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Countervailing duty determinations under united states trade agreements act of 1979
Countervailing Duty Determinations under United States Trade Agreements Act of 1979 Randall Cravath, Swaine New York
K. Anderson and Moore,
Randall K. Anderson practices law in New York City, He was born in Iowa City, Iowa, November 1 lth 1952. He obtained his Batchelor of Arts in Economics from the American University in 1974 and received his J.D., Magna cum Laude, from Georgetown University Law Centre in 1980. From 1980 to 1981 he was a law clerk to United States District Judge Edward S. Northrop of the District of Maryland. He is currently associated with the firm of Cravath, Swaine and Moore.
The conclusion of the GATT Tokyo Round in 1979 included adoption of a ‘subsidies code’. While this code has not yet become aggressively implemented in European countries, producers in Europe have become increasingly affected by its implementation in the United States, where over 150 cases have been raised. This article describes the evolving application of United States legal practice, particularly as codified by the Trade Agreements Act of 1979. It ti of direct relevance to all European exporters to the USA who are in receipt of subsidies in any form, such as capital on employment subsidies, or focus on favourable rates to encourage regional development. In 1979 the major trading nations of the world concluded a series of GATT’ negotiations which have become known as the Tokyo Round. Among the new
trading codes approved was the Agreement on Intepretations and Applications of Articles VI, XVI and XXIII, 12 April 1979, 31 U.S.T. 513, 530 T.I.A.S. No. 9619 at 18, U.N.T.S. Registration No. 814 LXXXVI (registered 1 July 1980) (hereinafter called ‘the subsidies code’). The European Communities have not sought aggressively to implement this code, but in the United States, under the private action provisions of that country’s law, over 150 cases have been brought. These cases have served to refine the definition of subsidy. This article describes that evolving definition of subsidy under United States Iaw and briefly explains current methods used by the United States Department of Commerce to measure the benefit provided by subsidies. A brief description of the procedures used to decide a countervailing duty case may be useful. Acase can be commenced in one of two ways. The Department of Commerce may self-initiate a case (19 U.S.C. 5 1671a(a)), as it did in the cases of steel plate from Belgium and hot-rolled sheet from France in late 1981 (46 Fed. Reg. 56639 (18 November 1981)). More often, cases are begun upon a petition filed by an interested party’ (19 U.S.C. 0 1671a(b)). In the case of a petition, the Department of Commerce must decide, within 20 days of its filing, whether the petition ‘alleges the elements necessary for the imposition of a [countervailing] duty . . . and contains information reasonably available to the petitioner supporting the allegation’ (19 U.S.C. 0 1671a(c)); Once this hurdle is crossed, both petition and self-initiated cases proceed on the same timetable. Within 45 days of the petition filing or the commencement of a self-initiated case, the International Trade Commission (ITC) must make a preliminary determination of whether there is a ‘reasonable indication that’ an industry in the United States is materially injured, or threatened with material injury, or the’ establishment of an industry in the United States is materially retarded by reason of the subsidized imports (19 U.S.C. 9 1671b(a)).3 If an affirmative preliminary determination4 is made by
67
the ITC,
the Department
of Commerce
must determine if there is a ‘reasonable basis to believe or suspect that a subsidy is being provided with respect to the merchandise’ (19 U.S.C. 5 1671b(b)). This determination must be made within 85 days of the petition filing or selfinitiation, unless the case is found to be extraordinarily complicated, in which case the determination must be made within 150 days (19 U.S.C. 9 1671b(c)). If the Department’s
preliminary
deter-
mination is affirmative, liquidation is suspended’ and importers must post a bond in the amount of the preliminarily estimated countervailing duties. In either event, the investigation is continued. The next event determination by Commerce, which 75 days of the determination (19 The investigation
is a final subsidy the Department of must be made within preliminary subsidy U.S.C. 0 1671d(i)).
is then completed
with
a final injury determination by the ITC. This last determination must be concluded by whichever is the later of 40 days after a final affirmative subsidy determination or 120 days after the affirmative preliminary determination (19 U.S.C. 0 1671d(2)). Thus, the entire process is intended to take no longer than eight or nine months and provide prompt relief from subsidized imports.
