Chapter 2: TRADE REMEDY LAWS

Countervailing Duty (CVD) Law

The Tariff Act of 1930, as amended, provides for the imposition of additional duties whenever a subsidy is bestowed by a foreign country upon the manufacture or production for export of any article which is subsequently imported into the United States. There are currently two separate provisions of the Tariff Act which govern the imposition of countervailing duties. Subtitle A of title VII of the Tariff Act of 1930, as added by the Trade Agreements Act of 1979 and amended by the Trade and Tariff Act of 1984 and the Omnibus Trade and Competitiveness Act of 1988,1 applies to imports from countries which are signatories to the General Agreement on Tariffs and Trade (GATT) Agreement Relating to Subsidies and Countervailing Measures,2 commonly referred to as the Subsidies Code, or which have assumed obligations sustantially equivalent to those of the Code. For imports from these countries, an injury test is required prior to imposition of countervailing duties. Imports from countries which have not signed the Subsidies Code or assumed substantially equivalent obligations are subject to the provisions of section 303 of the Tariff Act of 1930, as amended by the Trade Agreements Act of 1979,3 and are generally not afforded an injury test in countervailing duty cases. Other than the requirement of an injury test, however, the provisions of the countervailing duty law under the two separate sections are generally the same.

The purpose of the countervailing duty law is to offset any unfair competitive advantage that foreign manufacturers or exporters might enjoy over U.S. producers as a result of foreign subsidies. Countervailing duties equal to the net amount of the subsidies are imposed upon importation of the subsidized goods into the United States.

BACKGROUND

The first U.S. statute dealing with unfair trade practices was a countervailing duty law passed in 1897. The provisions of the 1897 statute remained substantially the same until 1979, when the U.S. countervailing duty law was changed to conform with the agreement reached in the Tokyo Round of multilateral trade negotiations.

The law prior to 1979 required the Secretary of the Treasury to assess countervailing duties on imported dutiable merchandise ben

119 U.S.C. 1671.

2 Agreement on Interpretation and Application of Articles VI, XVI, and XXIII of the General Agreement on Tariffs and Trade (relating to subsidies and countervailing measures), MTN/ NTM/W/236, reprinted in House Doc. No. 98-153, pt. I at 257.

3 19 U.S.C. 1303.

efiting from the payment or bestowal of a "bounty or grant." The 1897 law authorized countervailing duties against any bounty or grant on exportation of foreign articles; in 1922 Congress amended the provision to cover bounties or grants on manufacture or production as well as on exportation. The amount of the countervailing duty was to equal the net amount of the "bounty or grant." Prior to the amendments made by the Trade Act of 1974 the law applied only to dutiable merchandise and afforded no injury test. Article VI of the GATT, governing the imposition of countervailing measures by GATT signatories, requires evidence of injury prior to imposition of countervailing duties. The grandfather clause of the GATT, however, allowed the U.S. law to operate without an injury test since the U.S. law predated the GATT.

Although the substantive requirements of the countervailing duty law remained virtually the same, the Trade Act of 1974 made two important changes to the CVD law. First, it extended the application of the countervailing duty law for the first time to dutyfree imports, subject to a finding of injury as required by the international obligations of the United States (i.e., duty-free imports from GATT members). Second, it made extensive changes in many procedural aspects of the law, which had the effect of limiting executive branch discretion in administering the CVD statute. The responsibilities for countervailing duty investigations were also split with the Department of Treasury being responsible for subsidy determinations and the U.S. International Trade Commission (ITC) being responsible for injury determinations.

GATT Subsidies Code

During the Tokyo Round of multilateral trade negotiations, a multilateral agreement governing the use of subsidies and countervailing measures was concluded and signed by the United States. In order to enforce obligations with regard to the use of subsidies, the agreement provides for improved international procedures for notification, consultation and dispute settlement and, where a breach of an obligation concerning the use of subsidies is found to exist, or a right to relief exists, countermeasures are contemplated. In addition to the availability of countermeasures through the dispute settlement process, countries could also take traditional countervailing duty action to offset subsidies upon a showing of material injury to a domestic industry. The agreement sets out criteria for material injury determinations.

The key provisions of the agreement are as follows:

1. Flat prohibition of export subsidies on non-primary products as well as primary mineral products.

2. A description of export subsidies which supersedes the existing requirement that an export subsidy must result in export prices lower than prices for domestic sales, and includes an updated illustrative list of subsidy practices.

3. With respect to domestic subsidies, for the first time in an international agreement, explicit recognition that while they are often used to promote important objectives of national policy, they can also have harmful trade effects; relief (including countermeasures) is permissible where such subsidies (a) injure domestic producers; and (b) nullify or impair benefits of concessions under the

GATT (including tariff bindings); or (c) cause serious prejudice to the interests of other signatories.

4. Recognition that where domestic subsidies are granted on noncommercial terms, trade distortions are especially likely to arise; commitment by signatories to "take into account" conditions of world trade and production (e.g., prices, capacity, etc.) in fashioning their subsidy practices.

5. Improved discipline on use of export subsidies for agriculture. Prohibition on such subsidies when used in a manner which (a) displaces the exports of others or (b) involves material price undercutting in a particular market.

6. Provision for special and differential treatment under which developing countries could not use export subsidies where such subsidies adversely affect the trade or production interests of other countries; provision for negotiated phase-outs of export subsidies by developing countries.

7. Tight dispute settlement process.

8. Greater transparency regarding subsidy practices (including provision for notification to the GATT of practices of other countries).

9. For countervailing duty actions, an injury and causation test designed to afford relief where subsidized imports (whether an export or domestic subsidy is involved) impact on U.S. producers either through volume or through effect on prices.

