US Department of Commerce Finalizes Rule to Investigate Currency Undervaluation as a Countervailable Government Subsidy

On February 4, 2020, the US Department of Commerce (“Commerce”) published a final rule (the “Final Rule”),¹ paving the way for the agency to investigate “currency undervaluation” as an actionable government subsidy in future proceedings. The Final Rule largely adopts the basic framework set forth in the proposed rule published on May 28, 2019,² amending Commerce’s countervailing duty (“CVD”) (aka anti-subsidy) regulations to:

1. specify that companies that buy or sell goods internationally can constitute a “group” of enterprises for purposes of determining whether a subsidy is “specific” as a domestic subsidy and
2. address how Commerce will determine the existence and measurement of a benefit resulting from a subsidy in the form of currency undervaluation.

The Final Rule will apply to all segments of CVD proceedings administered by Commerce that are initiated on or after April 6, 2020, including investigations and administrative reviews.

The Final Rule represents a significant reversal of Commerce’s long-held position declining to investigate currency undervaluation allegations as a countervailable subsidy in Chinese proceedings. By way of background, under US law (and applicable rules of the World Trade Organization (“WTO”)), for a subsidy to be “countervailable” (i.e., to lead to the imposition of remedial tariffs), it must satisfy three legal requirements: (1) constitute a financial contribution by a public authority, (2) provide a benefit and (3) be specific within the meaning of the US CVD statute. Generally speaking, China (one of the many potential targets of the Final Rule) maintains a unified exchange rate regime that applies to all enterprises and individuals in the economy. In the absence of the Final Rule, this fact would create some difficulty with finding benefits from an undervalued currency to be “specific,” either as an export or domestic subsidy. In addition, certain practical concerns—e.g., (1) the complexity of determining and measuring currency undervaluation and (2) the Department of the Treasury’s (“Treasury”) jurisdiction over foreign currency—might also have played a role in Commerce’s past refusal to examine these allegations. For more detailed background information, please see the Mayer Brown Legal Update US Proposes New Rule to Address “Currency Undervaluation” as Potential Subsidy (May 30, 2019).³

Below we summarize key public comments received by Commerce in the rulemaking process and major changes to the Proposed Rule.

Public Comments

When the Proposed Rule was announced in May 2019, Commerce also sought comments from the public. In response to Commerce’s request, 47 comments were submitted on the Proposed Rule. These comments covered a wide array of issues, e.g., whether the CVD law was an appropriate tool to remedy subsidies from currency undervaluation; whether Commerce has the statutory authority to promulgate the proposed rule; whether currency undervaluation constitutes a financial contribution under section 771(5) of the Tariff Act of 1930, as amended; and whether companies engaged in international trade constitute a “group” of companies or industries for purposes of the Act. Other commenters argued that the Proposed Rule would be against IMF’s authority and that it could lead to retaliation from US trading partners. In the February 2020 notice, Commerce generally rejected these comments and arguments against the Proposed Rule.

Other comments, however, claimed that the Proposed Rule needed to have more objective and clear criteria and that the scope of government action in connection with currency undervaluation should be limited to official actions that target the exchange rate for competitive purposes and not to currency fluctuations caused by monetary and fiscal policies or any non-policy factors. Additionally, with respect to the definition of a “group,” some commenters argued that the proposed regulatory language requiring companies to be “primarily” engaged in international trade would be restrictive and would potentially impair the effectiveness of the Proposed Rule. Others asked Commerce to replace the term “may consider” with “will consider” for purposes of consistency with other CVD regulations. In the February 2020 notice, Commerce made revisions to the Proposed Rule to address these concerns about specific aspects of the new rule.