Determining Provided
the Subsidies
For the first time in the long history of United States countervailing duty law, subsidy has been defined in the Trade Agreements Act of 1979. This has not precluded sharp disagreements as to those governmental aids which are countervailable subsidies. The principal basis for disagreement between *the United States and the EC has been the European argument that subsidies provided to aid restructuring should not be considered countervailable subsidies. The purpose of a subsidy is of essentially no relevance under United States trade law. During the recent countervailing duty cases concerning steel from the
68
European
Communities,
the Commission
of the European Communities argued that subsidies should only be countervailed against if they lead to increased production. Thus, a subsidy to build a new steel mill might be countervailable, while a subsidy to assist with the restructuring of a steel mill for more efficient operation should not be countervailed against. This position was rejected by the United States Department of Commerce. 47 Fed. Reg. 39392 (7 September 1982). Another substantial difference between the United States and EC interpretations of the subsidies code concerns the importance of determining whether a subsidy is an export or domestic subsidy. Export subsidies are those which specifically aid export while domestic subsidies are all others. The European view is that domestic subsidies may be countervailed against only if they are proven to distort competition (Legal Arguments of the Commission of the European Communities with respect to the Countervailing Duty Investigations of Certain Steel Products from Belgium, et al. (17 May 1982)). Under the Trade Agreements Act of 1979 no such proof is required. Nonetheless, the distinction between export and domestic subsidies is not totally without meaning. First, an export subsidy may be offset by a countervailing duty, even if the subsidy is generally available to all industries, while domestic subsidies must be limited to specific industries or groups of industries before they will be offset.’ This limit on the countervailability of domestic subsidies are recently upheld by the United States Court of International Trade. Carlisle Tire & Rubber Co. v. United States, CIT -, Slip Op. 83-49,4 ITRD 2017 (18 May 1983). Second, if an export subsidy the countervailing duty may actively applied. 19 U.S.C. 0 (1). This retroactive application only the period 90 days before liminary subsidy determination.’
is found, be retro1671b(e) includes the pre-
Third, export subsidies are allocated differently. The benefit of domestic subsidies is allocated by the Department
of Commerce to all domestic production, while export subsidies are allocated solely to exported product. Apart from this difference, the benefit of both export and domestic subsidies is calculated using the same valuation methodology. The final portion of this article discusses the current methodologies used by the Department of Commerce. For valuation purposes, the Department of Commerce broadly divides subsidies into grants, loans and equity infusions. These will be discussed seriatim.
Grants Grants are generally outright gifts of money from a government to particular companies, industries or regions of the country. In some instances, loans which have an indefinite term may be treated as grants. As discussed above, distinctions based upon the purpose of a subsidy are irrelevant when the determination of countervailability is made. The Department of Commerce has, however, adopted a purpose test for valuing subsidies. Thus, grants, up to the amount required to offset a company’s operating losses for the prior year, are treated as a subsidy only in the year of receipt, while all other grants are allocated over time. There is little, if anything, in United States law to support this variation in valuation methodology, but the Department of Commerce believed that such treatment was required by accounting principles. Such treatment was accorded ‘to reflect the nature of the liabilities giving rise to the loss. These liabilities are generally the basic costs of operation (e.g., wages, terms, certain overhead expenses - items generally expensed in the year incurred.’ This has the effect of substantially reducing the countervailability of subsidies provided to loss-making enterprises. This is so because the processing of a countervailing duty complaint takes several months before preliminary relief can be granted and all the imports that come in prior to the grant of preliminary relied are not charged with a countervailing duty. An example of how this works can be simply described. A
company would incur substantial operating losses in Year 1 and be given a grant to cover those losses in, say, the third month of Year 2. United States competitors of the subsidized company would then prepare and file a countervailing duty petition, in say, the fifth month of Year 2. Preliminary relief might then be granted by the eleventh month of Year 2, but only imports brought in during the twelfth month of Year 2 would be subject to countervailing duties because the grant provided in Month 3 of that year has been, under the Department of Commerce’s methodology, totally expended in the 12 months of Year 2. This may appear to be an extreme case, and, indeed, it is because most companies that receive assistance with operating losses are also the recipients of other significant subsidies, but it does seem a strange incentive to provide subsidies for operating losses. It should be noted, however, that this portion of the Department’s valuation methodology has not been reviewed by the United States courts and it might very well be found to be in error. All other grants are valued as follows: The amount of the grant is allocated over the entire useful life of assets purchased with the grant or if no such direct relationship can be found, it is allocated over the average life of the industry’s capital assets. In the case of the steel investigations, this period was 15 years.” Time value of money is recognized in this calculation by assessing an interest charge l1 for the use of the grant funds. In addition, the legislative history of the Trade Agreement Act of 1979 requires that the Commence Department recognize the immediate commercial value of a subsidy. Commerce has dubbed this ‘front loading’. They front load this calculation by determining the amounts for each year and then reallocating these amounts so that there is an equal amortization payment for each year of the grants amortization schedule. An example will make this clear. Company X acquires a large asset worth $50 million and having a useful life of five years. A straight-line amortization of this amount would lead to a $10 million charge for each year.
