A Response to Wentong Zheng’s: “Counting Once, Counting Twice: The Precarious State of Subsidy Regulation”

Canada–United States Softwood Lumber Dispute relating to Countervailable Subsidy

Introduction

This article is a response to Mr. Wentong Zheng’s article “Counting Once, Counting Twice: The Precarious State of Subsidy Regulation”[1] published in the Stanford Journal of International Law in 2013. In 2008, a dispute came up before the WTO relating to the manner in which countervailing duty was imposed upon the products of a Non-Market Economy. This dispute reignited the debate of the imposition of the “double remedies”. Mr. Zheng in his article vehemently opposed the idea of “double remedies” or “double counting” and tried to provide some solutions to cure this problem. But, before understanding “double remedies”, it is important to have a background on the whole issue.

In the case of United States - Definitive Anti-Dumping and Countervailing Duties on Certain Products from China[2], the Chinese government challenged some of the U.S. measures, which imposed duties on imports from China for both dumping and subsidizing (imposition of “double duties” or “double remedies”). The Appellate Body found out that the United States had acted inconsistently with Article 19.3 of ASCM[3] in the four sets of parallel Anti-dumping Duty and Countervailing Duty at issue. It must also be remembered that China’s WTO Accession Protocol allowed the use of special calculations for Subsidy Regulation (for Non-Market Economies like China) that is not based on a strict comparison with domestic price or costs in China in anti-dumping cases till 2016.

According to the US Government and US Department of Commerce, the input suppliers and the financing bodies (banks) of China come within the ambit of “public bodies”[4] and hence there products are liable for the imposition of duties. According to the Appellate Body, the US Department of Commerce failed to take into account the requests made by the Chinese Government to take steps to avoid this double counting of subsidies. Instead, the Department of Commerce (DOC) used a method to calculate the normal value of the imports on the basis of non-subsidized prices from a third country. It was contended by the Chinese that under the DOC’s method, the domestic subsidies do not lower the Normal Value whereas they lower the Export Price thereby inflating the Anti-Dumping Duty on the domestic subsidies for which already a Countervailing Duty had been imposed earlier. It was finally held that Countervailing Duty is not “appropriate” under Article 19.3 of the SCM Agreement as double duties or double remedies arise in this case.

The Issue of “Double Remedies” or “Double Counting”

It is precisely this issue of “Double Remedies” that Mr. Wentong Zheng wishes to address in his article. He believes that the “Double Remedies” hypothesis adopted by the Department of Commerce is based upon the premise that a subsidy always passes through to the price of the subsidized. In order to substantiate this point, his article discussed the scope of subsidies that are subject to the rules mentioned under the SCM agreement. He criticized the definition of the subsidy mentioned under SCM agreement on the ground that it fails to make any distinction between the subsidies that alter the productive behaviour and the subsidies that do not alter the productive behaviour. Thus, according to Mr. Zheng, it is not always true that a subsidy will always lower the price of the subsidized product and in order to lower the price of the subsidized product, the subsidy needs to modify productive behaviour in the market as well as the firm. Unless that is done, the subsidy will not pass through to the price of the subsidized product. The article also states that both the SCM agreement and Countervailing Duty laws of countries like USA are silent about the issue of the “double counting”.

I concur with the reasoning of Mr. Zheng that for subsidies to be challenged on the WTO platform, such subsidies must cause an injury to the domestic industry thereby nullifying or impairing the benefits accruing directly or indirectly to the WTO members. However, I do not agree with the reasoning that the SCM agreement fails to take into account the issue of “double counting”. The reasons will be substantiated in the later parts of this article.

WTO Jurisprudence on Subsidy Regulation

Article 19.3 of the SCM Agreement talks about the imposition of countervailing duty. It clearly prescribes that for a countervailing duty to be levied, following conditions must be satisfied:

1. It should be in “appropriate amounts”.

2. It should be on a “non-discriminatory” basis.

3. Proper Investigation must take place before the imposition by the appropriate authority.

Even though no direct mention of “double counting” or “double remedies” is made, the phrases “appropriate amounts” and “non-discriminatory basis” read with the “investigation clause” clearly signify that in order to impose a countervailing duty, it must be established that the subsidy has passed on to the subsidized product. The mention is of course not explicit but the words of Article 19.3 are wide and broad enough to cover the issue of “double counting”.

Mr. Zheng has also criticized the approach adopted by WTO Panel in such cases. According to Mr. Zheng, WTO Panel has adopted vague and ambiguous methods to determine the countervailing duties in various cases. One such method adopted by the WTO Panel is the Marginal Cost of Production Analysis. Mr. Zheng thinks that such a method is neither appropriate nor desirable in the case of countervailing duties as such a method fails to take into account the injury caused or the adverse effects to the domestic market. It is his firm assertion that a distinction needs to be made between the “effects of subsidies” and the “effects of subsidized imports”. Presently, the WTO Dispute Settlement only considers the “effects of subsidized imports”.

