These principles are (1) from  a legal standpoint, Commerce does not have explicit authority to apply  CVDs against NME countries; and (2) as a practical matter, Commerce  cannot arrive at economically meaningful conclusions regarding subsidies  in such countries. Alternatively, Commerce could reverse its  1984 position and decide that CVD law could be applied to China while it  remains classified as an NME country. However, absent a clear grant of  authority from Congress, such a reversal could be challenged in court. WTO rules, including relevant  provisions of China’s WTO accession agreement, do not explicitly preclude  the United States from pursuing either alternative. Commerce could  employ third-country information or “facts available” to complete China  CVD actions. Chinese Subsidies Remain Difficult to Identify and Assess

“It is difficult to identify and quantify possible export subsidies in China because of the lack  of transparency in China’s subsidy regime. This lack of clarity raises a question about whether Commerce could  currently apply this commitment, even if it were to decide to reclassify  China as a market economy or specific Chinese industries as market  oriented in character. CVDs alone  generally tend to be lower than antidumping duties. For two reasons,  simultaneous application of both types of duties could well result in  reduced antidumping duties, and it is unclear whether application of CVDs  would compensate for such reductions. Second, regardless of whether China is designated as a  market economy, some companion antidumping duties might need to be  reduced to avoid double counting subsidy benefits. This may, in  part, explain why U.S. producers seek CVDs less often than antidumping  duties. Matters for Congressional Consideration

In the event that (1) Commerce changes China’s NME status or (2)  Congress decides to adopt proposed legislation that would authorize  Commerce to apply U.S. CVD laws to NME countries, including China,  Congress may wish to consider adopting legislation to provide Commerce  clear authority to  fully implement China’s WTO commitment regarding use of third- country information in CVD cases, and  make corrections to avoid double counting domestic subsidy benefits  when applying both CVDs and antidumping duties to the same products  from NME countries, in situations where Commerce finds that double  counting has in fact occurred, taking into account Commerce’s analyses  of this issue prepared in response to our recommendation above. In this report, we (1) explain  why the United States does not currently apply CVDs to imports from  China, (2) describe available alternatives for applying CVDs to Chinese- origin imports, (3) explore the challenges that the Department of  Commerce would face in applying these alternatives, and (4) examine the  potential impact that applying these alternatives would have on the rates of  duty applied to Chinese products.
Why GAO Did This Study

Some U.S. companies allege that unfair subsidies are a factor in Chinese success in U.S. markets. U.S. producers injured by subsidized imports may normally seek countervailing duties (CVD) to offset subsidies, but the United States does not apply CVDs against countries, including China, that the Department of Commerce classifies as "nonmarket economies" (NME). In this report, GAO (1) explains why the United States does not apply CVDs to China, (2) describes alternatives for changing this policy, (3) explores challenges that would arise in applying CVDs, and (4) examines the implications for duty rates on Chinese products.

What GAO Found

The current Commerce policy of not applying CVDs to NME countries (including China) rests on two principles advanced in 1984 and confirmed by a federal appeals court. These are that Commerce (1) lacks explicit authority to do so, and (2) cannot arrive at meaningful conclusions regarding subsidies in such countries due to government intervention in the economy. Commerce could reclassify China as a market economy or individual Chinese industries as "market oriented" and apply CVDs against China as a market economy. Commerce has criteria for such determinations, but said that China is unlikely to satisfy them in the near term. It could also reverse its 1984 position and apply CVDs without any change in China's NME status. However, absent a congressional grant of authority, such a decision could be challenged in court, with uncertain results. World Trade Organization (WTO) rules do not explicitly preclude either alternative. Commerce would face challenges, regardless of the alternative adopted. Chinese subsidies remain difficult to identify and measure. Employing third-country information or "facts available" may help, but would not eliminate these difficulties. Commerce lacks clear authority to fully implement China's WTO commitment on use of third-country information in CVD cases. It is unclear whether, on a net basis, applying CVDs would provide greater protection than U.S. producers already obtain from antidumping duties. CVDs alone tend to be lower than antidumping duties. If Commerce grants China market economy status, both CVDs and antidumping duties could be applied simultaneously, but required methodological changes could well reduce antidumping duties. It is not clear whether CVDs would compensate for these reductions. Regardless of China's status, some duties might need to be reduced to avoid double counting of subsidies. Commerce lacks clear authority to make such corrections when domestic subsidies are involved.