69
The risk-free interest charge is then added. If that rate were 18 per cent, the use of this $10 million for one year would be chargeable at $10 million plus $1,800,000 of interest. Thus, the subsidy is $11,800,000. Similarly, the secondyear amortization should be equal to the use of $10 million for two years (of course compounded). As one becomes further removed from the grant year the amortization plus interest charged for the use of the grant becomes larger. Commerce, to ‘front load’ the grant, re-allocates some of these large amounts in the out years to the early years. This is done through use of a constant payment annuity formula. The actual calculation for our example is as follows: $50 million
Y Y = (l+r)O + (I+# - Y - Y + (I++ + (H-r)3 Y + (I++’
Loans and Loan Guarantees The subsidy value from a loan or loan guarantee is calculated through the following process: the interest saved in each year is determined by comparing the interest rate charged with the average interest rate prevailing in the economy (the so-called ‘benchmark’ rate). This interest differential is then multiplied by the amount of the loan to determine the gross interest savings. Once this has been determined for each year all of the savings are discounted to present value and the lump sum obtained is treated as a grant and am ortized over 15 years unless the loan was for a specific large asset (greater than $50 million) with a useful life different from 15 years. 47 Fed. Reg. 39317-l 8 (7 September 1982). Payment holidays are treated as an additional subsidy and valued as a zero interest loan. Thus, the difference between the prevailing interest rate
70
and zero is determined, discounted to present value, and amortized as a grant. Loans to companies found to be incapable of obtaining private loans are treated as equity infusions. 47 Fed. Reg. 39318 (7 September 1982).
Equity
Infusions
Perhaps the most controversial aspect of the steel cases was the allegation, generally confirmed by the Department of Commerce’s findings, that the monies used to purchase stock in various European steel companies were in fact subsidies to those companies. The standard for determining whether government equity infusions are subsidies is whether the purchase of stock was consistent with commercial considerations. 19 USC. tj 1677(b) (B) (i). Equity infusions are initially allocated to cover operating losses to the extent those have not been covered by grants. Any remaining funds are then valued as follows: first, the difference between the average rate of return on equity investment in the country involved and the actual return on the equity investment is determined. This amount is then compared to the results that would be obtained if the equity infusion were treated as a grant. If the grant value is less than the value determined through the comparison of rates of return, the grant value is used. All of these valuation techniques were newly developed in the context of the steel cases and have not yet been approved by reviewing courts. Several cases currently before the Court of International Trade should determine whether these methods are consistent with the Trade Agreements Act of 1979.
