United States: US Commerce Department Issues Determination In First Trade Case Invoking New Subsidy Rule On Currency Undervaluation

On November 4, 2020, the US Department of Commerce ("Commerce") issued its preliminary determination in the countervailing duty ("CVD") investigation of Passenger and Light Truck Tires from the Socialist Republic of Vietnam ("Passenger Tires"). This determination is notable because it is the first case in which Commerce has invoked its new rule on currency undervaluation. On February 4, 2020, Commerce published a final rule allowing it to investigate currency undervaluation as an actionable government subsidy.¹ For more information regarding the adoption of the final rule, please see https://www.mayerbrown.com/en/perspectives-events/publications/2020/02/us-finalizes-rule-to-treat-currency-undervaluation-as-potential-subsidy.

Subsidies covered under the World Trade Organization's ("WTO") Agreement on Subsidies and Countervailing Measures ("SCM Agreement") must be "specific" within the meaning of the SCM Agreement (i.e., the subsidies must benefit particular companies, industry sectors or regions). Under Commerce's final rule, companies that buy or sell goods internationally can constitute a group of enterprises to determine whether a subsidy is specific.  In Passenger Tires, Commerce determined that the vast majority (i.e., 71.94 percent) of US dollar inflows into Vietnam during the period of investigation came from goods exports. Therefore, Commerce preliminary determined that the currency undervaluation subsidy is specific to enterprises that buy or sell goods internationally, thus meeting the specificity requirement of the SCM Agreement and the new rule.    

In order to determine the benefit conferred by the currency undervaluation subsidy, Commerce first established the gap between Vietnam's real effective exchange rate ("REER") and the real effective exchange rate that reflects appropriate policies ("equilibrium REER"). Commerce requested information from the US Treasury to determine whether the Vietnamese dong ("VND") was undervalued during 2019. Based on the information received from Treasury, Commerce determined that Vietnam's actions caused the VND to be undervalued relative to the US dollar by 4.7 percent.

To calculate the benefit of this subsidy for each Vietnamese respondent, Commerce requested information from each on the total value of USD exchanged, the exchange rate used for each transaction and the authorized credit institution that processed the currency exchange transaction. Using this data, Commerce calculated the difference between the currency received by each respondent in exchange for US dollars and the amount that the firms would have received if not for the 4.7 percent undervaluation. The sum of the transactional benefit was then divided by total sales to calculate the subsidy rate for each respondent. In this case, the currency undervaluation subsidy calculated for Kumho Tire (Vietnam) Co., Ltd. was 1.69 percent and for Sailun (Vietnam) Co. Ltd. was 1.16 percent.

Commerce is scheduled to issue its final CVD determination in Passenger Tires on March 15, 2021. The agency can, of course, extend this deadline by up to 60 days. Whenever Commerce issues its final determination, it will be interesting to see if the agency confirms or adjusts its methodology for determining the countervailability of currency undervaluation.   

Footnote

1. Modification of Regulations Regarding Benefit and Specificity in Countervailing Duty Proceedings, 85 FR 6031 (Feb. 4, 2020) (the "Final Rule").

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