comment.
    We really thank you. This, I think, is a vital prelude to 
what I think will be responsible action in this Congress.
    So, thank you very much, and the hearing is now adjourned.
    [Whereupon, at 3:45 p.m., the hearing was adjourned.]
    [Submissions for the Record follow:]
                 Statement of Columbia Forest Products
    Columbia Forest Products appreciates this opportunity afforded by 
the U.S. House of Representatives Committee on Ways and Means, 
Subcommittee on Trade, to voice its views on the application of U.S. 
countervailing duty laws to imports from countries considered to be 
``nonmarket economies.'' Open, constructive dialogue on this issue is 
essential to ensure that U.S. House of Representative Members are 
appropriately informed of the important issues addressed by the 
recently introduced H.R. 1229--the Nonmarket Economy Trade Remedy Act 
of 2007.
    We are confident that this discourse will clearly demonstrate the 
irrefutable logic underlying the introduced legislation--illegal 
subsidies injuring U.S. companies must be remedied, regardless of 
whether the offending country is considered to be a market- or 
nonmarket-economy.
    U.S. companies like ours want an opportunity to participate in a 
fair global trading community, free of distorting subsidies, in which 
we can demonstrate the quality of our products and the superior service 
that we provide our customers. As a business, we recognize that 
competition is beneficial to ensuring a company's optimal performance. 
However, competing against companies that receive illegal subsidies is 
much like being a runner that perfects her performance only to show up 
on race day to see that her competitor has been allowed a 50-meter head 
start. Such an unfair advantage would not be allowed in the context of 
international sports at the Olympic Games, and it should not be allowed 
in the context of international trade.
    The U.S. Department of Commerce has for too long relied on 1984 
case precedent, upheld by the U.S. Court of Appeals for the Federal 
Circuit, to assert that applying countervailing duty laws against 
nonmarket economies is unfair.
    U.S. antidumping laws address illegal dumping from all countries--
regardless of ``market-economy'' or ``nonmarket-economy'' status. U.S. 
countervailing duty laws should do the same with illegal subsidies.
    We strongly endorse the efforts of Representatives Artur Davis and 
Phil English to promote a level international trade playing field in 
which competitive companies can compete and succeed. We beseech the 
U.S. House of Representatives to quickly pass H.R. 1229.

            Respectfully submitted,

                                           Columbia Forest Products

                                 
                       Statement of Erik O. Autor
                                         National Retail Federation
                                                   February 7, 2007

The Honorable Sander Levin, Chairman
Ways and Means Trade Subcommittee
U.S. House of Representatives
1102 Longworth HOB
Washington, DC 20515

Dear Chairman Levin:

