China-U.S. Trade Law : International Trade Lawyer & Attorney : Baker Hostetler Law Firm : Trade Remedies, Customs & Export Controls

One of the most troubling features of the growing tensions between China and the United States is that both countries legitimately have a lot to complain about, and typically they are the same things. Three issues are particularly conspicuous at present and at the core of difficulties in the trade relationship – the definitions and status of “market” and “non-market” economies; the role of governments as owners of strategic economic sectors and retaliation over grievances arising from that role; and cyberattacks. When China and the United States criticize each other, they often are launching their complaints from inside glass houses, fortifications especially vulnerable to retaliation.

Market Economies

Almost every member of the World Trade Organization, and even countries (such as Russia) that are not, for international trade purposes are considered “market economies.” The designation is important because the rules of fair trade are written to promote markets, rewarding market transactions and penalizing conduct judged to distort markets. The distinctions emerged at the dawn of the Cold War when the rules enabling private enterprise to compete with state-directed economies were written.

State economic interventions, according to world trade rules, distort markets. State-directed economies – “non-market economies” (“NMEs”) – are inherently distorting. World trade rules deal with them through exclusion, denying them entitlement to the benefits of favorable assumptions.

Although China agreed, when it acceded to membership in the WTO in 2001, that it was not yet accepted as a market economy, it did not expect such recognition to be far behind. Now, nearly a decade later, it seems nowhere in sight, and largely because of objections raised by the United States.

The United States sees too much state direction in the Chinese economy. National plans are reinforced by regional and local planning. State-owned enterprises are dominant, particularly in the most important sectors of steel and energy production. State-owned banks control most lending. Tax schemes systematically favor designated sectors. Utilities providing manufacturers with energy are state-owned. There is no private ownership of land. And today, most important of all, currency is tied to the dollar and does not trade freely in international markets.

China does not see its economy this way. State enterprises are enterprises whose profits go to all shareholders, who are the people of China and not small investing bands of capitalists. They are controlled by boards with mandates to operate competitive, profitable businesses. Banks, controlled by the state, protect the state’s interests, and thus avoid reckless and feckless lending that can jeopardize whole economies. Labor is mobile and subject to competition. Land tenures in Britain, and some other Commonwealth countries, are based on the theory that the Crown owns all of the land, but thriving markets in land tenures exist. No one claims that the Crown’s ownership of all of the land in these countries suggests they are not market economies. The dollar began to float freely and trade on international exchanges less than forty years ago, and no one suggests that prior to the collapse of Bretton Woods the United States was not a market economy. In China’s view, all the people of China are the shareholders of the economy at large, but no less capitalistic in their support of competition and free enterprise. Most observers of China today remark on the Chinese worship of money, no less than in traditional capitalist societies.

The American indictment of China as an NME is defended now from inside a glass house. After the fall of Lehman Brothers in September 2008, the federal government in the United States took large ownership positions in many key banks. The government took effective ownership of the automobile industry. The Congress of the United States endlessly writes tax laws to favor one industry or another, especially the larger ones dependent on exports. Property is private, but government institutions set the terms of ownership and all of the financing that makes ownership possible. And the government in the United States intervenes in the economy regularly to create and save jobs, regulating the labor market, encouraging companies to hire labor and discouraging dismissals.

Neither China nor the United States is an ideal market economy. The distinctions might not matter practically, representing different paths to the acquisition and distribution of the benefits of commerce, except that they do in the application of trade laws. China thinks itself stigmatized by its designation as an NME, and it is disadvantaged in international trade.

Until 2006 there was at least a trade-off. Trade law, as applied everywhere, recognized that state intervention in the economy could not be market-distorting if there were no market. Consequently, trade remedy actions based on subsidy allegations could not be initiated, both because there was no way to measure a subsidy in the absence of market prices, and because a subsidy by definition must distort a market and in an NME there is no market to distort.

In late 2006, the United States began to have things both ways. It said China was enough of a market economy to justify bringing subsidy cases against its exports, yet not enough to shed its designation as an NME.  Ever since, China has been manifestly subject to a deliberately unfair trade regime. Yet, when China takes exception, it does so from within its own glass house, and not only because of the conditions that shaped American views in the first place.

