Statement of Daniel L. Porter, Partner, International Trade Group, Vinson and Elkins LLP

Testimony Before the Subcommittee on Trade
of the House Committee on Ways and Means

March 15, 2007

Good afternoon.  My name is Daniel Porter. I am a partner in the law firm of Vinson & Elkins LLP specializing in international trade.   I have represented clients in various trade remedy proceedings, including antidumping and countervailing duty cases, for more than 20 years.  Currently, this work includes, among other projects, representing the Chinese Government in the Commerce Department’s countervailing duty investigation on coated free sheet paper from China, and representing the Chinese Government, a Chinese exporter and a U.S. importer in a court case that seeks to stop this very Commerce Department CVD investigation. 

I appear today solely in my personal capacity.   I am not appearing on behalf of the Chinese government or any other client.  Rather, I am here in response to a request from the Subcommittee to share my personal thoughts about HR 1229.  I appreciate this invitation and the opportunity to discuss these issues with you.

At the outset I note that it is not my position that the U.S. Congress may not or should not pass legislation authorizing the application of the U.S. countervailing law to non-market economies such as China.  I fully recognize the ability and right of the United States to make amendments to its trade remedy laws to ensure that imports are fairly traded. 

That stated, I also believe that any changes to U.S. trade remedy laws should be fair and not impose unreasonable or unwarranted restrictions on imported products.  Said differently, while I recognize and appreciate the desire for U.S. producers to have a level playing field, I do not think it is appropriate to change the law to tilt the field in ways unfair to U.S. importing interests.  As currently drafted, I believe that HR 1229 does not satisfy the objective of achieving a level playing field, but rather tilts the field the other way.

I see four problems with HR 1229 as currently drafted. 

Problem #1:     Requiring Congressional Resolution of Approval Before Allowing Termination of NME Status

First, HR 1229 requires that any country designated a non-market economy retain that status until both the Commerce Department determines to revoke the non-market country designation and graduate the country to market economy status and Congress passes a joint resolution approving the Commerce Department’s action. 

If enacted, this legislation would represent the only instance in which Congress would become involved in the day-to-day application of trade remedy laws to individual cases.  Rather, as it has done before, Congress should establish the criteria it wants to be applied and then instruct the responsible agency to implement the criteria.   It makes no sense for Congress to act as some sort of reviewing body to determine whether the Commerce Department properly applied the criteria for graduating a country to market economy status. 

This particularly true in the antidumping world given that AD duties are assessed on a retrospective basis and all interested parties are permitted to appeal a Commerce Department’s final determination to the Court of International Trade.  Indeed, if this provision is passed, you very well could have an anomalous situation in which the Commerce Department decides to revoke the NME status of country, Congress subsequently passes a resolution approving the revocation, but then later the Court of International Trade rules that the Commerce Department original decision to revoke the NME status was not supported by substantial evidence on the record.  Needless to say, this would be a rather awkward legal and procedural situation.  I respectfully submit that Congress should not be involved in the day-to-day application of trade remedy laws to individual cases.

Problem #2:     Requiring Third Country Benchmarks for Calculation of Benefit

The second problem is that the current draft of HR 1229 requires Commerce Department to calculate the amount of the benefit -- the CVD rate – by utilizing benchmarks outside China.  Essentially, as long as China continues to be designated a non-market economy country, under HR 1229 the Commerce Department is prohibited from ever using any benchmarks from China to calculate the subsidy benefit.   With all due respect, such provision is not needed, is not fair, and is contrary to the provisions of China’s WTO Accession Protocol. 

First, the underlying premise of this provision --  that the alleged control of the economy by the Chinese Government  makes it impossible ever to utilize appropriate benchmarks from within China to calculate the subsidy benefit  -- is at odds with numerous factual findings concerning the real world economy of China today.  I note that in its comprehensive examination of the Chinese economy published last August, the Commerce Department itself made the following factual observations:

“The PRC Government has undertaken significant reforms to promote the introduction of market forces into the economy.”

“The Department notes that China permits all forms for foreign investment, e.g. joint ventures and wholly-owned enterprises, in most sectors of the economy.  Foreign investors are free to repatriate profit and investments are protected from nationalization and expropriation.”

See Commerce Department decision memorandum, dated August 30, 2006, re: China’s status as a non-market economy prepared for its antidumping investigation of Certain Lined Paper Products from the People’s Republic of China at p. 3.