Notes 1 The General Agreement on Tariffs and Trade was originally negotiated in 1947. For a variety of reasons, the Agreement has never been finally affirmed by its signatories, but it has been applied ‘provisionally’ by
2
3
4 5
6
all contracting parties. GATT, BZSD vol. IV, March, 1969. ‘Interested Party’ is defined, for this purpose, as: ‘(c) a manufacturer, producer, or wholesaler in the United States of a like product, (d) a certified union or recognized union or group of workers which is representative of an industry engaged in the manufacture, production, or wholesale in the United States of a like product, and (e) a trade or business association a majority of whose members manufacture, produce, or wholesale a like product in the United States.’ 19 U.S.C. 9 1677(g) (c) (d) and (e). This ‘injury’ requirement was added by the Trade Agreements Act of 19 79. Material injury is defined as ‘harm which is not inconsequential, immaterial, or unimportant.’ 19 USC. 0 1677(7) (A). The International Trade Commission has clarified that it is the effect of the imports and not the amount of the subsidy that must be considered in making this determination. Certain Steel Products from Spain. A negative preliminary injury determination ends the investigation. 19 U.S.C. 0 167Ib(a). The Customs service withholds determination of duties owed on the imports. ‘(5) Subsidy. The term ‘subsidy’ has the same meaning as the term ‘bounty or grant’ as that term is used in section 1303 of this title, and includes, but is not limited to, the following: (a) Any export subsidy described in Annex A to the Agreement (relating to ilhrstrative list of export subsidies). (b) The following domestic subsidies, if provided or required by government action to a specific enterprise or industry, or group of enterprises or industries, whether publicly or privately owned, and whether paid or bestowed directly or indirectly on the manufacture, production, or export of any class or kind of merchandise:
(i) The provision of capital, loans, or loan guarantees on terms inconsistent with commercial considerations. (ii) The provision of goods or services at preferential rates. (iii) The grant of funds or forgiveness of debt to cover operating losses sustained by a specific industry. (iv) The assumption of any costs or expenses of manufacture, production, or distribution. (6) Net subsidy. For the purpose of determining the net subsidy, the administering authority may subtract from the gross subsidy the amount of (a) any application fee, deposit, or similar payment paid in order to qualify for, or to receive, the benefit of the subsidy, (b) any Ioss in the value of the subsidy resulting from its deferred receipt, if the deferral is mandated by Government order, and (c) export taxes, duties, or other charges levied on the export of merchandise to the United States specifically intended to offset the subsidy received.’ 19 U.S.C. 0 1677(b) (5) and (6). 7 ‘Groups of industries’ includes industries in a region. Thus, aI1 regional aids will be subject to United States countervailing duties even if they are generally available to all industries in the region. 8 The finding of an export subsidy alone does not mandate retro-active application of countervailing duties. The Department of Commerce must also find that there has been massive importation over a relatively short period of time. This additional relief was included to deter exporters from rapidly increasing their exports just prior to the application of a countervailing duty. H.R. Rep. No. 96-317, 96th Cong., 1st Sess. 69 (1979). 9 There is a partial exception to this general statement. As explained. above, if some of the subsidies found to be provided are export subsidies and if there has been a rapid increase in the importation of the product under investigation from the
71
subsidizing country, then preliminary relief may be retro-actively applied to a period 90 days before the decision to grant preliminary relief. 19 U.S.C. 3 1671(e) (1). 10 Grants of the equivalent of less than $50 million are allocated simply to the year of receipt. 47 Fed. Reg. 39317 (7 September 1982). preliminary 11 In the Department’s determination in the steel cases, a market interest rate was used, but in the final determination the Department used a “‘risk-free” rate as indicated by the secondary market rate for long-term government debt (in the home country of the company under investigation).’ 47 Fed. Reg. 39317 (7 September 1982). The use of a risk-free rate is explained as follows: ‘The basic function of the ‘present value’s exercise is to allocate money received in one year to other years. Domestic interest rates perform this function within the context of an economy. The foundation of a country’s interest rate structure is usually its government debt interest rate (the risk-free rate). All other borrowings
incorporate this risk-free rate and add interest overlays reflecting the riskiness of the funded investment.’ ‘When we allocate a subsidy over a number of years it is not the intention of the Department to comment on nor judge the riskiness of the project undertaken with the subsidized funds nor to evaluate the riskiness of the company as a whole. Nor do we intend to speculate how a project would have been financed absent government involvement in the provision of funds. Rather, we simply need a financial mechanism to move money through time so as to accurately reflect the benefit the company receives. We believe that the best discount rate for our purposes is one which is risk-free and applicable to all commercial actors in the country. Therefore we have used in these final determinations long-term government debt rates in the secondary ( as reflected market) as our discount rates.’ 47 Fed. Reg. 39317 (7 September 1982).