Even as China began in 2006 to defend its practices in the United States, its conduct tended to reinforce the indictment instead of refuting it. Instead of acknowledging that it had little control over regional and local governments, their “planning” or their commercial practices, the central government, citing to the Constitution of the People's Republic of China, asserted that all governments reported to it.  Instead of acknowledging difficulty in amassing information demanded by U.S. authorities in trade investigations, it tried to answer questions without verifiable information. Instead of leaving private enterprises in China to find counsel and defend their own interests, the government convened supposedly independent chambers of commerce and largely directed the management of China’s legal defenses. It relied principally on the advice of Chinese lawyers with very limited knowledge of U.S. law. All these actions tended to convince American investigators that China is state-run and not ready to be considered a market economy.

As a practical matter, this issue has lost most of its importance. U.S. authorities have developed methodologies that would reach the same conclusions about fair trade even were China now recognized as a market economy. But symbolically this issue remains critical.

China’s Retaliation: Mutual Accusations Of Subsidies

Exhausted, perhaps, by the apparent futility in its claim that it should be recognized as a market economy, China has adopted an alternative strategy, accusing the United States of similar market deficiencies. China now formally accuses American exports of being subsidized in an economic system marked by substantial state involvement.

China does not deny that the development of its automobile industry has been heavily subsidized. Instead, China argues that it has graduated from subsidization. This view, however, neglects the history of international trade disputes centered on the privatization of state enterprises that followed on the collapse of Communist regimes. The United States accused all such enterprises, especially in the steel industry, of continuing long-term benefits, arguing that privatization could not extinguish the value of subsidies unless the sale of the state enterprise took place at a full market price. The United States placed the burden of proof that no subsidies passed through from the state to the private enterprise on the foreign private enterprise, a burden virtually impossible to bear because of inadequate documentation.

China, perhaps preemptively, has accused the U.S. automobile industry of exporting subsidized vehicles to China. As we discussed on December 1, 2009 on this blog, the countervailing duty investigation launched in November 2009 arises from a petition that argues the American automobile industry is in historic decline and survives only due to massive government subsidization. The central problem of these accusations, however, is that they are hurled from a glass house. The United States will now almost certainly accuse China of subsidizing the automobiles China is gearing up to sell to the United States. Hence, while the industries in both countries are trying to develop fuel efficient automobiles that will eliminate carbon emissions, thereby serving mutual objectives related to saving the planet, trade laws in both countries already are impeding direct competition based on the quality of the product.

China’s action, contending that the United States does not produce automobiles through free market enterprise, is a transparent retaliation for the American insistence that China is a non-market economy. However, this action carries the disagreement forward into the terrain of the future, where China and the United States need most to cooperate.

Cyberattacks

The United States has complained for a long time that China has subjected American defense and security establishments to incessant and invasive cyberattacks. These complaints took on a new character and dimension when Google complained that a coordinated Chinese assault on Google customers included an invasion of the accounts of Chinese dissidents. Google, already criticized for accepting Chinese government censorship that affects the internet in no other country, found the latest attacks intolerable. Google threatened to leave China.

The Google-China confrontation led Secretary of State Hillary Clinton to deliver a major speech on “internet freedom” that called for international condemnation of China.  Jack Goldsmith, Harvard Law School professor and former senior Justice Department official in the Bush Administration, responded quickly in The Washington Post: “[T]he problem with Clinton’s call for accountability and norms on the global network,” Goldsmith wrote, “is the enormous array of cyberattacks originating from the United States. Until we acknowledge these attacks and signal how we might control them, we cannot make progress on preventing cyberattacks emanating from other countries.”

The cyberattacks from China are presumed to be state-directed because of the state control and censorship of the internet imposed on companies such as Google. Attacks from the United States are presumed, at least by Americans, to be the work of private individuals, free-lancers, the sort of people who fill e-mail boxes incessantly with spam. Goldsmith accepts this orthodoxy, noting that “Scores of individuals and groups in the United States design or employ computer payloads to attack government Web sites, computer systems and censoring tools in Iran and China. These efforts are often supported by U.S. foundations and universities, and by the federal government. Clinton boasted about this support seven paragraphs after complaining about cyberattacks.”