    On behalf of the U.S. retail industry, the National Retail 
Federation is pleased to provide the following comments to the Ways and 
Means Trade Subcommittee regarding the hearing on H.R. 1229, the Non-
Market Economy Trade Remedy Act of 2007.
    By way of background, the National Retail Federation is the world's 
largest retail trade association, with membership that comprises all 
retail formats and channels of distribution including department, 
specialty, discount, catalog, Internet, independent stores, chain 
restaurants, drug stores and grocery stores as well as the industry's 
key trading partners of retail goods and services. NRF represents an 
industry with more than 1.6 million U.S. retail establishments, more 
than 24 million employees--about one in five American workers--and 2006 
sales of $4.7 trillion. As the industry umbrella group, NRF also 
represents more than 100 state, national and international retail 
associations.
What Is At Stake for the Retail Industry?
    Like other businesses, American retailers face the daily challenge 
of creating value for their customers and shareholders. Retailers must 
also grow their sales and their businesses in an industry marked by 
cutthroat competition that creates significant downward pressure on 
prices, and an average profit margin of 2 percent. To meet these 
challenges, retailers must offer customers a fresh selection of 
products--goods they want to buy at prices they are willing and able to 
pay.
    To provide their customers the best selection and value, every 
American retailer, from the biggest to the smallest, sources products 
from around the world. Thus, international trade issues fundamentally 
impact the ability of U.S. retailers to run their businesses 
successfully. The commercial activity generated by these imports 
support good-paying, blue and white collar jobs, many of them union 
jobs. These millions of American workers are employed not only in the 
retail industry, which accounts for one-fifth of the U.S. workforce, 
but also in many industries that support retail operations and supply 
chains--e.g., manufacturing, farming, ports, rail, trucking, 
warehousing, air delivery, and logistics.
    Commerce has historically provided the basis for U.S. economic 
prosperity. Moreover, the United States today is a consumer-driven 
economy, with consumer spending accounting for a huge portion of U.S. 
gross domestic product and economic growth. Nonetheless, we now see a 
rising sentiment that blames international trade and globalization for 
a host of economic and competitiveness challenges facing Americans, 
some having little or nothing to do with trade.
    Much of this national economic anxiety is focused on issues in the 
U.S.-China trade relationship as China becomes a significant player in 
the global economy. However, few U.S. industries have more at stake in 
the debate on the U.S.-China trade relationship than retailers. 
Consumer goods comprise 80 percent of all U.S. imports from China, and 
China is a key supplier, and sometimes the dominant supplier, in every 
consumer goods category. Moreover, retailers have been adversely 
impacted by a recent notable increase in trade remedies investigations 
(antidumping and safeguards) against imported consumer products--e.g., 
wooden bedroom furniture, grills, etc--particularly from China.
U.S. Retail Industry Views on H.R. 1229
    The Non-Market Trade Remedy Act of 2007 has two major provisions 
that would make changes to the U.S. trade remedies regime. First, it 
would statutorily mandate that U.S. countervailing duty (CVD) law 
applies to China and other non-market economy (NME) countries. Second, 
it would require Congressional approval of any Administration decision 
to graduate a NME country to market economy status.
1. Application of CVD law to NME countries
    To be countervailable, Articles 1.2 and 2.1 of the World Trade 
Organization (WTO) rules under the Agreement on Subsidies and 
Countervailing Measures require that a subsidy be ``specific to an 
enterprise or industry or group of enterprises or industries.'' U.S. 
countervailing law contains the same specificity requirement.
    Since 1984, the U.S. Department of Commerce (DOC) has declined to 
pursue countervailing duty cases against NME countries under the theory 
that it is not always possible to identify specific subsidies and 
calculate their benefits in countries where prices are not set by the 
