Court of Appeals Rejects Constitutional Challenge to Statute Authorizing Countervailing Duties on Imports from Non-market Economy Countries

International Trade Update

On March 13, 2015 the U.S. Court of Appeals for the Federal Circuit issued a ruling on the controversial topic of the application of countervailing duties (CVDs), also known as anti-subsidy duties, to non-market economy countries (NMEs), such as China and Vietnam. The decision, GPX International Tire Corp. v. United States, CAFC No. 14-1188 (GPX II), is the culmination of years of litigation regarding the extent to which the U.S. Department of Commerce can apply duties on imports to counteract subsidies bestowed by NME governments upon their producers and exporters. The three-judge panel upheld the constitutionality of an amendment to the CVD statute enacted by Congress in 2012 to expressly authorize Commerce to apply such duties, not only in future cases, but also retroactively to proceedings since November 2006. The outcome in GPX II was perhaps unsurprising, as the opposite result would have been contrary to the Court of Appeals’ longstanding disinclination to find constitutional flaws in the trade remedies statutes. It also would have led to significant uncertainty regarding the legality of eight years of CVD proceedings involving NME imports, agency determinations and tariffs.

The history of the dispute is uniquely marked by sharp changes in the governing law and the active involvement of all three government branches: the Executive (through the Department of Commerce), the Judiciary and Congress. The origins of the issue date back to the 1980s, when Commerce reasoned that the very definition of a “subsidy”—the bestowal by a government of financial benefits upon a producer or industry that distorts the functioning of the market and results in a misallocation of resources—had no meaning in a centrally-planned economy in which there was no free-functioning market and all activity was controlled by the government.1 Commerce’s conclusion in 1984 that the CVD law could not coherently be applied to NMEs was upheld by the Court of Appeals in Georgetown Steel Corp. v. United States, 801 F.2d 1308 (Fed. Cir. 1986).

Almost 20 years later, the collapse of the Soviet Union, the fundamental shift of many former centrally-controlled economies to market economy status, and the marked changes in the remaining NMEs, such as China and Vietnam, caused Commerce to reconsider its position. In 2006, in the course of the investigation in Coated Free Sheet Paper from China, Commerce reversed its policy. It interpreted Georgetown Steel not as prohibiting Commerce from imposing CVDs on imports from NMEs, but rather as confirming Commerce’s discretion to decide whether or not, in individual situations, it was appropriate to do so. In the context of the Coated Free Sheet Paper investigation, Commerce examined the conditions of China’s economy and determined that, although China “remains an NME for purposes of the U.S. antidumping law,” it was “significantly different from the Soviet-style economies at issue in Georgetown Steel.”2 Commerce found that “it is possible to determine whether the P.R.C. Government has bestowed a benefit upon a Chinese producer (i.e., the subsidy can be identified and measured) and whether any such benefit is specific.”3 It therefore concluded that the policies that underlay the decision underlying Georgetown Steel no longer “prevent us from concluding that the P.R.C. Government has bestowed a countervailable subsidy upon a Chinese producer.”4

Commerce’s new position was challenged by various parties, and reversed by a three-judge panel of the Court of Appeals for the Federal Circuit. The Court held that, by failing to reverse Commerce’s interpretation of the CVD law in subsequent legislation since Georgetown Steel, Congress had effectively ratified Commerce’s original interpretation of the statute, thereby stripping the statute of its ambiguity and preventing Commerce from changing its interpretation. GPX Int’l Tire Corp v. United States, 666 F.3d 745 (Fed. Cir. 2011) (GPX I), reh’g granted, 678 F.3d 1308 (Fed. Cir. 2012). By the time the GPX I decision was issued, however, over two dozen CVD orders had already been issued pursuant to Commerce’s 2006 policy shift authorizing the application of countervailing duties against NME imports.

Only three months after the panel issued its decision and while en banc review by the entire Court of Appeals was pending, Congress intervened. By an overwhelming bipartisan majority, it enacted legislation (swiftly signed into law by President Obama) that amended the statute to codify Commerce’s 2006 revision of its practice. Congress thus overruled the Court of Appeals’ decision in GPX I, which was expressly labeled as “erroneous” by individual Members of Congress. Moreover, the legislation not only authorized the application of the CVD law to NMEs prospectively, but also permitted Commerce to impose countervailing duties retroactively to proceedings initiated on or after November 20, 2006. That date, of course, was not randomly chosen; it was the date on which Commerce first indicated that it was considering applying countervailing duties to imports from China in the context of its Notice of Initiation of the CVD investigation in Coated Free Sheet Paper from China. The express retroactive applicability of the statute thereby ensured the legality of all CVD orders against NME imports that had already been issued. See Pub. L. No. 11299, 126 Stat. 265 (2012). It also generated another round of litigation.

China commenced a dispute at the World Trade Organization (WTO) challenging the statute’s consistency with the United States’ international obligations, but in 2014 the Appellate Body stopped short of finding that the retroactive application of the statute violated the United States’ commitments. The WTO panel had faulted the United States for failing to consider the potentially duplicative remedy of simultaneously applying anti-dumping and countervailing duties to the same imports (so-called “double counting”), but decided that the retroactive application of the new law did not violate the United States’ international obligations. The Appellate Body found that the panel had erred on the latter point. However, due to the inadequate development of the factual record by the panel, the Appellate Body was unable to complete the analysis under a proper interpretation of the WTO’s Anti-Dumping Agreement.5

Meanwhile, the law’s retroactivity served as the impetus for two constitutional challenges in U.S. courts. The first challenge, based on the Ex Post Facto clause (Art. I, sec. 9, cl. 3) of the U.S. Constitution, was rejected in Guandong Wireking Housewares & Hardware Co. v. United States, 745 F.3d 1194 (Fed. Cir. 2014), because the Court of Appeals concluded that the law was remedial rather than punitive in nature. The Ex Post Facto clause prohibits the enactment by Congress of laws retroactively imposing penalties, and the appellant in Wireking had argued—as did the Government of China at the WTO—that the law was penal in nature because its safeguard against the double counting of antidumping and countervailing duties applied only prospectively. The Court of Appeals decided that the absence of a retroactive safeguard against the double counting of duties did not negate the statute’s predominantly remedial impact.