Boarding Up The Glass Houses

China surely knows at least as much about what is happening in its cyber sphere as Professor Goldsmith. The American complaint about Chinese interference with the internet appears well-founded, as is the American complaint about China’s control of its economy and China’s subsidization of industry. But each of these complaints is launched from a glass house. Until China and the United States acknowledge mutually the problem – that their legitimate reciprocal complaints need more solution than aggravation – such complaints will compound and multiply, and the two countries will grow further apart and more antagonistic. They must either appreciate the view that glass houses uniquely afford – a place from which one can see out very well, but others can also see in -- stop throwing things at each other from inside the glass houses, or board them up. The last choice, which may define the direction in which things are going, is probably the worst of all.

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The Scope Of The Challenge

China’s Ministry of Commerce (“MOFCOM”) initiated officially on November 6, 2009 antidumping and countervailing duty investigations into saloon and cross-country cars imported from the United States and manufactured by General Motors, Chrysler, and Ford Motor companies. Although the scope of the products at issue is described (chassis, engine, etc.) and defined according to tariff codes, the real scope of the petitions has little to do with saloon and cross-country (or sport utility) vehicles. The petitions upon which the investigations have been initiated may be the single most important documents in China-U.S. trade relations since the Chinese Protocol of Accession to the WTO. They are about competing models of economic and industrial development, and constitute a complaint against the American strategy for overcoming the financial crisis that dates from at least 2008. According to the Chinese petition, the United States, and the United States alone, caused the crisis. The Chinese contend that China is ascendant while the United States is declining, a statement as much of Chinese historical perspective as of legal rights and wrongs.

The selection of the Big Three American manufacturers, the timing, and the contents of the petitions, suggest that China, on the eve of President Obama’s first visit there, is going far beyond a trade remedy action concerning automobiles. Automobiles, however, may have been chosen as the target of the sweeping indictment, both because of vulnerability in the economic crisis, and because of their symbolism as the icon of American industrial dominance in the twentieth century. China is calling into question the American economic development model and the entire premise of American trade actions against China, advancing an argument that the U.S. automobile industry is failing and exposing the depth and breadth of American economic support for an exporting industry. Were the petitions to succeed, they would likely be the first of many against other U.S. exports to China.

The Chinese petitions challenge American definitions of market and non-market economies, and turn against the United States the subsidy policies and practices the United States has been applying to China. The Chinese petitions question the legitimacy of much of American trade policy toward China, while exposing great American vulnerability to trade remedy actions against American exports.

The petitions reach beyond trade policy. They question the U.S. Government’s energy and climate change policies by challenging government support for research and development into more energy efficient and less-polluting vehicles. As President Obama has placed research and development at the heart of the American economic recovery (and identified it with American global leadership), so China is now contending that state support for research and development is, according to Chinese law, the WTO, and implicitly American practice, a collection of countervailable subsidies.

There are many ironies in the Chinese decision to initiate a countervailing duty investigation based on the automobile petition, but perhaps the greatest is in the agreement reached a few days after initiation by Presidents Obama and Hu Jintao, in mid-November. They announced a cooperative effort specifically for the development of electric vehicles, and both committed significant R&D funds. Yet, China began investigating, ten days before President Obama’s visit, whether American subsidies for the development of electric vehicles violate WTO obligations. The Chinese petition contends that an American competitor, Tesla, in the nascent electric vehicle market, has been receiving funds (the petition alleges at least $465 million) from the federal government under several programs. The petition also identifies electric vehicle development funds to the Big Three, alleging $5.9 billion to Ford alone.

The excuse for the allegations against electric vehicles is the fungibility of money, which is an argument that has been used in the past by the U.S. Commerce Department that says any funds given to a company, for whatever purpose, may contribute to production and export of subject merchandise by relieving other sources of funds. There is no excuse offered, however, for the discussion of Tesla, which is not one of the Big Three, not a manufacturer of subject merchandise, and therefore not a respondent. Nor is there an explicit acknowledgement that electric cars are a different product not subject to the petition.

Warned But Oblivious

In December 2008, we warned the Office of the United States Trade Representative (“USTR”) of a potential Chinese action such as this one. USTR, under the Bush Administration, had solicited comments on how the United States should treat alleged Chinese subsidies. We advised that, since September 15, 2008, it was no longer possible to continue business as usual. The United States, in response to the global financial crisis, was subsidizing banks and encouraging loans to uncreditworthy companies at below market rates. Banks were becoming state-owned, even if temporarily, in all but name. The United States was also acquiring significant equity positions in the automobile industry through massive cash infusions.

