    U.S.-China Trade: Commerce Faces Practical and Legal Challenges
    in Applying Countervailing Duties (17-JUN-05, GAO-05-474).

    Some U.S. companies allege that unfair subsidies are a factor in
    Chinese success in U.S. markets. U.S. producers injured by
    subsidized imports may normally seek countervailing duties (CVD)
    to offset subsidies, but the United States does not apply CVDs
    against countries, including China, that the Department of
    Commerce classifies as "nonmarket economies" (NME). In this
    report, GAO (1) explains why the United States does not apply
    CVDs to China, (2) describes alternatives for changing this
    policy, (3) explores challenges that would arise in applying
    CVDs, and (4) examines the implications for duty rates on Chinese
    products.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-05-474
        ACCNO:   A26997
      TITLE:     U.S.-China Trade: Commerce Faces Practical and Legal
    Challenges in Applying Countervailing Duties
         DATE:   06/17/2005
      SUBJECT:   International economic relations
    	     International trade
    	     International trade regulation
    	     International trade restriction
    	     National policies
    	     Policy evaluation
    	     Restrictive trade practices
    	     Subsidies
    	     Trade policies
    	     Foreign governments
    	     China

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    GAO-05-474

                     United States Government Accountability Office

                         GAO Report to Congressional Committees

    June 2005

    U.S.-CHINA TRADE

    Commerce Faces Practical and Legal Challenges in Applying Countervailing Duties

                                           a

    GAO-05-474

    Contents

      Letter

    Results in Brief
    Background
    Legal and Practical Obstacles Have Prevented Application of CVDs

    to China Department of Commerce Could Act to Allow Application of CVD

    Law to China Challenges Would Remain in CVD Actions against China
    Uncertain Whether Applying CVDs Would Result in Increased

    Protection Conclusions Recommendations for Executive Action Matters for
    Congressional Consideration Agency Comments and Our Evaluation

    1 3 6

    6

    10 18

    23 29 30 31 31

    Appendixes
                    Appendix I:       Objectives, Scope, and Methodology       34
                                 CVDs and Antidumping Duties under WTO Rules
                   Appendix II:                    and U.S.
                                                     Law                       36
                                     WTO Agreement Provides General Rules      36
                                      U.S. Procedures Reflect WTO Rules        37
                                   Countervailing Duties Usually Applied in
                                           Tandem with Antidumping
                                                    Duties                     39
                  Appendix III:    Comments from the Department of Commerce    43
                                                 GAO Comments                  47
                  Appendix IV:      GAO Contact and Staff Acknowledgments      50

    Table Table 1:	Former NME Countries Reclassified as Market Economy
    Countries

    Figures Figure 1: Figure 2:  Current NME Countries U.S. Countervailing   8
                                        Duties and Companion Antidumping
                                                Duties, 1995-2004              24
                         Figure 3: Outline of the U.S. Process for Making CVD
                                                 Determinations                38
                         Figure 4:   Results of 72 CVD Petitions, 1995-2004    40
                         Figure 5:   How Are Antidumping Duties Determined?    41

    Contents

    Figure 6:	U.S. CVD Orders against All Countries and Antidumping Duty
    Orders against Market Economies, Other NME Countries, and China, 1996-2004
    42

    Abbreviations

    CVD countervailing duty
    ITC International Trade Commission
    NME nonmarket economy
    USTR Office of the United States Trade Representative
    WTO World Trade Organization

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
    copyright holder may be necessary if you wish to reproduce this material
    separately.

    A

    United States Government Accountability Office Washington, D.C. 20548

    June 17, 2005

    The Honorable Richard C. Shelby
    Chairman
    The Honorable Barbara A. Mikulski
    Ranking Minority Member
    Subcommittee on Commerce, Justice, and Science
    Committee on Appropriations
    United States Senate

    The Honorable Frank R. Wolf

    Chairman

    The Honorable Alan B. Mollohan

    Ranking Minority Member

    Subcommittee on Science, the Departments of State, Justice, and Commerce,
    and Related Agencies Committee on Appropriations House of Representatives

    Imports from China have grown rapidly over the last decade, from a total
    value of about $42 billion in 1995 to over $196 billion in 2004.1 While
    the prices of these Chinese goods are often lower than U.S. prices and
    therefore benefit consumers, this growth has presented a major challenge
    for U.S. producers that compete with Chinese products in the U.S. market.

    Some U.S. companies adversely affected by this growth have alleged that
    unfair Chinese government subsidies have been an important factor in
    Chinese companies' success in the U.S. market. U.S. officials have
    expressed concern about Chinese subsidies in bilateral and multilateral
    meetings. However, while U.S. producers injured by subsidized imports may
    normally seek imposition of countervailing duties (CVD) to offset the
    competitive advantages that these subsidies confer, U.S. CVD laws are not
    currently applied against countries-including China-that the United States
    classifies as "nonmarket economy" (NME) countries. Various parties,
    including U.S. industry representatives, some trade attorneys, and the
    U.S.-China Economic and Security Review Commission, have advocated taking
    steps to make CVDs available against Chinese products. Congress is
    currently considering legislation that would explicitly

    1Both values are expressed in constant 2004 dollars.

    authorize CVD actions against NME countries.2 Nonetheless, the
    implications of such steps have not been fully explored.

    In light of increased concern about China's trade practices, the
    conference report on fiscal year 2004 appropriations legislation requested
    that GAO monitor the efforts of U.S. government agencies responsible for
    ensuring free and fair trade with that country.3 In subsequent discussions
    with staff from the House Appropriations Committee's Subcommittee on
    Science, the Departments of State, Justice, and Commerce, and Related
    Agencies, we agreed to provide a number of reports on relief mechanisms
    available to U.S. producers that are adversely affected by unfair or
    surging imports, and on the manner in which the mechanisms have been
    applied to China.4 In this report, we

    o 	explain why the United States does not currently apply CVDs to imports
    from China,

    o 	describe alternative courses of action available to the Department of
    Commerce that would lead to application of CVDs to Chinese-origin imports,

    o 	explore the challenges that Commerce would face in applying these
    alternatives, and

    o 	examine the potential impact that applying these alternatives would
    have on the rates of duty applied to Chinese products.

    To address our objectives, we reviewed applicable U.S. laws and
    regulations and World Trade Organization (WTO) agreements, including
    relevant portions of the agreement through which China acceded to WTO
    membership in 2001. We conducted a literature search and reviewed relevant
    scholarly and legal analyses, Department of Commerce determinations, and
    decisions by U.S. courts and the WTO Dispute

    2See, for example, H.R. 1216, S. 593. Similar bills were introduced in
    both houses of Congress in 2004, but did not gain approval. See H.R. 3716,
    S. 2212.

    3H.R. Rep. No. 108-401, at 574 (2003), accompanying the Consolidated
    Appropriations Act, 2004, Pub. L. No. 108-199, 118 Stat. 3, 65.

    4We have already published a report on textile safeguards. See GAO,
    U.S.-China Trade: Textile Safeguard Procedures Should be Improved,
    GAO-05-296 (Washington D.C.: Apr. 4, 2005). Forthcoming reports will focus
    on other safeguard measures and antidumping duties.

    Settlement Body. We consulted with trade and legal policy experts from the
    U.S. government, private sector trade associations, consulting and law
    firms, and academic institutions, as well as representatives of the WTO,
    the government of China, and other governments. Finally, we assembled and
    analyzed statistical information on numbers of CVD orders applied by the
    United States over the last decade and duty rates applied in these cases.
    For comparison, we assembled equivalent information for antidumping duties
    applied on similar products over the same period. We conducted our work
    from January 2004 through April 2005 in accordance with generally accepted
    government auditing standards. Appendix I contains a more detailed
    description of our scope and methodology.

    Results in Brief	U.S. producers that believe themselves injured by
    subsidized Chinese imports have not been able to obtain relief through CVD
    actions because China is considered a nonmarket economy country (NME)
    under U.S. law and practice. In two 1984 cases, the Department of Commerce
    declined to make CVD determinations for NME countries on the grounds that
    it lacked explicit legal authority to impose CVDs on NME countries and
    that, as a practical matter, it could not arrive at economically
    meaningful conclusions regarding subsidies in such countries-and therefore
    could not rationally apply the CVD laws. Commerce based the latter finding
    on its conclusion that, in such countries, government intervention in the
    economy is so pervasive that meaningful comparisons between subsidized and
    market-determined prices are not possible. A federal appeals court
    subsequently upheld Commerce's determinations.

    Commerce could take either of two paths to applying U.S. CVD laws to
    China. First, Commerce could, when appropriate, make administrative
    determinations that reclassify China as a market economy or individual
    Chinese industries as "market oriented" in character. This would permit
    Commerce to take CVD action against China on a country or industry basis.
    Commerce has criteria in place for making both types of determinations.
    However, Commerce officials stated that it may be difficult for China to
    meet these criteria in the near term. Second, Commerce could reverse its
    1984 position and process CVD actions against China without changing that
    country's NME status. However, absent a clear congressional grant of
    authority, such a decision by Commerce could be challenged in court, with
    uncertain results. WTO rules, including China's WTO accession agreement,
    do not explicitly preclude either of these alternatives. Moreover, the
    agreement contains provisions that permit application of third-country

    information in CVD actions against China and that may facilitate such
    actions against state-owned enterprises.

    Commerce would face substantial challenges in determining appropriate CVD
    levels against Chinese products. Chinese subsidies remain difficult to
    identify and quantify-largely because of the structure of the Chinese
    economy and a lack of transparency in the country's subsidy regime.
    Commerce has no directly relevant experience and little guidance in place
    to indicate how it would proceed. It may be able to overcome these
    difficulties-at least partially-by using third-country information to
    create benchmarks for measuring subsidy benefits or by employing "facts
    available" to complete cases in which foreign parties cannot or will not
    provide needed information. However, these approaches would not fully
    resolve the methodological challenges that would face Commerce. Moreover,
    under current U.S. law, Commerce lacks explicit authority to fully
    implement China's commitment regarding use of third-country information in
    CVD cases.

    Making CVDs available against China would give U.S. producers access to
    import relief measures that explicitly target unfair government subsidies.
    However, it is unclear whether applying CVDs would result in levels of
    protection for U.S. producers that are higher than those already applied
    in the form of antidumping duties. While the magnitude of any CVDs that
    might be applied to China has yet to be determined, CVDs alone tend to be
    lower than antidumping duties. Both types of duties could be applied
    simultaneously. However, for two reasons, simultaneous application could
    well result in reduced antidumping duties on Chinese products, and it is
    unclear whether application of CVDs would compensate for these reductions.
    First, designating China as a market economy would require Commerce to
    abandon its NME methodology for calculating antidumping duties on Chinese
    products. If made, such a change is widely expected to lead to lower
    antidumping duty rates. Second, regardless of whether China is designated
    a market economy, simultaneous application of CVDs and antidumping duties
    could, at least in some cases, require corrections to avoid "double
    counting"-that is, imposing two sets of duties to compensate for the same
    unfair trade practice. Commerce is required to reduce duties to avoid
    double counting when export subsidies are involved. However, the full
    implications of double counting are unclear because Commerce does not have
    clear legal authority to make adjustments for domestic subsidies.

