28 May 2019
Proposal Would Allow DOC to Impose CV Duties on Suppliers with Undervalued Currencies
The U.S. Department of Commerce is seeking comments from interested parties by 27 June on a proposal to modify two regulations pertaining to the determination of benefit and specificity in countervailing duty proceedings. If adopted, these modifications would (i) clarify how the DOC determines the existence of a benefit resulting from a subsidy in the form of currency undervaluation and (ii) clarify that companies in the traded goods sector of an economy can constitute a group of enterprises for purposes of determining whether a subsidy is specific. According to the DOC, in practical terms these changes would 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 proposal identifies the criteria the DOC would 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 would 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 would 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.
The DOC notes that there are a variety of possible currency-related fact patterns that might satisfy the legal criteria for countervailability. One analytical approach is to view currency undervaluation under a unified currency regime as a domestic currency premium. According to the DOC, this occurs when exporting enterprises exchange U.S. dollars for their domestic currency at a state bank or other entity that the DOC determines on the record of the proceeding to be an authority (or a private entity entrusted or directed by an authority) and, in doing so, receive more domestic currency in exchange for each U.S. dollar converted than they would otherwise earn in the absence of the currency undervaluation. The receipt of domestic currency from an authority (or an entity entrusted or directed by an authority) in exchange for U.S. dollars could constitute the financial contribution under section 771(5)(D) of the Tariff Act of 1930.
In general terms, the currency undervaluation benefit calculation would require an identification of what the currency’s value should be absent the undervaluation. To do this, one method would be to employ the concept of an equilibrium “real effective exchange rate” (REER) or its equivalent, consistent with International Monetary Fund methodologies. For purposes of the proposal, equilibrium REER is defined as the REER that would lead to an appropriate level for external balance over the medium term. This equilibrium REER or its equivalent would be employed in the following two-step benefit analysis.
- Step 1 would involve a threshold determination of the extent of foreign currency undervaluation, on the basis of a comparison of a country’s REER and equilibrium REER in the relevant time period. Parties alleging that there is a currency undervaluation subsidy could submit, where possible, objective, third-party, publicly available estimates of the nominal U.S. dollar rate consistent with the REER needed to achieve external balance. To the extent that a country’s equilibrium REER exceeds its REER in the relevant time period, a benefit may exist.
- Step 2 would be to identify the nominal, bi-lateral U.S. dollar exchange rate consistent with the equilibrium REER that would have prevailed in the relevant time period absent the undervaluation. The difference between (i) this nominal, bi-lateral U.S. dollar rate that would otherwise have prevailed and (ii) the actual average nominal, bi-lateral U.S. dollar (money or market) rate used for commercial purposes in the relevant time period could demonstrate the existence of a benefit from currency undervaluation.
The proposal further indicates that in assessing the parties’ arguments and conducting its analysis the DOC would timely request that Treasury evaluate any currency undervaluation resulting from government action on the exchange rate. The DOC expects that Treasury would timely provide an evaluation and conclusion as to whether and to what extent the government action on the exchange rate has resulted in undervaluation of the currency, and, if Treasury deems appropriate, an evaluation of the benefit arising from such undervaluation. Treasury would use a consistent framework to assess currency undervaluation resulting from government action on the exchange rate, recognising country-specific factors. The DOC would submit Treasury’s evaluation to the record of the administrative proceeding and defer to Treasury’s evaluation as to undervaluation in making a determination as to countervailability, unless the DOC has good reason to disagree with that evaluation based on the record as a whole.
The DOC adds that the value of the countervailable benefit to a particular enterprise under investigation or review could be determined by taking into account the amount of U.S. dollars that enterprise converted into domestic currency through an entity determined to be an authority (or entrusted or directed by an authority) during the relevant investigation or review period, the actual exchange rates in effect at the time of conversion, and the nominal dollar rate determined by the DOC. The benefit could also be determined in other ways, depending on the particular circumstances.
With respect to the specificity of an undervalued currency under a unified currency regime, an analysis under the proposed regulation could take into consideration a country’s balance of payments data and, specifically, the amount of foreign currency supplied by broad categories of entities or activities in that country (e.g., exporters, foreign investors, tourists and recipients of factor income earned abroad). Information, where available, regarding the market supply of foreign currency could provide a reasonable proxy for the amount of U.S. dollars converted into the undervalued domestic currency of the country under investigation.
The final step, according to the proposal, would be to determine the portion of this total amount that is composed of foreign exchange supplied by enterprises that primarily buy or sell goods internationally. Starting with gross foreign currency supplied by exporters and deducting the foreign exchange needed by these exporters to purchase any imported inputs used in the production of exported goods would result in a figure for net foreign exchange supplied by the enterprises in the exporting and importing sector of that country. If enterprises in a country that primarily buy or sell goods internationally collectively constitute a predominant user or account for a disproportionate share of net foreign exchange supply, the DOC could find a currency undervaluation subsidy to be specific to that group of enterprises.