Even were the petitions to be taken entirely at face value – that they were prepared by a private industry association and reviewed by MOFCOM for a subsequent government decision whether to initiate investigations in response to a private request – MOFCOM’s notices of initiation imply acceptance of the petitions as to the credibility of most of the allegations. The petitions, therefore, are plausibly statements of MOFCOM’s views on a variety of subjects critical to U.S.-China relations.

The petitions appear to have been used as an opportunity for China to offer a comparative history of economic development, of industry in general and the automobile industry, the American icon, in particular. This Chinese version argues that the American automobile industry had every possible advantage in global markets over the last century, that China’s industry has been developing quickly, first with foreign help but more recently of its own accord, and that the United States’ efforts to save its automobile industry cannot come at the expense of China.

Loosely tied to the petitions’ comparative history of economic development is a contemporary conclusion. The petitions allege that “the U.S. subprime crisis escalated suddenly and ballooned into a global financial crisis.” (Elsewhere, the petition complains, “since the broke out [sic] of economic crisis aroused by the United States sub-loan crisis.”) This critical commentary, like the comparative economic history, is irrelevant to the subsidy and dumping allegations, but appears to be an unvarnished Chinese view of why the United States is today in China’s debt. It is a commentary that unashamedly connects economic and industrial policy to allegations of unfair trade, without hesitating to accuse the United States of pursuing a state-driven “industrial policy,” while implicitly denying its own.

Even the terms of reference equate American policy with Chinese language: the petitioners found President Obama referring to the automobile as a “pillar industry” of the American economy, a favorite Chinese term frequently noted by the U.S. Department of Commerce when, focusing on Chinese central planning, it assumes a link of plans to actions and accuses the state-driven Chinese economy of massive subsidies.

It is possible that neither President knew the details of the automobile petitions when they met shortly after investigations were initiated and they agreed to cooperate in the development of electric vehicles. There had been bilateral consultations as mandated by the WTO before initiation of a subsidies investigation, and the United States Trade Representative had summoned the Big Three manufacturers to a meeting, but the United States has not exported electric cars to China and the subject of the investigation is saloon cars and sport utility vehicles. There was no reason, therefore, for either President to think that R&D support for the development of electric vehicles was a primary focus of the countervailing duty petition.

The agreement Presidents Obama and Hu reached on this subject is strange in the circumstances. In light of the agreement, there is little logic in pursuing the allegations, but China may have its own reasons for both, nearly simultaneous, actions.

A Petition More And Less Than Meets The Eye

According to the countervailing duty petition, China is second only to the United States worldwide in the purchase of automobiles. In the narrower classes of saloon and cross-country vehicles, the petition claims China imported 33,732 such vehicles from the United States in 2007, and 43,240 in 2008. Chinese total imports of these vehicles, however, grew from 234,493 to 299,132 during the same period. Thus, the Big Three represent, in shipping from the United States, less than 15 percent of China’s imports of the subject merchandise, and less than half of one percent of China’s total consumption.

The petition does not link systematically any injury being caused by these shipments to current Chinese manufacture and sale of these specific categories of vehicles. To the contrary, the petition acknowledges that China’s own production and consumption grew during the period of investigation, even as overall imports grew as well. Nor are the subsidy allegations focused on the subject merchandise, but rather refer to the entire automobile industry, and especially initiatives regarding energy efficiency and green technologies that are unrelated to the subject merchandise. The petition challenges almost every aspect of the economic recovery package, with a particular objection to Buy American provisions. But it does not narrow the subsidies analysis to the scope of the petition, complaining more generally about the automobile industry. In repeated recitations of the legal “specificity” standard, it treats automobiles as a specific industry, not the types of cars about which the petition complains.

The petition details two arguments for upstream subsidy investigations, although it does not expressly call for any, and Chinese regulations may not articulate how one might be done. After all, upstream subsidy investigations in the United States have been rare, with the Commerce Department loathe to do them. In a notable exception to practice, the Commerce Department undertook an upstream subsidy analysis in Hardwood Laminated Trailer Flooring from Canada and in February 1997 found no subsidy. There, the allegation was about Canadian stumpage, possibly the most controversial subsidies issue between Canada and the United States in the last twenty-five years. Here, the allegations focus on steel and on components for electric vehicles. Steel is perhaps the most contentious trade issue between China and the United States and likely will be the subject of more petitions in 2009 and early 2010. In both principal instances – stumpage with Canada, steel with China -- an important motivation for the petition might have been to get at the upstream product. The attack on electric car inputs may reflect the U.S. objections in several subsidies cases brought against China regarding inputs from state-owned enterprises. The United States, however, has not deployed any upstream analyses.

