Leibowitz: The expanding definition of subsidies

Long ago, Congress passed the first “countervailing duty” law that applied to any “bounty or grant” paid on exports of sugar to the United States. The law was expanded several times into the 20th century. By 1913, the law applied to all exports, not just sugar, and included government payments not only on exports but also on “domestic” subsidies to encourage production.

The law permitted the government to impose “countervailing duties” equal to the subsidies bestowed by the government of the exporting country. All this was before there were any statutes in the US that dealt with “dumping” – the selling products in the US below prices charged in the home market, or below the cost of production. Today, “countervailing duties” still refer to subsidies even though the term could literally apply to any duties in response to any disfavored practices. 

In 1979, the original countervailing duty statute was repealed, replaced by the statute we basically have today. While the new statute did not expressly limit countervailing duties to subsidies bestowed by the country of manufacture, it defined a “subsidy” the same as a “bounty or grant” under the old law.

Fast forward to the 21st century

The pressure to expand the reach of trade remedy laws is constant. Last year, the Commerce Department proposed to eliminate its regulation limiting countervailing duties to subsidies granted by the government of the country where the goods were produced. Last week, Commerce published a final rule to do that.

The department said that the old rule was based on the statute repealed in 1979. The world, it went on, had changed since then, and some governments subsidize production not only in their own country but also in third countries. The “Belt and Road Initiative,” in which China made loans to developing countries to build infrastructure, was held out as an example of this.

Potential flashpoints

The details of how this new authority operates have not yet been revealed. But there are numerous problems. 

• First, the expanded definition will likely be challenged in the courts. The statute does not clearly allow the Commerce Department to impose countervailing duties on products made in Country A that benefit from subsidies bestowed by Country B. Any legal challenge will be made once this new power Commerce has given itself is actually used. When it comes up, the 40-year judicial deference to administrative agencies (the Chevron doctrine) may be a thing of the past. Courts will determine whether the repeal of the old law actually removed the limitation of subsidy payments to the country of production. Congress may need to authorize that change explicitly.
• Second, countervailing duty cases may become even more complex than they are now. Imagine a hypothetical case on Pakistani textiles coming to the US: the domestic petitioners could argue that “Belt and Road” loans from China benefited production of textiles in Pakistan. If, as seems certain, China did not cooperate with Commerce’s investigation, the department could (and no doubt would) impose “adverse facts available” to cause subsidy margins on the Pakistani exports to skyrocket, driving those goods from the US market. US-Pakistani trade in textiles would stop. (Reminder, this is a hypothetical example.)
• Third, there would be challenges in the World Trade Organization (WTO) and perhaps in other international forums on this “third-country” issue. While the WTO dispute settlement system remains paralyzed, that may not always be the case. And, in the absence of dispute settlement, other countries could retaliate unilaterally against US exports. 

The takeaway

This is, to be sure, one of many potential disputes that could erupt between the US and its trading partners. But in a world where trade has already been weaponized and where the threat of war is increasing, we and our trading partners need fewer, not more, reasons to be at each other’s throats.