The Court of Appeals’ March 13 decision in GPX II rejected a second constitutional challenge to the 2012 amendment, which centered upon whether the law’s retroactive authority to impose CVDs against NMEs violated constitutionally-protected due process rights of importers of goods from NMEs. The Court ruled that, although it applied retroactively, the statute did not violate the importers’ due process rights because the retroactivity was “justified by a rational legislative purpose”—namely, to remedy “the damage from unfair foreign trade practices.” GPX II, Slip Op. at 9, 15.

In analyzing whether the rational legislative basis test was met by the 2012 law’s retroactive application, the Federal Circuit assessed five factors utilized by the U.S. Supreme Court in governing precedents, such as United States v. Hemme, 476 U.S. 558 (1986), and General Motors v. Romein, 503 U.S. 181 (1992).

1. The Court of Appeals considered whether the retroactive provision was “wholly” new, and determined that it was not, but rather was simply an extension of Commerce’s existing authority to apply CVDs to imports.
2. The Court considered whether retroactive action resolved uncertainty in the law, and concluded that the legislation resolved the longstanding uncertainty over whether Commerce had the authority to apply CVDs to imports from NMEs.
3. The Court found that the period covered by the retroactive application of the amendment, from March 2012 back to November 2006 was reasonable, though not particularly persuasive in one direction or the other.
4. The Court concluded that the importers in the GPX case “clearly had notice,” given that the imports covered by that case occurred after Commerce first indicated that it was considering applying CVDs to imports from China in the 2006-07 investigation of Coated Free Sheet Paperfrom China. Indeed, the particular investigation against the imports covered by GPX (off-road tires from China) had not been commenced until 2007, after Commerce had announced its new policy. In addition, the Court found that, even if the importers had relied on the prior state of the law, that fact alone was not dispositive, because the Supreme Court had previously upheld legislation even where a party had no prior notice of the change in law and had “specifically and detrimentally relied” on the preexisting law.
5. The Court considered whether the retroactive provisions are remedial, and answered the question in the affirmative. It pointed out that the trade remedy statutes have long been considered not to be punitive in nature, but rather are “designed to be remedial and to preserve American industry.” In addition to finding that the remedies were forward-looking, the Court found that the retroactive imposition of duties “eliminate[ed] past advantages enjoyed by the importers” from NMEs. GPX II, Slip Op. at 13.

In sum, four of the five factors (with the length of the period of retroactive application being the exception) leaned against finding a due process violation. The Federal Circuit thus concluded that the 2012 amendment to the CVD law rationally relates to the government’s interest in retroactively remedying damage from unfair trade practices, and thus does not violate the Due Process Clause. The panel also reaffirmed theWireking panel’s rejection of constitutional claims based on the Ex Post Facto clause.

Although the parties in GPX II may seek rehearing from the Court of Appeals and/or certiorari to the U.S. Supreme Court, the litigation regarding the constitutionality of the 2012 amendment to the CVD law is likely complete. Now that Commerce’s authority to calculate and impose CVDs in the NME context is established, the focus will turn to more detailed questions regarding its methodology and implementation. In particular, questions will inevitably arise as to the method by which Commerce measures the degree of double counting in individual cases, as well as the burden it imposes on NME respondents to submit factual evidence necessary to quantify such double counting.

If you have any questions regarding this Update, please contact the Sidley lawyer with whom you usually work, or

Neil R. EllisPartner+1.202.736.8075nellis@sidley.comAndrew W. ShoyerPartner+1.202.736.8326ashoyer@sidley.comMarinn CarlsonPartner+1.202.736.8769mcarlson@sidley.com

1See, U.S. Department of Commerce, Carbon Steel Wire Rod From Czechoslovakia: Final Negative Countervailing Duty Determination, 49 Fed. Reg. 19370 (May 7, 1984).

2 U.S. Department of Commerce, Countervailing Duty Investigation of Coated Free Sheet Paper from the People's Republic of China—Whether the Analytical Elements of the Georgetown Steel Opinion Are Applicable to China's Present–Day Economy, at 2, 4 (Mar. 29, 2007), available athttp://ia.ita.doc.gov/download/nme-sep-rates/prc-cfsp/china-cfs-georgetown-applicability.pdf.

3Id. at 10.

4Id. at 10.

5 See, United States – Countervailing and Anti-dumping Measures on Certain Products from China, WT/DS449/AB/R (adopted 22 July 2014), paras. 4.123 – 4.183, 5.1(g).

Sidley International Trade Practice

To receive Sidley Updates, please subscribe at www.sidley.com/subscribe.

Sidley Austin provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship.

Attorney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, 212.839.5300; One South Dearborn, Chicago, IL 60603, 312.853.7000; and 1501 K Street, N.W., Washington, D.C. 20005, 202.736.8000.