    In order to provide Congress and the Department of Commerce with better
    information, we recommend that the Secretary of Commerce analyze and
    report to Congress on

    o 	Commerce's ability to identify and measure subsidy benefits at the
    present time, based on Commerce's knowledge of significant Chinese subsidy
    programs; and

    o 	broadly applicable methodologies that Commerce might employ to complete
    CVD actions against Chinese products, if called upon, including how it
    might respond to potential double counting of domestic subsidy benefits.

    In the event that Commerce changes China's NME status or Congress decides
    to adopt proposed legislation that would explicitly authorize Commerce to
    apply U.S. CVD laws to NME countries, including China, Congress may wish
    to consider adopting legislation to provide Commerce clear authority to
    (1) implement China's WTO commitment regarding use of third-country
    information in such cases, and (2) make corrections to avoid double
    counting domestic subsidy benefits when applying both CVDs and antidumping
    duties to the same products from NME countries, taking into account
    Commerce's analyses on this topic.

    The Department of Commerce provided written comments on a draft of this
    report, which are reprinted in appendix III. Commerce disagreed with one
    of our recommendations, believing that reporting on methodologies that it
    would employ to complete CVD actions against China would be speculative
    and might prejudge the results of future cases. Regarding our matters for
    congressional consideration, Commerce cited some authority to apply
    third-country information and asserted that double counting of domestic
    subsidies may not occur and may be difficult to correct. In response, we
    clarified and elaborated upon our discussion of the legal issues involved.
    While agreeing that Commerce should not attempt to specify how it would
    proceed in specific sets of circumstances, we continue to believe that it
    would be instructive for Commerce to report broadly on how it might apply
    CVD law to China. We also maintain that it would be prudent for Congress
    to enact legislation that would fully authorize Commerce to implement
    China's WTO commitment on using third-country information in CVD cases and
    correct for any double counting of domestic subsidies that may occur in
    the event that CVD law is applied to China as an NME country.

    The Department of Commerce also provided technical comments on a draft of
    this report, as did the Office of the United States Trade Representative
    (USTR) and the International Trade Commission (ITC). We took these
    comments into consideration and made revisions throughout the report as
    appropriate to make it more accurate and clear.

    Background	The WTO Agreement on Subsidies and Countervailing Measures
    establishes general international rules regarding the types of subsidies
    that exporting countries may and may not maintain and procedures that
    importing countries may employ to counter injurious subsidy practices.
    U.S. trade law generally reflects the agreement's provisions. The United
    States applies CVDs with some regularity-almost always in tandem with the
    other major mechanism for providing relief from unfairly traded imports:
    antidumping duties. However, CVDs are requested and applied much less
    frequently than antidumping duties. Appendix II provides additional
    background information on WTO subsidy rules and relevant U.S. laws,
    explains antidumping actions in more detail, and provides more detail
    about how frequently CVD and antidumping actions are sought and duties
    actually imposed.

      Legal and Practical Obstacles Have Prevented Application of CVDs to China

    The U.S. government does not apply its CVD laws against China because the
    Department of Commerce classifies China as an NME country and has adopted
    a policy against taking CVD actions against countries so designated. This
    policy rests upon two principles, first advanced in two 1984 Department of
    Commerce decisions and subsequently upheld by the U.S. Court of Appeals
    for the Federal Circuit. These principles are (1) from a legal standpoint,
    Commerce does not have explicit authority to apply CVDs against NME
    countries; and (2) as a practical matter, Commerce cannot arrive at
    economically meaningful conclusions regarding subsidies in such countries.

    The Department of The Department of Commerce classifies China, as well as
    Vietnam and a Commerce Classifies China number of former Soviet republics,
    as NME countries. Under U.S. trade as an NME Country law, Commerce may
    classify any country that does not operate on market

    principles "so that sales of merchandise in such country do not reflect
    the fair value of the merchandise" as an NME country.5 Commerce has
    classified China as an NME country since 1981.6 Figure 4 shows the
    countries that Commerce currently classifies as NMEs.

    519 U.S.C. S:1677(18).

    6Final Determination at Less Than Fair Value: Natural Menthol from the
    People's Republic of China, 46 Fed. Reg. 24614, May 1, 1981.

        Commerce DeterminedThat It Lacks Authority to Apply Countervailing Duty Law
        to NME Countries

    U.S. trade law does not contain any explicit prohibition against applying
    CVDs to NME countries. Nonetheless, the Department of Commerce determined
    in 1984 that it did not have explicit legal authority to apply CVDs to
    such countries. Commerce set forth its conclusions on this matter in
    rulings denying CVD protection against carbon steel wire rods from Poland
    and Czechoslovakia (which were then considered NME countries).7 Commerce
    observed that, even though Congress had addressed unfair trade remedies in
    both the Trade Act of 19748 and the Trade Agreements Act of 19799 and
    revised U.S. countervailing duty law on both occasions, it had not given
    any indication that CVD law should be applied against these countries.
    Instead, Congress provided two other remedies-antidumping duties and
    safeguard measures-to address unfair trade practices by NME countries. The
    U.S. Court of Appeals for the Federal Circuit upheld Commerce's decision
    in Georgetown Steel Corp. v. United States.10

        Commerce Unable to Measure Subsidy Benefits in NME Countries

    In its 1984 determinations, the Department of Commerce concluded that it
    cannot measure subsidy benefits in NME countries. In explaining this
    conclusion, Commerce observed that, in market economy countries, markets
    generate prices that can be used to measure the impact of government
    subsidies. However, in NME countries, government intervention in the
    economy is so pervasive that one cannot make meaningful comparisons
    between market-determined prices and those that have been distorted by
    government intervention. Commerce summarized the methodological problems
    it faced in these cases as follows:

    749 Fed. Reg. 19370, 19374 (May 7, 1984).

    8Pub. L. No. 93-618, 88 Stat. 1978.

    9Pub. L. No. 96-39, 93 Stat. 144.

    10801 F.2d 1308 (Fed. Cir. 1986). In upholding the Department of
    Commerce's position, the Court of Appeals overruled an earlier ruling in
    the same case by the Court of International Trade, which had reversed the
    department. See Continental Steel v. United States, 614 F. Supp. 548, 550
    (C.I.T. 1985).

    "We believe a subsidy (or bounty or grant) is definitionally any action
    that distorts or subverts the market process and results in a
    misallocation of resources. . . . In NMEs resources are not allocated by a
    market. With varying degrees of control, allocation is achieved by central
    planning. Without a market, it is obviously meaningless to look for
    misallocation of resources caused by subsidies. There is no market process
    to distort or subvert.... It is this fundamental distinction-that in an
    NME system the government does not interfere in the market process but
    supplants it-that has led us to conclude that subsidies have no meaning
    outside the context of a market economy."11

    In upholding Commerce's position in this matter, the Court of Appeals
    found in Georgetown Steel that in nonmarket economies the governments
    control their trading entities by determining where, when, and what they
    will sell, and upon what terms. When no market exists, subsidies cannot be
    found to distort market decisions.

      Department of Commerce Could Act to Allow Application of CVD Law to China

    Commerce could take either of two paths to applying U.S. CVD law to China.
    First, Commerce could use its administrative authority to change China's
    NME status in whole or in part. This would allow Commerce to apply U.S.
    CVD law to China on a country or industry basis. However, Commerce
    officials observed that it may be difficult for China to meet these
    criteria in the near term. Alternatively, Commerce could reverse its 1984
    position and decide that CVD law could be applied to China while it
    remains classified as an NME country. However, absent a clear grant of
    authority from Congress, such a reversal could be challenged in court. The
    results of such a challenge are uncertain. WTO rules, including relevant
    provisions of China's WTO accession agreement, do not explicitly preclude
    the United States from pursuing either alternative. Moreover, China's WTO
    accession commitments (1) permit use of third-country information in CVD
    cases and (2) could facilitate Commerce adjudication of CVD actions
    against state-owned enterprises in that country.

    Commerce Could Change The Department of Commerce has administrative
    authority to reclassify China's NME Status in NME countries as market
    economy countries, or individual NME country Whole or in Part industries
    as "market oriented" in character, provided that the country as a

    whole or the industries in question meet certain criteria.

    1149 Fed. Reg. 19370, 19374 (May 7, 1984).

    Commerce Could Reclassify China as a Market Economy Country

    Department of Commerce officials explained that countries classified as
    NMEs may ask that their status be reviewed either within the context of an
    ongoing import relief case or as an independent matter. Commerce has
    responded to a number of requests for such reviews, granting some
    countries (such as Russia and Estonia) market economy status while
    classifying others (such as Vietnam) as nonmarket economies.12 Table 1
    shows former NME countries that Commerce has determined merit
    reclassification as market economy countries.

    Table 1: Former NME Countries Reclassified as Market Economy Countries

    Year of Country Commerce decision

    Romania

    Lithuania

    Estonia

    Russia

    Kazakhstan

    Latvia

    Hungary

    Czech Republic

    Slovakia

    Poland

    Source: Department of Commerce.

    In making decisions on such matters, U.S. trade law specifies that
    Commerce shall take into account the following factors:

    o 	the extent to which the country's currency is convertible into the
    currency of other countries,

    o 	the extent to which wage rates are determined by free bargaining
    between labor and management,

    12For details on these decisions see, for Russia, a Commerce Department
    memorandum available at
    http://ia.ita.doc.gov/download/russia-nme-status/russia-nme-decision-final.htm;
    for Estonia, 68 Fed. Reg. 10445 (Mar. 5, 2003); and for Vietnam, 68 Fed.
    Reg. 4986 (Jan. 31, 2003).

    o 	the extent to which joint ventures or other investments by foreign
    firms are permitted,

    o  the extent of government ownership over the means of production,

    o 	the extent of government control over the allocation of resources and
    enterprises' price and output decisions, and

    o  other factors that Commerce considers appropriate.13

    In April 2004, the United States and China established a Structural Issues
    Working Group under the auspices of the U.S.-China Joint Commission on
    Commerce and Trade.14 Among other things, this group is examining issues
    relevant to China's desire to be classified as a market economy country
    under the criteria set forth in U.S. antidumping law.15 U.S. officials
    involved with the group have observed that substantial additional reform
    will have to take place (e.g., in improving respect for labor rights and
    reducing or abandoning controls on currency convertibility) before China
    can expect to be declared a market economy country under the criteria
    listed above.

