Currency Undervaluation as a Subsidy

Author: Samarth Negi

Under the WTO Agreement, a countervailing duty may be imposed in respect of a subsidy, which has the following elements:

• It involves a financial contribution (example a grant or loan) by a government or public body, or by a private body, and

• It provides a benefit to a producer or an exporter and 

• It is specific i.e. it is limited to an enterprise or industry or group of enterprises/industries, or a region.

Where any subsidy, having the above listed elements, allows an exporter to export any product at a price which causes injury or threatens to cause injury to the domestic industry, the importing country may levy countervailing duty as a remedy against the unfair subsidized imports.

For years, some US policymakers have argued that currency undervaluation should also be treated as an countervailable subsidy. This is because when a currency is undervalued, it would allow the exporters to export the goods at cheaper prices, in terms of foreign currency, for the same price in domestic currency.

Some US policymakers had increasingly expressed concerns that US industries have suffered due to unfair exchange rate policies of Government of other countries. It has been argued that other countries have purposefully undervalued their currency relative to US dollar to boost exports, at the expense of U.S. firms. To assuage these growing concerns, the, US Department of DOC (“DOC”) published a final rule (“Final Rule”) on February 4, 2020, which allows the DOC to consider whether a benefit is conferred to foreign producers as a result of currency undervaluation in terms of exchange of US dollars for the currency of country under review.

Whether currency undervaluation satisfy the requirements of a countervailable subsidy?

As per the Final Rule of the DOC, currency undervaluation satisfies the requirements of a countervailable subsidy, in terms of the following key elements:

  1. Financial Contribution: Under the Final Rule, DOC has defined financial contribution as the receipt of domestic currency from an authority in exchange of U.S. dollars. Such an exchange would be treated as “direct transfer of funds”.
  2. Undervaluation: Currency undervaluation is a perquisite to an affirmative benefit determination, and, to assess whether there is undervaluation. The Final Rule states that DOC “normally will” examine the gap between the subject country’s real effective exchange rate (REER) and an equilibrium exchange rate.
  3. Government Action on the Exchange Rate: DOC indicated that an affirmative finding of currency undervaluation will be made only if there has been a government action. The Final Rule specifies that such government action will not normally include monetary and related credit policy of an independent central bank or monetary authority.
  4. Specificity: Under the Final Rule, DOC expanded the definition of specificity to include companies engaged in international trade as a single group for specificity determination. As per the Final Rule, DOC “normally will consider enterprise that buy or sell goods internationally to comprise such a group”.

Benefit Calculation:

The Final Rule has also laid down the methodology for calculation of benefit. In this regard, it is important to note that “X percent undervaluation” will not lead to “X percent duty”. DOC has indicated that calculation of benefit under the Final Rule will be “firm-specific” and based on exporter’s questionnaire response. Further, DOC will determine the existence of a benefit after examining the difference between (a) the amount of domestic currency that the foreign company at issue received in exchange of US dollars and (b) the amount of currency that the company would have received based on exchange rate consistent with the equilibrium exchange rate.

Potential Impact:

The Final Rule will apply to all segments of CVD proceedings initiated on or after April 6, 2020. These modifications represent a significant departure from DOC’s long held position that undervaluation of currency is not a countervailable subsidy. Given the significant change in Commerce’s Final Rule, the initial proceedings will be important in terms of clarifying and developing the jurisprudence regarding the treatment of currency undervaluation as a countervailable subsidy.

Historically, China has been a target of US currency/CVD proposals, which may be the reason why several policy experts as well as retail firms and the China Chamber of International Commerce opposed the change. Concerns have been raised by such parties that there is no precise way to measure exchange rate undervaluation, whether CVD is the most effective tool for addressing currency undervaluation and whether the rule change is consistent with WTO agreements. It is highly likely that Final Rule will face legal challenge before the US Court of International Trade or the WTO’s Dispute Settlement Body.

The same may also be challenged by major trading partners of the US, such as Indonesia, India, Vietnam, Thailand, etc due to the potential impact on their trade. However, the extent to which the Final Rule would be challenged will depend upon on the countries targeted by future currency undervaluation investigations.