Even when legal analysts agree that the undervalued Yuan is equivalent to a subsidy under WTO rules, they disagree however about how to find in this instance, “financial contribution”, “benefit” and “specificity”.
I was curious to see how the recent draft of the “Currency Reform for Fair Trade Act” arbitrates between these divergent views and what I have found seems interesting.
Governmental Financial Contribution
Some legal analysts think that the financial contribution takes in the yuan instance the form of the provision by the Chinese Government of a service or a good. Others think that it takes the form of a direct transfer of fund. And of course, some think that there is no financial contribution at all.
I was surprised to see that the Act chooses to answer clearly this issue. According to the Act,
“Section 771(5)(D) of the Tariff Act of 1930 (19 U.S.C. 1677(5)(D)) is amended by adding at the end the following new sentence: ‘‘A fundamentally and actionably undervalued currency (as determined under section 771C) constitutes a financial contribution under clause (I)”. Since clause (I) deals with “the direct transfer of funds, such as grants, loans, and equity infusions, or the potential direct transfer of funds or liabilities, such as loan guarantees”, we see here clearly that the debate has been settled under the Act by selecting the “direct transfer of funds” view of financial contribution.
It is interesting to note that this position is similar to the one adopted by Wiley Rein & Fielding. According to them, “The Chinese government's transfer of cash to an exporter required to convert his export receipts into yuan at the prescribed rate of exchange is indistinguishable from and as much a governmental financial contribution as the situation in which a government transfers cash to a recipient in return for an equity interest in a company”
Benefit
According to the Act, a benefit exists “(v) in the case of a fundamentally and actionably undervalued currency (as determined under section 771C), if the exporter or producer receives or is entitled to receive more of the exporting country's currency in exchange for the United States dollars paid for the subject merchandise than if the exporting country's currency were not fundamentally and actionably undervalued.''
This view seems to reflect the classical “market benchmark”. In other words, a benefit exists when the recipient receives more yuans than he would receive in a counterfactual situation where the exchange rate is market determined. Of course, this counterfactual market rate would have to be constructed as a proxy by the Department of Commerce according to the indications given by the Act, because there is no place in China or in the World where such a market rate is observable.
Specificity
Here there is also no surprise, because the Act indicates that " For purposes of this subparagraph, a fundamentally and actionably undervalued currency (as determined under section 771C) constitutes an export subsidy.'' In other words, it is a subsidy contingent upon export performance (more likely implicitely de facto contingent) in the sense of Article 3 of the SCM. The consequence for the specificity criterion is immediate since Article 2.3 of the SCM Agreement stipulates that "Any subsidy falling under the provisions of Article 3 shall be deemed to be specific."