market and everything is, in effect, subsidized. Petitioner groups have 
argued that this policy leaves them no mechanism to offset government 
subsidies to Chinese industries.
    However, NME countries are subject to much more stringent 
procedures in antidumping cases, which effectively offset any benefit 
conferred by government subsidies through the use of surrogate country 
prices to calculate costs of production.
    Example: It costs a Chinese company $20 to make a widget, which it 
sells in the United States at $10, thereby creating a dumping margin of 
100 percent. The Chinese Government provides the manufacturer a subsidy 
of $10 per widget, which lowers its cost of production to $10, the same 
as its U.S. price. In an antidumping case, DOC will ignore the Chinese 
company's costs in calculating what the normal value of the widget is 
in China, and instead use the costs in a surrogate country like India, 
which are set by the market. If the cost of production in India is $30, 
the result is not only a higher dumping margin of 200 percent, but, the 
benefit of the $10 subsidy is completely offset by ignoring the Chinese 
company's costs.
    Given this result, subjecting China and other NME countries to the 
CVD law raises two problems. First, it appears unfairly biased by 
essentially treating China as a non-market economy for antidumping 
cases but as a market economy for CVD cases. This bias raises the 
question whether this effect would violate the WTO most favored nation 
principle of non-discrimination. If the United States were to be 
challenged on this point at the WTO and lose, it would expose U.S. 
exports to WTO-sanctioned trade retaliation unless the United States 
eliminated the discriminatory treatment.
    The second problem is the issue of double-counting in offsetting 
the injury from the subsidized imports if there are both antidumping 
and countervailing duty orders on the same product. It is clear that 
WTO rules limit a petitioner to one remedy against injury from imports 
of the same product. Unless the intention is to provide petitioning 
industries two bites at the apple in attacking imports from China, then 
the legislation needs to ensure that there is no double-counting of 
benefits from subsidies between antidumping and CVD cases on the same 
product. Otherwise, the legislation would run afoul of WTO rules.
    In recognition of this problem, a bill passed last year by the 
House of Representatives contained a provision to prevent double 
counting, which is not contained in H.R. 1229. While a step in the 
right direction, this provision only addressed the problem of double 
counting when simultaneous antidumping and CVD investigations are 
launched, but not when a CVD investigation is launched against a 
product already subject to an antidumping order. Although any double-
counting could be rectified in this situation by requesting an 
administrative review, such reviews take time. If the committee 
determines to approve H.R. 1229, then it is necessary to include a 
provision to prevent double counting in a comprehensive manner.
2. Congressional approval required for any change to NME status in 
        antidumping cases
    The concern that appears to underlie the proposal to require 
Congressional approval of any change to NME status in antidumping cases 
is that the Administration has allegedly based prior decisions to 
graduate former NME countries, like Russia, primarily on political 
rather than economic reasons. This may be a valid concern. It is hard 
to discern a rationale differentiating Russia that is in the process of 
renationalizing key sectors of its economy, and China that is 
continuing the process of privatizing its state owned sectors. The 
arbitrariness of this question is underscored by the fact that the 
European Union and Canada already deem China to be a market economy 
country. Our main concern and question about this provision is that 
under the guise of trying to eliminate political influence in NME 
determinations, this change would end up making the process even more 
political and arbitrary by throwing the decision to Congress.
    NRF appreciates the opportunity to comment on H.R. 1229, and looks 
forward to working with the Ways and Means Committee as it considers 
this legislation. Should you have any questions please contact me at 
(202) 626-8104 or by e-mail at [email protected].

