The past few years have seen an explosion in privately and publicly expressed concern over the surging US imports from, and trade deficit with, China. The resulting political pressure, fueled by the US manufacturing sector’s well-documented troubles, is so intense that earnest discussions have begun both inside and outside the government over whether the current arsenal of trade remedy tools is adequate, and in particular over whether there should be a readily usable import remedy (compensation to domestic producers) against Chinese goods that benefit from subsidies. Senior officials in the administration of US President George W. Bush have hinted at a review taking place within the US Department of Commerce (DoC), which administers the principal US trade remedy laws. The review addresses whether the countervailing duty (CVD) remedy (a border tax imposed on injurious, subsidized imports) should be made applicable to goods imported from non-market economies (NMEs) like China.

This review of the CVD law's reach is welcome—indeed overdue. The existing “NME exemption” makes little policy sense and rests on shaky ground. However, the DoC’s actual output in the CVD field indicates that, far from narrowing or revoking the NME exemption, the agency is actually bolstering and expanding that exemption. In particular, the decision in Sulfanilic Acid from Hungary, issued by the DoC in 2002, carved a significant additional hole into the CVD law’s protection by ruling that large subsidies bestowed in a foreign country prior to its “graduation” from NME status can not be offset even after graduation. This article reviews the decision, its rationale, and potential consequences for future CVD cases involving imports from China as well as Russia and other transitional economies.

The Sulfanilic Acid Decision

Hungary was considered, for the purposes of trade remedy law, to be an NME until its “graduation date” of January 1, 1998, after which the country’s lengthy transition from central planning to market-orientation had progressed sufficiently to enable home market prices to be used in determining “normal value” in antidumping cases. In antidumping analysis, normal value is compared with the price at which goods are exported. Under US court precedents, that January 1998 graduation date also marked the beginning of the period in which US industries could obtain CVD relief with respect to subsidized imports from Hungary.

The US producer Nation Ford Chemical filed a CVD petition in September 2001 alleging that subsidized sulfanilic acid products imported from Hungary were causing material injury to the competing US industry. The CVD investigation focused on the 2000 calendar period of investigation and on subsidies to the Hungarian producer Nitrokemia. The DoC straightforwardly handled the subsidy allegations except in regard to two large subsidies bestowed in the latter half of 1997—a July 1997 assumption of environmental liabilities and a November 1997 cash grant. While there was no question that Hungary was a market economy subject to CVD law during the period of investigation examined by the DoC in the 2000 calendar year, these particular subsidy transactions occurred just before Hungary’s graduation date. Subsidies are ordinarily allocated and offset through countervailing duties over a period corresponding to the average useful life of renewable assets in the industry involved, in this case 11 years. Therefore, if these 1997 bestowals were indeed subsidies, they would have definitely yielded a benefit in 2000.

The case was a minor one economically, and since neither the US industry nor the Hungarian respondents participated through counsel, the important and novel question posed by the 1997 bestowals was not briefed by any party. The question at hand was whether the DoC in such a case must investigate and remedy all subsidies bestowed in the relevant allocation period, including those bestowed prior to graduation?

The DoC determined that it was under no obligation to include pre-graduation subsidies in the investigation and, in fact, was precluded by law from doing so. The DoC relied on a 1986 Court of Appeals for the Federal Circuit decision, Georgetown Steel Corp. v. United States, to support this conclusion.

Unanswered Questions in Sulfanilic Acid

The DoC's reliance on Georgetown Steel was misplaced. The issue addressed in Georgetown Steel was whether the DoC in 1983-4 had acted lawfully in terminating a pair of CVD investigations involving steel wire rod imported from Poland and Czechoslovakia and in refusing to conduct CVD investigations involving potash imported from the German Democratic Republic and the Soviet Union. The cases arose many years before any of these countries gained market economy status. In rejecting the CVD petitions, the DoC reasoned that while the CVD law contained no express exclusion for NME countries, it could not be applied to NME products because concepts like subsidization and resource misallocation were meaningless in the context of a centrally planned economy. The question raised by the petitioners’ appeal was whether the DoC’s interpretation of the CVD statute was a permissible one. The Court of International Trade disagreed with the DoC in its 1985 Continental Steel Corp. v. United States decision holding that the CVD law did apply to NME products, and called for further agency proceedings. But the Federal Circuit reversed Continental in its Georgetown Steel decision and found the DoC’s action to be neither contrary to law nor an abuse of discretion.

Perhaps regrettably, the Federal Circuit did not curtail its ruling there, but instead added some extensive dicta expressing its opinion that the DoC could not have found the CVD law applicable to NME products. In establishing this dicta, the US Federal Circuit answered an entirely hypothetical question; this is an important, but often overlooked, element of the decision. Nonetheless, in any event, Georgetown Steel addressed the situation in which the country targeted by a CVD petition was, on the date the petition was filed, still an NME. The issue was whether a CVD proceeding even needed to be conducted under the applicable CVD law. Georgetown Steel did not address or lay out detailed rules for what would happen if an NME country graduated to market economy status and a later CVD case included allegations dating from the pre-graduation period. However, the US Federal Circuit said nothing —even in dicta —about this situation.