I partially agree with the reasoning adopted by Mr. Zheng. No doubt that SCM agreement requires that for a countervailing duty to exist, there must be an injury to the domestic market by the import that is taking place. However, we cannot discount the fact that it is quite possible that a subsidized import that is causing injury to the domestic market might be causing such an injury due to its pricing mechanism or other factors and not because of the subsidy only. The effect of the subsidy on the “subsidized imports” needs to be ascertained carefully before jumping into any conclusion. On the same ground, I differ with Mr. Zheng on the ground that studying the behavioural impact of a subsidy is a complex task and would require a tailor-made methodology on a case to case basis depending upon the facts and circumstances of each case. A non-market Economy like China might adopt different method of providing subsidy so as to impact the subsidized import and a least developing country might adopt a different method in this respect. Evaluating both the situations using a rigid formula might lead to absurd results.

I certainly feel that this issue requires more deliberation at the law-making level. The countries need to be careful in selecting the type of methodology they wish to adopt with respect to the subsidies.

Burden of Proof

Another important issue raised by Mr. Zheng pertains to the question of the “burden of proof” in such cases. The general rule on burden of proof in WTO is that a party claiming a violation of a provision of a covered agreement must assert and prove its claim. And once a prima facie has been made out, the burden of proof shifts to the respondent who must refute the consistency of the claim. Mr. Zheng thinks that the correct approach in this respect would be to mandate the complainants to factually prove that a subsidy passes through to the price of the subsidized product before imposing “double remedies”. The complainants must show that plausible and judicial evidence exists as to the fact that the subsidy has passed through to the price of the product. Speculation in such cases is at best to be avoided.

Mr. Zheng has also talked about the limitations to the above-mentioned approach. I certainly feel that it is not a feasible method as Mr. Zheng himself accepts that it is very possible that even if a subsidy passes through to price, it may not always affect the price. The proportion in which a subsidy has passed through to the price would depend upon myriad factors such as level of production, demand curve, transportation costs, administrative costs, methodology adopted by the investigating authority etc.

“Efficiency Rationale” and “Entitlement Rationale”

Mr. Zheng also talked about the justifications for the Subsidy Regulation and how they are incomplete in themselves. The first is the “Efficiency Rationale” that treats subsidies as distortion to trade and something which has a direct correlation with the economic efficiency. Thus, this school of thought believes that subsidies must not be allowed in the first place as they are a distortion to trade.

The alternative justification for the regulation of subsidies is provided under the “Entitlement Rationale”. This school of thought believes that the purpose of regulating subsidy is to protect the producers of the importing countries and subsidy is not a distortion to trade.

I think that a middle path should be resorted to in this case. It is impractical to assume that subsidies regime is vanishing away. Subsidies are here clearly to stay for a long time to come. Thus subsidies need to be regulated not just to protect the domestic market but also to create a level-playing field. Once we have reconciled with the fact that subsidies are here to stay, it becomes an obvious choice to think about the regulation of subsidies.

Country Specific Safeguard Approach

In this respect, Mr. Zheng proposes that instead of Subsidy Regulation, a Country Specific Safeguard Approach needs to be adopted. Such an approach would emphasize upon the injury caused by the imports and would take into account all the relevant factors into consideration. It would also increase the potential of the importing to impose extra duties.

I think that the solution proposed by Mr. Zheng is a novel but complex one. A Country Specific Safeguard Approach would involve multiple standards by the countries. These standards will clearly not meet the test on the anvil of the subsidy regulations provided under the WTO agreements. The only silver lining in this approach would be that it would address the issue of “double counting” or “double remedies”.  However, it will completely fail to resolve the present problems that persist in relation to the Subsidy Regulation. In fact, it would be a cure of the symptom rather than the disease itself.

  

Conclusion

Imposing countervailing duties on subsidized products is not a new concept. According to Mr. Zheng, it is being practised by US since the 18^th century. However, the current subsidy regime has changed considerably. The problems such as “double counting” clearly show us that something is clearly missing or inconsistent in these regulations. The foundational aspects of subsidy regulation need to be revisited. The behavioural impact of subsidies has also not been adequately studied and more research needs to be done on this issue.

Mr. Zheng also concluded by saying that the problem of “double counting” clearly shows us that something is not right with the present subsidy regime. I agree that the present subsidy regime is not perfect and reforms clearly need to take place. However, the important question is the manner and the kind of reforms that are needed. A country specific safeguard approach could be a temporary solution but a more comprehensive solution is needed. Such a solution could be achieved only when the countries come together and try to understand why passing of the subsidy to the price of the product is important for the purposes of calculating the countervailing duty. Once that is realized, the modalities of the new regulation can surely be achieved soon.

---

[1] Wentong Zheng, Counting Once, Counting Twice: The Precarious State of Subsidy Regulation, 49 Stan. J. Int'l L. 427 (2013).

[2] Appellate Body Report, United States--Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, WT/DS379/AB/R, adopted on March 25, 2011.

[3] Article 19.3 of the Agreement on Subsidies and Countervailing Measures – When a countervailing duty is imposed in respect of any product, such countervailing duty shall be levied, in the appropriate amounts in each case, on a non-discriminatory basis on imports of such product from all sources found to be subsidized and causing injury, except as to imports from  those sources which have renounced any subsidies in question or from which undertakings under the terms of this Agreement have been accepted. Any exporter whose exports are subject to a definitive countervailing duty but who was not actually investigated for reasons other than a refusal to cooperate, shall be entitled to an expedited review in order that the investigating authorities promptly establish an individual countervailing duty rate for that exporter.

[4] See Article 1.1(a)(1) of the Agreement on Subsidies and Countervailing Measures.