Currency Undervaluation as a Countervailable Subsidy: The United States Takes Its First Step



Danyal Arnold, Eric Emerson & Zachary Simmons | Steptoe

On May 27, 2021, the U.S. Department of Commerce (Commerce) issued its affirmative final determination in the countervailing duty (CVD) investigation of Passenger Vehicle and Light Truck Tires (PVLT) from Vietnam, in which it concluded that the Vietnamese Dong (VND) was undervalued, and that this undervaluation constituted a countervailable subsidy under U.S. trade law. This is only the second CVD investigation in which currency undervaluation, as a form of countervailable subsidy, has been at issue (the other case being certain twist ties from China, see here), and is the first instance where Commerce made a final substantive decision as to the currency undervaluation issue.  For that reason, PVLT from Vietnam establishes new law in several important areas, and is likely to be used as a template for future Commerce decisions in this area.

Under U.S. law, a government program is deemed to be a countervailable subsidy when it meets three criteria. The program must (i) constitute a financial contribution provided by a government authority or public body, (ii) yield a benefit to the recipient, and (iii) be specific to an enterprise or industry or a group thereof.  In its February 2020 final rule (Final Rule), Commerce modified its regulations regarding benefit and specificity to address the issue of currency manipulation. If a country’s currency was undervalued, the Final Rule defines the benefit to be the extra amount of domestic currency gained when converting USD into that domestic currency. On specificity, the Final Rule provides that: “In determining whether a subsidy is being provided to a “group” of enterprises or industries … the Secretary normally will consider enterprises that buy or sell goods internationally to comprise such a group.”

As the first substantive determination issued after this Final Rule, PVLT from Vietnam establishes important precedents in a number of areas, but three stand out in particular.

The first is its definition of “specificity.”  In determining whether currency undervaluation was “specific” for purposes of its preliminary determination, Commerce used USD inflows into Vietnam as a proxy for conversion of USD into VND. The agency analysed inflows of USD via exports of goods, exports of services, various forms of portfolio and direct investment, and earned income from abroad. In its preliminary decision, Commerce found that the first of these (the traded goods sector) accounted for 71.94 percent of USD inflows, and thus found that the subsidy was de facto specific to this group.

In the final phase of the investigation, this preliminary finding of specificity was challenged on a number of grounds, the most significant of which was that the traded goods sector was too broad to constitute a “specific” group of enterprises.  As a practical matter, members of the traded goods sector came from a wide variety of industries, so much so that the subsidy effectively would be spread through the entire economy. Furthermore, entities that buy or sell goods internationally were not “known or particularised” as is required by WTO case law (discussed below).  Commerce dismissed the first argument by stating that there need not be shared characteristics (such as membership of a particular industry) to comprise a “group.”.  Commerce dismissed the second argument by stating that it had established that a particular portion of USD inflow went to the traded goods sector (by implication this group was “known and particularised”).  In addition, Commerce noted that it had previously found that state-owned enterprises constituted a “group,” which it contended was as “known and particularised” as the traded goods sector.

Commerce’s preliminary determination on specificity was also challenged on the grounds that to treat exporters as a group was against Commerce’s previous practice. Commerce had previously observed that: “subsidies to exporters are countervailable as export subsidies…. That scheme is set on its head by treating exporters as a “group” for purposes of finding a domestic subsidy under section 771(5A)(D) of the Act.”  Commerce acknowledged its previous comments and position, but nevertheless concluded that as a matter of agency practice it was entitled to change its view, so long as that change was adequately explained.

The second key finding related to whether a currency is undervalued, and how the amount of undervaluation would be measured.  To make this finding, Commerce relied on the results of an analysis published by the U.S. Department of the Treasury (Treasury) in August 2020 which made use of the Treasury’s Global Exchange Rate Assessment Framework, which is itself heavily based on a model developed by the International Monetary Fund (IMF).  However, while the Treasury methodology lays out the framework of the model, much of the underlying data out of which the model was built, and indeed certain parameters of the model, were not.

The respondents argued that Commerce should have disclosed not only the model used by Treasury but also the underlying data, and should have put that information on the administrative record. Commerce responded that disclosure of all the Treasury data was not required by the subsidy regulations. In support of its argument, Commerce noted that it used findings from other agencies without putting the underlying data on the record.  For example, Commerce stated that it “relies on asset depreciation tables of the Internal Revenue Service (IRS) for purposes of allocating non-recurring subsidies, without placing the IRS’s data on the record.”