            Respectfully submitted,

                                                      Erik O. Autor
                                Vice President, Int'l Trade Counsel

                                 
                     Statement of Nucor Corporation
                                                  Nucor Corporation
                                                     March 14, 2007

The Honorable Charles B. Rangel
Chairman, Committee on Ways and Means
United States House of Representatives
Washington, DC 20515

The Honorable Jim McCrery
Ranking Member, Committee on Ways and Means
United States House of Representatives
Washington, DC 20515

Dear Chairman Rangel and Ranking Member McCrery:

    On behalf of Nucor and its 11,900 employees, I write to express my 
whole-hearted support for H.R. 1229, the ``Nonmarket Economy Trade 
Remedy Act of 2007.'' Nucor continues to be deeply concerned about the 
negative effects of illegal trade practices that are in direct 
violation of internationally agreed upon rules. We are particularly 
concerned about the threat posed to U.S. manufacturing from increasing 
volumes of illegally subsidized Chinese imports. There is simply no 
reason to exempt China or any other country from the trade laws. This 
legislation is long overdue and Nucor urges its prompt approval by the 
Committee and Congress.
    China continues to be the main culprit in providing massive illegal 
subsidies to its steel and other manufacturing industries. Over the 
past six years, Chinese steel production has risen by 234 percent, and 
now accounts for nearly 35 percent of global steel production. This 
unprecedented increase in steel production was possible only because of 
the enormous subsidies provided by the Chinese government. We are 
already seeing the impact of this government-sponsored overproduction, 
with Chinese imports pouring into our market in unprecedented numbers. 
These imports compete directly with our steel and, while Nucor is as 
competitive and efficient as any producer in the world, over the long 
run private industry simply can not compete against the Chinese 
government.
    U.S. trade laws provide a remedy for such illegal and deceptive 
practices. But the law is not being fully applied--China and other 
nonmarket economies have been given a free pass because the Commerce 
Department has chosen not to apply the countervailing duty (``CVD'') 
law to their imports. It is time to end this special treatment and 
apply the full force of our trade laws to China. H.R. 1229 would do 
just that. We believe that vigorous application of the CVD law to China 
is essential to confront the growing threat of unfairly traded Chinese 
products and to provide U.S. industry an effective remedy against 
China's illegal and distortive trade practices.
    Application of the CVD law to China and other nonmarket economies 
is entirely consistent with U.S. law and, we believe, required by our 
international obligations. I'm an engineer, not a lawyer, but it seems 
to me that we cannot exempt China from the CVD law while applying it to 
other WTO members. In fact, it is my understanding that China 
explicitly obligated itself to be subject to CVD investigations when it 
joined the WTO years ago. Like all of our trading partners, China 
should be held to the letter of the agreements it signed.
    I understand that the Chinese government has raised concerns 
regarding the application of the CVD law to its imports, including 
supposed difficulties with identifying and quantifying subsidies. These 
concerns are nothing more than a smoke screen designed to evade 
compliance with its WTO obligations. There is no doubt that Chinese 
government subsidies are quantifiable and measurable. A recent report 
sponsored by the American Iron and Steel Institute and the Steel 
Manufacturers Association documented in detail numerous subsidies to 
China's steel industry, including specific examples of WTO-prohibited 
subsidies.\1\ More importantly, China itself identified more than 75 
types of subsidies in its April 2006 subsidies notification to the WTO. 
The notification confirmed that China continues to provide a broad 
range of subsidies contingent on export performance, even though such 
subsidies are prohibited by the WTO. If China can identify them, so can 
we!
---------------------------------------------------------------------------
    \1\ See The China Syndrome: How Subsidies and Government 
Intervention Created the World's Largest Steel Industry, available at 
http://www.wileyrein.com/docs/docs/80.pdf.
---------------------------------------------------------------------------
    By continuing to exempt China and other nonmarket economies from 
application of the CVD law, the United States sends the message that 
countries can violate international and U.S. trade laws with impunity. 
This bill would change that by ensuring that there are no more free 
passes for China and other nonmarket economies that systematically 
violate our trade laws by subsidizing their manufacturers. I would also 
like to express Nucor's support for the so-called ``graduation'' 
provision in this bill, which would require Congressional approval of a 
determination by the Department of Commerce to revoke a country's 
nonmarket economy status under U.S. antidumping law. This provision 
would ensure that Commerce follows the criteria required by law for 
promoting countries to market economy status and that Congress has a 
say in such an important decision.
    In summary, Nucor urges prompt passage of H.R. 1229. Application of 
the full range of trade remedies available under the law is critical to 
countering the serious threat to U.S. industry posed by unfairly 
subsidized Chinese imports. Applying the CVD law to China and other 
nonmarket economies will help end the significant distortions in global 
trade flows caused by enormous government subsidies. Bringing a rapid 
end to these illegal and damaging practices is essential to the future 
health and prosperity of the U.S. steel industry and U.S. manufacturing 
in general.

            Sincerely,

                                                  Daniel R. DiMicco
                   Chairman, President, and Chief Executive Officer

