U.S. Congress Retroactively Authorizes Anti-Subsidy Investigations Against Non-Market Economy Goods

International Trade Update

The U.S. Congress this week overturned a decision issued less than three months ago by the U.S. Court of Appeals for the Federal Circuit (CAFC), which had ruled that the U.S. Department of Commerce (DOC) has no authority to apply countervailing duties (CVD) on products of non-market economies (NMEs), such as China and Vietnam. Under the legislation, which the President is expected to sign just as quickly as the Congress approved it, more than two dozen CVD orders and several pending investigations against products of NMEs will be allowed to stand. Despite the swift passage of this legislation, however, the issue is sure to continue to be litigated for years, in part because the law purports to retroactively authorize CVD measures against NMEs, back to November 2006.

Background

As we have reported previously in updates on December 20, 2011 and September 24, 2009, in 2007, the DOC reversed a long-standing position that it is not possible to measure subsidies in NMEs, which had precluded the application of the CVD law to NMEs. In GPX International Tire Co. v. United States, the DOC’s reversal was challenged by Chinese tire exporters, the first NME entities subjected to the simultaneous application of antidumping and CVDs. They argued that (1) prior to 2007, the Congress had legislatively ratified the DOC view that the CVD law cannot apply to NMEs, removing any authority for the DOC to change its position, and (2) the special surrogate methodology used by the DOC to calculate the margin of dumping for NMEs already accounted for any subsidies the government may have provided to the exporting industry, so the application of both resulted in double counting, providing an impermissible double remedy. In December 2011, the CAFC ruled in favor of the Chinese exporters on the first ground, never reaching the second issue.

In the World Trade Organization, however, the Government of the People’s Republic of China also challenged the U.S. application of a CVD to NME exports at the same time that anti-dumping AD) duties, calculated using the surrogate methodology, are applied. In March 2011, the WTO’s Appellate Body (AB) agreed with China. In United States – Definitive Anti-Dumping and Countervailing Duties on Certain Products from China (WT/DS379/AB/R), the AB ruled that by not assessing whether double remedies arose from the concurrent application of antidumping duties calculated on the basis of NME surrogate methodology and countervailing duties, the United States acted inconsistently with the WTO Agreement on Subsidies and Countervailing Measures. That decision compels the United States to remedy the inconsistency with its obligations under the WTO.

The legislation approved by Congress this week, H.R. 4105, purports to resolve both issues, although the GPX decision is not yet final because on March 5, the Administration timely filed a petition with the CAFC for a re-hearing en banc. If granted, this would mean that all of the judges on the court would reconsider the case, which was initially decided by a three-judge panel. Based on past precedent, however, the CAFC most likely will deny the request, a process that could take several weeks to complete. Ultimately, however, in light of this week’s change in the law, the CAFC may be asked by the Administration to vacate its GPX decision.

Congress Steps in to Change the Law, in Part Retroactively and in Part Prospectively

With the full support of the Administration, bills to overturn the GPX decision were introduced in the House of Representatives and the Senate. The texts of the two bills were identical and both garnered large numbers of co-sponsors, portending their high-speed passage through the legislative process.

Section 1 of the bill nullifies GPX by providing that the CVD law applies to merchandise imported or sold for importation into the United States from an NME country, unless the DOC is unable to “identify and measure subsidies provided by the government of the [NME] or a public entity within that territory of the [NME] because the economy of that country is essentially comprised of a single entity.” Because since 2007 the DOC has found that it now can identify and measure subsidies provided by China and by Vietnam, two countries the United States treats as NMEs, and that these countries are no longer “single entities,” the legislation ensures that products of China and Vietnam will be vulnerable to CVD measures.

Under the legislation, the effective date of Section 1, the application of the CVD law to NMEs, is November 20, 2006 – which is when the first CVD petition against Chinese products was filed and then accepted by the DOC. That effective date applies to any administrative proceedings initiated on or after that date, any actions taken by U.S. Customs and Border Protection to implement or enforce a CVD measure, and to any proceedings before a Federal court. That means that the GPX respondents will not reap the benefit of their court victory because, as of the date the new law will come into force, GPX will still be pending before a Federal court.

Section 2 of the bill purports to implement the adverse WTO determination. In fact, as drafted, it appears unlikely that the new law will ever result in an offset of any double counting of countervailable subsidies. Thus, Section 2 amends U.S. law to provide that if:

  1. the DOC determines that, with respect to a good from an NME for which the antidumping duty is determined using surrogate values, and
  2. a countervailable subsidy has been provided and such subsidy “has been demonstrated to have reduced the average price” of the imports, and
  3. the DOC “can reasonably estimate” the extent to which, through the use of the surrogate value methodology, the countervailable subsidy has increased the weighted average dumping margin,

Then the DOC shall reduce the antidumping duty by the amount of the increase in dumping margin attributable to the countervailable subsidy.

The bill’s sponsors, in explaining how this provision will work, make clear that the initial burden of proof will be on a foreign exporter, and even if the foreign exporter meets that burden, there may be no offset if the DOC does not believe it can make a “reasonable estimate” of the amount of double-counting. In fact, during the course of the GPX litigation, the DOC indicated that it does not believe it can make a reasonable estimate.

Significantly, unlike Section 1 of the bill, which is retroactive, Section 2 of the bill is only prospective, starting with the date of enactment. That appears to preclude any adjustments for existing orders, assuming the burden could be met by the foreign exporters or that the DOC would say that it could reasonably estimate the necessary adjustment.

The Battle Will Likely Continue, in U.S. Courts and in the WTO

At least some respondents in pending CVD investigations against products of NME countries have asked the DOC to stay those proceedings, based on the GPX decision, and it is likely that many NME respondents subject to CVD orders were anticipating seeking refunds of the CVDs paid, once the GPX decision is finalized. Once the amendment to the U.S. trade remedy law is in force, however, retroactively authorizing the application of the CVD law to products of NMEs and providing only a prospective possibility of adjustments to account for double counting, it is highly unlikely that the DOC will respond positively. The DOC would certainly cite the new law, and its prospective application of the doubling counting “fix,” as justification for rejecting such requests.

On the other hand, it is likely that a court challenge to the amended law will be forthcoming. The most obvious ground for a challenge is that a retroactive change in the law is unconstitutional. That argument also would provide a basis for requesting a refund of countervailing duties assessed since 2007.

Under Article I, Section 9 of the U.S. Constitution, Congress may not pass “any ex post facto law.” Whether that argument will prevail remains to be seen. That provision of the Constitution has been interpreted narrowly in the past, with the U.S. Supreme Court holding that not all retroactive laws are unconstitutional. Instead, the Court has concluded that only those retroactive laws that are unreasonable are unconstitutional.

Additionally, the Chinese Government may challenge the new law, and any implementing regulations, as failing to bring the United States into compliance with the AB’s decision. Thus, under the WTO’s Dispute Settlement Understanding, China could assert that the new U.S. measure is inadequate because it does not direct the DOC (1) to establish whether there is a double remedy, instead placing the burden on the foreign exporter, or (2) to calculate to what extent the same subsidies are counted twice, because the law as amended would allow the DOC to say that it cannot make a “reasonable estimate” and therefore make no adjustment.

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

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