It seems the petition, then, is not so seriously about saloon cars and SUVs. It may be more about preemptive strikes (electric vehicles; R&D) and retaliation on thorny disputes (steel). The petitions seem to contend that there is no material difference between the economic actions of governments in China and the United States, between market and non-market economies.

The petition is a first foray against multiple levels of American government (with four allegations concerning subsidies from the state of Michigan), perhaps a response to the now-frequent American complaints about Chinese regional and local government programs and planning. The petition, thus, is less than meets the eye: it is hard to take it too seriously as to the specific cars in question; and a great deal more than meets the eye: a resetting of the table for the treatment of the role of the state in the economy, for addressing American federalism, and in the future of energy efficiency and green technologies.

Possible Reverberations

There are many possible problems arising from this investigation. The United States has never before defended itself in China. China has never before sent investigators to examine U.S. books. No U.S. state has ever before submitted to a Chinese investigation, or participated in one. Although this petition has precipitated China’s third countervailing duty investigation against the United States, none has yet reached a preliminary determination, none has yet involved a verification with Chinese officials inspecting U.S. government books, and none has involved a state government. The U.S. automobile industry has not been subject to dumping or subsidies allegations before. Conducting the investigation will be new for China; responding to it will be new for Americans. It will require a sorting out of American federalism, and a new diplomacy for China.

Some have said that the investigation is retaliation for the tire safeguard. In its timing, this view seems attractive, but too much about it makes the theory implausible. The petition covers too much ground and is too broad an assault on the U.S., its trade and economic policies, to have been mere retaliation for a safeguard contemplated in the Accession Protocols. The timing is more notable for President Obama’s first visit to China than for the safeguard. It sets an agenda: affirmatively, market economy recognition; negatively, warnings on steel and electric vehicles.

There have been no reports suggesting any U.S.-China dialogue about the petition during President Obama’s visit. The United States may have chosen deliberately to say nothing, or it may not have reached the President’s attention in the planning of the visit. China, however, may take American silence on the subject as a first round of acquiescence to the charges, and the charges, formally lodged in a trade action, are the most serious China has brought against the United States since, at least, China’s accession to the WTO.

Other countries likely will watch this investigation closely. On the last day of his Asian tour, President Obama received from President Lee Myung-Bak of South Korea agreement to reconsider the automobile dispute that is blocking finalization of a free trade agreement, but he did not receive agreement to reopen settled language in the pending treaty as sought by Congress. South Korea likely will be reinforced in its objections to the terms of the pending free trade agreement with the United States, as China intends to demonstrate massive subsidies to the U.S. automobile industry that ought to make South Korea reluctant to lower its barriers to U.S. cars.

Competing automobile industries, especially in Europe, which have been subsidized heavily during the financial crisis, may face future Chinese challenges. China may seek to clear its market, as implied in a petition that sees its industry ascendant.

China may have been anticipating American barriers to electric vehicles. The action brought, however, could now arguably make those barriers more likely. Tesla manufactures a luxury vehicle; China will seek to enter the U.S. with much more modest electric cars. Consequently, it may be difficult for Tesla, or any other U.S. manufacturer of electric vehicles, who may not yet have sold in the market when Chinese imports first arrive, to challenge Chinese electric cars. The Chinese petition, however, provides theories for challenging vehicles not yet in the market, including an attack on suppliers.

In Laminated Woven Sacks from China, the U.S. International Trade Commission found neither injury nor threat of injury to any American industry. Instead, it found that China’s industry was responsible for retarding the development of a U.S. industry. China did not contest this weakest of all possible injury allegations, enabling final affirmative determinations.

Chinese acquiescence could inspire a similar approach to electric vehicles. American petitioners might allege that Chinese imports are designed to kill off a nascent American industry. The petition could assure an American petition against Chinese electric cars that could complicate the efforts of both countries to develop new technologies for energy efficiency and environmental improvement. The petition is uncompromising and unforgiving as to American efforts to develop cleaner, more efficient automobiles.

