DoC Practice and Graduation from NME Status

NME status is determined today by several statutory factors including currency convertibility, government ownership and control of input resources and output allocation, treatment of foreign direct investment, and the bargaining of wages and work conditions between employers and employees. At the time of the Georgetown Steel decision, this test was not part of the statute, and the DoC had simply defined a NME as an economy that “operates on principles of non-market cost or pricing structures so that sales or offers for sale of the merchandise in that country or to other countries do not reflect the market value of the merchandise.” Under the current, expanded test, the DoC graduated Hungary—even though its economy was not yet operating on pure market principles—because a substantial portion of the Hungarian economy had already transitioned. It is difficult to fathom the DoC’s failure to take account of this evolutionary process in analyzing subsidies bestowed during the transition period.

Similarly, the DoC’s recent decision terminating Russia’s NME status stated that the country had been in transition for several years and decided that, although Russia is still undergoing transition, it had made sufficient progress to graduate. This analysis is incompatible with the notion that conditions that permit market benchmarks to be identified in such a country, usable in CVD analysis, tend to emerge abruptly.

Finally, in the DoC’s antidumping practice, producers in pre-graduation NME countries can show that their industry operates on market principles, and thereby become eligible to have their home market costs used instead of surrogate country costs in determining normal value. Consequently, the DoC itself has recognized that the industrial environment prevailing in a pre-graduation economy may not always be as completely distorted as the Sulfanilic Acid decision suggests.

Implications of the Decision

The DoC’s decision on pre-graduation subsidies was not altogether without precedent. In the Preamble to its 1998 CVD Rules, 63 Red. Reg. at 65,360, the DoC declared that:

“[I]t is important to note here our practice of not applying the CVD law to non-market economies. The Federal Circuit upheld this practice in Georgetown Steel Corp. v. United States … . We intend to continue to follow this practice. Where the Department determines that a change in status from non-market to market is warranted, subsidies bestowed by that country after the change in status would become subject to the CVD law.”

This statement of intention was not codified in a regulation, and even if it were, it would be valid only to the extent that it was not found to conflict with the underlying CVD statute. The Federal Circuit decision is not insulated from reconsideration at the agency level and certainly not from judicial review, even if the DoC may have expected to reach this result and believed that it rested on a permissible interpretation of the statute in 1998. The DoC has never applied its rule on pre-graduation subsidies in a case other than Sulfanilic Acid.

Even without the current firestorm over imports from China, it would make sense for the DoC to reconsider its ruling on pre-graduation subsidies, which was issued without the benefit of interested party comment, and encourages the provision of large capital subsidies in transitional economies. The WTO Appellate Body recently delivered a severe blow to CVD-using industries by decreeing a new exemption for pre-privatization subsidies. An exemption for pre-graduation subsidies will only aggravate the harm to industries , forced, through no fault of their own, to compete with subsidized imports. The most extreme fact pattern is the one actually presented in Sulfanilic Acid: large subsidies which are bestowed immediately prior to a country’s graduation, and which should be subject to CVD offset for the next 10 to 15 years, will continue to have trade-distorting effects but will be unreachable by CVD law.

Russia and Kazakhstan recently graduated to market economy status, and the DoC is currently examining the economic status of neighboring countries such as Ukraine, Moldova, Romania, Lithuania, and Estonia. Controversy concerning these countries will reflect the extent to which they are observed to have bestowed large “non-recurring” (amortizable) subsidies during their respective transition periods. Nevertheless, with the CVD law’s direct applicability to NME, specifically Chinese, goods now apparently in play, the theological approach reflected in the Sulfanilic Acid decision will almost certainly get a well-deserved second look.