The GPX Tires’ Decision and Its Implications for Vietnam

26 November 2009
Canh Tranh & Nguoi Tieu Dung

On September 18, 2009, the United States Court of International Trade issued a decision that will change the way the US treats imports from Vietnam. In GPX International Tires v. U.S. the court addressed the US Department of Commerce's recent application of trade remedies law against China. Because of other recent actions of the Department of Commerce, Vietnam will also receive the benefits, or burdens, of GPX Tires. In order to understand the implications of GPX Tires it is necessary to first understand certain things about United States trade remedies.

What are trade remedies?

Trade remedies are actions taken by a country against perceived harmful trade practices. Historically, these remedies took the form of tariffs or other fines imposed upon imports. Today, the United States relies primarily on two remedies: antidumping (AD) and countervailing duties (CVD).

Dumping occurs when an entity exports goods into a country for less than fair market value. Fair market value is loosely defined as the cost of production or the price for the product in the home country.  By dumping goods the exporter forces competitors in the domestic market to lower prices or sacrifice market share to the dumped products. When the US Department of Commerce makes a determination of dumping, they impose a tariff on the dumped goods from the dumping country and, in effect, force the dumped goods to compete at fair market value.

CVDs are a trade remedy imposed against subsidies. A subsidy is, among other things, a benefit granted to a particular industry by its government that lowers the price of exported goods. Those goods then compete at a lower price point than other products and gain an advantage similar to that gained by dumping. The difference between dumping and subsidies lies in who bears the cost caused by the lower price: for dumping the cost lies with the exporter and for subsidies it lies with the home government. If the US Department of Commerce (Commerce) determines a subsidy exists and that it injures the US market, then they can impose duties equal to the amount of the subsidies.

NME/ME distinction

For the purpose of applying trade remedies Commerce separates countries into two categories: market economies (ME) and non-market economies (NME), a classification that dates back to the Cold War and is arguably based less in economics than in politics. Nevertheless, the US, GATT, and now the WTO maintain the distinction. MEs were those economies that operated on market principles of supply and demand and where such market forces determined the costs of production. NMEs were countries where control of the costs of production lay in the hands of the state and consisted solely of Communist bloc countries. Commerce used this dual system to develop separate regulations for the application of trade remedies against ME and NME countries.

Antidumping

In AD cases, Commerce differentiates between ME and NME countries by the method it uses to calculate the fair market value of goods dumped.  Normally, Commerce looks at the price of the goods in the home country or in a third country market. If neither of those prices is available, it will then look at the costs of the factors of production: raw materials, labor, infrastructure costs, etc. In MEs Commerce trusts such prices to be determined by market forces and therefore aggregate to a fair market value. In NMEs, however, Commerce not only does not trust the cost of the price in the home country, it does not trust the price of the factors of production.  As a result, Commerce created what it calls the "surrogate" method for calculating fair market value.

When Commerce applies the surrogate method to a NME, rather than using prices in the home country it looks to similarly situated economies. Even then it is further limited by those countries that actually respond to its questionnaires. Say, for example, that the dumped product is a chair from China. Instead of asking China how much the wood, screws, and glue cost it will ask Thailand how much the wood cost, Paraguay how much the screws cost, and India how much the glue cost. This creates an abnormally high fair market value and, since the dumping rate is determined by the difference between the fair market value and the actual sale price of the good, an abnormally high antidumping duty.

Countervailing Duties

Commerce historically refrained from applying countervailing duties to NMEs. Remember that subsidies are benefits granted by the government to a particular industry or business. In most NMEs, those businesses and industries are controlled by the government. Therefore, Commerce reasoned, it is impossible for the government of a NME to grant a benefit to itself and, by extension, the identification and calculation of a subsidy in a NME was impossible. Trade remedies against NMEs were limited to the use of antidumping duties. Subsequently, the US Congress never promulgated regulations nor did Commerce ever develop administrative guidelines to govern the application of CVDs against NMEs.  This policy remained in place until 2007, when Commerce changed the way it treated China.  

In its decision to impose CVDs against China, Commerce concluded that it was now possible to identify subsidies in China's economy. Commerce cited China's accession to the WTO and the numerous economic reforms implemented since-privatization, increased foreign investment, and measures to liberate the Ren min bi-to support its argument that it could now identify benefits granted by the Chinese government to certain industries within China. Commerce did not, however, reclassify China and continues to apply NME procedures in antidumping cases.

Commerce's Comeuppance and GPX Tires

Soon after Commerce initiated the first CVD case against China, US industry lodged a flurry of complaints against Chinese exporters. Undeterred by the lack of legislative guidance and internal procedure, Commerce began to identify subsidies and impose duties by improvisation. Specifically, they adapted their experience imposing CVDs to MEs and AD duties to NMEs and, in so doing, applied a procedure that was deemed unpredictable and arbitrary. In GPX Tires, the US Court of International Trade ruled that three of these practices in particular were impermissible.

Double Remedies

Because CVDs are triggered by benefits granted to producers/exporters and ADs are triggered by discounts made by the producers/exporters, there is sometimes an overlap between the two remedies. When a government grants an export subsidy, that value is normally applied only to the price of the exported goods. When a government grants a domestic subsidy, the producer absorbs that benefit and then will normally discount any savings to both domestic and exported goods, thus avoiding any AD issues.

The US Congress long ago determined that CVDs imposed for export subsidies should be subtracted from any subsequent AD duties to avoid double counting in this area of overlap. They remained silent, however, when it came to domestic subsidies.