K. Anderson and Moore,
Randall K. Anderson practices law in New York City, He was born in Iowa City, Iowa, November 1 lth 1952. He obtained his Batchelor of Arts in Economics from the American University in 1974 and received his J.D., Magna cum Laude, from Georgetown University Law Centre in 1980. From 1980 to 1981 he was a law clerk to United States District Judge Edward S. Northrop of the District of Maryland. He is currently associated with the firm of Cravath, Swaine and Moore.
The conclusion of the GATT Tokyo Round in 1979 included adoption of a ‘subsidies code’. While this code has not yet become aggressively implemented in European countries, producers in Europe have become increasingly affected by its implementation in the United States, where over 150 cases have been raised. This article describes the evolving application of United States legal practice, particularly as codified by the Trade Agreements Act of 1979. It ti of direct relevance to all European exporters to the USA who are in receipt of subsidies in any form, such as capital on employment subsidies, or focus on favourable rates to encourage regional development. In 1979 the major trading nations of the world concluded a series of GATT’ negotiations which have become known as the Tokyo Round. Among the new
trading codes approved was the Agreement on Intepretations and Applications of Articles VI, XVI and XXIII, 12 April 1979, 31 U.S.T. 513, 530 T.I.A.S. No. 9619 at 18, U.N.T.S. Registration No. 814 LXXXVI (registered 1 July 1980) (hereinafter called ‘the subsidies code’). The European Communities have not sought aggressively to implement this code, but in the United States, under the private action provisions of that country’s law, over 150 cases have been brought. These cases have served to refine the definition of subsidy. This article describes that evolving definition of subsidy under United States Iaw and briefly explains current methods used by the United States Department of Commerce to measure the benefit provided by subsidies. A brief description of the procedures used to decide a countervailing duty case may be useful. Acase can be commenced in one of two ways. The Department of Commerce may self-initiate a case (19 U.S.C. 5 1671a(a)), as it did in the cases of steel plate from Belgium and hot-rolled sheet from France in late 1981 (46 Fed. Reg. 56639 (18 November 1981)). More often, cases are begun upon a petition filed by an interested party’ (19 U.S.C. 0 1671a(b)). In the case of a petition, the Department of Commerce must decide, within 20 days of its filing, whether the petition ‘alleges the elements necessary for the imposition of a [countervailing] duty . . . and contains information reasonably available to the petitioner supporting the allegation’ (19 U.S.C. 0 1671a(c)); Once this hurdle is crossed, both petition and self-initiated cases proceed on the same timetable. Within 45 days of the petition filing or the commencement of a self-initiated case, the International Trade Commission (ITC) must make a preliminary determination of whether there is a ‘reasonable indication that’ an industry in the United States is materially injured, or threatened with material injury, or the’ establishment of an industry in the United States is materially retarded by reason of the subsidized imports (19 U.S.C. 9 1671b(a)).3 If an affirmative preliminary determination4 is made by
67
the ITC,
the Department
of Commerce
must determine if there is a ‘reasonable basis to believe or suspect that a subsidy is being provided with respect to the merchandise’ (19 U.S.C. 5 1671b(b)). This determination must be made within 85 days of the petition filing or selfinitiation, unless the case is found to be extraordinarily complicated, in which case the determination must be made within 150 days (19 U.S.C. 9 1671b(c)). If the Department’s
preliminary
deter-
mination is affirmative, liquidation is suspended’ and importers must post a bond in the amount of the preliminarily estimated countervailing duties. In either event, the investigation is continued. The next event determination by Commerce, which 75 days of the determination (19 The investigation
is a final subsidy the Department of must be made within preliminary subsidy U.S.C. 0 1671d(i)).
is then completed
with
a final injury determination by the ITC. This last determination must be concluded by whichever is the later of 40 days after a final affirmative subsidy determination or 120 days after the affirmative preliminary determination (19 U.S.C. 0 1671d(2)). Thus, the entire process is intended to take no longer than eight or nine months and provide prompt relief from subsidized imports.