Third, the respondents raised queries about the specific methodology used by Treasury and relied upon by Commerce to determine undervaluation. A central argument was that other models of undervaluation (such as those used by the IMF, which is the basis of the Treasury’s own methodology) produced different results, including that the VND was overvalued. Commerce responded that those models concerned periods before 2019, i.e., the relevant period of investigation, and were thus not relevant.

As PVLT from Vietnam was the first final determination to address substantively the issue of currency undervaluation as a subsidy, it is understandable that Commerce’s methodology is still under development.  Nevertheless, several aspects of the agency’s decision raise serious questions, and appear ripe for challenge.

First, it is not clear whether Commerce’s determination that the “traded goods sector” constitutes a specific group would satisfy the standard under Article 2 of the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement), which provides that a countervailable subsidy must be specific to a “group of enterprises or industries.” Article 2.1(c) of the SCM Agreement requires that the investigating authority consider certain factors in demonstrating de facto specificity, including “use of a subsidy programme by a limited number of certain enterprises,” and “predominant use by certain enterprises.”  The WTO Appellate Body has construed the term “certain enterprises” in this context to mean enterprises that are “known and particularized.”  Appellate Body Report, United States – Countervailing Measures on Certain Hot-Rolled Carbon Steel Flat Products from India, WT/DS436/AB/R (December 8, 2014), para. 4.376.  Based on this definition, it may be difficult for the United States to argue that the “traded goods sector” is “known and particularised,” given that enterprises belonging to the sector can be found in almost every industry and constitute a significant proportion of the Vietnamese economy.  Commerce’s definition of “group” in this case may therefore be vulnerable to challenge at the WTO level, if the GoV were to take that approach.

Further, in deciding whether the traded goods sector converted more USD into VND than other sectors (such as the traded services sector), Commerce used inflows of USD into Vietnam as a proxy for conversion of USD into VND. But the inflow of USD is not a direct measure of conversion, nor is it even a good proxy.  Just because a USD flows into Vietnam does not mean it will be converted into VND. USDs that flow to the traded goods sector may well be placed in a USD-denominated bank account, or in USD-denominated assets as an investment, or used to buy capital equipment in USD on international markets, and so on.  Indeed, it may well be the case that the Vietnamese traded service sector, though receiving fewer USDs than the traded goods sector, actually converted many more of those dollars into VND since salaries to service providers in Vietnam would likely all be paid in VND. Thus, the inflow of USD is arguably a poor proxy for USD-VND conversion, and may be another basis on which to challenge specificity.

Second, as a matter of U.S. administrative law, the decision by Commerce not to place the data used by Treasury to make its undervaluation determination on the administrative record raises questions of fidelity to basic principles of administrative law. For example, although some of the underlying data used by the Treasury to create its model may be available publicly (such as some IMF data), much of it is not. For example, Treasury estimates of the ‘safe asset index’ and the ‘commodity terms of trade gap’ are not publicly available, and yet are critical to determine the model’s parameters and ultimately the results of the undervaluation.  Another example is that the Treasury model relies upon the concept of ‘desired policies,’ such as the ideal amount of exchange intervention. Departures from this ‘desired policy’ can be a reason for undervaluation in the model, but the data on the administrative record do not reveal at what level Treasury set these desired policies in its model. Without the inclusion of this information on the record, reviewing courts will find it difficult to review whether Commerce’s decision on undervaluation was supported by substantial evidence and was in accordance with law.

The need for parties to be able to review the data underlying the Treasury analysis is all the more important since Commerce is not obligated to accept Treasury’s recommendation.  Commerce’s regulations state that Commerce “will request that the Secretary for the Treasury provide its evaluation and conclusion as to the determinations {of undervaluation},” As noted above, in this case, Commerce disregarded alternative valuation methodologies proposed by the parties on the grounds that they did not cover the relevant period of investigation.  But parties in future cases could provide contemporaneous alternatives, and if so, Commerce would then be faced with the prospect of deciding which analysis to adopt, and being able to assess the reasonableness of the assumptions made will be a critical component of that analysis.

We anticipate that Commerce will continue to investigate allegations of currency undervaluation as countervailable subsidies, and if so, we will continue to monitor these developments.

focuses his practice on antidumping (AD) and countervailing duty (CVD) investigations and reviews before the US Department of Commerce (DOC) and the US International Trade Commission (ITC) and related litigation before the US Court of International Trade (CIT) and the US Court of Appeals for the Federal Circuit (CAFC).

To read full blog by Steptoe, please click here.