Such factual conclusions strongly suggest that, even if China as a whole does not meet the criteria for graduating to market economy status, there can be little question that there are sectors in the economy that operate under market principles and therefore could provide suitable benchmarks for measuring the extent of the subsidy benefit.   There is simply no longer any basis to presume that suitable benchmarks can never be found in China.

As importantly, requiring  the Commerce Department to adopt such a presumption would be contrary to the provisions of China’s WTO Accession Protocol.  Article 15 (b) of the protocol states that when calculating the benefit of subsidies the relevant provisions of the WTO SCM agreement shall apply; however, “if there are special difficulties in that application,” the importing WTO member may then use alternative methodologies to identify and measure the subsidy benefit.

It is clear from this language that the U.S. may resort to surrogate benchmarks only after making a specific factual finding that “there are special difficulties” with utilizing benchmarks in China.   Or stated differently, a requirement to find special difficulties necessarily implies that such finding be made on a case-by-case basis.  The reason is that every case is different – different products have different producers in different industries operating in different sectors of the economy.  A finding that special difficulties exist in one sector does not mean that the same special difficulties will exist in another.

There is no question that China’s WTO Protocol specifically allows the U.S. to utilize surrogate benchmarks in certain CVD cases when measuring subsidies.  However, there is equally no question that in extracting this agreement from China, the U.S. promised that it would only resort to surrogate country benchmarks upon a factual finding of “special difficulties.”  HR 1229 requires the U.S. to renege on this specific promise.

There is a simple fix to this problem  -- change HR 1229 to reflect the language of Section 3 of HR 3283, a bill that authorized the application of the CVD law to NME countries that was passed by the House in the 109^th Congress.  The language of HR 3282 correctly reflected the agreement in the China WTO Protocol.  If the Congress takes any action on this issue, I respectfully urge the re-adoption of HR 3283.

Problem #3:     No Provision To Avoid Double Counting

The third problem with the current draft of the legislation is that it does not prevent double counting of duties -- that is, imposing two sets of duties to compensate for the same unfair trade practice -- in those situations in which the same exporters face both an antidumping and a CVD case. 

The double counting problem stems from the special antidumping rules that are applied to non-market economies.  Very simply, the special antidumping rules that are applied to NME countries such as China already offset most subsidization.  Specifically, under the special NME methodology mandated by the existing AD law the Commerce Department does not use Chinese producer’s actual costs.  Rather the Commerce Department restates the Chinese producer’s costs based on information from a surrogate market-economy.  Most importantly, when the Commerce Department restates the Chinese producer’s costs, by law, Commerce may only use surrogate values that are subsidy free. 

To understand double counting, it is necessary to compare what happens in a market economy context with what happens in a non-market economy context when there are both antidumping duties and countervailing duties imposed on the same product.

I will use raw material inputs as an example.  I will also use “constructed value” as an example, since the NME methodology is essentially a constructed value methodology which substitutes surrogate values or imported value inputs for actual input values.  We can thus easily and directly compare to different rules for a market economy and non-market economy context.

In a market economy context, Commerce bases constructed value on the foreign producer’s actual costs of the raw material inputs, whether or not that input is subsidized.  Thus, for example, assume that the major input is iron ore and its market value is 100 per ton.  However, let’s assume that the government in the exporting market economy country provides a subsidy of 20 for purchases of iron ore and, therefore, the export producer in fact only pays 80 for the iron ore. 

For the dumping calculation in the market economy case, the actual cost to export producer would be used – the raw material costs of 80.  For the subsidy calculation, the subsidy amount of 20 would be used.  Therefore, to the extent that constructed value and dumping margins are lowered by 20 because of the subsidized input, this lower cost would be captured by virtue of the countervailing duty imposed to offset the subsidy of 20 received by the producer.  In market economy cases the two laws work in tandem, in a logical and consistent manner.

