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						 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
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 [email protected]. 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.

GAO's Mission	The Government Accountability Office, the audit, evaluation
and investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.

Obtaining Copies of The fastest and easiest way to obtain copies of GAO
documents at no cost

is through GAO's Web site (www.gao.gov). Each weekday, GAO postsGAO
Reports and newly released reports, testimony, and correspondence on its
Web site. To Testimony have GAO e-mail you a list of newly posted products
every afternoon, go to

www.gao.gov and select "Subscribe to Updates."

Order by Mail or Phone	The first copy of each printed report is free.
Additional copies are $2 each. A check or money order should be made out
to the Superintendent of Documents. GAO also accepts VISA and Mastercard.
Orders for 100 or more copies mailed to a single address are discounted 25
percent. Orders should be sent to:

U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
D.C. 20548

To order by Phone:	Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061

  To Report Fraud, Contact:
  Waste, and Abuse in Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: [email protected] Programs Automated answering system: (800)
424-5454 or (202) 512-7470

Congressional	Gloria Jarmon, Managing Director, [email protected] (202)
512-4400 U.S. Government Accountability Office, 441 G Street NW, Room 7125

Relations Washington, D.C. 20548

Public Affairs	Paul Anderson, Managing Director, [email protected] (202)
512-4800 U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548
*** End of document. ***