                                 
            Statement of Retail Industry Leaders Association
    The Retail Industry Leaders Association (RILA) welcomes the 
opportunity to submit comments on the application of the countervailing 
duty law to imports from non-market economy countries, with a focus on 
H.R. 1229, the ``Non-market Economy Trade Remedy Act of 2007.'' While 
RILA recognizes that policymakers should ensure that U.S. producers 
have the tools necessary to address unfair trade, it is equally 
important that such tools are drafted and administered objectively and 
in line with U.S. international obligations.
    RILA opposes H.R. 1229 in its current form because it goes well 
beyond simply applying the countervailing duty law to non-market 
economies. The bill, as introduced, prescribes an unfair methodology 
for calculating subsidies and inserts a Congressional role into the 
administration of trade remedy laws--procedures which should more 
appropriately remain the subject of objective, quasi-judicial 
proceedings at the U.S. Department of Commerce (DOC) and the U.S. 
International Trade Commission.
    By way of background, RILA promotes consumer choice and economic 
freedom through public policy and industry operational excellence. Our 
members include the largest and fastest growing companies in the retail 
industry--retailers, product manufacturers, and service suppliers--
which together account for more than $1.5 trillion in annual sales. 
RILA members provide millions of jobs and operate more than 100,000 
stores, manufacturing facilities and distribution centers, have 
facilities in all 50 states, and provide millions of jobs domestically 
and worldwide. Our members pay billions of dollars in federal, state 
and local taxes and collect and remit billions more in sales taxes. Our 
members are also leading corporate citizens with some of the nation's 
most far-reaching community outreach and corporate social 
responsibility initiatives.
    The retail sector, along with the suppliers and customers that it 
serves, is an essential part of the U.S. economy. Retailers meet the 
needs of U.S. consumers, and in doing so are essential drivers of the 
U.S. economy. We also serve the global market for consumer goods and 
bring U.S. products to the foreign markets where they operate. 
Retailers provide quality jobs at all employment levels with good 
benefits. The industry also creates opportunities for entry-level 
employment, part-time work, jobs for non-skilled workers, and 
management training for front-line workers.
Congressional Vote on Market Economy Status
    The most concerning provision in H.R. 1229 is the requirement for 
Congressional approval for any change in non-market economy status in 
antidumping and countervailing duty cases. Proponents of this measure 
claim that Congressional action is required to prevent the 
Administration from making decisions based on political interests 
rather than economic facts. However, such a provision would 
intrinsically raise the level of political interference in these 
decisions. The DOC is much better prepared to objectively analyze the 
statutory criteria that determine whether a country should be 
considered a market economy, such as currency convertability, whether 
wage rates are established by free bargaining, the extent of joint 
ventures and foreign investments, and the extent of government 
ownership or control of production and of the allocation of resources. 
The trade analysts at the DOC have the information, analysis, and 
expertise to evaluate these technical economic issues. It is false to 
suggest that Members of Congress would be better positioned to make 
such an assessment.
Application of Countervailing Duty Law to Non-Market Economy Countries
    It is appropriate to have in place tools that address unfairly 
subsidized trade and can provide relief to U.S. producers that are 
injured. To be sure, U.S. policy should discourage foreign governments 
from intervening in private enterprise through subsidies and other 
actions. Nevertheless, RILA believes that H.R. 1229, as introduced, 
does not provide an appropriate legal platform for the Department of 
Commerce to conduct a technical analysis of the facts of specific 
subsidy cases against imports from non-market economies. Any effort to 
apply the countervailing duty law to non-market economies should not be 
undertaken in a vacuum.
    Continuing to employ a non-market economy methodology in 
antidumping proceedings while also applying the countervailing duty law 
to the same product from the same country requires analysts to 
carefully identify whether and how there may be double counting for the 
same government interventions in the marketplace. The Government 
Accountability Office (GAO) recognized this potential problem in its 
report entitled ``U.S.-China Trade: Commerce Faces Practical and Legal 
Challenges in Applying Countervailing Duties'' (GAO-05-474). 
Specifically, unlike antidumping cases that involve market economy 
countries, the antidumping methodology for non-market economy countries 
also accounts for government intervention in the marketplace, so 
blanket authority for a subsidy analysis of the same imports would 
inevitably count certain behavior twice.
    RILA suggests that better legal language to apply the 
countervailing duty law to non-market economies can be found in Section 
3 of H.R. 3283 in the 109th Congress, which passed the House of 
Representatives in July 2005 by a vote of 255-168. As with H.R. 1229, 
Section 3 of H.R. 3283 would also give United States producers access 
to relief that directly targets government subsidies. At the same time, 
it also addresses the GAO's concern regarding potential double 
counting, and ensures that any relief from subsidized imports is 
granted in an objective and fair manner, and in line with U.S. 
multilateral obligations. Such prudent measures are beneficial to the 
U.S. trade remedy regime because they would decrease the likelihood 
that any relief granted would be subject to time-consuming and 
burdensome legal challenges in U.S. courts and in the World Trade 
Organization (WTO).
    Additionally, Section 3 of H.R. 3283 implements another GAO 
recommendation to explicitly give the Commerce Department the authority 
to use third-country benchmarks to measure government subsidies in 
China. The bill also carefully tracks the commitment U.S. negotiators 
secured from China when it acceded to the WTO. While H.R. 1229 also 
provides for third-country benchmarks, it inappropriately requires the 
DOC to presume that any subsidies conferred in a non-market economy 
should be measured by benchmarks in surrogate countries. Such an 
approach is significantly more likely to be challenged in the WTO 
because it does not track international agreements. Issues such as 
appropriate benchmarks should be left to experts at the DOC, and those 
analysts should endeavor to make an objective analysis to determine the 
most appropriate benchmark rates to most accurately measure any subsidy 
conferred.
Conclusion
    RILA recognizes that U.S. producers that are harmed by subsidized 
imports should have access to remedies that directly address such 
unfair trade. RILA does not oppose an effort to simply apply the 
countervailing duty law to non-market economy countries. At the same 
time, it is unclear whether legislation is actually required to do so. 
In fact, the DOC is already currently investigating allegations of 
Chinese subsidies to its paper industry. Further, RILA believes that if 
legislation does move forward to apply the countervailing duty law to 
non-market economies, the Committee should endeavor to make the 
legislation objective and consistent with international obligations. 
Section 3 of H.R. 3283 from the 109th Congress is a much better 
alternative to achieve this goal than H.R. 1229. If you have any 
questions on this statement or require any assistance, please contact 
Lori Denham, Executive Vice President, Public Policy and Industry 
Operations at, or Andrew Szente, Director, Government Affairs.
                                 