Determining Provided
the Subsidies
For the first time in the long history of United States countervailing duty law, subsidy has been defined in the Trade Agreements Act of 1979. This has not precluded sharp disagreements as to those governmental aids which are countervailable subsidies. The principal basis for disagreement between *the United States and the EC has been the European argument that subsidies provided to aid restructuring should not be considered countervailable subsidies. The purpose of a subsidy is of essentially no relevance under United States trade law. During the recent countervailing duty cases concerning steel from the
68
European
Communities,
the Commission
of the European Communities argued that subsidies should only be countervailed against if they lead to increased production. Thus, a subsidy to build a new steel mill might be countervailable, while a subsidy to assist with the restructuring of a steel mill for more efficient operation should not be countervailed against. This position was rejected by the United States Department of Commerce. 47 Fed. Reg. 39392 (7 September 1982). Another substantial difference between the United States and EC interpretations of the subsidies code concerns the importance of determining whether a subsidy is an export or domestic subsidy. Export subsidies are those which specifically aid export while domestic subsidies are all others. The European view is that domestic subsidies may be countervailed against only if they are proven to distort competition (Legal Arguments of the Commission of the European Communities with respect to the Countervailing Duty Investigations of Certain Steel Products from Belgium, et al. (17 May 1982)). Under the Trade Agreements Act of 1979 no such proof is required. Nonetheless, the distinction between export and domestic subsidies is not totally without meaning. First, an export subsidy may be offset by a countervailing duty, even if the subsidy is generally available to all industries, while domestic subsidies must be limited to specific industries or groups of industries before they will be offset.’ This limit on the countervailability of domestic subsidies are recently upheld by the United States Court of International Trade. Carlisle Tire & Rubber Co. v. United States, CIT -, Slip Op. 83-49,4 ITRD 2017 (18 May 1983). Second, if an export subsidy the countervailing duty may actively applied. 19 U.S.C. 0 (1). This retroactive application only the period 90 days before liminary subsidy determination.’
is found, be retro1671b(e) includes the pre-
Third, export subsidies are allocated differently. The benefit of domestic subsidies is allocated by the Department
of Commerce to all domestic production, while export subsidies are allocated solely to exported product. Apart from this difference, the benefit of both export and domestic subsidies is calculated using the same valuation methodology. The final portion of this article discusses the current methodologies used by the Department of Commerce. For valuation purposes, the Department of Commerce broadly divides subsidies into grants, loans and equity infusions. These will be discussed seriatim.
Grants Grants are generally outright gifts of money from a government to particular companies, industries or regions of the country. In some instances, loans which have an indefinite term may be treated as grants. As discussed above, distinctions based upon the purpose of a subsidy are irrelevant when the determination of countervailability is made. The Department of Commerce has, however, adopted a purpose test for valuing subsidies. Thus, grants, up to the amount required to offset a company’s operating losses for the prior year, are treated as a subsidy only in the year of receipt, while all other grants are allocated over time. There is little, if anything, in United States law to support this variation in valuation methodology, but the Department of Commerce believed that such treatment was required by accounting principles. Such treatment was accorded ‘to reflect the nature of the liabilities giving rise to the loss. These liabilities are generally the basic costs of operation (e.g., wages, terms, certain overhead expenses - items generally expensed in the year incurred.’ This has the effect of substantially reducing the countervailability of subsidies provided to loss-making enterprises. This is so because the processing of a countervailing duty complaint takes several months before preliminary relief can be granted and all the imports that come in prior to the grant of preliminary relied are not charged with a countervailing duty. An example of how this works can be simply described. A
company would incur substantial operating losses in Year 1 and be given a grant to cover those losses in, say, the third month of Year 2. United States competitors of the subsidized company would then prepare and file a countervailing duty petition, in say, the fifth month of Year 2. Preliminary relief might then be granted by the eleventh month of Year 2, but only imports brought in during the twelfth month of Year 2 would be subject to countervailing duties because the grant provided in Month 3 of that year has been, under the Department of Commerce’s methodology, totally expended in the 12 months of Year 2. This may appear to be an extreme case, and, indeed, it is because most companies that receive assistance with operating losses are also the recipients of other significant subsidies, but it does seem a strange incentive to provide subsidies for operating losses. It should be noted, however, that this portion of the Department’s valuation methodology has not been reviewed by the United States courts and it might very well be found to be in error. All other grants are valued as follows: The amount of the grant is allocated over the entire useful life of assets purchased with the grant or if no such direct relationship can be found, it is allocated over the average life of the industry’s capital assets. In the case of the steel investigations, this period was 15 years.” Time value of money is recognized in this calculation by assessing an interest charge l1 for the use of the grant funds. In addition, the legislative history of the Trade Agreement Act of 1979 requires that the Commence Department recognize the immediate commercial value of a subsidy. Commerce has dubbed this ‘front loading’. They front load this calculation by determining the amounts for each year and then reallocating these amounts so that there is an equal amortization payment for each year of the grants amortization schedule. An example will make this clear. Company X acquires a large asset worth $50 million and having a useful life of five years. A straight-line amortization of this amount would lead to a $10 million charge for each year.
