U.S. Commerce Department’s Recent Decision to Impose Duties for Currency Manipulation Raises World Trade Organization Concerns

Commerce’s decision to use the CVD process to address alleged foreign currency manipulation will likely lead to unintended consequences for the United States, whose own monetary policy could be considered countervailable under its own established criteria. In fact, other countries have already signaled their belief that the U.S. dollar may be undervalued. For example, Brazil criticized the U.S. Federal Reserve’s use of quantitative easing for putting significant downward pressure on the dollar. It is foreseeable then that other countries would implement their own CVD policies — with their own standards and methodologies — to countervail U.S. monetary policy in retaliation.

Importantly, Commerce’s findings appear to be at odds with the United States’ obligations as a member of the World Trade Organization (WTO). The Agreement on Subsidies and Countervailing Measures (SCM Agreement) defines what government measures may be considered countervailable subsidies. To the extent that currency practices do not fall within the scope of the definition of a “specific subsidy,” Commerce’s final determination in PVLT Tires From Vietnam would be inconsistent with the obligations found in the SCM Agreement.

Currency Practices Do Not Appear to Fall Within the Scope of a Countervailable Subsidy Under the SCM Agreement

In the PVLT Tires From Vietnam final determination, Commerce concluded that Vietnamese producers and exporters received a “financial contribution” deriving from foreign exchanges of currency at an undervalued rate. Commerce further found that the GOV entrusted or directed both state-owned commercial banks and private banks to provide this financial contribution to Vietnamese exporters in the form of direct transfers of funds. Commerce also determined that the currency program was de facto specific because it was predominantly used by exporters that trade in goods. However, questions remain as to whether Commerce’s conclusions are consistent with the definition of a countervailable subsidy under the SCM Agreement.

The SCM Agreement allows WTO Members to impose CVDs on goods that have been subsidized by exporting countries. However, the Appellate Body has made it clear that not all government-conferred benefits are considered subsidies that are countervailable under the SCM Agreement. To be a countervailable subsidy, aside from conferring a benefit, a measure must (i) include a “financial contribution” by a government and (ii) meet the “specificity” requirement. We further discuss below both requirements and Commerce’s findings.

Is an Exchange of Currency a “Financial Contribution”?

Article 1.1(a) of the SCM Agreement provides an exhaustive list of measures considered a “financial contribution.” The measures that qualify under Article 1.1(a)(1) are (i) a government practice that involves an actual or potential “direct transfer of funds”; (ii) foregoing of government revenue otherwise due; (iii) certain government provisions of goods or services, or government purchases of goods; and (iv) government payments to a funding mechanism entrusted to carry out one or more of the functions discussed in (i) – (iii).²

After finding that the GOV undervalued its currency, Commerce went on to conclude that such currency undervaluation qualified as a “financial contribution” because it involved a “direct transfer of funds” to Vietnamese exporters. Commerce based this conclusion on the definitions of “transfer” (i.e., “a conveyance, passing or exchange of something from one person to another”) and “funds” (i.e., “money or some monetary resource”).³ In Commerce’s view, a situation where exporters directly exchange foreign currency for the Vietnamese dong falls within this general definition of a transfer of funds.

However, Commerce’s conclusion relies on a broad and expansive reading of the text of the SCM Agreement. Currency undervaluation is not explicitly included as a form of “financial contribution.” Additionally, it is not included in the SCM Agreement’s illustrative list of a “direct transfer of funds,” which includes grants, loans, and equity infusion. Although this list is not exhaustive, the Appellate Body has stated that the “inclusion of specific examples [of a ‘direct transfer of funds’] nevertheless provides an indication of the types of transactions intended to be covered by the more general reference to ‘direct transfer of funds.’ ”⁴ This decision conflicts with Commerce’s apparent position that any “direct transfer of funds” qualifies as a “financial contribution.” Instead, a WTO panel or Appellate Body may conclude that “a direct transfer of funds” is limited to transfers that are more similar to the examples included in the SCM Agreement’s illustrative list.

Is the Currency Program “Specific”?

Even if a government measure were properly determined to provide a financial contribution, it must also be “specific” within the meaning of Article 2 of the SCM Agreement. The specificity requirement allows WTO Members to provide certain subsidies that are widely available across a government’s economy without fear of exposing their exporters to CVDs. Under Article 2, specificity may be established in a number of ways. For example, a measure may be specific if it is either de jure (in law) or de facto (in fact) limited to “an enterprise or industry or group of enterprises or industries.”⁵ The following factors may be considered when making such a determination: the “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.” Moreover, “the extent of diversification of economic activities within the jurisdiction of the granting authority” must also be taken into account.

Commerce concluded that Vietnam’s currency practices were de facto specific because they were predominantly used by “certain enterprises,” specifically “enterprises that buy or sell goods internationally,” which Commerce dubbed the “traded goods sector.” ⁶ Its assessment found that nearly 72% of USD inflows to Vietnam came from goods exports.⁷ In reaching its conclusion, Commerce found that “there need not be shared characteristics among the enterprises that comprise a ‘group,’ [and therefore] it does not matter if these enterprises represent unrelated industries.”⁸

However, the “traded goods sector” appears to be too broad a group to be specific as a “group of enterprises or industries” within the meaning of Article 2.1 of the SCM Agreement. In U.S. –Carbon Steel (India), the Appellate Body concluded that the dictionary definition of “group” suggests that the relevant enterprises have “ ‘some mutual or common relation or purpose’, or ‘degree of similarity.’ ”⁹ The category of all exporters, however, includes virtually all of the industries listed in the Statistical Summary Book of Vietnam for 2019.¹⁰ There is no degree of similarity among these entities, and therefore it is reasonable to conclude that they would not be considered a “group” within the meaning of the SCM Agreement. Indeed, the quintessential example of nonspecificity is the provision of public roads by a government, which arguably are used predominantly by entities that trade in goods (as opposed to services), yet no authority would conclude that the provision of public roads is de facto specific because of the predominant use of those roads by the traded goods sector.

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In sum, Commerce’s decision to find that undervaluation of currency is a countervailable subsidy relies on a questionable interpretation of the United States’ WTO obligations. As a result, Vietnam, or any other country similarly targeted, would have plausible claims that Commerce’s application of CVDs to address currency manipulation violates the SCM Agreement.

¹Passenger Vehicle and Light Truck Tires From the Socialist Republic of Vietnam: Final Affirmative Countervailing Duty Determination, 86 Fed. Reg. 28566 (Dep’t of Commerce May 27, 2021), and accompanying Issues and Decision Memorandum (PVLT Tires From Vietnam IDM).

²Article 1.1(a)(1) of the SCM Agreement.

³PVLT Tires From Vietnam IDM, at 13 (citing Final Rule, 85 Fed. Reg. at 6034 (Dep’t of Commerce Feb. 4, 2020)).

⁴Appellate Body Report, U.S. – Large Civil Aircraft (2nd Complaint), para. 613.

⁵Article 2.1 of the SCM Agreement.

⁶PVLT Tires From Vietnam IDM, at 18-20, 29.

⁷Id. at 20.

⁸Id. at 19-20.

⁹Appellate Body Report, U.S. – Carbon Steel (India), para. 4.365 (quoting Panel Report, U.S. – Anti-Dumping and Countervailing Duties (China), para. 373).

¹⁰PVLT Tires From Vietnam IDM, at 17.