The Final Rule Framework and Key Revisions

Specificity – Companies that buy or sell goods internationally as a “group” (19 C.F.R. 351.502(c)): In line with the Proposed Rule, Commerce maintains its position that companies engaged in international trade can constitute a “group” for purposes of determining “specificity” of domestic subsidies, as reflected in the new paragraph (c) to 19 C.F.R. 351.502. However, in its final formulation, such companies do not need to be “primarily” engaged in international trade, and Commerce “normally will,” instead of “may” as used in the Proposed Rule, consider enterprises that buy or sell goods internationally to make up such a group.

The potential impact of this provision cannot be understated. On its face, this new provision is not limited to the currency undervaluation context. While Commerce defended this expansive definition in a currency context, nothing in the regulation prevents broader application. How Commerce ultimately applies this regulation both in the short and medium terms remains unclear. 

Benefit – Methodology to determine and calculate benefit (19 C.F.R. § 351.528): In the Final Rule, Commerce’s framework and methodology to determine the existence and extent of benefits from currency undervaluation largely mirrors its proposal in May 2019. However, the Final Rule specifies, in new section 19 C.F.R. § 351.528, in greater detail the process it will follow to make these “benefit” determinations. The components of Commerce’s methodology in the Final Rule include:

1. Undervaluation: Under the Final Rule, currency undervaluation during the relevant period is a prerequisite to an affirmative benefit determination, and, to assess whether there is undervaluation, Commerce normally will consider the gap between the subject country’s real effective exchange rate (“REER”) and the REER that achieves an external balance over the medium term that reflects appropriate policies (the “equilibrium REER”). Similar language only appeared in the preamble of the Proposed Rule.
   
   
2. Government Action: Under the Final Rule, government action on the exchange rate is, in turn, a prerequisite to the “undervaluation” determination. Adopting similar language in the preamble of the Proposed Rule, the new provision specifies that “government actions” within the meaning of this provision will not normally include monetary and related credit policy of an independent central bank or monetary authority. Additionally, Commerce may consider the relevant government’s degree of transparency regarding actions that could alter the exchange rate.
   
   In general, Commerce seems to take the position that the relationship between the currency undervaluation and the government action needs to go beyond the collateral effects of a country’s general monetary policymaking. In practice, this might result in more allegations being made against countries that the United States considers to be non-market economies and those whose banking sector consists mostly of state-owned banks.
   
   
3. Benefit Calculation: Under the Final Rule, if the prerequisites are met, Commerce will consider the benefit from currency undervaluation to be the difference between (1) the amount of domestic currency that the foreign company at issue received in exchange for US dollars and (2) the amount of currency that the company would have received based on an exchange rate consistent with the equilibrium REER.
   
   
4. Treasury’s Role: Under the Final Rule, Commerce will request Treasury to provide its evaluation and conclusions as to undervaluation and the US dollar exchange rate gap. That said, how much deference is afforded to Treasury’s assessment of currency undervaluation remains a question mark. On the one hand, the Final Rule reiterates Commerce’s position that it will normally adhere to Treasury’s evaluations and conclusions unless substantial evidence on the administrative record necessitates otherwise. However, Commerce also explains in great detail that it retains ultimate authority to determine whether exchanges of an undervalued currency constitute countervailable subsidies in a given case. How much deference is ultimately afforded to Treasury will be an important trend to watch going forward.

In sum, in the Final Rule, Commerce (1) expanded the definition of “specificity” to include companies engaged in international trade as a single group for domestic-subsidy “specificity” determinations, (2) explained in more detail how the agency intends to calculate the “benefit” of an undervalued currency and (3) left unclear how much deference will be afforded to Treasury in its assessment of alleged currency undervaluation.

Potential Impact on Interested Parties

The Final Rule raises several important issues for parties interested in US CVD proceedings. The definition of “specificity” is broadened significantly, impacts every future CVD proceeding initiated by Commerce and will inevitably be subject to litigation. Moreover, in relation to currency subsidy allegations, how Commerce will ultimately calculate the “benefit”—and the extent to which it will defer to Treasury—remains unclear. Ultimately, how the Final Rule applies in CVD proceedings will take years to sort out over the course of several investigations and judicial reviews.

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