The Chinese countervailing duty petition on automobiles could do more to change Chinese-U.S. trade relations than summits and presidential visits. Just as President Obama apparently did not pursue the frequent congressional complaint (and constant Bush Administration theme) regarding revaluation of Chinese currency, so China did not, apparently, assail publicly the United States as the source of the global financial crisis. Yet, President Obama was barely home before congressional committees called again for tough trade sanctions against China, including an attack on Chinese currency.

In a public document that forms the basis for a Chinese investigation of the United States, the current form of American capitalism is being put on trial. Consultations already have failed. No negotiations have followed. Unless national leaders contain the impulses of their respective Ministries (Departments) of Commerce, the trade war that the tires safeguard likely did not trigger may become inescapable. Each country will accuse the other of violating international trade rules in their respective pursuit of a cleaner and more energy efficient planet. Cooperation might threaten leadership. Without a swift settlement, China will be obliged to make its subsidies case, and the United States will not like it.

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The Chinese Ministry of Commerce (“MOFCOM”) announced on November 6, 2009 that it had launched anti-dumping (“AD”) and countervailing (“CVD”) investigations against sedans and sport utility vehicles of cylinder capacity ≥ 2000cc originating from the United States. We are providing on this blog an English translation of the CVD notice. This announcement represents the third CVD investigation initiated against U.S. products in less than six months. So far, Chinese investigations have targeted CVD investigations only against products originating from the United States.

According to the November 6 notice, MOFCOM will investigate 24 alleged subsidy programs, all identified as being provided by the U.S. Government. However, four of those alleged programs are tax incentives and other assistance provided by the state of Michigan, which in the U.S. federal system is a distinct sovereign and not part of the U.S. Government. ( In China, all regional and local governments are subordinate to the central government. In the U.S., the states have distinct powers and are not subordinate.)

China adopted its regulations on CVD investigations in October 2001, and the Regulations Of The People’s Republic Of China On Countervailing Measures entered into force at the beginning of 2002. However, China did not initiate its first CVD investigation until June 1, 2009.

The vocal U.S. steel industry was the first target of Chinese countermeasures. The product under investigation was grain-oriented flat-rolled electrical steel, and an Ohio company – the AK Steel Corporation – and a Pennsylvania producer – the ATI Allegheny Ludlum Corporation – were singled out as respondents.

Soon after President Obama imposed additional tariffs on Chinese commercial, low-cost tires as a China-specific safeguard measure, MOFCOM issued a press release saying it would review AD and CVD petitions against U.S. poultry products and cars. Many observers rushed to label this announcement as “retaliation.” However, both products have been the subject of trade disputes between China and the United States for a long time. Our previous article “Trade War?” analyzed the safeguard action and recent trade disputes between the two sides, querying whether China was retaliating in the opening salvo of a trade war. The initiation of investigations into U.S. automobiles may require an adjustment in our analysis. We expect to post soon an analytical article on China’s investigations of alleged U.S. subsidy programs, particularly as they refer to U.S. automobiles.
 

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This article is co-authored by Elliot J. Feldman and John J. Burke.

 Until now, China has preferred the WTO to resolve trade disputes. Of a dozen countervailing duty cases brought against Chinese products, all but one (the coated free sheet paper case failed at the International Trade Commission) went adversely before U.S. agencies and the Government of China challenged none of these final agency determinations in U.S. courts. Instead, China consolidated four of them and complained at the WTO.

We have indicated before our doubts about the wisdom of this choice (see our blog article titled WTO Challenges: Not Always A Panacea For Respondents In Trade Litigation). Now, there is new evidence. In GPX International Tire Corporation v. United States, a case brought before the United States Court of International Trade (“CIT”) by private parties (not the Government of China), Chief Judge Jane Restani found an important flaw in the procedures of the United States Department of Commerce that could return substantial sums of money to importers of Chinese goods and alter the way trade remedy actions are brought and analyzed against China. Although this victory for Chinese interests is less than suggested by its advocates and some in the trade press, it is significant nonetheless and comes at an important time. The Chinese Government has achieved nothing comparable in its efforts at the WTO.

Judge Restani’s decision does not preclude the Department of Commerce from initiating countervailing duty investigations against China or any other non-market economy. In fact, its impact is more likely to be seen in the conduct of antidumping cases against China. Judge Restani held that, when Commerce chooses to apply the countervailing duty law to China with respect to the same products for which it also is calculating antidumping duties, using the non-market economy methodology, Commerce must alter its antidumping calculations to avoid counting the same subsidy twice. She noted that Commerce would have to accomplish this task within the confines of the non-market economy provisions of the antidumping law. She remanded to Commerce to find some way to resolve this problem.

