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DOC May Impose CV Duties on Suppliers with Undervalued Currencies under New Rule

The U.S. Department of Commerce has modified two regulations pertaining to the determination of benefit and specificity in countervailing duty proceedings. Effective 6 April, these modifications clarify (i) how the DOC will determine the existence of a benefit when examining a subsidy resulting from currency undervaluation and (ii) that companies in the traded goods sector of the economy can constitute a group of enterprises for purposes of determining whether a subsidy is specific. In practical terms these changes allow the United States to impose CV duties on countries that act to undervalue their currency relative to the U.S. dollar, resulting in a subsidy to their exports.

The final rule identifies the criteria the DOC will use to determine if CV duties should be imposed for currency undervaluation. Specifically, in determining whether a benefit is conferred when a firm exchanges U.S. dollars for the domestic currency of a country under a unified exchange rate system, the DOC will normally consider a benefit to be conferred when the domestic currency of the country is undervalued in relation to the U.S. dollar. In applying this rule, the DOC will request that the U.S. Treasury Department provide its evaluation and conclusion as to whether the currency of a country is undervalued as a result of government action on the exchange rate and the extent of any such undervaluation.

In determining whether a country’s currency is undervalued, the DOC will normally take into account the gap between the country’s real effective exchange rate (REER) and the real effective exchange rate that achieves an external balance over the medium term that reflects appropriate policies (equilibrium REER). The DOC will normally make an affirmative finding of currency undervaluation only if there has been government action on the exchange rate that contributes to an undervaluation of the currency. In assessing whether there has been such government action, the DOC will not normally include monetary and related credit policy of an independent central bank or monetary authority. The agency may consider the relevant government’s degree of transparency regarding actions that could alter the exchange rate.

Once the DOC has made an affirmative finding of currency undervaluation, it will normally determine the existence of a benefit after examining the difference between (i) the nominal, bi-lateral U.S. dollar rate consistent with the equilibrium REER, and (ii) the actual nominal, bi-lateral dollar rate during the relevant time period, taking into account any information regarding the impact of government action on the exchange rate. If there is a difference between (i) and (ii), then the amount of the benefit will normally be determined by comparing the amount of the domestic currency that the recipient received to the amount it would have received absent the difference between (i) and (ii). In short, the benefit will typically be equal to the extra amount of domestic currency received by a firm because of the undervaluation.

Information regarding the amount of domestic currency that the recipient actually received from an exchange of U.S. dollars will generally come from the recipient itself, through the DOC’s normal questionnaire process. In this sense, the DOC indicates that a currency-related subsidy does not differ from the other types of subsidies that the agency customarily investigates.

The final rule also provides that in determining whether a subsidy is being provided to a “group” of enterprises or industries within the meaning of section 771(5A)(D) of the Tariff Act of 1930 the DOC will normally consider enterprises that buy or sell goods internationally to comprise such as group. This language is intended to provide further clarification regarding the entities that comprise a “group” in the traded goods sector.

The DOC made a number of changes to the proposed rule (primarily additions to the regulatory text) in response to a multitude of comments. Many of these modifications represent an effort by the DOC to describe in greater detail the steps of the benefit determination as well as the role of government action on the exchange rate.

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