    The Chinese government regards recognition as a market economy among its
    trading partners as a desirable diplomatic goal. While acknowledging that
    this change in status may result in the United States (and other
    countries) applying countervailing duties, Chinese officials we spoke with
    emphasized the political value of their country being officially declared
    a "market economy." Other trade experts pointed out that Chinese officials
    may also be seeking this change because they believe it would generally

    1319 U.S.C. S:1677(18).

    14The commission was established in 1983 to serve as a forum for
    high-level dialogue on bilateral trade issues.

    15According to Commerce, the working group has held two meetings (in July
    2004 and May 2005).

    result in lower antidumping duties being assessed against Chinese
    products.16

    China has actively sought change in its status among its trading partners.
    A number of them, including Singapore and Malaysia, have declared China to
    be a market economy. However, in June 2004, the European Union officially
    declined a Chinese request for designation as a market economy. In making
    this decision, the EU acknowledged that China had made progress, but
    concluded that much remained to be done in reducing state interference in
    the economy, improving corporate governance and the rule of law, and
    bringing the banking sector under market rules.17 Department of Commerce
    officials informed us that Chinese representatives have not yet officially
    requested that Commerce review their country's NME status under U.S. law.

    Commerce Could Classify The Department of Commerce could also designate
    individual Chinese

    Individual Chinese Industries as industries as "market oriented" and thus
    as eligible for application of CVDs.

    Market Oriented	In a 1992 CVD decision involving imported oscillating and
    ceiling fans from China, Commerce determined that, short of finding that
    an entire country merits designation as a market economy, Commerce can
    find specific industries within such countries to be "market oriented" in
    character.18 Commerce stated that certain criteria, developed earlier in
    the context of an antidumping case (also against China),19 would have to
    be met for an

    16Application of Commerce's NME ("surrogate" or third-country-based)
    methodology for calculating antidumping duties is widely believed to lead
    to application of duties that are significantly higher than those
    resulting from application of the department's standard methodology for
    market economy countries. We were unable to identify any analyses showing
    conclusively that this is the case. Our forthcoming report on the
    application of antidumping duties to Chinese products will include
    information and analyses of this question.

    17European Union, China-Market Economy Status in Trade Defense
    Investigations, memo 04/163 (Brussels, June 28, 2004).

    18Oscillating and Ceiling Fans from the People's Republic of China, 57
    Fed. Reg. 24018 (Dept. of Commerce, 1992) (final determination) and 57
    Fed. Reg. 10011 (Dept. of Commerce, 1992) (preliminary determination). In
    issuing these decisions, the department was responding to an allegation
    from the company petitioning for relief that, regardless of the nature of
    China's economy, the Chinese fan industry operated pursuant to market
    principles and that U.S. CVD laws should therefore apply.

    19Sulfanilic Acid from the People's Republic of China, 57 Fed. Reg. 9409,
    9411 (Dept. of Commerce, Mar. 18, 1992).

    industry to be found market oriented. The industry in question must be
    characterized by the following:

    o 	virtually no government involvement in setting prices or amounts to be
    produced,

    o  private or collective ownership, and

    o 	market-determined prices being paid for all significant inputs, whether
    material or nonmaterial, and for all but insignificant proportions of all
    the inputs accounting for the total value of the product.

    Commerce justified application of these criteria to determine whether a
    CVD investigation should proceed by observing that if the Chinese fan
    industry met the criteria just described, then Commerce could rely on
    prices and costs to producers in that industry to provide accurate
    measures of value. Commerce concluded that, if the prices and costs in a
    sector of an NME were market determined, then the practical concerns cited
    by the Court of Appeals in Georgetown Steel would not arise and Commerce
    could apply U.S. CVD law.20

    To date, Commerce has not accepted any claim that an NME country industry
    should be designated as market-oriented in character. Commerce officials
    observed that, as a practical matter, the criteria for designation as a
    market-oriented industry may be difficult for producers operating in a
    nonmarket economy to satisfy. In any event, Commerce has not received a
    CVD petition involving a market-oriented industry claim since the early
    1990s. In a few cases, Chinese companies have responded to antidumping
    cases, in part, by requesting designation as a market-oriented industry.
    Commerce has denied these requests-primarily on the grounds that the
    Chinese companies in question submitted information that was insufficient

    20Commerce also observed that Congress had amended U.S. antidumping laws
    in 1988 to provide the department with the authority to use its market
    economy methodology to calculate antidumping duties on industries from NME
    countries when the available information permits. The department stated
    that "this change was added in recognition of attempts by the traditional
    NME countries to evolve toward market-oriented economies" and that
    "Congress clearly contemplated a situation in which a sector of an NME may
    be sufficiently free of NME distortion so that the actual prices and/or
    costs incurred in the NME could be used in dumping calculations and render
    meaningful results." Commerce also found that, if a market-oriented
    industry existed, failure to permit application of CVD law would leave
    affected U.S. industries at a disadvantage. 57 Fed. Reg. 24018 (June 5,
    1992).

    or provided too late in Commerce's process to allow an informed
    decision.21

        Commerce Could Apply CVD Law against NME Countries, but There Are Legal
        Obstacles to Such Action

    Since there is no explicit statutory bar to applying CVDs to NME country
    products, Commerce could make an administrative determination to apply
    such duties to China and other NME countries. Some legal experts have
    taken the position that Georgetown Steel merely upheld Commerce's decision
    that it could not apply CVD law to NME countries, and that Commerce could
    therefore change its policy so long as the change could be defended as
    reasonable. Commerce officials told us that it might be possible for
    parties in a particular case to present new legal positions that would
    permit it to apply CVDs against an NME country product without a change in
    current law. They added, however, that in the absence of an actual case,
    it was hard to say whether or how this would occur.

    While Commerce could reverse its 1984 position, the Court of Appeals'
    Georgetown Steel ruling raises serious doubt about Commerce's ability to
    make such a change without a clear grant of authority from Congress. The
    Court of Appeals did uphold Commerce, but the court also appeared to make
    its own findings. The court emphasized that recent trade legislation
    showed that Congress had intended that any selling by NME countries at
    unreasonably low prices should be dealt with under the antidumping law,
    and that there was no indication that Congress had intended or understood
    that the CVD law would also apply. The court stated, in addition, that
    "[i]f [antidumping law] is inadequate to protect American industry from
    such foreign competition (resulting from sales in the United States of
    merchandise that is priced below its fair value) . . . it is up to
    Congress to provide any additional remedies it deems appropriate."22 The
    Uruguay Round Agreements Act,23 adopted in 1994, made important changes in
    U.S. CVD law but did not add any language authorizing CVD actions against
    NME countries. Moreover, the Statement of Administrative Action
    accompanying the Act acknowledged that the Georgetown Steel ruling stood
    for "the reasonable proposition that the CVD law cannot be applied

    21For example, the Department of Commerce recently denied such requests by
    Chinese color television and bedroom furniture companies. See 69 Fed. Reg.
    20594 (Apr. 16, 2004) and 69 Fed Reg. 67313 (Nov. 17, 2004).

    22801 F.2d 1308, 1318 (Fed. Cir. 1986).

    23Pub. L. No. 103-465, 108 Stat. 4809, adopted Dec. 8, 1994.

    to imports from nonmarket economy countries."24 Although Members of
    Congress introduced legislation to make U.S. CVD law explicitly applicable
    to NME countries in 2004, and again in 2005, these bills did not gain
    approval. Consequently, a Commerce decision to reverse the position it
    adopted in 1984 and allow CVD actions against NME countries could very
    well be challenged in court. The results of such a challenge are
    uncertain.

        WTO Agreements Are Silent on NME Issue in CVD Actions

    WTO subsidy and countervailing duty rules do not address the issue of NME
    status in CVD proceedings. The WTO Agreement on Subsidies and
    Countervailing Measures does not discuss market/nonmarket economy
    designations in general and, more specifically, does not address the
    question of whether members can bring CVD actions against NME countries.
    The CVD provisions in China's WTO accession agreement are similarly
    silent.25 Thus, we believe that these rules (1) do not explicitly restrict
    the United States from continuing or ceasing to apply NME status to China
    on either a countrywide or industry-specific basis and (2) do not
    explicitly preclude bringing CVD actions against countries that are
    classified as NMEs.

    Accession Agreement While WTO rules allow members to apply alternate
    methodologies-not Permits Use of Third-based strictly on information from
    within the exporting country-to Country Information to calculate
    antidumping duties in certain cases,26 the organization's rules do

    not make explicit provision for applying third-country information in
    CVDCalculate Countervailing cases. However, China's WTO accession
    agreement specifically permits Duties application of third-country
    information in CVD determinations. The

    agreement states that countries attempting to identify and quantify
    subsidy

    24The statement presented the Clinton administration's views on the
    interpretation and application of the agreements resulting from the
    Uruguay Round of trade negotiations, and was approved by Congress as part
    of this Act. 108 Stat. 4814, 19 U.S.C. S: 3511(a)(2).

    25China's accession agreement does recognize that decisions on NME status
    in antidumping actions are to be made under the national laws of WTO
    members. WTO Protocol on the Accession of the People's Republic of China,
    art. 15(d).

    26General Agreement on Tariffs and Trade Annex I, Ad art. VI, states,
    "[I]n the case of imports from a country which has a complete or
    substantially complete monopoly of its trade and where all domestic prices
    are fixed by the State, special difficulties may exist in determining
    price comparability [in antidumping analyses] and in such cases importing
    contracting parties may find it necessary to take into account the
    possibility that a strict comparison with domestic prices in such a
    country may not always be appropriate."

    benefits in China may encounter special difficulties because "prevailing
    terms and conditions in China may not always be available as appropriate
    benchmarks." In such situations, the agreement allows other member
    countries to employ "terms and conditions prevailing outside China" to
    generate benchmarks that can be used to measure subsidy benefits and
    establish appropriate CVDs. The agreement does require, however, that
    before considering application of information from outside China, member
    countries should first seek to use adjusted information from China
    itself.27 This provision has no expiration date and does not differentiate
    between China as a market or a nonmarket economy.28

        Accession Agreement May Facilitate Actions against State-Owned Enterprises

    China's WTO accession agreement contains another provision that may
    facilitate application of CVDs in some cases involving state-owned
    enterprises.29 WTO members may only apply CVDs when the subsidies in
    question can be shown to be "specific to an enterprise or industry or
    group of enterprises or industries."30 Determining whether a particular
    subsidy meets this test can be challenging. For example, a government loan
    program directed specifically at providing below-market financing to
    enable fishermen to acquire boats and equipment might be considered
    specific, and thus actionable. On the other hand, a program that provides
    below-market financing to many types of small businesses, including some
    fishermen, might not be considered specific, and thus not open to
    application of CVDs.31

    China's accession agreement provides that subsidies benefiting stateowned
    enterprises will be regarded as specific if, among other things, such
    enterprises are the "predominant" recipients or receive "disproportionally

    27WTO Protocol on the Accession of the People's Republic of China, art.
    15(b).