The easiest way for Commerce to resolve the double counting problem, as strongly hinted by Judge Restani, would be to resume its old practice of more than twenty years of not applying the countervailing duty laws to non-market economies. She noted that the Court of Appeals for the Federal Circuit in the 1986 case, Georgetown Steel, held that Commerce was not required to apply the countervailing duty laws to non-market economies. Many legal commentators had interpreted the Georgetown Steel case as prohibiting the use of countervailing duty laws to non-market economies. Judge Restani acknowledged that interpretation, but held that Georgetown Steel was ambiguous and she herself found the statute ambiguous. Therefore, she deferred to Commerce’s interpretation as "not unreasonable."

Judge Restani implicitly urged Commerce to abandon its adventure in applying the countervailing duty law to non-market economies, but nonetheless gave Commerce the option of altering its antidumping methodologies to prevent double counting. Given all of the political capital the Commerce Department has now invested in applying the countervailing duty laws to China, we expect Commerce will work hard to find a way to resolve this issue through changes in its antidumping calculations, without returning to the conventional interpretation of Georgetown Steel.

Commerce could separate antidumping from countervailing duty cases. It could decline to initiate them together against the same product. The cost of filing may go up for petitioners, but they might be able to preserve the ability to claim both subsidies and dumping. They could, alternatively, not include alleged subsidies in the calculation of cost of production for dumping, and instead allege all subsidies together in the separate countervailing duty petition. There would be no double-counting, but alleged subsidies would not escape scrutiny.

Judge Restani does not exclude these possibilities. To the contrary, she expressly authorizes as “reasonable” petitions alleging subsidies in non-market economies. She denies overturning Georgetown Steel, but she certainly overturns the popular understanding of it for the last two decades.

Judge Restani also overturned Commerce’s automatic use of December 11, 2000, the date China joined the WTO, as the cut-off date for determining whether a subsidy could be calculated in China. Commerce had been countervailing alleged subsidies conferred after that date, but refusing to investigate any allegations of subsidies conferred before that date. Some of the Chinese companies argued that Commerce could not go back any earlier than the date in 1997 when it announced it would apply the CVD law to China. The U.S. producers argued that there should be no cut-off date. Judge Restani ruled that Commerce must decide how far back to go based on the facts of each subsidy allegation. The bottom line for the Chinese Government and Chinese companies is that they now have to be prepared to defend against subsidy allegations reaching back into the 1990s, a serious setback from core arguments advanced by some counsel for China in the CVD cases.

Judge Restani, Chief Judge of the CIT, has long been a rigorous, thoughtful judge willing to reject the arguments of the United States Government and prepared to interpret the law and international agreements as favoring free trade. However, the Court of Appeals for the Federal Circuit historically has not been unwilling to overturn her. Occasionally, when she thinks a legal issue especially important and perhaps difficult, she assembles a three-judge panel of the court to hear a case. Three-judge panels have not been overturned in the last twenty years. Consequently, this decision is vulnerable to appeal.

Despite the celebration of a Chinese victory, assuming an unsuccessful appeal, there may be many ways around the rejection of double-counting, leaving China with less of a legal victory than it seems now to think. Nonetheless, although China lost the key legal principle at issue in the case – whether subsidy actions can be brought against non-market economies – it won a point that should mean the return of monies to importers of record in the United States and should complicate life for petitioners who were making the simultaneous filing of antidumping and countervailing duty petitions routine. As narrow as that victory may be, it is substantially more than anything gained to date at the WTO, and more than anything likely to be possible at the WTO as to Chinese exposure to CVD petitions.  It ought  to convey several lessons one of which is that U.S. courts are not necessarily inhospitable to Chinese appeals.  Another ought  to be, like the Chinese proverb, that the road is long, and requires many steps.  This appeal should be the first, not the last, on a journey to justify the practices of the Chinese economy.
 