In identifying subsidies in China, Commerce included both domestic and export subsidies and applied CVDs for those amounts. Then Commerce used the surrogate method to construct the fair market value of the goods for applying AD duties, but in calculating the amount of the duty to be applied, they compared the constructed fair market value to the subsidized value. By failing to factor domestic subsidies into their fair market value calculation, Commerce double counted the domestic subsidies.

Think of it as a mathematical equation. For calculating ADs against a ME country, Commerce normally compares the fair market value (FMV) to the price of the good in the domestic market (DMV). FMV = DMV. DMVs would normally be calculated as the actual value (AV) of the good plus any domestic subsidies (DS) as identified in the CVD investigation. DMV = AV + DS. In the NME context, however, the DMV is replaced by a constructed surrogate value (CSV) that, as it is derived from factors of production from other countries, does not include any domestic subsidies. DMV = CSV. CSVs are normally much higher than a DMV due to the method of construction. Domestic subsidies, which are automatically subtracted in ME AD cases, therefore, remain in NME AD cases. By initiating CVD cases against the same goods, Commerce penalizes domestic subsidies twice, once in CVD duties and then again for AD duties.

Market-Oriented Entity Status

Commerce has at various times and in various methods allowed industries or companies in NMEs to apply for an exemption from the NME classification. This exemption would then allow the industry or company to be analyzed according to ME methodology. Such exemptions are granted if the industry or company can demonstrate their operations are controlled by market forces: factors of production are all priced by markets, value of goods is determined by markets, there is no government control in the industry, etc. This exemption is infamously difficult to obtain, but it is nonetheless available to industries undergoing AD investigations.

In GPX Tires, two companies applied to receive market-oriented entity status. One company, a US invested JV received the exemption. The other company, a primarily Chinese owned company, was refused on the grounds that Commerce did not have a procedure for granting the MOE exemption in CVD cases. The court ruled that this behavior was impermissible. Commerce could not pick and choose its procedure on the fly, or deny such a request because it claimed not to have a procedure. They could not apply one procedure to one party and another procedure to another. They had to pick one and stick to it, whatever that procedure be.

"Graduation Date"

Subsidies have a lifespan. One of the more important parts of Commerce's CVD investigations involves a determination of the period over which a government granted subsidies to exporters. When a historically NME country like Poland or Ukraine "graduated" to ME status, Commerce treated the date of that graduation as the first day on which any subsidies could be identified. In China's case there is no graduation date because Commerce still classifies China as a NME. Instead of relying on a graduation date Commerce picked the date of China's WTO accession as the first day on which subsidies could be identified.  Commerce justified this date as appropriate because of the many economic reforms required by China to join the WTO. But China implemented many of those reforms before it acceded to the WTO and it is still implementing further reforms.  

The court ruled that Commerce's selection of the WTO accession date was arbitrary. If Commerce has only now felt itself able to identify subsidies in China, where scattered privatizations create an uneven distribution of markets, then it cannot say that every industry began receiving subsidies as of the WTO accession. The court ordered Commerce that in identifying subsidies it must investigate specific subsidies and identify the actual period over which the subsidy was granted. It could not choose an arbitrary date for every industry and apply it without modification to individual cases.

Why this matters to Vietnam?

Commerce classifies Vietnam as a NME. On April 20, 2009, Commerce expanded its application of CVDs to NME countries and initiated its first CVD case against Vietnam. In Polyethylene retail carrier bags from Vietnam, Commerce lumped Vietnam with China as an economy with sufficient market characteristics to identify subsidies, but not sufficient enough to classify it as a ME. Although Commerce has not yet issued its final determination of countervailable duties, it has so far treated Vietnam exactly like China.

Fortunately for Vietnamese industry, this similar treatment provides increased transparency into the procedures Commerce will use when it initiates CVD cases against them. Although Commerce has not issued new policies or a final CVD determination since the court's ruling in September, it is possible to extrapolate some principles from the existing regulations and from the court's orders.

In predicting Commerce's behavior, it is important to understand its past actions. Whether intentional or coincidental, Commerce tends to single out China when it comes to the use of trade remedies. There are more AD orders in effect against China than any other country. Vague legislation is almost always construed against China's benefit. Admittedly, this protectionist attitude is influenced by Congress and the president, and in many ways stems from Cold War antagonisms, but Commerce still seems set against China, and now that Commerce has lumped Vietnam with China, Vietnam may very well expect similar treatment.

With that principle in mind, it becomes easier to predict Commerce's policy decisions.

Where Commerce could alter its constructed surrogate values to determine fair market value in such a way as to include domestic subsidies, it will instead retain its constructed surrogate value methodology and simply subtract the value of the domestic subsidy. This will maintain the abnormally high fair market value used to determine AD orders while satisfying the court.

There have been several variations of the market-oriented status exemption and it is difficult to determine which one Commerce will apply in the CVD context. It is imminently less difficult, however, to predict that Commerce will not make acquisition of the exemption easy. In all likelihood they will simply borrow the current exemption from the AD legislation and apply it to CVDs, thus making it all but impossible to satisfy the requirements and obtain the exemption.

Finally, Commerce will follow the court's order to identify the period of each subsidy on a case by case basis. This will, of course, force a greater complexity to, raise the price of, and increase the time it takes to complete investigations of CVD petitions.

As US industry becomes increasingly protectionist in response to the global financial crisis, it will seek ways to deter international competition in the US marketplace and one of the best, internationally acceptable, ways for it to do so is through the liberal application of trade remedies. Vietnamese industries should prepare themselves for a spate of CVD cases and familiarize themselves with not only the need to be responsive to Commerce, but with the options available to minimize or appeal any duties Commerce imposes.

Authors

Steven Jacob




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