    28China's accession agreement also affirms other WTO members' right to
    apply third-country information in antidumping actions against China.
    However, the agreement provides that members will cease doing so in the
    event that they recognize China as a market economy, in whole or in part.
    The agreement indicates further that its provisions on applying
    thirdcountry information in antidumping cases will expire in December
    2016.

    29USTR officials stated that state-owned enterprises are believed to be,
    by far, the major recipients of subsidies in China.

    30WTO Agreement on Subsidies and Countervailing Measures, art. 2.1.

    31See WTO, Technical Cooperation Handbook on Notification Requirements,
    WT/TC/NOTIF/SCM/1, 9 (Geneva, September 1996), 6-7.

    large amounts" of such subsidies.32 This may facilitate application of
    CVDs in some circumstances because it may make it difficult for China to
    argue that such subsidies are generally available, and thus not
    actionable. Instead, members may regard them as specific to state-owned
    businesses without regard for the sector in which they operate.33

      Challenges Would Remain in CVD Actions against China

    While Commerce could proceed with CVD actions against China, it would
    continue to face substantial practical challenges in identifying Chinese
    subsidies and determining appropriate CVD levels. Commerce could employ
    third-country information or "facts available" to complete China CVD
    actions. However, these approaches would not eliminate the challenges that
    such actions would present. Moreover, Commerce lacks explicit legal
    authority to implement China's WTO commitment allowing other members to
    employ third-country information in CVD actions against China.

        Chinese Subsidies Remain Difficult to Identify and Assess

    Several trade experts stated that even in the best of circumstances, it
    can be quite difficult to identify and quantify subsidy benefits.34 In
    joining the WTO, China specifically agreed to eliminate all prohibited
    subsidies upon accession and to provide the organization with information
    on all of its subsidies as called for in the WTO subsidies agreement. Some
    trade experts we spoke with believed that sufficient information could be
    obtained to understand and estimate the benefits derived through Chinese
    subsidies. However, U.S. government officials and other trade experts said
    that it remains particularly difficult to obtain substantive information
    about Chinese subsidies. For example, USTR has observed the following:

    "It is difficult to identify and quantify possible export subsidies in
    China because of the lack of transparency in China's subsidy regime.
    Chinese subsidies are often the result of internal administrative measures
    and are not publicized. U.S. subsidy experts are currently seeking

    32WTO Protocol on the Accession of the People's Republic of China, art.
    10.

    33According to the World Bank, state-owned enterprises now account for
    less than onequarter of China's industrial output. See the World Bank,
    China: An Evaluation of World Bank Assistance (Washington, D.C., 2004).

    34WTO officials observed that even the United States-a country wherein
    government actions that influence the economy are comparatively well
    documented-has had difficulty identifying and quantifying subsidy
    information that it is required to report to the WTO.

    more information about several Chinese programs and policies that may
    confer export subsidies. Their efforts have been frustrated in part
    because China has failed to make any of its required subsidy notifications
    since becoming a member of the WTO."35

    Commerce officials told us that even though there has been substantial
    reform in China, underlying features of the Chinese economy continue to
    make it difficult to identify appropriate benchmarks for measuring
    subsidies. For example, according to USTR, most Chinese subsidies are
    believed to be provided through that country's financial system. However,
    some trade experts stated that government control over the banking system
    in China makes it difficult to identify market-determined rates of
    interest that could be used as benchmarks to determine whether, or to what
    extent, particular companies or industries are benefiting from credit
    subsidies. U.S. government and private sector analysts added that while
    the Chinese government heavily influences allocation of credit-favoring
    some industries over others-it is uncertain how to quantify the subsidy
    benefits conferred through this process. In addition, while some attorneys
    who have represented Chinese companies disagreed, Commerce officials and
    attorneys who have represented U.S. firms said that lack of adherence to
    generally recognized accounting standards and unreliable bookkeeping among
    Chinese companies can make accurate identification and accurate
    measurement of subsidy benefits extremely difficult. Some Commerce
    officials and trade experts also said that unlike most market economies,
    which are national, China's economy is fragmented into five or six
    regions, each with its own pricing. Thus, even if an industry were
    declared to be

    35USTR, National Trade Estimates Report (Washington, D.C., March 2004).

    market oriented, it would be difficult to evaluate the subsidy benefits
    accruing to the national industry as a whole.36

        Third-Country Information or "Facts Available" May Be Useful, but Would Not
        Fully Resolve Challenges

    Commerce may find employing third-country information or "facts available"
    helpful in completing China CVD actions. However, these approaches would
    not fully resolve the challenges that would face Commerce.

    Commerce has not attempted to develop methodologies or procedures for
    determining CVDs against products from nonmarket economies-based either on
    information from within the country itself or from a third country.
    Nonetheless, Commerce officials stated that, if required, they would
    endeavor to apply existing guidance and conduct an investigation that
    would withstand analytical and legal scrutiny.

    While the United States employs "surrogate" or third-country information
    to calculate antidumping duties on imports from China and other NME
    countries, CVD cases against China would raise issues that Commerce
    analysts do not face in antidumping cases and that may not be resolved by
    use of third-country information. For example, it may be difficult to
    separate specific (and therefore countervailable) subsidies from those
    that are generally available (and therefore not countervailable).37 In
    addition, identifying reasonable benchmarks (such as market-determined
    capital costs) in third countries will only provide Commerce with a
    starting point

    36While Commerce has never reached an affirmative final determination in a
    CVD case against China-or any other NME country-Canada did complete three
    CVD cases against China during the last year. In two of these cases,
    Canadian officials were able to obtain sufficient information from the
    Chinese government and exporting companies to complete their analyses.
    Canada Border Services Agency, Statement of Reasons: Outdoor Barbeques
    Originating in or Exported from the People's Republic of China, CVD/102
    (Ottawa, Dec. 3, 2004), and Statement of Reasons: Certain Laminate
    Flooring Originating in or Exported from the People's Republic of China,
    CVD/104 (Ottawa, June 1, 2005). In the remaining case the agency was
    unable to obtain sufficient information from the Chinese government and
    completed its analyses by employing "the best information available."
    Canada Border Services Agency, Statement of Reasons: Certain Carbon Steel
    and Stainless Steel Fasteners Originating in or Exported from the People's
    Republic of China, CVD/103 (Ottawa, Dec. 24, 2004). Unlike the United
    States, Canada does not differentiate between market and nonmarket economy
    countries in countervailing duty actions. Canadian officials did not
    employ third-country information in any of these cases. As far as we are
    aware, these are the only CVD actions completed against China to date by
    any WTO member.

    37As already observed, article 10 of China's WTO accession protocol
    facilitates such determinations when state-owned industries are involved.

    for calculating CVD rates that should be applied to Chinese products.
    After establishing such benchmarks, Commerce would then face significant
    challenges in quantifying, for example, the capital or utility costs that
    are actually being paid by Chinese companies under investigation, so that
    analysts can determine the difference between unsubsidized and subsidized
    costs.

    Commerce also has the authority to employ facts available to overcome
    difficulties in calculating subsidy benefits and corresponding CVD rates.
    Commerce normally obtains information from U.S. companies seeking relief
    and also from foreign companies and government agencies alleged to be
    benefiting from or providing subsidies. However, U.S. law grants Commerce
    authority to make determinations based on facts otherwise available when
    foreign sources cannot or will not provide needed information.38 Commerce
    might be able to complete some China CVD cases by applying this approach.
    However, Commerce officials pointed out that their authority to employ
    facts available is subject to certain limitations.39 The extent to which
    Commerce would employ this approach in China CVD cases is uncertain.

        Commerce Does Not Have Explicit Authority to Implement China's WTO
        Commitment Regarding Third-Country Information in CVD Cases

    Existing U.S. laws do not provide Commerce with clear authority to fully
    implement China's WTO commitment allowing members to use thirdcountry
    information to identify and measure Chinese subsidy benefits. In joining
    the WTO, China made commitments regarding four import relief measures that
    other members may apply against imports from China. As already noted, even
    before China joined the WTO, U.S. trade law specifically allowed for
    implementation of the first of these commitments-application of
    third-country information in antidumping cases. Congress has passed
    legislation-commonly referred to as section 421-implementing the second
    (involving application of safeguard measures).40 While Congress did not
    adopt legislation to implement China's

    3819 U.S.C. S:1677e(a).

    39For example, 19 U.S.C. S:1677e(b) prevents the department from applying
    information that is clearly adverse to the interests of an exporter unless
    it determines that the exporter has failed to cooperate with the
    investigation to the best of its abilities.

    40Section 421 of the Trade Act of 1974, as amended, Pub. L 106-286, 114
    Stat. 882, 19 U.S.C. S: 2451. This section implements article 16 of
    China's WTO protocol of accession, which authorizes other WTO members to
    apply product-specific safeguards on Chinese imports that are deemed to be
    causing or threatening to cause market disruption.

    third import-relief commitment (regarding textile safeguards), the U.S.
    interagency group responsible for processing textile safeguard cases41
    believes that existing legislation provides it with authority to implement
    such measures.42

    In contrast, U.S. trade law was not amended to explicitly authorize
    Commerce to implement China's fourth commitment, regarding application of
    third-country information in CVD cases, and does not otherwise clearly
    state that Commerce may apply third-country information in such cases
    against foreign countries in general. Commerce regulations do provide for
    application of third-country information to CVD cases-but only in some
    circumstances.43 The most explicit provision covers only subsidies that
    impact goods and services used in producing the allegedly subsidized
    imports.44

    This lack of clarity raises a question about whether Commerce could
    currently apply this commitment, even if it were to decide to reclassify

    41This interagency group, which is headed by the Commerce Department, is
    the Committee for the Implementation of Textile Agreements.

    42See 7 U.S.C. 1854 and Exec. Order 11651, 37 Fed. Reg. 4699 (Mar. 3,
    1972), as amended. Nevertheless, the interagency group's authority to
    process China textile safeguard cases has been challenged in court by the
    U.S. Association of Importers of Textiles and Apparel, partially on the
    ground that Congress did not enact legislation implementing China's
    commitment. U.S. Ass'n of Importers of Textiles and Apparel v. United
    States, Ct. No. 00598 (C.I.T. Dec. 1, 2004). GAO takes no legal position
    on this issue.

    43For example, according to Commerce, 19 C.F.R. S: 351.505 authorizes use
    of international lending rates to measure subsidy benefits from certain
    loans. However, this provision only applies to loans and does not
    specifically authorize use of third-country information.

