Until April 2004, no WTO member had ever initiated any countervailing (anti-subsidy) investigations against China, essentially on the grounds that the Chinese economy did not yet entirely function as a market economy and, hence, it is not easy to calculate the levels of subsidy granted to Chinese companies (or more bluntly: everything could be a subsidy in China’s state-controlled economy). A further deterrent for using the anti-subsidy protection against non-market economy countries is the fact that, when countervailing investigations are combined with antidumping investigations, there is an inherent risk of doublecounting the subsidy: once in the anti-dumping margin and once in the countervailing margin.

However, no WTO provision prevents WTO members from imposing countervailing duties against non-market economies (NMEs), and Canada and the United States (US) have made ample use of the anti-subsidy instrument in the past few years.

We examine below what has been the Canadian and US practices in the countervailing investigations initiated against China so far, as well as what the EU’s expected stance on this matter will be.

The Canadian practice

Canada was the first country to launch a countervailing investigation against an NME country, namely China. This first investigation was launched on 13 April 2004, into selfstanding barbeques for outdoor use. It was a combined countervailing and anti-subsidy investigation. All the other countervailing cases initiated by Canada against China were also combined with an anti-dumping investigation: carbon steel and stainless steel fasteners (28 April 2004), laminate flooring (4 October 2004) and certain seamless carbon or alloy steel, oil and gas well casings (13 August 2007).

In these investigations, Canada treated all Chinese producers as operating under normal market conditions for the purpose of calculating their anti-dumping duty margin, in contrast to its previous NME approach against China. This means that the dumping margin was normally calculated by comparing each sampled Chinese producer’s domestic and export sales, taking the company’s cost of production into account, as is the case for companies located in market economy countries.

China remained relatively quiet following Canada’s decision to launch countervailing investigations against it, probably because China was treated in these combined cases as a market economy country.

The US practice

The US has so far launched seven countervailing investigations against China, the first one in November 2006. These investigations were also all combined with antidumping investigations. The products targeted are coated free sheet paper, circular welded carbon quality steel pipe, light-welded rectangular pipes, laminated woven sacks, certain off-the-road tyres and lightweight thermal paper.

In the first preliminary findings to be published in these cases, on 30 March 2007 in the coated paper investigation, the duties calculated ranged between 10.9% and 20.4%. The final determination adopted on 25 October 2007 imposed countervailing duties of 7.4% to 44.25%. On 6 November 2007, the preliminary ruling in the circular welded carbon quality steel pipes case was published, imposing duties of 16.59% to 264.98%.

Unlike Canada, the US does not recognise China as a market economy in these combined anti-dumping and anti-subsidy cases. Furthermore, no adjustments regarding the subsidies granted are made for the determination of the dumping margin. The duty imposed in both the coated paper case and the welded carbon quality steel pipes case amount to the sum of the anti-subsidy and dumping margins calculated.

The US largely relies on sale prices in a surrogate country in calculating NME dumping margins (by comparing domestic sales of producers located in the surrogate country – the surrogate “normal value” – to export sales of Chinese producers to the US – the “export price”). This methodology could lead to the double counting of any subsidisation in China: once in the countervailing margin, and once in the dumping margin. Indeed, surrogate normal values are generally non-subsidised ones, and hence are automatically higher than subsidised normal values.

As the normal value is higher, the amount by which it exceeds the export price (the dumping) will be higher as well. One way around this is – as in Canadian investigations – not to use a surrogate normal value and to use the subsidised Chinese normal value instead. Another method for avoiding the double counting of the subsidy is to adjust to surrogate normal value by deducting an amount equivalent to the Chinese subsidy. This would result in a reduction of the dumping margin equivalent to the level of subsidisation found, which is already offset by the countervailing measures. A third way is to impose the anti-dumping duty only inasmuch as it exceeds the countervailing duty, or, vice-versa, which also results in the imposition of duties that do not offset the subsidy twice.

The US seems not to address this issue of double-counting at all in its combined investigations and, therefore, potentially infringing GATT Article VI.5, which prohibits the combination of anti-dumping and countervailing duties to “compensate for the same situation of dumping or export subsidisation”.

China filed on 14 September 2007 its first ever WTO dispute settlement procedure against the US preliminary ruling in the coated paper case.

Will the EU follow suit?

The combined anti-dumping and anti-subsidy investigations initiated by Canada and the US against China beg the question of whether the EU will follow suit.

Although doing so might appear politically sensitive, countervailing investigations are seen in Brussels as one of the remedies against unfair trade practices and it would seem that only practical considerations have so far resulted in no such investigation being initiated against non-market economy countries.

Although the EU can, under WTO law, initiate countervailing investigations against China, it has currently little incentive in doing so, at least if the purpose sought is to impose duties against Chinese products. Indeed, the EU currently imposes very high anti-dumping duties in investigations against China, essentially through disregarding Chinese companies’ domestic sales for the purpose of calculating the normal value, and has recourse instead to domestic sales of companies located in the so-called analogue country (the equivalent of US’s “surrogate country”).

However, there is a clear incentive to use the countervailing instrument if the prime purpose of the EU is to see the targeted subsidy schemes withdrawn by China. Indeed, countervailing duties will remain applicable as long as the subsidy scheme is in force, and will be withdrawn as soon as the subsidy ends. It is also much easier to extend findings concerning a subsidy scheme made in a countervailing investigation against one product to all products which also benefit from this subsidy scheme (provided the subsidy is not so broad as to become non-specific). The Commission can then replicate the initial findings in order to impose duties against all these other products without it being necessary for the Commission to invest too much of its limited staff and resources.

Whether the EU intends to emulate Canada and automatically treat companies targeted by countervailing investigations as operating under market economy conditions or whether it will follow the US example and impose countervailing duties and still treat China as a non-market economy for the purpose of calculating the dumping margin, remains to be seen. However, the former option has a significant drawback: by treating all Chinese companies as operating under market economy conditions, the duty calculated for Chinese companies would be (much) lower than that what is possible under the current methodology in anti-dumping investigations (where most companies have a high duty calculated by comparing sales in the analogue country and Chinese export sales to the EU).

As to the second option, it would seem to be acceptable under the WTO only if the normal value in the analogue country is adjusted in order to take into account the subsidy received in China. Adjusting the normal value calculated in the analogue country is something that the Commission does routinely at present. It does not do so in order to take into account any subsidisation in China, but in order to reflect other differences between the Chinese domestic market and the domestic market of the analogue country which have a bearing on the prices on those markets.

We understand that the EU does not expect to take any decision as to how to treat China in countervailing investigations until it has been contacted by the EU industry in view of filing a complaint against Chinese countervailable subsidies, which has not been the case to date. This might be because there is so little incentive for EU producers to move away from the anti-dumping instrument, which usually yields very high duties for what would likely prove to be far less effective countervailing measures.