69
The risk-free interest charge is then added. If that rate were 18 per cent, the use of this $10 million for one year would be chargeable at $10 million plus $1,800,000 of interest. Thus, the subsidy is $11,800,000. Similarly, the secondyear amortization should be equal to the use of $10 million for two years (of course compounded). As one becomes further removed from the grant year the amortization plus interest charged for the use of the grant becomes larger. Commerce, to ‘front load’ the grant, re-allocates some of these large amounts in the out years to the early years. This is done through use of a constant payment annuity formula. The actual calculation for our example is as follows: $50 million
Y Y = (l+r)O + (I+# - Y - Y + (I++ + (H-r)3 Y + (I++’
Loans and Loan Guarantees The subsidy value from a loan or loan guarantee is calculated through the following process: the interest saved in each year is determined by comparing the interest rate charged with the average interest rate prevailing in the economy (the so-called ‘benchmark’ rate). This interest differential is then multiplied by the amount of the loan to determine the gross interest savings. Once this has been determined for each year all of the savings are discounted to present value and the lump sum obtained is treated as a grant and am ortized over 15 years unless the loan was for a specific large asset (greater than $50 million) with a useful life different from 15 years. 47 Fed. Reg. 39317-l 8 (7 September 1982). Payment holidays are treated as an additional subsidy and valued as a zero interest loan. Thus, the difference between the prevailing interest rate
70
and zero is determined, discounted to present value, and amortized as a grant. Loans to companies found to be incapable of obtaining private loans are treated as equity infusions. 47 Fed. Reg. 39318 (7 September 1982).
Equity
Infusions
Perhaps the most controversial aspect of the steel cases was the allegation, generally confirmed by the Department of Commerce’s findings, that the monies used to purchase stock in various European steel companies were in fact subsidies to those companies. The standard for determining whether government equity infusions are subsidies is whether the purchase of stock was consistent with commercial considerations. 19 USC. tj 1677(b) (B) (i). Equity infusions are initially allocated to cover operating losses to the extent those have not been covered by grants. Any remaining funds are then valued as follows: first, the difference between the average rate of return on equity investment in the country involved and the actual return on the equity investment is determined. This amount is then compared to the results that would be obtained if the equity infusion were treated as a grant. If the grant value is less than the value determined through the comparison of rates of return, the grant value is used. All of these valuation techniques were newly developed in the context of the steel cases and have not yet been approved by reviewing courts. Several cases currently before the Court of International Trade should determine whether these methods are consistent with the Trade Agreements Act of 1979.