    44When no useable market-determined prices are available in the exporting
    country, 19 C.F.R. S: 351.511 authorizes the use of world market prices to
    determine subsidy benefits for goods and services employed in producing
    the exports in question. However, this provision does not extend to
    subsidy benefits conveyed through other means, such as equity investments.
    In its ruling on the United States application of CVDs against Canadian
    softwood lumber, the WTO Appellate Body found that information from
    outside the subsidizing country could be used to measure subsidy benefits
    in very limited circumstances. However, it did not make any specific
    findings on the U.S. regulations. WTO,

    United States-Final Countervailing Duty Determinations with Respect to
    Certain Softwood Lumber from Canada, WT/DS257/AB/R, paras. 77-103 (Geneva,
    January 2004). Several North American Free Trade Agreement panels have
    also ruled on the softwood lumber CVD case and questioned application of
    the methodology set forth in the U.S. regulation. North American Free
    Trade Agreement Secretariat, United States-Final Affirmative
    Countervailing Duty Determination: Certain Softwood Lumber Products from
    Canada, File USA-CDA-2002-1904-03 (Aug. 13, 2003, and June 7, 2004).

    China as a market economy or specific Chinese industries as market
    oriented in character. Department of Commerce officials said they had not
    yet decided whether Commerce could fully apply the commitment in the
    absence of authorizing legislation.

      Uncertain Whether Applying CVDs Would Result in Increased Protection

    Making CVD procedures available to U.S. producers that believe they are
    injured as a result of unfairly subsidized Chinese imports would provide a
    mechanism for taking actions that specifically target Chinese government
    subsidies. However, it is unclear whether, on a net basis, applying CVDs
    to China would result in overall levels of protection for U.S. products
    that are higher than those already applied through antidumping duties.
    CVDs could be applied alone or in tandem with antidumping duties. CVDs
    alone generally tend to be lower than antidumping duties. For two reasons,
    simultaneous application of both types of duties could well result in
    reduced antidumping duties, and it is unclear whether application of CVDs
    would compensate for such reductions. First, designating China as a market
    economy would require a change in the methodology used to calculate
    companion antidumping duties that is widely expected to lead to lower duty
    rates. Second, regardless of whether China is designated as a market
    economy, some companion antidumping duties might need to be reduced to
    avoid double counting subsidy benefits. Each of these considerations
    introduces an element of uncertainty about the magnitude of the total
    level of protection that would be applied to Chinese products; each may
    result in combined rates that are lower than might be expected.

        CVD Rates Vary, but Tend to Be Lower Than Antidumping Duties

    U.S. CVDs tend be lower than companion antidumping duties. This may, in
    part, explain why U.S. producers seek CVDs less often than antidumping
    duties. Figure 2 compares CVDs and antidumping duties imposed on the same
    products over the last decade. As the figure shows, CVDs imposed on these
    products varied from less than 2 percent to more than 60 percent. However,
    CVDs were lower than companion antidumping duties in nearly 70 percent of
    the 36 cases where the United States imposed CVDs. The average CVD rate
    imposed in these cases was about 13 percent, while the average antidumping
    duty rate imposed was about 26 percent.

    Figure 2: U.S. Countervailing Duties and Companion Antidumping Duties,
    1995-2004

    Product (country) year
    Steel wire rod (Italy) 1997

    Stainless steel sheet (Italy) 1998

    Steel plate (Italy) 1999

    Steel plate (Korea) 1999

    Steel flat products (Argentina) 2000

    Softwood lumber (Canada) 2001

    Stainless steel bar (Italy) 2001

    Uranium (United Kingdom) 2001

    Uranium (Netherlands) 2001

    Uranium (Germany) 2001

    D-RAMS (Korea) 2002

    Pasta (Italy) 1995

    Pasta (Turkey) 1995

    Steel plate in coils (Belgium-Lux) 1998

    Stainless steel sheet (France) 1998

    Stainless steel sheet (Korea) 1998

    Steel plate in coils (Italy) 1998

    Steel plate in coils (South Africa) 1998

    Steel products (Brazil) 1998

    Steel beams (Korea) 1999

    Steel plate (France) 1999

    Steel plate (India) 1999

    Steel plate (Indonesia) 1999

    Honey (Argentina) 2000

    Steel flat products (India) 2000

    Steel flat products (Indonesia) 2000

    Steel flat products (South Africa) 2000

    Steel flat products (Thailand) 2000

    PET Film (India) 2001

    Steel wire rod (Brazil) 2001

    Steel wire rod (Canada) 2001

    Sulfanic acid (Hungary) 2001

    Uranium (France) 2001

    Hard red spring wheat (Canada) 2002

    Pigment (India) 2003

    Steel wire strand (India) 2003
    0 102030405060708090
    Duty rate (percentage)

                               Countervailing (CVD) rates

                                 Antidumping (AD) rates

    Source: GAO analysis of Department of Commerce data.

    Notes: This figure compares "all others" duty rates from each new CVD
    action concluded during the indicated period to the "all others"
    antidumping duty rates applied to the same products. "All others" rates
    are weighted averages of the individual rates assigned to the exporting
    companies investigated in each case. The data is displayed according to
    the year in which petitioners filed for CVD action. Comparisons employing
    the highest rates issued in each case (that is, the highest rates applied
    to any individual company) or the median values of the rates applied to
    individual companies provide similar results. While Commerce can, and
    does, change rates over time to reflect changing circumstances, the figure
    does not take such changes into account.

    In the three cases involving uranium from the United Kingdom, Germany, and
    the Netherlands, Commerce concluded that no antidumping duty should be
    applied. For more information, see 66 Fed. Reg. Reg. 65886 (Dec. 21,
    2001).

    Commerce ordered antidumping duties on Korean D-RAMS in 1993. However,
    Commerce subsequently revoked its order, and collection of these duties
    ended in 1999-prior to initiation of a CVD action on these products. For
    more information, see 65 Fed. Reg. 59391 (Oct. 5, 2000).

    Under the WTO subsidies agreement and U.S. law, CVD rates are limited to
    the levels required to offset the amount of the subsidies.45 For example,
    a company may be receiving government credit subsidies that reduce its
    capital costs by 20 percent. This advantage may make a real difference in
    the company's ability to compete in the international market. However,
    Commerce stated that CVD rates are calculated by dividing the total value
    of subsidy benefits by the total value of an exporting company's sales.
    Since the subsidy just mentioned affects only one portion of the company's
    balance sheet (capital costs) the countervailing duty applied to offset
    this benefit may be much lower than 20 percent. In some instances, past
    government intervention and support may have been critical to an exporting
    industry's start-up or survival. However, loans and nonrecurring benefits,
    such as equity infusions or grants, are generally amortized over a period
    of years. After several years have passed, the current value of these
    subsidies may have declined to a comparatively insignificant level. U.S.
    companies, therefore, may experience substantial difficulty in competing

    45See article 19 of the WTO Agreement on Subsidies and Countervailing
    Measures, and 19 U.S.C. S:1671(a).

    with Chinese companies that owe their existence to favorable government
    actions in the past, but find that legitimately applied CVDs are
    minimal.46

        Change in Methodology May Lower Antidumping Duties

    Administrative actions reclassifying China as a market economy (in whole
    or in part) would require Commerce to cease applying its NME methodology
    for calculating antidumping duties on affected Chinese products. This is
    significant because, as noted earlier, CVD actions usually have a
    companion antidumping action. U.S. law allows Commerce to employ its
    third-country-based methodology to calculate antidumping duties only when
    the merchandise in question is being produced in countries that it
    classifies as NMEs. Therefore, once Commerce reclassified China as a
    market economy it could no longer apply this methodology. Similarly,
    Commerce could no longer apply this methodology to individual Chinese
    industries after it found them to be market-oriented in character. After
    either finding, Commerce would apply its market economy approach to
    calculate antidumping duties. Commerce has never attempted to calculate
    antidumping duties on Chinese products based on prices charged within
    China. Whether these antidumping duties would be higher, lower, or
    approximately the same as those derived through Commerce's NME approach
    remains uncertain.47 However, if-as trade experts commonly expect-they
    prove to be significantly lower than antidumping duty rates derived
    through Commerce's NME methodology, then even in combination with
    companion CVDs, the total level of protection applied may not be as high
    as that currently applied against Chinese products.

    46The likelihood that significant CVDs could be imposed to counter past
    government support in China and other NME countries is further reduced by
    a 2002 WTO dispute settlement decision that established a rebutable
    presumption that prior subsidies usually will not be considered to have
    provided countervailable subsidy benefits for new, private owners of
    former state-owned enterprises-provided that the enterprise was turned
    over to private ownership in an arm's length, fair market transaction.
    WTO, United States-Countervailing Measures Concerning Certain Products
    from the European Communities, WT/DS212/AB/R (Geneva, December 2002).
    Furthermore, in a countervailing duty case involving exports from Hungary,
    Commerce found that subsidies provided by a country before its status is
    changed from nonmarket to market economy are not subject to U.S.
    countervailing duty law. Sulfanilic Acid from Hungary, 67 Fed. Reg. 60223
    (Dept. of Commerce, 2002) (Issues and Decision Memorandum for the Final
    Determination at 14-15).

    47GAO is currently engaged in an analysis of how antidumping duty rates
    derived through Commerce's nonmarket economy methodology compare with duty
    rates derived through the department's standard methodology. The results
    of this analysis will be included in our forthcoming report on application
    of antidumping duties to China.

        Adjustments to Avoid Double Counting Might Lower Companion Antidumping
        Duties

    Adjustments Required to Avoid Double Counting of Export Subsidies

    If called upon to apply CVDs against Chinese products, Commerce would have
    to adjust companion antidumping duty rates downward in some cases in order
    to avoid "double counting"-imposing two sets of duties to compensate for
    the same unfair trade practice. However, the extent of these
    adjustments-and their net impact on combined duty rates to be
    applied-remains uncertain.

    Both WTO rules and U.S. laws require adjustments in combined duty rates to
    avoid double counting of export subsidies. WTO rules specify that no
    product can be subjected to both antidumping and countervailing duties "to
    compensate for the same situation of dumping or export subsidization."48
    U.S. law echoes this provision, in effect, by requiring adjustments in
    antidumping duties in the event that CVDs are applied simultaneously to
    counter export subsidies on the same products.49

    The rationale behind these provisions is that since antidumping duties are
    calculated by comparing domestic prices with export prices, such duties
    already offset the price advantage that export subsidies confer over the
    prices charged in the exporter's domestic market. When imposing both
    countervailing and antidumping duties, Commerce adjusts antidumping duty
    rates downward by any amount that is attributable to export subsidies.
    Commerce would be obliged to make such adjustments when applying both
    types of duties to China, regardless of whether China remains an NME
    country under U.S. law.

