On March 30, 2007 the US Department of Commerce announced its affirmative preliminary determination regarding acceptance of a petition from NewPage Corporation, a US paper corporation, to initiate a countervailing duty (CVD) case involving coated free sheet paper imported from China.

The department preliminarily determined that Chinese producers and exporters have received net countervailable subsidies ranging from 10.90 to 20.35 percent. As a result, it will instruct US Customs and Border Protection to suspend liquidation of entries of coated free sheet paper and to collect a cash deposit or bond based on these preliminary rates.

Below, we have answered some questions we have received about this determination.

1. Why is the Department of Commerce now accepting such a petition when it has refused to do so for almost a quarter of a century?

The Department of Commerce historically (for at least 23 years) has taken the position that CVDs did not apply to non-market economy countries, because essentially their whole economy was so distorted that it was not possible to characterize any particular government program as a subsidy. As the department states in the decision memorandum:

"Soviet-style economies . . . made it impossible to apply [the concept of countervailing duties] because they were so integrated as to constitute, in essence, one large entity. In such a situation, subsidies could not be separated out from the amalgam of government directives and controls.

The current nature of the Chinese economy does not create these obstacles to applying the statute."

Another, practical, reason is that it is apparent that the Chinese national and regional governments are in fact providing subsidies to favored industries and producers, that these are having an effect on commerce, and the Department of Commerce considers it necessary to take action – other than a World Trade Organization (WTO) complaint – to discourage the export subsidies.

2. Strategically, why would a US producer prefer to bring a petition for imposition of CVDs instead of initiating an antidumping case? Would it be easier to prove? Would there be tougher penalties?

In fact, a petitioner does not have to choose. Petitioners can, and often do, allege both in parallel proceedings. This has been common, for example, in flat-rolled carbon steel cases. The CVD allegations simply give petitioners another basis for the imposition of penalty duties.

3. What is the expected reaction from the PRC's government? Are there retaliatory steps it could take against US commercial interests?

The PRC sought to stop the Department of Commerce from conducting a CVD investigation and taking this action by filing a complaint in the US Court of International Trade to prevent the department from proceeding. The court held that the controversy was not ripe for adjudication. Presumably, the PRC will pursue the litigation strategy in the event there is a final determination that CVDs apply.

We do not believe that a WTO strategy would work for China (unless the complaint was based on arguments that the particular programs found to be improper subsidies are not in fact actionable under WTO standards). In its WTO accession, China agreed not to subsidize its exports and not to engage in other industry subsidization that results in injury to the industries of other WTO members. Any action that the PRC might take against the United States for acting to countervail subsidies that are in violation of these undertakings would itself be a WTO agreement violation (e.g., a prohibited discriminatory measure).

4. How does imposition of CVDs fit into the WTO framework?

Countervailing measures are authorized by the General Agreement on Tariffs and Trade and the Agreement on Subsidies and Countervailing Measures, both of which are basic WTO agreements, to which all WTO members must subscribe.

5. What are the procedural steps for the petition before a decision will be made (e.g., submission to the US International Trade Commission [USITC])?

A CVD proceeding in the United States follows basically the same procedural track as an antidumping proceeding, except that the time prescribed for the Department of Commerce investigation is somewhat shorter. As a result, when both a CVD action and an antidumping duty action are filed with respect to the same product, the time for the final CVD determination by the Department of Commerce typically is extended in order to have both proceedings move to the USITC for a final "injury" determination at the same time.

Thus, in this case, there has not been a final determination by the Department of Commerce as to the existence and amount of countervailable subsidies or a final determination by the USITC as to "injury." CVD proceedings, like antidumping proceedings, have a required "injury" element, with essentially the same injury standard as in the case of antidumping duty actions.

If you have any questions regarding this preliminary determination or its implications, or if you need any additional information regarding related issues, please contact any of the Squire Sanders lawyers listed in this Alert, or the one with whom you are most familiar.