             Statement of Society of the Plastics Industry
                                   Society of the Plastics Industry
                                                     March 29, 2007

Chairman Sander Levin
Trade Subcommittee
Committee of Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515

Dear Chairman Levin:

    Thank you for this opportunity to submit comments on H.R. 1229, the 
``Non-Market Economy Trade Remedy Act of 2007.'' The Society of the 
Plastics Industry (SPI), as the primary association representing the 
U.S. plastics industry, urges Congress to adopt legislation that 
directs the Commerce Department to apply countervailing duties to 
unfairly subsidized and injurious imports from non-market economy 
countries such as China. SPI believes that this legislation is 
necessary for the U.S. plastics industry because it allows the U.S. 
government to counteract the negative impact of subsidies provided by 
important non-market economies to their manufacturers.
    The production of plastics materials and plastics products is the 
third-largest manufacturing industry in the United States. SPI is the 
only national plastics trade association representing companies that 
operate in all segments of the plastics supply chain--processors, 
manufacturers of machinery, molds, and raw materials (resins/polymers). 
SPI members range from large multinational corporations to small and 
medium-sized companies, many of which are family-owned businesses, all 
playing a vital role in the delivery of myriad plastics products that 
enhance every aspect of our lives.
    China is a significant market for the U.S. plastics industry. In 
2003, China became the third largest export market for plastics 
industry goods, with exports valued at $1.32 billion.\1\ This export 
growth continued in the past three years, leading to U.S. plastics 
exports worth $2.8 billion in 2006. Despite this robust growth in 
exports, the U.S. plastics industry is experiencing a very large and 
growing bilateral trade deficit with China, which amounted to $5.6 
billion in 2006. The bilateral trade deficit is even more pronounced in 
processed plastic products, reaching $7.2 billion in 2006.
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    \1\ Unless otherwise noted, ``plastics industry goods'' refers to 
products falling under four categories: resins/raw materials (HTS 3901-
3915); plastics products--intermediate and final goods (HTS 3916-3926); 
plastics machinery and parts (HTS 8477, 8479); and plastics molds (HTS 
8480).
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    The U.S. plastics industry is experiencing significant 
disadvantages in the global marketplace caused by unfairly subsidized 
exports from non-market economies, such as China. SPI members believe 
that manufacturers injured by unfair subsidization should have an 
effective mechanism to remedy their harm. Although passage of H.R. 1229 
by itself will not alleviate all of the plastics industry's pressures, 
addressing the subsidies and other unfair practices of trading partners 
can certainly improve the competitive position of U.S. plastics 
manufacturers and, in turn, save and create jobs.
    Plastics manufacturing is a technologically-advanced and capital-
intensive industry able and willing to compete in the global 
marketplace. However, countries like China are providing an unfair 
advantage to their exporters by maintaining an artificially low level 
of their currencies. Along with high natural gas and energy prices, 
this has been an external pressure that has unnecessarily burdened the 
industry's competitiveness. As the artificially undervalued currency of 
China and other Asian countries affects sales by plastics companies 
both in their domestic market and abroad, SPI urges Congress to 
specifically designate exchange rate misalignment as an export subsidy 
actionable under the U.S. countervailing duty statute. SPI strongly 
supports the legislative approach undertaken by Representatives Tim 
Ryan and Duncan Hunter in the ``Fair Currency Act of 2007'' (H.R. 782).
    If left unchecked, the challenges posed by unfair industry 
subsidization and currency misalignment in non-market economies 
threaten the survival of an American industry that generates 
approximately $341 billion in annual revenues and directly employs 1.1 
million people. By allowing the application of the U.S. countervailing 
statute to China and other non-market economies, H.R. 1229 will 
unambiguously demonstrate Congress's commitment to combating unfair 
trade practices and enhancing the competitiveness of the U.S. 
manufacturing sector. The passage of H.R. 782 would further build on 
this approach by providing a tool to U.S. manufacturers to address a 
critical problem that they face in the global marketplace.
    We appreciate the opportunity to comment on this issue and hope 
that the Committee on Ways and Means finds this information helpful as 
it considers whether the CVD law should be applied to non-market 
economies. If you would like additional information from SPI or have 
questions, please do not hesitate to contact SPI.