10. Greater transparency in the administration of countervailing duty laws and regulations.

Application of GATT Subsidies Code to U.S. law

Congress approved the GATT Subsidies Code under section 2(a) of the Trade Agreements Act of 1979. Section 101 of the 1979 Act added a new title VII to the Tariff Act of 1930, containing the new provisions of the countervailing duty law to conform to U.S. obligations under the Subsidies Code. One of the most fundamental changes made by the 1979 Act is the requirement of an injury test in all CVD cases involving imports from "countries under the Agreement"-countries which either are signatories to the Subsidies Code or have assumed substantially equivalent obligations to those under the Code. The "no injury test" provisions of the preexisting section 303 were generally retained, however, for cases involving imports from countries which are not "countries under the Agreement" (other than duty-free imports from GATT members). Other changes made by the 1979 Act include the grant of provisional relief for the first time, reduction of the time periods for investigation, and greater opportunities for participation by interested parties.

Subsequent changes to U.S. law

In 1979, under President Carter's Reorganization Plan No. 3, the responsibility for administering the subsidy portions of the countervailing duty statute was transferred from the Department of the Treasury to the Department of Commerce (DOC).4

4 Exec. Order No. 12188, January 4, 1980, 44 Fed. Reg. 69273.

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In 1984, the Trade and Tariff Act of 1984 modified the application of the CVD law to "upstream subsidies"-subsidies bestowed on inputs which are then incorporated into the manufacture of a final product which is exported to the United States. The 1984 Act also made certain other clarifications and procedural changes to the law.

In 1988, the Omnibus Trade and Competitiveness Act clarified USTR's authority to revoke the injury test for countries which have not honored their obligations with respect to export subsidies. It also made certain procedural and definitional changes to the countervailing duty law, including an explicit grant of authority to prevent circumvention of countervailing duty orders.

BASIC PROVISIONS

Section 701 of the Tariff Act of 1930, as amended, 5 provides that a countervailing duty shall be imposed, in addition to any other duty, equal to the amount of net subsidy if two conditions are met. First, the DOC must determine that a subsidy is being provided, directly or indirectly, "with respect to the manufacture, production, or exportation of a class or kind of merchandise imported into the United States" and must determine the amount of the net subsidy. Second, the ITC must determine that "an industry in the United States is materially injured, or is threatened with material injury, or the establishment of an industry in the United States is materially retarded, by reason of imports of that merchandise." The countervailing duty will apply whether the merchandise is imported directly or from third countries, and whether or not in the same condition as when exported.

Section 303 of the Tariff Act of 1930, as amended, applies to imports from countries which are not "countries under the Agreement." Under section 303 the second condition of an injury test is not required, except for cases involving duty-free imports from GATT members.

Net subsidy

Countervailing duties are imposed in the amount of the net subsidy as determined by the DOC. Subsidies are direct and/or indirect grants for the production or exportation of goods. They can take many forms, including direct cash benefits, credits against taxes, and loans with artificially low interest rates.

Although the statute does not provide an explicit definition of the term "subsidy," it provides that the term shall mean the same as "bounty or grant" under section 303, and provides an illustrative list of subsidies. The list includes, but is not limited to, any export subsidy described in Annex A of the Subsidies Code, and certain specified domestic subsidies if provided to a specific enterprise or industry, or group of enterprises or industries. The DOC is required to examine whether benefits are in law and in fact provided to a specific enterprise or industry or group of enterprises or industries in determining whether a subsidy exists.

5 19 U.S.C. 1671.

To determine the amount of net subsidy on which the CVD will be based, the DOC may subtract from gross subsidy the amount of: (a) any application fee, deposit, or similar payment paid to qualify for or receive the subsidy;

(b) any loss in the subsidy value resulting from deferred receipt mandated by government order; and

(c) export taxes, duties, or other charges on exports to the United States specifically intended to offset the subsidy.

Section 613 of the Trade and Tariff Act of 1984 clarifies the scope of the countervailing duty law with respect to its application to upstream subsidies. An upstream subsidy is defined as any subsidy described in present law that:

(1) is paid or bestowed by a government with respect to an input used to manufacture or produce in that same country merchandise subject to a CVD proceeding;

(2) in the judgment of the DOC bestows a competitive benefit on that merchandise; and

(3) has a significant effect on the cost of manufacture or production of the merchandise.

With regard to the second criterion, the DOC shall decide that a competitive benefit has been bestowed when the price for the input used in manufacture or production of the merchandise subject to investigation is lower than the price the manufacturer or producer would otherwise pay for the input from another seller in an armslength transaction. Whenever the DOC has reasonable grounds to believe or suspect an upstream subsidy is being paid or bestowed, the DOC must investigate whether it is in fact and, if so, include the amount of any competitive benefit, not to exceed the amount of upstream subsidy, in the amount of any CVD imposed on the merchandise under investigation.

The provision on upstream subsidies added by the 1984 Act does not affect the basic definition of subsidy in any way. The potential for an upstream subsidy exists only when a sector-specific benefit meeting all the other criteria of being a subsidy is provided to the input producer. The provision is also limited to subsidies paid or bestowed by the country in which the final product is manufactured. In 1988, a separate, special rule was added to the law with respect to calculating subsidies on certain processed agricultural products.

Material injury

Prior to issuance of a countervailing duty order under title VII, the ITC must determine that the domestic industry is being materially injured, or threatened with material injury, or the establishment of a domestic industry is materially retarted, by reason of subsidized imports. The standard of injury under the countervailing duty law, material injury, is the same standard as that under the antidumping law. Section 771(7) of the Tariff Act of 1930 defines "material injury" as harm which is not inconsequential or unimportant.

The ITC determination of injury basically involves a two-prong inquiry: first, with respect to the fact of material injury, and second, with respect to the causation of such material injury. The ITC is required to analyze the volume of imports, the effect of im