In 2007, the United States Department of Commerce (USDOC) altered a long standing policy of not applying the countervailing duty (CVD) law to non-market economies (NMEs), and initiated eight countervailing and antidumping duty investigations on Chinese imports. The change brings heated debate on trade remedy policies and NME issues.
Trade remedies mainly include antidumping, countervailing, and safeguards. The World Trade Organization (WTO) permits certain responses from importing nations which can prove that they suffered material injury due to unfair trade practices. So far, antidumping is the most popular trade remedy measure in the worldwide trade disputes.

Countervailing duties are less common than antidumping measures. From January 1, 1995 to December 31, 2006, a total of 3048 antidumping and 191 countervailing initiations were notified to the WTO by reporting members (See Table 1). The United States did not apply CVD to China until recently as China has been classified as a “non-market economy” since 1981.1 This policy rests on two principles advanced in 1984 and confirmed by a federal appeals court. 2 On November 21, 2006, the US Department of Commerce announced its decision to initiate an antidumping and countervailing duty investigation on imports of coated free sheet paper from China. This decision changed the long standing precedent that the “non-market economies” could not be subject to the U.S. CVD investigations, on the basis that the extent of such subsidies cannot be accurately identified or measured.

In the case of coated free sheet paper, the USDOC has found several countervailing subsidies provided by the Chinese government, but no injury to the US industry was found by the International Trade Commission (USITC). Thus the first case was concluded in November 2007 without CVD order. Nonetheless, the change in USDOC policy has opened the gate for more CVD cases on China. By the end of 2007, eight AD and CVD investigations against Chinese imported goods have been filed and more cases are expected (Table 2). Today, policymakers from developing countries argue that antidumping measures have been increasingly used as preferred means by which industries in industrial countries seek protection from their governments. Countervailing measures are a matter of even greater concern as they can be more easily abused due to ambiguous rules. Developing and administering disciplines on the use of subsidies seems to be one of the most difficult works of international economic policy and rule making. As a matter of fact, both AD and CVD measures are extremely costly and ineffective as shown in the following sections.

The change of the U.S. CVD policy has broad trade policy implications for China, Vietnam, and other NME countries. Several technical issues may be of great concerns by developing countries: How to distinguish between legitimate governmental industrial policies and distortion trade subsidies in a developing and transition economy? Are American trade remedy policies consistent with the WTO Agreements and its commitments? What are implications of the United States changing its policy of not applying CVD laws to NME countries? How to clarify the rules on antidumping, countervailing, and NME issues in the WTO negotiations?

This study intends to shed light on the abovementioned questions by providing a review of the economics of subsidies, WTO principles on subsidies and countervailing measures, and US antidumping and countervailing duty laws and criteria for subsidies in nonmarket economies. The paper will focus on the first completed CVD case on coated free sheet paper from China; analyze the implications of this unprecedented case for trade and industrial policy implementations in China and other transition economies.

The rest of the paper is organized as follows. The section II gives a brief overview of the definition and classification of subsidies under the WTO Agreement on Subsidies and Countervailing Measures (SCM). The economic impact of subsidies and countervailing duties is discussed in section III. In section IV we trace the evolution of NME issues under the GATT/WTO system, and compare the different criteria for a market economy between the U.S. and EU. Section V discusses how the U.S. trade remedy laws treat  nonmarket economies. Section VI presents an analysis on the first U.S. CVD and AD investigations on the Chinese imported CFSP, and discusses the main controversial issues and implications for China’s public policies. We also provide a preliminary assessment of China’s related subsidies, and discuss various challenges facing China, Vietnam and other NME countries in this section. It is our view while acceding countries should revise their domestic development policies in the perspective of economic efficiency, social welfare, and comply with the WTO rules, it is also important to further clarify the NME issues under the WTO system, and pay keen attention to the rules negotiations on the use of trade remedy measures in the current WTO Doha Round.