A couple weeks ago, Jesse Kreier wrote about the Commerce Department's decision to treat currency undervaluation as a countervailable subsidy in a case against tires from Viet Nam. As he explained it, one aspect of the Commerce Department's reasoning was related to the specificity of the subsidy:
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.
The Commerce Department decision is here. The reasoning on this point was, in part, as follows:
In determining whether currency undervaluation by the government of Vietnam is specific, we considered 19 CFR 351.502(c) and preliminary find that the subsidy is predominantly used by the group of enterprises constituting the traded goods sector. ...
Based on the IMF data considered, we estimated the total proportion of USD inflows Vietnam has received in the POI through the following four major channels of exchange: (a) exports of goods, (b) exports of services, (c) various forms of portfolio and direct investment, and (d) earned income from abroad. To add precision to the amount of USD inflows received from Vietnam’s exports of goods, we discounted Vietnam’s exports of goods value by the amount of intermediary imported inputs (based on OECD estimates) to arrive at a reasonable estimate of exports that earned foreign exchange. Even after adjusting Vietnam’s exports by its share on intermediary imported inputs, this analysis has found that among the four channels, the vast majority (71.94 percent) of USD inflows coming into Vietnam during the POI came from goods exports. As a result, we preliminarily determine that enterprises that buy or sell goods internationally are the predominant users of the GOV’s currency undervaluation subsidy, and, therefore, this program is de facto specific under section 771(5A)(D)(iii)(II) of the Act.
The specificity provisions of the SCM Agreement are in Article 2:
2.1 In order to determine whether a subsidy, as defined in paragraph 1 of Article 1, is specific to an enterprise or industry or group of enterprises or industries (referred to in this Agreement as "certain enterprises") within the jurisdiction of the granting authority, the following principles shall apply:
(a) Where the granting authority, or the legislation pursuant to which the granting authority operates, explicitly limits access to a subsidy to certain enterprises, such subsidy shall be specific.
(b) Where the granting authority, or the legislation pursuant to which the granting authority operates, establishes objective criteria or conditions governing the eligibility for, and the amount of, a subsidy, specificity shall not exist, provided that the eligibility is automatic and that such criteria and conditions are strictly adhered to. The criteria or conditions must be clearly spelled out in law, regulation, or other official document, so as to be capable of verification.
(c) If, notwithstanding any appearance of non-specificity resulting from the application of the principles laid down in subparagraphs (a) and (b), there are reasons to believe that the subsidy may in fact be specific, other factors may be considered. Such factors are: use of a subsidy programme by a limited number of certain enterprises, predominant use by certain enterprises, the granting of disproportionately large amounts of subsidy to certain enterprises, and the manner in which discretion has been exercised by the granting authority in the decision to grant a subsidy. In applying this subparagraph, account shall be taken of the extent of diversification of economic activities within the jurisdiction of the granting authority, as well as of the length of time during which the subsidy programme has been in operation.
Let's say WTO dispute settlement starts functioning again under a Biden administration. If Viet Nam were to challenge the Commerce Department reasoning on currency undervaluation (there is similar reasoning in a case against China as well, which could also be challenged), how would a panel and/or the Appellate Body consider the Commerce Department action pursuant to Article 2? Do "enterprises that buy or sell goods internationally" constitute a "group of enterprises" as referred to in these provisions? Is this an area where the standard of review is critical, and a compromise on appointing AB Members could involve setting a special standard for CVD cases? If we do get to the point where negotiations on restoring the AB are happening, I can imagine that the U.S. negotiators will be concerned about cases like this one.