Notes 1 The General Agreement on Tariffs and Trade was originally negotiated in 1947. For a variety of reasons, the Agreement has never been finally affirmed by its signatories, but it has been applied ‘provisionally’ by
2
3
4 5
6
all contracting parties. GATT, BZSD vol. IV, March, 1969. ‘Interested Party’ is defined, for this purpose, as: ‘(c) a manufacturer, producer, or wholesaler in the United States of a like product, (d) a certified union or recognized union or group of workers which is representative of an industry engaged in the manufacture, production, or wholesale in the United States of a like product, and (e) a trade or business association a majority of whose members manufacture, produce, or wholesale a like product in the United States.’ 19 U.S.C. 9 1677(g) (c) (d) and (e). This ‘injury’ requirement was added by the Trade Agreements Act of 19 79. Material injury is defined as ‘harm which is not inconsequential, immaterial, or unimportant.’ 19 USC. 0 1677(7) (A). The International Trade Commission has clarified that it is the effect of the imports and not the amount of the subsidy that must be considered in making this determination. Certain Steel Products from Spain. A negative preliminary injury determination ends the investigation. 19 U.S.C. 0 167Ib(a). The Customs service withholds determination of duties owed on the imports. ‘(5) Subsidy. The term ‘subsidy’ has the same meaning as the term ‘bounty or grant’ as that term is used in section 1303 of this title, and includes, but is not limited to, the following: (a) Any export subsidy described in Annex A to the Agreement (relating to ilhrstrative list of export subsidies). (b) The following domestic subsidies, if provided or required by government action to a specific enterprise or industry, or group of enterprises or industries, whether publicly or privately owned, and whether paid or bestowed directly or indirectly on the manufacture, production, or export of any class or kind of merchandise:
(i) The provision of capital, loans, or loan guarantees on terms inconsistent with commercial considerations. (ii) The provision of goods or services at preferential rates. (iii) The grant of funds or forgiveness of debt to cover operating losses sustained by a specific industry. (iv) The assumption of any costs or expenses of manufacture, production, or distribution. (6) Net subsidy. For the purpose of determining the net subsidy, the administering authority may subtract from the gross subsidy the amount of (a) any application fee, deposit, or similar payment paid in order to qualify for, or to receive, the benefit of the subsidy, (b) any Ioss in the value of the subsidy resulting from its deferred receipt, if the deferral is mandated by Government order, and (c) export taxes, duties, or other charges levied on the export of merchandise to the United States specifically intended to offset the subsidy received.’ 19 U.S.C. 0 1677(b) (5) and (6). 7 ‘Groups of industries’ includes industries in a region. Thus, aI1 regional aids will be subject to United States countervailing duties even if they are generally available to all industries in the region. 8 The finding of an export subsidy alone does not mandate retro-active application of countervailing duties. The Department of Commerce must also find that there has been massive importation over a relatively short period of time. This additional relief was included to deter exporters from rapidly increasing their exports just prior to the application of a countervailing duty. H.R. Rep. No. 96-317, 96th Cong., 1st Sess. 69 (1979). 9 There is a partial exception to this general statement. As explained. above, if some of the subsidies found to be provided are export subsidies and if there has been a rapid increase in the importation of the product under investigation from the
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subsidizing country, then preliminary relief may be retro-actively applied to a period 90 days before the decision to grant preliminary relief. 19 U.S.C. 3 1671(e) (1). 10 Grants of the equivalent of less than $50 million are allocated simply to the year of receipt. 47 Fed. Reg. 39317 (7 September 1982). preliminary 11 In the Department’s determination in the steel cases, a market interest rate was used, but in the final determination the Department used a “‘risk-free” rate as indicated by the secondary market rate for long-term government debt (in the home country of the company under investigation).’ 47 Fed. Reg. 39317 (7 September 1982). The use of a risk-free rate is explained as follows: ‘The basic function of the ‘present value’s exercise is to allocate money received in one year to other years. Domestic interest rates perform this function within the context of an economy. The foundation of a country’s interest rate structure is usually its government debt interest rate (the risk-free rate). All other borrowings
incorporate this risk-free rate and add interest overlays reflecting the riskiness of the funded investment.’ ‘When we allocate a subsidy over a number of years it is not the intention of the Department to comment on nor judge the riskiness of the project undertaken with the subsidized funds nor to evaluate the riskiness of the company as a whole. Nor do we intend to speculate how a project would have been financed absent government involvement in the provision of funds. Rather, we simply need a financial mechanism to move money through time so as to accurately reflect the benefit the company receives. We believe that the best discount rate for our purposes is one which is risk-free and applicable to all commercial actors in the country. Therefore we have used in these final determinations long-term government debt rates in the secondary ( as reflected market) as our discount rates.’ 47 Fed. Reg. 39317 (7 September 1982).