    The extent to which Commerce would have to reduce antidumping duty rates
    in order to avoid double counting Chinese export subsidies is unknown. As
    already noted, China agreed to cease providing export subsidies upon
    joining the WTO. Some trade experts allege that China has nonetheless
    continued to provide such subsidies. However, no industry group has
    petitioned for application of countervailing duties against Chinese
    subsidies, and U.S officials have not attempted to quantify the benefits
    provided by Chinese subsidy programs in general, or export subsidies in
    particular.

    48WTO General Agreement on Tariffs and Trade, art. VI.5. 4919 U.S.C.
    S:1677a(c)(1)(C).

    Implications of Double Counting Domestic Subsidies Are Unclear

    Another potential source of double counting could emerge if Commerce were
    to apply CVDs to China while it retains its NME status. In such
    circumstances, Commerce would continue to use third-country information to
    calculate antidumping duties. While, in principle, double counting of
    actionable domestic subsidies generally does not occur when analysts
    employ information from exporting countries themselves to determine duty
    rates, it may occur when analysts use third-country information. However,
    current trade law does not make any specific provision for adjusting
    antidumping duties in such situations, and the implications of such
    situations arising are therefore unclear.

    When an antidumping duty is calculated using the third-country-based
    methodology that Commerce applies to NME countries, the normal value of
    the product (the basis for calculating an antidumping duty) is based not
    on Chinese prices (which might be artificially low as a result of domestic
    subsidies) but on information from a country where prices are determined
    by free markets. Thus, when the normal value is compared with the export
    price, the difference will, at least in theory, reflect the price
    advantages that the exporting company has obtained from both export and
    domestic subsidies.50

    Economists, trade law practitioners, and Commerce officials we consulted
    disagreed on whether, in practice, antidumping duties derived through the
    third-country-based methodology effectively offset all of the subsidy
    benefits enjoyed by Chinese exporters.51 However, they generally agreed
    that, in theory, antidumping duties derived in this way do offset much of
    the value of both export and domestic subsidies. As a result, it appears
    that some double counting of actionable domestic subsidies could occur if
    Commerce used third-country information to calculate antidumping duties on
    the same products against which it also applied CVDs.

    50In contrast, when a market economy methodology is used, both the normal
    value and the export price will, in principle, reflect the benefits that
    the producer has derived from domestic subsidies. Therefore, comparing the
    normal value with the export price will not result in an antidumping duty
    rate that captures the benefits provided by these subsidies; these
    benefits will be captured only in a CVD investigation. Thus, domestic
    subsidy benefits generally would not be double counted.

    51For example, some of those with whom we spoke pointed out that
    Commerce's analyses may not result in antidumping duties that fully offset
    Chinese subsidies because the thirdmarket values employed by the
    department may, themselves, be distorted by subsidies provided by other
    governments.

    Because the United States has never attempted to apply both countervailing
    and antidumping duties against an NME country, the implications of taking
    such an action are unknown. The relevant WTO agreements are silent with
    regard to making adjustments to avoid double counting actionable domestic
    subsidies, and U.S. law does not provide Commerce with any specific
    authority to avoid double counting in such situations. Therefore, Commerce
    officials observed that they would have no choice but to apply both duties
    without making any adjustments.52  While at least two U.S. courts have
    suggested that double counting to compensate for the same unfair trade
    practice is generally considered improper,53 they have not ruled on the
    specific question of whether double counting of actionable domestic
    subsidies, in particular, is improper. Commerce officials told us that,
    theoretical arguments aside, interested parties finding fault with
    Commerce's decision making would have to prove that there was actual
    double counting.

    Conclusions	Despite increasing concern about Chinese government subsidies
    and their adverse impacts on U.S. producers, U.S. producers may not
    currently avail themselves of the U.S. government's primary tool for
    countering unfair subsidies-CVDs. While the methodology that Commerce
    currently employs to calculate antidumping duties on Chinese products
    already results in duty rates that offset subsidy benefits to some degree,
    Commerce

    52Commerce officials identified one case involving alleged double counting
    of domestic subsidies. The case involved application of antidumping and
    countervailing duties against low enriched uranium from France-a market
    economy country. In this case, Commerce concluded that the information on
    the record did not provide a sufficient basis for determining whether
    double counting had taken place. Some parties to the case objected to
    Commerce's conclusion, but they did not provide any new information that
    would have helped Commerce in re-examining it; they also did not challenge
    Commerce's reasoning before the courts. The determination itself may be
    accessed online http://ia.ita.doc.gov/frn/0112frn/01-31509.txt. A decision
    memorandum providing additional information is also available at
    http://ia.ita.doc.gov/frn/summary/france/01-31509-1.txt.

    53For example, in a CVD case involving tax subsidies, the Court of Appeals
    for the Federal Circuit found that Commerce had erred in counting both a
    rebate of a tax and a tax deduction in calculating the amount of a
    subsidy. Similarly, in an antidumping case against Chinese companies, the
    court found that Commerce had double counted a substantial component of
    total freight expenses such that the results fell "outside the limits of
    permissible approximation." Finally, in an antidumping case, the Court of
    International Trade instructed Commerce to reconsider its method of
    calculating exporter profit margins, in part to avoid double counting.
    Kajaria Iron Castings PVT. LTD v. United States, 156 F. 3d 1163, 1173-74
    (Fed. Cir. 1998); Sigma Corp. v. United States, 117 F. 3d 1401, 1407 (Fed.
    Cir. 1997); and Geum Pong Corp. v. United States, 193 F. Supp. 2d. 1363,
    1370 (C.I.T. 2002).

    could act to make CVDs available against China as well. It could do this
    either by changing China's NME status, or by changing its current policy
    and determining that it may apply CVD law against China regardless of its
    NME status. However, Commerce appears unlikely to employ the first
    alternative in the near future, and the Georgetown Steel ruling raises an
    obstacle to employing the second, without clear authority from Congress.

    While Congress is considering legislation that would authorize Commerce to
    apply CVDs to China as an NME country, substantial practical questions
    about how such cases would proceed remain unanswered, and the results that
    they would produce remain uncertain. The absence of such information makes
    it difficult for interested Members of Congress, prospective participants
    in CVD cases, and Commerce itself to gain any perspectives on the
    implications of taking such actions. Commerce has had no experience in
    attempting to complete CVD investigations on Chinese products and has no
    specific guidance in place for how to proceed. In particular, Commerce
    lacks guidance or experience in applying third-country information to
    calculate CVD rates-an approach that is explicitly permitted under the
    terms of China's accession to the WTO and that Commerce may very well find
    necessary to employ given lack of transparency regarding China's subsidy
    practices. The CVD rates that would result from these investigations are
    uncertain, as are the net effects of applying both CVDs and antidumping
    duties to Chinese products.

    Furthermore, Commerce lacks clear authority under U.S. law to either fully
    implement China's WTO commitment regarding the use of third-country
    information in CVD cases or adjust antidumping duty rates to avoid double
    counting of Chinese domestic subsidy benefits. Given this lack of clarity,
    it is reasonable to expect that parties objecting to Commerce's decisions
    on these issues would challenge relevant aspects of CVD decisions against
    China, complicating and delaying application of such duties to products
    from that country. Until these issues are clarified, policymakers will not
    be fully informed about the implications of applying U.S. CVD laws to
    China, and Commerce will not be prepared to implement such a change in
    policy.

    Recommendations for 	In order to provide Congress and the Department of
    Commerce with better information about the implications of taking actions
    that would result in

    Executive Action	application of U.S. CVD laws to China, we recommend that
    the Secretary of Commerce analyze and report to Congress on

    o 	Commerce's ability to identify and measure subsidy benefits at the
    present time, based on its knowledge of significant Chinese subsidy
    programs; and

    o 	broadly applicable methodologies that Commerce might employ to complete
    CVD actions against Chinese products, if called upon, including how it
    might respond to potential double counting of domestic subsidy benefits
    when applying both countervailing and antidumping duties to the same
    products.

    Matters for In the event that (1) Commerce changes China's NME status or
    (2)

    Congress decides to adopt proposed legislation that would
    authorizeCongressional  Commerce to apply U.S. CVD laws to NME countries,
    including China, Consideration  Congress may wish to consider adopting
    legislation to provide Commerce

    clear authority to

    o 	fully implement China's WTO commitment regarding use of third-country
    information in CVD cases, and

    o 	make corrections to avoid double counting domestic subsidy benefits
    when applying both CVDs and antidumping duties to the same products from
    NME countries, in situations where Commerce finds that double counting has
    in fact occurred, taking into account Commerce's analyses of this issue
    prepared in response to our recommendation above.54

        Agency Comments and Our Evaluation

    The Department of Commerce provided written comments on a draft of this
    report. These comments are reprinted in appendix III. Commerce provided a
    different characterization of our finding that it did not have clear legal
    authority to apply CVD law to China, taking the position that there is no
    explicit statutory bar to taking such an action, and stating that Commerce
    would carefully consider any CVD petition. We modified our report to
    clarify that Commerce could decide, in response to a petition, that
    circumstances warrant and permit a change in its policy. However, given
    that Commerce determined in 1984 that it did not have explicit legal

    54We limit this matter for congressional consideration to situations
    involving NME countries because we believe it unlikely that double
    counting problems involving domestic subsidies will arise in companion
    antidumping and countervailing duty actions against market economy
    countries.

    authority to take such an action, and this was subsequently upheld and
    affirmed by a federal appeals court, and later confirmed by a 1994
    statement of administrative action, we continue to believe that there
    would be legal obstacles to Commerce changing its policy.

