Final U.S. CVD Rules Allow Targeting of Transnational Subsidies

In a final rule to be published on March 25, the U.S. Commerce Department says that "when appropriate," it "will investigate and countervail transnational subsidies (i.e., subsidies provided by a government or public entity in one country that benefit producers or exporters in another country)." This will bring the Commerce Department's practice in line with that of the EU, where the European Commission has considered these subsidies in several cases (its determinations are currently being challenged in both EU courts and the WTO).

As CTM reported in August 2023, the U.S. Commerce Department announced a proposed rule that would eliminate the current regulation which prevented it from countervailing "transnational" or "cross-border" subsidies, with China's BRI subsidies a likely target of any new countervailing duties.

In the final rule, which make a wide range of changes to "improve and strengthen the enforcement" of anti-dumping and countervailing duty laws, Commerce has made a determination "to repeal the current transnational subsidies regulation" and allow countervailing of transnational subsidies. Implementation of this new rule could lead to challenges in both U.S. courts and at the WTO, as has been the case with a similar approach used by the European Commission.

In its final rule, Commerce explained that in the proposed rule, "in awareness of changes in the world economy," Commerce had "proposed eliminating the current regulation prohibiting the countervailing of certain transnational subsidies, § 351.527." Commerce then said that in the final rule, "[a]fter considering the comments received on our proposal to withdraw [§ 351.527]," it "has determined to repeal the current transnational subsidies regulation."

In repealing this regulation, Commerce clarified that "when appropriate," it "will investigate and countervail transnational subsidies (i.e., subsidies provided by a government or public entity in one country that benefit producers or exporters in another country)."

As a further explanation here, Commerce noted that the statute "does not impose geographic limitations on countervailing unfair foreign subsidies." When § 351.527 was promulgated, it said, "Commerce’s administrative experience at that time was that normally governments were subsidizing manufacturing and production activities in their own countries rather than subsidizing manufacturing and production abroad." Consistent with the experience at that time, "upon promulgating § 351.527, in 1998, Commerce repeated this perspective and, accordingly, stated, '{i}n our view, neither the successorship of section 701 for Subsidies Code members nor the repeal of section 303 by the {Uruguay Round Agreements Act (URAA)}, eliminated the transnational subsidies rule, and there is no other indication that Congress intended to eliminate this rule.'"

Since that time, Commerce said, "the assumptions underlying Commerce’s interpretation of section 701 of the Act have changed." In "the intervening two decades," Commerce "has observed increasing instances in which a government subsidizes foreign production."

As a result, Commerce "now believe[s] that our past regulatory interpretation of section 701 of the Act was overly restrictive and not required by statute." Commerce’s "self-imposed restriction on its ability to countervail subsidies only if those subsidies were provided to entities of a country solely by the government of that country, when subsidies from other foreign governments would otherwise be determined countervailable under the CVD law and injurious to producers of the domestic like product, is inconsistent with the very purpose of the CVD law. Section 701 of the Act does not require such a restrictive interpretation."

Commerce then considered the comments it had received on this issue, noting that it "received numerous comments expressing strong support for eliminating the current transnational subsidies regulation." In this regard, "[n]umerous commenters provided specific examples of the increasing prevalence in which a government provided a subsidy that benefits foreign production," and several commenters "cited the People’s Republic of China’s (China) 'Belt and Road Initiative' (BRI) as a primary example."

One commenter explained that "subsidies associated with China’s BRI program have propped up third country export platforms for a variety of industries"; and another commenter argued that "programs like China’s BRI have driven a rapid expansion of Chinese industrial capacity in third countries with significant government support, which both displaces sustainable, market-based investment and perpetuates global distortion." That commenter also said:

Significantly, industrial capacity projects under the BRI often proceed with support from investment funds that have the trappings of international lending or development institutions but that are ultimately vehicles for Chinese industrial policy initiatives. In certain industries, including the steel industry, BRI-linked subsidies have transplanted excess capacity into third countries, resulting in a proliferation of non-market production that has avoided AD/CVD orders on unfairly traded imports directly from China.

Commerce said that it agreed with these comments, and it was not persuaded by various comments arguing for keeping the prohibition on countervailing transnational subsidies.

Commerce concluded with the following:

As the administering authority for countervailing duty proceedings, it is Commerce’s charge to enforce U.S. CVD law, such that U.S. industries are receiving the fullest extent of the remedy provided by the statute. As the dynamics of global trade continue to evolve and foreign governments implement novel approaches to subsidization, the removal of § 351.527 strengthens Commerce’s ability to accomplish its statutory mission to assess and remedy unfair foreign trade practices that harm U.S. workers, farmers, and companies.