This afternoon I finally got around to reading the Decision Memorandum underlying the US Commerce Department’s preliminary determination in the US CVD investigation on Tires from Vietnam (C-552-829). This investigation is of course best known for being the first application of the DOC’s new regulations on currency undervaluation as a countervailable subsidy. The Decision Memorandum answers a number of questions about DOC’s approach to currency undervaluation that were not clear from the regulations.
With respect to financial contribution, DOC is treating the situation as a direct transfer of funds, which is being provided both directly through an “authority”, two State-owned Commercial Banks, and indirectly through the entrustment or direction of private financial institutions. With respect to the former, DOC finds that “the GOV is able to control these SOCBs through a CPV- [Communist Party) appointed board of members and the banks are vested with government authority” (DOC seems to be attempting to meet AB standards for public body here). Regarding the latter, DOC contends that banks are required to exchange currency, and at rates that are within a “narrow band” set by the State Bank of Vietnam. Thus, DOC’s findings are based upon government control and regulation of exchange rates and transactions, and are not necessarily transferable to other countries with different systems.
Regarding benefit, DOC relies upon Treasury findings that Vietnam’s currency was undervalued, that GOV action contributed to the undervaluation and that the full amount of the undervaluation was caused by that action. I still find it odd that the government action assessment here relates to benefit, rather than financial contribution, but it is interesting that seemingly the amount of the benefit is capped by the effects of the government action (here, interventions in the exchange markets), which could in principle be less than the full amount of the undervaluation. It is also notable that DOC seems to have deferred to Treasury, which submitted a detailed report to DOC, in regards to undervaluation.
Finally, in respect to specificity, DOC found that the subsidy was de facto specific to the “group of enterprises constituting the traded goods sector”. In doing so, it recognized that there were other “channels” of exchange involving USD inflows, such as the export of services, portfolio and direct investment and earned income from abroad, but found that the trade goods sector was the “predominant user” of the subsidy as exports of goods represented the “vast majority” (72%) of USD inflows. I have always thought that specificity meant targeting within the goods sector (otherwise, since the goods sector is a small share of most economies, a subsidy that went to all goods production might not be specific), but here DOC is including non-goods users in the denominator.
At the end of the day, currency undervaluation did not generate large subsidy rates (1.16% to 1.69%). The bulk of the countervailable subsidy came from other programs, such as income tax benefits for new investments, import duty exemption schemes and the provision of land and natural rubber. So undervaluation here may be more important for the precedents it sets than its impact on the case.