    With regard to our recommendations, Commerce did not comment on our
    recommendation that it analyze and report on its ability to identify and
    measure subsidy benefits in China. Commerce believed our recommended
    report on the methodologies the department would employ if called upon to
    apply CVDs to China would be too speculative, and therefore not meaningful
    or appropriate before an actual case was filed, and that such a report
    could prejudge the outcome of future actions. We agree that specific
    decisions on how best to complete individual CVD actions against China
    would depend upon the facts in particular cases. We did not intend that
    Commerce provide detailed discussions of how it would respond to
    particular sets of circumstances. Rather, this report would provide
    Commerce, Members of Congress, and potential parties to CVD cases with
    some general-level guidance about how such actions might proceed. For
    example, such a report could address Commerce's use of benchmark
    information from within or outside China to measure subsidy benefits and
    application of China's WTO commitment regarding CVD actions involving
    state-owned enterprises. Providing broad commentary on such points would
    be consistent with Commerce making general guidance on its antidumping
    practices publicly available.55

    Regarding our matters for congressional consideration, Commerce cited some
    legal authority for using external benchmarks in CVD cases. We evaluated
    this information and added a discussion in our report. We were not
    convinced that the cited authority would clearly provide for full
    implementation of the special methodology in China's WTO accession
    agreement. An explicit grant of authority by Congress would remove doubt
    and lesson the chances for legal disputes, and therefore we continue to
    believe our suggestion is prudent. Commerce also said our suggestion that
    Congress provide Commerce with authority to correct any double counting of
    domestic subsidies in companion CVD and antidumping actions was not
    warranted or appropriate because Commerce had not yet encountered this

    55U.S. trade law provides general rules for completing antidumping actions
    against NME countries. 19 U.S.C. S: 1667b(c). However, Commerce has also
    provided additional guidance. See Department of Commerce, Import
    Administration Dumping Manual, chapter 8, (Washington, D.C., 1997). This
    document is available on the Internet at
    http://ia.ita.doc.gov/admanual/index.html.

    situation, such corrections might be too difficult, and it would put China
    in a special category distinct from all other countries. We maintain that
    our analysis shows that there is substantial potential for double counting
    of domestic subsidies if Commerce applies CVDs to China while continuing
    to use its current NME methodology to determine antidumping duties. We
    believe that, in such a situation, Commerce should be provided authority
    to proactively address potential double counting, rather than waiting for
    it to occur and create methodological and legal problems. Finally, we
    intended that our suggestion on double counting apply to all NME
    countries, and have clarified our language on this point.

    The Department of Commerce also provided technical comments, as did USTR
    and ITC. We took these comments into consideration and made revisions
    throughout the report as appropriate to make it more accurate and clear.

    We are sending copies of this report to the Secretary of Commerce and the
    United States Trade Representative, appropriate congressional
    committees, and other interested parties. We will also make copies
    available to others upon request. In addition, the report will be
    available at
    no charge on GAO's Web site at http://www.gao.gov.

    If you or any of your staff have any questions about this report, please
    contact me at (202) 512-4347 or yagerl@gao.gov. Contact points for our
    Offices of Congressional Relations and Public Affairs may be found on the
    last page of this report. GAO staff who made major contributions to this
    report are listed in appendix IV.

    Loren Yager
    Director, International Affairs and Trade

    Appendix I

                           Objectives, Scope, and Methodology

    In May 2003, the House Appropriations Committee's Subcommittee on
    Commerce, Justice, and State, the Judiciary, and Related Agencies held
    hearings regarding U.S. government efforts to support American businesses
    adversely affected by imports from China. In light of concerns expressed
    at this hearing, the conference report on fiscal year 2004 appropriations
    legislation requested that GAO monitor the efforts of U.S. government
    agencies responsible for ensuring free and fair trade with China.1 In
    subsequent discussions with your staff, we agreed to respond by providing
    a number of reports on relief mechanisms available to U.S. producers
    adversely affected by unfair or surging imports, and the manner in which
    they have been applied to China.2 In this report, we (1) explain why the
    United States does not currently apply CVDs to imports from China, (2)
    describe available alternatives for applying CVDs to Chineseorigin
    imports, (3) explore the challenges that the Department of Commerce would
    face in applying these alternatives, and (4) examine the potential impact
    that applying these alternatives would have on the rates of duty applied
    to Chinese products.

    To address our objectives, we reviewed applicable U.S. laws and
    regulations and World Trade Organization (WTO) agreements, including the
    Agreement on Subsidies and Countervailing Measures, and China's WTO
    accession agreement. We conducted a literature search and reviewed
    relevant scholarly and legal analyses, Department of Commerce
    determinations, and decisions by U.S. courts and the WTO Dispute
    Settlement Body. We consulted with trade and legal policy experts from the
    U.S. government, private sector trade associations, consulting firms, and
    academic institutions; law firms with broad experience in trade actions
    against China; as well as representatives of the WTO, the government of
    China, and other governments concerned about Chinese trade practices,
    including the European Union, Canada, New Zealand, and Mexico.

    In addition, to address our fourth objective, we obtained information on
    U.S. countervailing and antidumping duty actions from 1995 through 2004
    from the Department of Commerce and the U.S. International Trade
    Commission. We used this data to construct our own database on

    1H.R. Rep. No. 108-401, at 574 (2003), accompanying the Consolidated
    Appropriations Act, 2004, Pub. L. No. 108-199, 118 Stat. 3, 65.

    2We have already published a report on textile safeguards. See GAO,
    U.S.-China Trade: Textile Safeguard Procedures Should be Improved,
    GAO-05-296 (Washington, D.C.: Apr. 4, 2005). Forthcoming reports will
    focus on other safeguard measures and antidumping duties.

    Appendix I
    Objectives, Scope, and Methodology

    countervailing duty determinations and antidumping duties applied on
    similar products over the same period. We included all countervailing duty
    cases over this time period, as well as all antidumping cases in which a
    petition was filed by U.S. industry for an antidumping investigation
    against a similar product from the same country (e.g., honey from
    Argentina). Of the 72 countervailing duty cases from 1995 through 2004, we
    found only 3 in which a similar antidumping petition was not also filed.
    Our database includes information on the outcome of the investigations
    (e.g., whether an order was issued), the status of the orders as of the
    end of 2004, the duty rates imposed in each case that resulted in a CVD
    order and the antidumping duty rates imposed on similar products. For each
    countervailing or antidumping duty order, the Department of Commerce may
    issue several different duty rates. These may include separate duty rates
    for large individual companies (suppliers), as well as weighted average
    "all others" rates for smaller suppliers. We collected all of these rates
    and compared the lowest and highest separate rates, the average of all
    separate duty rates, and the "all others" rates. As we report above, we
    found that the averages or median rates for countervailing duties orders
    are smaller than similar antidumping rates, whether comparing the lowest
    rates, the highest rates, the average rates, or the "all others" rates.
    However, as shown in figure 2, in some individual cases countervailing
    duty rates were higher than antidumping rates. Also, future investigations
    may yield different results depending on the types of products, countries,
    and activities investigated. Having verified these data with the original
    Federal Register notices, which provide the official U.S. government
    notification of investigations and orders, we find the data to be
    sufficiently reliable for analyzing the number, status, and duties (if
    imposed) on U.S. countervailing duty cases from 1995 through 2004, as well
    as U.S. antidumping cases on similar products.

    In addition, to provide information on the growth of U.S. imports from
    China, we examined official U.S. import data from the Department of
    Commerce, Bureau of the Census, which we adjusted for inflation using the
    end-use import price index published by Commerce's Bureau of Economic
    Analysis. While U.S. data on imports from China have some acknowledged
    limitations, we found them to be sufficiently reliable for the purpose of
    establishing that there has been rapid growth in these imports in recent
    years.

    We performed our work from January 2004 through June 2005 in accordance
    with generally accepted government auditing standards.

    Appendix II

      CVDs and Antidumping Duties under WTO Rules and U.S. Law

        WTO Agreement Provides General Rules

    The WTO Agreement on Subsidies and Countervailing Measures defines a
    subsidy as a financial contribution by a government or any public body
    within a WTO member that confers a benefit. While the agreement imposes an
    outright ban on some types of subsidies,1  most types are not completely
    prohibited but are classified as actionable under certain conditions.
    Actionable subsidies are those that are specific-i.e., benefit a specific
    enterprise, industry, or group of enterprises or industries-and cause
    adverse effects to the interests of another WTO member, such as injury to
    their domestic industries.

    According to the WTO, members may impose CVDs when they (1) identify
    subsidized imports, (2) determine that a domestic industry is suffering
    injury, and (3) establish a causal link between the subsidized imports and
    the injury being suffered. These duties are intended to offset the price
    advantages that the subsidy confers on the imported product and, more
    broadly, encourage governments that maintain subsidies to eliminate them.
    The subsidies agreement requires that the investigating authorities
    quantify the value of the subsidies being provided and limits the level of
    duty imposed to that value.

    To facilitate identification of subsidies and evaluation of their trade
    effects, the agreement requires WTO members to provide the organization
    with annual notifications on all of the specific subsidies they maintain
    and to provide additional information on any of these programs when
    requested. The agreement specifies that member states should provide
    sufficient information "to enable other Members to evaluate the trade
    effects and to understand the operation of notified subsidy programs."2

    1Export subsidies (those contingent on export performance) and local
    content subsidies (those contingent on use of domestic over imported
    goods) are explicitly prohibited. Members may challenge prohibited
    subsidies through the WTO's dispute settlement process and may impose
    countermeasures if the member being challenged declines to eliminate the
    subsidies. In contrast to CVD actions, members bringing such complaints do
    not have to show that their domestic industries have suffered adverse
    effects as a result of these subsidies.

    2WTO Agreement on Subsidies and Countervailing Measures, art. 25.3.

          Appendix II CVDs and Antidumping Duties under WTO Rules and U.S. Law

        U.S. Procedures Reflect WTO Rules

    Under U.S. law,3 CVDs may be imposed against subsidized imports from other
    WTO members when a U.S. industry is materially injured or threatened with
    injury or the establishment of an industry in the United States is
    materially retarded.4 The ITC and the Department of Commerce share
    investigative and decision-making responsibility in CVD cases. The ITC
    determines whether there is material injury or threat thereof to the
    domestic industry by reason of the subject imports. Commerce determines
    whether the foreign country is providing a countervailable subsidy, and,
    if so, the size of the subsidy and (consequently) the size of the CVD that
    should be imposed. To make these determinations, Commerce solicits
    information from exporting country governments and from individual
    producers and exporters of the subject merchandise and applies this
    information to establish appropriate duty rates for each known exporter or
    producer.5

    319 U.S.C. S:1671 and following.

    4U.S. law requires an injury test when the exporting country is a WTO
    member or meets certain other criteria. 19 U.S.C. S:S:1671(b) and (c).

    5Individual company rates can vary a great deal, depending upon the facts
    in each case. In one recent case, for example, the Commerce Department
    applied a CVD of about 17 percent to one Indian exporter of carbazole
    violet pigment, but a rate of about 34 percent to another Indian exporter
    of this product. 69 Fed. Reg. 77995 (Dec. 29, 2004).

    Appendix II CVDs and Antidumping Duties under WTO Rules and U.S. Law

          Figure 3: Outline of the U.S. Process for Making CVD Determinations

    Time Day 0

                                         Day 20

                                         Day 45

                                         Day 85

                                       Case ends

                                       Case ends

    Case Day 160 ends

    CaseDay 205 ends

    Day 212

    International Trade Commission (ITC) actions

    Department of Commerce actions

                            Source: Department of Commerce.

          Appendix II CVDs and Antidumping Duties under WTO Rules and U.S. Law

    Notes: In addition to producers and associations of producers, U.S. law
    grants unions and other recognized worker groups in affected U.S.
    industries the right to submit petitions for relief. Petitions are filed
    with Commerce and ITC simultaneously. Commerce may also self-initiate
    investigations.