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Political pressures have led the U.S. Department of Commerce to launch countervailing duty investigations against China while insisting that it cannot use market information from within China to measure the alleged subsidies because China is a non-market economy. That political reality contravenes the principles embodied in U.S. law. Subsidies are found and measured according to the market distortion they cause. Where there is no market, there can be no market distortion. It is not possible for China to have developed markets sufficiently to be subject to subsidies allegations and investigations, yet have no markets by which to ascertain and measure the subsidies.

The problem that pervades the United States’ countervailing duty investigations of China is an attitude, which has at least three manifestations.

1. There is the Department’s confusion of methodologies used in dumping and countervailing duty investigations. In dumping cases involving non-market economies, the law expressly allows the Department to seek out surrogate values from other countries. In theory, at least, this exercise is fairly precise: the cost of a nail in India might substitute for the cost of the same nail in China. The Department, however, has taken to utilizing this methodology in countervailing duty cases where the law does not authorize it and the measurements are not remotely so precise.The consequence is that the Department ignores prevailing market conditions within China in favor of data from hand-selected countries to determine the existence and amount of a countervailable subsidy in China. The Department is having the market issue both ways: China is enough of a market economy for government subsidies to cause distortions, but not enough of one – in any sector – to resort to prices in China that are less likely to show the existence of a subsidy.
2. There is a lack of recognition and appreciation of China’s radical transition to a market economy. The People’s Republic is privatizing, and creating competition, at a feverish pace. Its central planning is indicative and no longer directive; its collectives are giving way to individual entrepreneurs and its controls are yielding to markets. The Department verified that state-owned enterprises are operating autonomously, for profit, without government direction. They are seen as benefiting the people collectively instead of a small group of private owners, but contrary to the Department’s preconceived notions, that collective benefit makes them no less market-driven than privately-owned entities. Many of the changes in China’s economy are taking place in weeks and months, not years or decades. Countervailable subsidy allegations of a practice in June quickly become outdated as the practice disappears in September. The United States’ failure to recognize and appreciate these changes is a bad policy toward China because it carries all the wrong incentives: offsetting programs that have been abolished or expired creates liabilities that discourage abandoning the programs, or beg for replacements. It teaches all the wrong lessons about opening markets, because what it really communicates is that the United States is closing its own.
3. There is the allegation that officials of the People’s Republic of China do not always cooperate with the Department or do all they could to answer questions and assist with the Department in its investigation. The allegation is worse than undiplomatic. It violates the comity of nations by refusing to respect the acts of foreign sovereigns within their own jurisdictions. By presuming that China must collect and have information that, within its own jurisdiction it says it does not collect and does not have the Department violates a principle respected formally by the United States since the Supreme Court first pronounced on it in 1797. This third manifestation of attitude – the willingness to deny the veracity of official testimony without contrary information or evidence – tarnishes the Department’s investigations. As a matter of comity, the Department owes good faith respect to Chinese officials as it would expect them to respect officials of the Department.

Comity is not merely an element of diplomacy. It is an obligation of international practice and a legitimate expectation of our friendly trading partners. Chinese officials are entitled to be believed absent strong evidence to the contrary. The Department breaches its trust when it makes decisions based on nothing more than hostile beliefs. Insisting something must exist when told it doesn’t, and having no evidence to the contrary, is nothing more than a hostile belief. What is at stake is much more than the fate of any particular exported product. What is at stake is the good faith of American trade relations with China.

Hostile attitudes ought not to interfere with respect for the law and sound policy. In this instance, there is an additional concern. Much of the American objection to alleged Chinese subsidies could now be said, at least since September 15, 2008, about the United States. It probably has been necessary to combat global rececession with massive government economic interventions, but it has made much more of the American economy dependent on government support. We analyzed those troubling contradictions in formal comments filed with the United States Trade Representative in January 2008 on Applying the CVD Laws to China.
 

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The Commerce Department on August 12 postponed its preliminary determination in Prestressed Concrete Steel Wire Strand from the People’s Republic of China to October 24 claiming it needed more time due to the large number and complexity of the subsidy programs alleged in the case.  However, most of the allegations involve programs that Commerce has investigated recently in other cases.  A more likely explanation, therefore, is that the civil servants temporarily acting while political positions in the Commerce Department remain vacant want more time in hopes that more politial guidance wil be provided before critical policy decisions must be made.  A recent article in Inside U.S. Trade's World Trade Online took note of the large number of vacancies in the political positions in the Commerce Department.  We discussed how these vacancies are affecting trade policy in a recent posting on this blog.

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