            Respectfully submitted,

                                                      Bill Carteaux
                                                William R. Carteaux
                                                  President and CEO
                                 
              Statement of Southern Shrimp Alliance, Inc.
                                     Southern Shrimp Alliance, Inc.
                                      Tarpon Springs, Florida 34688
                                                     March 23, 2007

The Honorable Sander M. Levin, Subcommittee Chairman
Subcommittee on Trade,
Committee on Ways and Means,
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515

Dear Chairman Levin:

    In response to the Subcommittee's March 7, 2007 announcement of 
hearing and opportunity for comments, the Southern Shrimp Alliance 
hereby submits written comments in support of The Nonmarket Economy 
Trade Remedy Act of 2007. SSA supports application of the 
countervailing duty law to imports from nonmarket economy countries. 
While the attached comments submitted to the U.S. Department of 
Commerce make clear that change in legislation is not required, 
amending the law would resolve any lingering questions about the 
legality of extending the countervailing duty law to nonmarket 
economies.
    The United States has recognized the existence of a number of 
subsidies in China by its requests for consultations before the World 
Trade Organization. The large and growing trade deficit, particularly 
with China, and the existence of trade-distorting subsidies in 
nonmarket economies demonstrate the need to remove any possible legal 
impediment to addressing subsidies in nonmarket economies through the 
countervailing duty law.
    SSA appreciates the opportunity to comment on pending legislation. 
Please contact the undersigned if you have any questions regarding this 
submission.

            Respectfully submitted,

                                                      John Williams
                                                 Executive Director
                                 
