Comments Show Proposal to Incorporate Currency Distortions in CVD Cases Is Controversial

Jeffrey Winton, an international trade lawyer, wrote simply: "The Proposed Modification is inconsistent with the statute, the Department’s own past decisions, and basic economic reality."

However, more than 20 organizations, including the AFL-CIO, the Alliance for American Manufacturing, steelmakers, and flooring and cabinetry manufacturing trade groups lauded the proposal -- and some of them said it doesn't give Commerce enough latitude to tax exports from countries with devalued currency. Comments closed June 27.

Wiley Rein had one of the most substantive comments in support of the policy change. The law firm said: "This will benefit not only the individual industries petitioning for relief against unfair trade. It will also provide an effective deterrent against a practice that has generated persistent, global macroeconomic imbalances and will ultimately contribute to a fairer and more sustainable international trading system."

Both supporters, like Wiley Rein and Stewart and Stewart lawyer Terence Stewart, and opponents, like the Chamber of Commerce, focused on the question of specificity. Under WTO rules, countervailing duties can only counteract subsidies to discrete producers.

Stewart and Stewart suggested that the way Commerce had written its rule is not clear in this regard. The firm said that instead, the department should say that if enterprises primarily engaged in foreign trade account for a disproportionate share of net foreign exchange supply, that would be a specific group. "If Commerce stays with the approach presented in its proposal, efforts should be made to make the specificity standard one that is more easily understood and met," it said. "For example, the draft language will consider whether enterprises are a specific group if they 'primarily' buy or sell goods internationally. In this context, 'primarily' is a problematic term because it is unclear in setting out what enterprises may be considered in the specificity determination." Stewart also proposed defining product specificity could be as simple as using 6-digit tariff codes where there is at least $5 million in exports, with companies that export that amount or more of that product providing the level of detail.

Wiley Rein said the "primarily" term could limit the rule to companies where a majority of their production is exported, and that "would unduly restrict the Department’s ability to address currency undervaluation subsidies."

Among those who oppose the proposal, this same vagueness is a reason to scrap it. The National Retail Federation wrote: "NRF believes that Commerce’s proposed modification is unavoidably imprecise, which could lead [to] a wide potential range of outcomes, including the imposition of countervailing duties where no countervailable subsidy exists; it underestimates the negative impacts on the U.S. economy; and it is inconsistent with U.S. law, past Commerce practice, and rulings of the U.S. Court of International Trade (“CIT”). And, if Commerce were to apply its proposed methodology in a CVD investigation that was challenged in WTO dispute settlement, we believe that the Appellate Body would likely find the measure to be inconsistent with WTO rules."

The wide potential range of outcomes was laid out by Commerce in its notice. In its first estimate, the agency said it’s unlikely more petitions for CV duty investigations would be filed as a result of the change, because the determining factor for domestic petitioners is whether they can prove injury. At the time of filing, petitioners don’t generally know about every subsidy program, Commerce said. Undervaluation would just be another type of subsidy, likely only resulting in about $4 million to $21 million in additional CV duties collected annually. That’s a small fraction of the $527 million in CV duties collected on average over the past five years.

On the other hand, according to a second estimate based on the impact of CV duties on electricity subsidies, between $1.71 billion and $3.14 billion in new CV duties would be collected just on Chinese imports. That’s roughly a threefold to sixfold increase in overall CV duty collections.

Many commenters also focused on who would decide a country's currency is undervalued. Commerce said it would defer to the Treasury, but then also said it could overrule the Treasury if it had "good reason to believe otherwise."

King and Spalding wrote, "By establishing competing decision-making responsibilities, Commerce opens the door to near certain judicial challenge and potential reversal." The Retail Industry Leaders Association pointed to the "good reason" language as troubling.

In contrast, some advocates for the proposal said Commerce should be the dominant player -- or that Treasury should not be part of the decision-making at all. The AFL-CIO wrote: "Ceding authority on this matter to the Treasury Department not only denies the benefit of the Commerce Department’s expertise and knowledge on the impacts of currency manipulation, but also puts too much authority in the hands of an agency that has historically shown little interest in the problem, much less taking the strong and decisive actions necessary to address it. Treasury can and should play a role in this, but entrusting too much authority to an entity that has shown continuing reluctance to use it is a recipe for continued inaction."

The Alliance for American Manufacturing, which is funded by domestic steel producers and the United Steelworkers labor union, wrote: "The proposal would be enhanced by eliminating the Department of the Treasury’s role in evaluating and making a conclusion as to whether government action on the exchange rate has resulted in currency undervaluation. Based on Treasury’s track record of failing to name China and other serial abusers as currency manipulators ... we are concerned that its proposed involvement in the process of administering U.S. trade remedy laws will ultimately serve as a barrier to domestic companies and workers who are entitled to prompt relief."

Mark Sobel, a former deputy assistant Treasury secretary for International Monetary and Financial Policy, wrote at length about his misgivings about the proposal. "In my judgment, the proposals are fundamentally flawed, show a lack of understanding about the role exchange rates play in financing global trade and capital flows, fail to reflect the realities of exchange rate determination and valuation, do not define key terms and concepts, and suffer from other logical and procedural weaknesses," he wrote. "Further, they would grant the Commerce Department excessive discretion. I believe these proposals, if implemented, will significantly harm the international monetary system and the U.S. economy. This proposal should be shelved."

Sobel -- and many other opponents -- noted there is no agreed-to methodology for determining undervaluation.

The Government of India's comments said: "In the absence of an agreed model, it is not clear how it is proposed to arrive at an equilibrium [real effective exchange rate (REER)]. Further, the phrase 'or its equivalent' makes it even more open ended. This makes the proposal subjective."

"Commerce itself alludes to these complex issues," Sobel wrote. "It notes that for China, for example, the IMF models yield an uncertainty range from 13 percent undervaluation to 7 percent overvaluation. Commerce splits the difference, taking a percent undervaluation in its examples in the text. But this is far too wide an uncertainty range to provide a reasonable basis for decision-making that stands up to proper scrutiny."