    Commerce will dismiss petitions that (1) do not allege the elements
    necessary for imposition of a duty and contain information "reasonably
    available to the petitioner" in support of these allegations or that (2)
    have not been filed by or on behalf of the domestic industry concerned.
    The information to be submitted must address, among other things, the
    nature of the subsidies being provided to the foreign producers, the
    competitive benefits that these subsidies bestow, and injury to the U.S.
    industry by reason of the subject imports.

      Countervailing Duties Usually Applied in Tandem with Antidumping Duties

    The United States has imposed CVDs with some regularity, on a variety of
    products from a variety of countries.6 From 1995 through 2004, U.S.
    domestic industries petitioned for 72 CVD investigations against 43
    different products from 25 countries.7 Thirty-six of these investigations
    (50 percent) resulted in application of CVDs.8 Figure 4 shows the results
    of these 72 petitions.

    6The United States has more CVDs in place than any other country.
    According to the WTO, the United States had 57 CVD measures in place as of
    June 2004. The next highest reported totals were for the European
    Community (18) and Canada (10). See WTO, Report (2004) of the Committee on
    Subsidies and Countervailing Measures, G/L/711 (Geneva, Nov. 9, 2004).

    7The Department of Commerce declined to initiate investigations in 4 of
    the 72 cases, involving certain crude petroleum oil products from Mexico,
    Iraq, Saudi Arabia, and Venezuela, because of insufficient U.S. industry
    support for the petition. 64 Fed. Reg. 44480 (Aug. 16, 1999).

    8Twenty-three of these 36 cases (64 percent) involved steel products.
    Other products included pasta, honey, softwood lumber products, low
    enriched uranium, and semiconductors. India was the country most
    petitioned against (10 out of the 72 investigations), while Italy faced
    the most positive determinations. (All six of the investigations against
    Italy resulted in CVDs.)

    Appendix II CVDs and Antidumping Duties under WTO Rules and U.S. Law

    Figure 4: Results of 72 CVD Petitions, 1995-2004

    1%

    Suspended - 1

    Incomplete - 3

    Not initiated - 4

    Orders revoked - 4

    Orders in place - 32

    Terminated - 28

    CVDs not imposed

    CVDs imposed

    Source: Federal Register.

    Note: There are currently 57 CVD orders in place. Thirty-two of these (as
    shown in the figure) resulted from petitions filed from 1995 through 2004.
    The remainder resulted from petitions filed prior to 1995.

    Generally, when petitioners seek imposition of CVDs, they also seek
    imposition of antidumping duties on the same product from the same
    country. In 69 of the 72 CVD cases, petitioners also requested a companion
    antidumping investigation.9

    9The three cases in which petitioners requested CVDs but not antidumping
    duties involved laminated and hardwood flooring from Canada (1996), carbon
    and certain alloy steel wire rod from Turkey (2001), and D-RAMS (a type of
    semiconductor) from Korea (2002). The Department of Commerce did order
    assessment of antidumping duties against Korean D-RAMS beginning in 1993.
    However, this order was revoked approximately two years prior to
    initiation of a CVD action against these products.

    Appendix II CVDs and Antidumping Duties under WTO Rules and U.S. Law

    Dumping occurs when a foreign company sells merchandise in a given export
    market (for example, the United States) at prices that are lower than the
    prices charged in the producers' home market or another export market.
    When this occurs, and when the imports have been found to materially
    injure, or threaten to materially injure, U.S. producers, WTO rules and
    U.S. laws permit application of antidumping duties to offset the price
    advantage enjoyed by the imported product. As in CVD cases, Commerce
    analysts establish antidumping duties for each known producer or exporter.
    Figure 5 illustrates how antidumping duties are determined.

    Figure 5: How Are Antidumping Duties Determined?

    Note: As with CVDs, the Department of Commerce and ITC share
    responsibility for processing antidumping actions. Commerce determines
    whether and to what extent dumping is taking place, while ITC determines
    whether a U.S. industry has suffered material injury as a result. Duties
    may be imposed only if both agencies make positive determinations.

    Petitioners requesting antidumping investigations do not always request
    CVD investigations, and CVDs are, in fact, sought and imposed much less
    frequently than are antidumping duties. From 1995 through 2004, U.S.
    industry groups petitioned for nearly five times as many antidumping as
    countervailing duty investigations (354 compared with 72). Similarly, the
    United States put in place over four times as many antidumping duty orders
    (156) as it did CVD orders (36).

    Figure 6 shows the distribution of these countervailing and antidumping
    duty orders by year for 1996 through 2004. For antidumping orders, these
    are further broken down into orders against market economies, China, and

          Appendix II CVDs and Antidumping Duties under WTO Rules and U.S. Law

    other nonmarket economies. The number of CVD orders imposed might have
    been higher, and the contrast with antidumping duty orders less
    pronounced, if CVDs had been available against nonmarket economies during
    this period. Nonetheless, figure 6 shows that even among market economy
    countries, the United States imposes CVDs much less frequently than
    antidumping duties.

    Figure 6: U.S. CVD Orders against All Countries and Antidumping Duty
    Orders against Market Economies, Other NME Countries, and China, 1996-2004

    Number of cases 35 30 25 20 15 10 5 0

    1996 1997 1998 1999 2000 2001 2002 2003 2004 Fiscal year

    All CVD orders Antidumping duty orders - other NME countries Antidumping
    duty orders - China Antidumping duty orders - market economies Source:
    Federal Register.

    Notes: The figure shows the countervailing and antidumping duty orders
    issued each year as a result of petitions submitted from 1995 through
    2004. The figure does not provide data for 1995 since all of the
    investigations based on petitions filed in that year remained incomplete
    at the end of the year.

    According to the WTO, antidumping and countervailing duties affected less
    than 0.5 percent of U.S. imports in 2001. See WTO, Trade Policy
    Review-United States 2004 (Geneva, 2004).

    Appendix III

    Comments from the Department of Commerce

    Note: GAO comments supplementing those in the report text appear at the
    end of this appendix.

    Appendix III
    Comments from the Department of
    Commerce

                                     See comment 1.

                                     See comment 2.

                                     See comment 3.

    Appendix III
    Comments from the Department of
    Commerce

                                     See comment 4.

                                     See comment 5.

    Appendix III
    Comments from the Department of
    Commerce

                                      Appendix III
                            Comments from the Department of
                                        Commerce

    The following are GAO's comments on the Department of Commerce's letter
    dated June 1, 2005.

      GAO Comments 1.

    2.

    3.

    We agree that U.S. trade law does not explicitly bar CVD actions against
    NME countries. Also, we acknowledge that the Department of Commerce
    remains open to considering petitions for CVD action against such
    countries, and that Commerce could conceivably decide that the facts in a
    particular case warrant and permit applying CVDs in an NME context. We
    have revised the text to ensure that these points are clearly stated.

    Nonetheless, while not explicitly barring CVD actions against NME
    countries, U.S. trade law also does not explicitly authorize such actions,
    and both Commerce and a U.S. Court of Appeals decision have indicated that
    U.S. CVD law was not intended to be applied to NME countries. This
    position was also supported by the Statement of Administrative Action
    accompanying the 1994 Uruguay Round Agreements Act. Accordingly, we
    conclude that there would be legal obstacles to Commerce reversing its
    policy and allowing CVD actions against NME countries, including China. It
    is likely that, absent a clear grant of authority, such a policy change
    would result in court challenges.

    We do not presume that applying CVD law to China would require that China
    be designated a market economy under U.S. antidumping law. We assume that
    if Commerce applied CVDs to China without changing its status as an NME
    country, it would continue to apply its NME methodology in antidumping
    cases against that country.

    We agree that completing CVD actions against China would be a challenging
    exercise, and that specific decisions on how best to complete such actions
    would depend on the facts at hand in particular cases. We do not intend to
    suggest that Commerce provide detailed analyses of how it would respond in
    case-specific circumstances.

    Nonetheless, a Commerce study evaluating how it might generally proceed in
    such cases would be helpful to Commerce itself and Members of Congress in
    considering whether to take actions that would lead to CVD cases against
    NME countries, as well as to potential parties to such actions concerned
    about how to proceed in such cases. For example, such a report could
    address (1) benchmark information

    Appendix III
    Comments from the Department of
    Commerce

    from within or outside China that Commerce would consider in measuring
    subsidy benefits, (2) methods and approaches that could be employed to
    respond to potential double counting of domestic subsidy benefits, and (3)
    how China's WTO commitment regarding subsidies and state-owned enterprises
    might affect specificity determinations.

    We have revised the report text to make these points.

    4.	We acknowledge that Department of Commerce regulations do provide for
    applying information from outside a subsidizing country to assist in
    assessing subsidy benefits-in some circumstances-and that Commerce has
    applied them in a number of cases. We have revised our report to include
    information on these provisions.

    Nonetheless, current U.S. law does not explicitly authorize Commerce to
    fully apply China's commitment regarding the use of information from
    outside China to complete CVD actions. Also, as discussed in more detail
    in the body of the report, the methodologies set forth in regulatory
    provisions cited by Commerce do not apply to the full range of subsidies
    that might arise in a CVD case. Moreover, the methodology in the more
    specific of these provisions has been questioned in a dispute settlement
    case under the North American Free Trade Agreement.

    5.	We agree that any legislation authorizing Commerce to adjust duty rates
    to avoid double counting in applying countervailing and antidumping duties
    to products from NME countries should not apply only to China. We have
    modified the report text to make this clear.

    We disagree with Commerce's comment that legislative action on this matter
    is not warranted or appropriate. We believe that sound economic reasoning
    suggests that there is substantial potential for domestic subsidies to be
    double counted in the event that Commerce applies CVDs to NME country
    products while continuing to use thirdcountry information to calculate
    antidumping duties on those same products. Therefore, congressional action
    to provide Commerce with authority to avoid double counting in these
    instances would be prudent. We agree that making such adjustments could
    raise complex methodological issues. It is for this reason that we
    recommend that, in reporting on methodologies for completing CVD actions
    against China, Commerce include discussion on responding to potential
    double counting of domestic subsidy benefits. This would allow Commerce to

    Appendix III
    Comments from the Department of
    Commerce

    evaluate, among other things, the feasibility and cost of making such
    adjustments and their likely impact.

    Appendix IV

                         GAO Contact and Staff Acknowledgments

                        GAO Contact Loren Yager, (202) 512-4347

    Staff 	In addition to those named above, the following individuals made
    significant contributions to this report: Adam R. Cowles, R. Gifford

    Acknowledgments	Howland, Michael McAtee, Richard Seldin, Ross Tuttelman,
    and Timothy Wedding.

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