Court’s Ruling on Import Duties Impacts U.S.-China Trade Relations

By Chad Burchard | February 5, 2012

China’s Ministry of Commerce issued a statement last Thursday warning that the U.S. might launch new investigations of Chinese trade practices amid allegations of illegal government subsidies and product dumping. [Bloomberg News, China Says U.S. May Start More Anti-Dumping Probes on Auto Parts, February 2, 2012].

The statement comes in the wake of the U.S. Court of Appeals for the Federal Circuit’s decision several weeks ago in GPX International Tire Corp. v. United States, which significantly limits how the U.S. can apply certain duties on goods imported from non-market economy (NME) countries such as China.

As the court noted in its opinion, U.S. trade law allows for the imposition of “anti-dumping” and “countervailing” duties on imported goods. “Dumping” is a form of predatory pricing where the exporting country sells its exports at below fair market value. Anti-dumping duties are intended to combat such practices. Countervailing duties are imposed on goods that receive foreign government subsidies.

The legal battle began back in 2008 when the Commerce Department granted a U.S. tire manufacturer’s petition to start imposing both anti-dumping and countervailing duties on some Chinese tires. Chinese companies filed complaints with the U.S. International Trade Court, which found in their favor and ordered the Commerce Department to stop imposing countervailing duties. [Cheng Liu and Linda Davidson, US-China Trade Wars Continue: No Countervailing Duty to be Applied to Goods from China, a Non-Market Economy Country, January 24, 2012]. The Federal Circuit upheld the Trade Court’s decision but not on the same grounds. The basic problem that confronted the courts was whether the U.S. government could impose both anti-dumping and countervailing duties on NME countries. The issue first arose during the mid-1980s, when various American manufacturers petitioned the Commerce Department to impose countervailing duties on goods imported from Czechoslovakia, then an NME country. The Commerce Department denied the petition on the grounds that countervailing duties could not be applied to NMEs because there is no “market” in such countries for a subsidy to distort. The matter eventually worked its way up to the Federal Circuit, which sided with the Department in Georgetown Steel Corp. v. United Statesin 1986.

However, the Commerce Department reversed its position in 2007, announcing that it would allow the imposition of countervailing duties on Chinese goods because China’s economy was sufficiently “different from the Soviet-style economies at issue in [the 1980s]” to enable it to calculate the existence of government subsidies. Duties on Chinese tires and the subsequent lawsuit soon followed.

The Trade Court originally found that the Commerce Department’s interpretation of the law was “unreasonable” for reasons that have to do with how the duties are calculated. For goods imported from market-economy countries, the anti-dumping duty is equal to the goods’ price in the exporting country (its “normal” or fair market value) minus its price in the U.S. However, because goods imported from NMEs have no domestic “market” price, the Commerce Department must estimate it using data taken from comparable market economy countries. Because the price calculated from such data will not reflect the impact of any subsidies, it may in fact exceed the actual NME domestic price and thus result in a higher anti-dumping duty. If countervailing duties were also imposed, the Trade Court feared that it might lead to a double counting of subsidies. The Trade Court rejected attempts by the Commerce Department to prevent such double counting in a later decision.

The Federal Circuit’s ruling went much further. It held that the doctrine of legislative ratification applied. This doctrine holds that “Congress is presumed to be aware of an administrative or judicial interpretation of a statute and to adopt that interpretation when it re-enacts a statute without change.” Since Congress voted not to amend countervailing duty law in 1988 and then declined to make any changes to it again during a major overhaul of the nation’s trade laws in 1994, the court found that Congress had long ago ratified the Commerce Department’s earlier interpretation of the law.

Experts are uncertain as to what course the U.S. government will now take. The Obama administration could appeal the decision, either to the Federal Circuit en banc or to the U.S. Supreme Court. It could also ask Congress to pass legislation overriding the decision and granting the Commerce Department authority to impose both anti-dumping and countervailing duties on NMEs. A third option would be for the Commerce Department to classify China’s economy as market-based. [David J. Levine and Ramond Paretzky, New Court Ruling Renders U.S. Anti-Subsidy Law Inapplicable to China, The National Law Review, December 24, 2011].

The government could also do what China’s Trade Ministry has expressed fears about: expand investigations of illegal subsidies and dumping. In any event, observers on all sides of the trade debate will be watching closely.