The U.S. Department of Commerce has proposed a new agential interpretation on the countervailability of the so-called “transnational subsidy.” What is a transnational subsidy? Wentong Zheng and I have recently discussed this issue in an article. Here are some relevant excerpts:
Suppose that a foreign company (A) from country X establishes a joint venture (B) in country Y to manufacture a product that will be eventually exported to country Z. What if country Z attempts to impose a countervailing duty on imports from company B, arguing that company A’s FDI into company B was unfairly subsidized by country X? In general, the U.S. countervailing duty statute does not recognize transnational subsidies, barring special conditions, such as an “upstream subsidy.”[1] An upstream subsidy is defined as any countervailing subsidy that is “ paid or bestowed by an authority (…) with respect to a product (hereafter in this section referred to as an “input product”) that is used in the same country as the authority in the manufacture or production of merchandise which is the subject of a countervailing duty proceeding.”[2] Therefore, in the aforementioned hypothesis, the United States (country Z) may not countervail imports from company B because an “input product” from country X that is allegedly countervailable contributes to company B’s manufacture of a final product within a different country (country Y). Basically, the U.S. upstream subsidies presuppose that the manufacture of an input product and that of a final product transpire within the same country.
Obviously, the DOC’s proposal will change the aforementioned status quo. It appears to emulate the EU’s precedent on the same issue (Commission Regulation 2020/776, 2020 O.J. (L 189)). In this case, the EU, for the first time, imposed countervailing duties on glass fibre fabrics produced and exported by Egyptian companies (Jushi Egypt and Hengshi Egypt) that received preferential financing from Chinese state-owned banks. Commentators view that the DOC’s new interpretation has been influenced by China’s Belt and Road Initiative.
This might usher in a new chapter of the likely global subsidy war in the future. In the era of global value chains, the imposition of transnational subsidies could be overused, misused and even abused. This is a radical departure from the traditional WTO subsidy regime based on territoriality. What could, and should, the WTO do about it, especially when its Appellate Body has been paralyzed?
[1]. 19 C.F.R. § 351.527 (2022) (“Except as otherwise provided in section 701(d) of the Act (subsidies provided to international consortia) and section 771A of the Act (upstream subsidies), a subsidy does not exist if the Secretary determines that the funding for the subsidy is supplied in accordance with, and as part of, a program or project funded: (a) By a government of a country other than the country in which the recipient firm is located;” (…)).