The same facts in an non-market economy (NME) context, however, yield a very different result.  The raw material inputs in an NME context are not valued based on the cost to exporter/producer, but are based either on a market economy surrogate value or the arm’s length purchase price of the raw material imported from a market economy.  Under either method, the Commerce Department is prohibited from using any values that reflect subsidies.  Thus, in an NME case, Commerce would use the actual value of 100 in the above example, not the actual subsidized cost paid by the company.  The fact that the Chinese exporter/producer may be receiving a subsidy of 20 on its raw material becomes irrelevant because by valuing the raw material at 100 the effects of the subsidized input are already fully offset.  Thus, to use 100 in constructing normal value in the NME context and then adding a subsidy of 20 would essentially double count the benefit of the subsidy to the NME exporter/producer.

I note that the conclusion that the application of current AD and CVD laws to NME countries (as contemplated by HR 1229) would result in unfair double counting is not just my conclusion.  The United States Government Accountability Office (GAO) reached the same conclusion based on its analysis of applicable laws and discussions with Commerce officials.  Indeed, the GAO report noted that (a) Commerce officials admitted that if both CVD and antidumping duties are applied to NME countries they would have no authority, under existing law, to avoid double counting and (b) two U.S. courts have suggested that double counting to compensate for the same unfair trade practice is generally considered improper.”  See U.S. Gov’t Accountability Office, GAO-05-474, U.S.-China Trade:  Commerce Faces Practical and Legal Challenges in Applying Countervailing Duties (June 2005) at pp. 27-28, and U.S. Gov’t Accountability Office, GAO-06-608T, Testimony Before the U.S. China Economic and Security Review Commission (April 4, 2006) at p. 18. 

As importantly, significant U.S. companies also have expressed their concern about the unfairness of double-counting AD and CVD duties.  For example, General Motors submitted the following statement in response to the Commerce Department’s request for comments on whether the CVD law should be applied to non-market economies:

General Motors takes the position that the use of anti-dumping and countervailing duty law and the methodologies used to identify and address unfair trading practices must be fair and balanced. .

With regard to the specific issue of non-market economies, any advantage gained by such economies because of the reluctance of the U.S. to pursue subsidy cases has clearly been offset by the disadvantage that non-market economies experience in antidumping cases.  Since World Trade Organization rules allow the use of factors of production analysis as a proxy for prices in non-market economies, designation as a non-market economy represents a significant penalty in anti-dumping proceedings, particularly in the U.S. where factors of production analysis is routinely used.

Given this situation, we believe that industries should be treated consistently in both countervailing duty and anti-dumping proceedings.

See General Motors letter dated January 12, 2007 to Susan Kuhbach, Senior Office Director for Import Administration, U.S. Department of Commerce. 

I agree with the General Motors.  It is essential that any legislation that authorizes the Commerce Department to apply CVD duties to non-market economy countries must take into account the special antidumping rules that are applied. 

Again, it is easy to fix this problem -- change HR 1229 to reflect the language of Section 3 of HR 3283, a bill that authorized the application of the CVD law to NME countries that was passed by the House in the 109^th Congress.  The language of HR 3282 simply stated that the Commerce Department shall ensure that any countervailing duties that are applied to a non-market economy country are not double-counted in an antidumping case against the same products.  This is the correct approach.  Again, if Congress takes any action, I resrepectfully urge the re-adoption of this language of HR 3283.

Problem # 4:    Unfair Retroactive Application

The final problem of HR 1229 is the effective date.  HR 1229 states that the changes to the law shall applyy to CVD petitions filed on or after October 1, 2006.  Use of such date is an obvious attempt to make legal the ongoing CVD case on coated free sheet paper that was filed on October 31, 2006.

Mr. Chairman, such retroactive application of changes to the trade remedy laws is not fair.  Supreme Court precedent make clear that retroactive application of statutes is highly frowned upon given the constitution's prohibition against ex post facto laws and bills of attainder.  Moreover, the idea of retroactive application is just unfair.  Through this effective date provision, Congress is unfairly targeting the Chinese lined-paper case and, with it, the respondents in the investigation.   These respondents had relied upon the consistently applied 23 year interpretation that the current CVD law does not apply NME countries.   To apply HR 1229 retroactively is equivalent to punishing them for acts that were legal at the time they were committed.  It is for these reasons that retroactive legislation has always been looked upon with disfavor.

Mr. Chairman, I urge you to correct this deficiency. As before, the fix can be found the language of HR 3283.  HR 3282 would have applied only to new CVD petitions that were filed 30 days after the date the legislation became law.

This concludes my testimony.  I thank you for your attention.  I would be happy to answer any questions.