                     Statement of Zygmunt Jablonski
    My name is Zygmunt Jablonski, Executive Vice President and General 
Counsel of Unisource Worldwide, Inc. Prior to my employment with 
Georgia-Pacific and with Unisource, I was an international trade 
attorney in private practice in Washington, D.C. It is a pleasure to 
discuss U.S. trade remedy laws and H.R. 1229.
    Unisource is one of the largest independent paper, packaging and 
facility supplies distribution companies in the United States. In 2006, 
our sales were nearly $6 billion of which paper products represent 
roughly 60 percent of total sales. We have 75 locations across the 
country, a fleet of approximately 1300 vehicles, and we have about 5000 
employees in the United States.
    We buy and sell products from both U.S. producers and foreign 
suppliers. When it comes to paper products--such as coated free sheet 
paper--we purchase more of our products domestically than we import.
    I raise this issue because it is important to consider the business 
climate in which we operate as the Committee considers this 
legislation. At the outset, I want to make clear that we fully 
recognize the need to ensure that imports are fairly traded. We would 
support a law that allows investigations of whether imports from non-
market economies have been unfairly subsidized. Our objective is to 
ensure that legislation does not impose unreasonable standards on 
imported products. So, we support a level playing field for our 
domestic suppliers but we do not support a playing field which tilts 
the other way and is unfair to our foreign suppliers. As currently 
drafted, we believe that H.R. 1229 does not strike an appropriate 
balance.
    I would like to raise two technical issues and one fundamental 
issue with the current legislation. First, the bill requires the 
Commerce Department to calculate the CVD rate for non-market economies, 
like China, by using benchmarks outside of China. In our view, whether 
subsidies exist, and how to value them, should primarily be based on 
whether there is preferential treatment vis-a-vis other domestic 
enterprises, as in the case with market economies and other WTO 
members. Anti-subsidy rules, including WTO rules, do not preclude 
governments from providing benefits as long as those benefits are not 
specific to a particular industry. H.R. 1229 would penalize the Chinese 
government by disregarding domestic benchmarks that would be used for 
all other WTO members. In addition, prohibiting Commerce from using 
benchmarks from China ignores the market reforms that have taken place 
in China. Today, there are many companies in China that are completely 
private, foreign owned and operate according to market economy 
principles.
    Second, H.R. 1229 does not prevent double counting of duties in 
situations in which the same exporters face both an antidumping and a 
CVD case. The bill would impose two sets of duties to compensate for 
the same unfair trade practice. As you know, GAO confirmed that such a 
framework would result in an unfair double counting. U.S. courts have 
suggested that such double counting is generally considered improper, 
and such double counting would also expose the United States to a 
challenge in the WTO that it would likely lose.
    To address these issues, I respectfully suggest that the 
legislation authorize the Commerce Department to offset those elements 
of the subsidies which are fully accounted for in the use of surrogate 
values to calculate the dumping margins. The need to offset any double 
counting is already recognized in existing law by allowing Commerce to 
offset export subsidies against antidumping margins. Likewise, in the 
non-market economy context, a similar authority is necessary to allow 
Commerce to offset non-export subsidies against antidumping margins 
that already take into account such non-export subsidies. The ability 
to offset would help provide a level playing field and reflect the 
principles of fair trade.
    In addition to the technical issues I just raised, I would like to 
close by discussing a fundamental economic contradiction in H.R. 1229. 
We do not believe that Commerce should apply the CVD law to China as 
long as China is treated as an NME for purposes of the antidumping law. 
Among the specific factors that the Commerce Department has examined in 
treating China as a non-market economy, of direct relevance to 
application of the countervailing duty law is the convertibility of the 
local currency, in this case the renminbi, which reflects its 
reliability as a measure of international market value. Domestic prices 
and costs denominated in what the Commerce Department deems to be an 
unreliable currency are nevertheless the very values that the 
Department would rely upon to calculate any subsidy benefit in a CVD 
investigation.
    For example, when Commerce determines the benefit from a tax 
program that is alleged to confer a countervailable subsidy, the actual 
tax paid is a function of sales revenues and production costs that may 
be denominated in both the local currency and foreign currencies. Yet 
Commerce does not consider the foreign currency to be comparable to 
international currencies. How is it that Commerce would rely upon 
figures derived from locally-denominated prices in the countervailing 
duty context if it has determined that the prices are so distorted in 
the antidumping context that they cannot be used to determine reliable 
values? Yet that inconsistency is what the bill would require.
    Thank you for this opportunity to present our views on this 
important matter.

                                 
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