[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
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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.
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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!
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\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.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
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.