Countervailing Duties

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Countervailing DutiesAuthor(s): Howard P. Marvel and Edward John Ray

Source: The Economic Journal, Vol. 105, No. 433 (Nov., 1995), pp. 1576-1593

Published by: Wiley on behalf of the Royal Economic Society

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The Economic Journal, 105 (November), I576-I593. C Royal Economic Society I996. Published by Blackwell

Publishers, Io8 Cowley Road, Oxford OX4 iJF, UK and 238 Main Street, Cambridge, MA 02I42, USA.

COUNTERVAILING DUTIES

Howard P. Marvel and Edward John Ray

I. INTRODUCTION

Countervailing duties (CVDs) are selective tariffs on imports allegedly

stimulated by government subsidies in the exporting nation. Such duties are

supposed to level the playing field for international competition. Since they

may mitigate distortions, CVDs are generally not condemned as strongly as

other supposed 'safeguards' such as antidumping tariffs and escape clause

protection (Finger, I995; Brennan and Pincus, I993).The suspicion remains,

however, that this protection 'cure' for subsidies is far more harmful than the

subsidies themselves. CVD protection may reflect internal political forces of the

country imposing the protection rather than the threat, actual or perceived, the

subsidies present.'

It is important for a number of reasons to resolve this question of whether

countervailing duties are primarily protectionist or, alternatively, devices to

reduce trade distortions. Disputes over tariffs designed to counter unfair trade

practices, whether in the form of subsidies or dumping, constitute the most

contentious portion of the trade relationship between the United States and its

major trading partners. Both subsidy use and imposition of duties against

unfair trade practices are growing rapidly. Consequently, either the subsidy

disease or the protection cure or both constitute major challenges to continued

liberalisation of the international trading system. Considerable theoretical

attention has been given to the impact of these practices. Much of this attention

has been focused on the strategic use of subsidies, particularly on subsidies

designed to foster leadership in high technology industries. Thus a second

reason for considering the sources and impacts of subsidies and countermeasures

is to assess whether these new theories provide important insights when applied

to countervailing duties. Finally, the GATT Subsidies Code underwent a

major rewrite as part of the Uruguay Round negotiations (Schott, I994). The

new Subsidies Code agreements enshrine a broad definition of what constitutes

a subsidy, increase the size of the set of subsidies that would automatically or

nearly automatically trigger countermeasures, define a set of permitted

subsidies, and allow less developed countries more flexibility to impose

subsidies intended to spur development. These codes represent a compromise

in which neither conception of the role of CVDs gave way to the other. The net

result of these changes may be an increase in CVDs sought throughout the

world. Again, it is apparent that an understanding of the reasons nations

1 The contrasting views of countervailing duties are nicely summarised in Patrick Messerlin's widely

quoted remark encapsulating the divergent views of Uruguay Round negotiators circa I 986: 'To the United

States, the [Subsidies] [C]ode is an instrument to control subsidies. To the rest of the world, it is an

instrument to control U.S. countervailing duties.' Quoted by Finger (I995), p. 42.

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[NOVEMBER I995] COUNTERVAILING DUTIES I577

countervail subsidies is crucial in predicting whether the new focus on

countervailing measures will protect or stifle trade liberalisation impulses.

We begin our inquiry by reviewing the changes to the GATT Subsidies and

Countermeasures Code (hereinafter Subsidies Code) adopted as a result of the

Uruguay Round negotiations. In dong so, we also summarise the state of US

countervailing duty law, as the United States is the world's leading exponent

and US law serves as the basis for much of the new Subsidies Code and for

countervailing duty laws in other nations. We briefly consider some of the

explanations that have been offered for the use of subsidies, and which therefore

condition the analysis of countervailing duties. Finally, we review the post

Tokyo Round characteristics of countervailing duty use. The existing literature

contains a number of interesting and useful case studies of countervailing duties

(Kalt, i988, I994,) empirical studies of the effects of duties on employment and

revenues of import-competing industries (Morkre and Kelly, I993, I994), and

factors affecting the outcome of US International Trade Commission (ITC)

decisions on CVD petitions (Baldwin and Steagall, I 994). We provide a broad

empirical overview of countervailing duties, summarising their use and

discussing the characteristics of industries that obtain such protection. Our

data on countervailing duty use give rise to the following conclusions:

(i) Countervailing duties have been growing in number and importance,

particularly outside of the United States. While US countervailing duties are

typified by their use for the steel industry, CVD activity elsewhere is oriented

more toward agricultural products and raw materials.

The overall growth in countervailing duties is troubling, indicating either

that subsidies must be growing in contradiction to previous attempts to reduce

them, or that CVDs are being employed against a wider range of supposed

subsidies than ever before, suggesting an increasingly protectionist cast.

The growth of countervailing measures in the rest of the world is particularly

troubling, since the smaller size of the domestic economies involved makes it

less likely that CVDs are intended to induce exporting nations to abandon

subsidies.

(2) While subsidies have been explained by strategic trade models, the

characteristics of industries involved in countervailing duty cases suggests that

the strategic role of subsidies is minor. In particular, we show that US CVD

petitions tend to be made against multiple nations simultaneously, that the

petitions are initiated in well-established American industries, and that the

products involved tend to be standardised products with well-understood

technologies. We show, moreover, that far from embracing the strategic

approach to explaining subsidies, the Uruguay Round modifications to the

GATT subsidies code explicitly permit subsidies of the sort most likely to have

strategic impacts.

(3) Economists generally agree that antidumping arguments for tariffs are

simply window-dressing for protection. It is implausible for most industries that

predation would drive domestic firms from the market and effectively block

entry by firms from other nations in order to capture monopoly returns

sufficient to recoup the losses entailed by dumping. We show that except in rare

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995] COUNTERVALINGDUTES I579

protection measures obtained by rent-seeking domestic industries. As a result,

we view the Uruguay Round approach of clarifying the nature of prohibited

subsidies while permitting nations to continue to expand CVD use as a failure

to confront a dangerous threat to GATT principles. The course of

countervailing duty activity throughout the world will bear careful watching,

particularly if trends in countervailing duty use remain in place.

II. COUNTERVAILING DUTIES IN UNITED STATES AND WORLD

TRADE LAW

Countervailing duties are apparently an American invention of ancient origin,2

but did not attract attention under international trading agreements until the

Tokyo Round of GATT agreements in I979. Like the Uruguay Round, the

Tokyo Round Subsidies Code was intended to reign in non-traditional forms

of protection. That is, the successive rounds of GATT negotiations had

succeeded in cutting tariffs across the board, but these broad cuts were

undermined in particular industries by both non-tariff barriers and selective

tariffs, two forms of protection that together constituted administrative

protection. But the Tokyo Round attempt to limit administrative protection

may have instead encouraged its use. As Destler (I 995) notes, 'by bringing US

law into conformity with GATT and international practice, the injury

standard (in the Tokyo Round) legitimized use of CVDs in future cases'

(Destler, I995, p. I49).

The Tokyo Round had banned subsidies listed in an Enumerated List of

Exports Subsidies. This list was intended to include all export subsidies for units

sold to other nations, These subsidies were colloquially termed 'red-light'

subsidies, a categorisation analogous to the treatment of certain anticompetitive

practices as per se violations of antitrust law. In contrast, subsidies offered to

domestic and export units on a non-discriminatory basis were to be permitted.

Countries importing such subsidised products were permitted to impose

countervailing duties of no more than the impact of the subsidy on margins

whenever the subsidised imports could be shown to have caused material injury

to the domestic industry of the recipient country.3 These actionable, or 'yellow

light' subsidies thus were to be treated roughly analogously to rule-of-reason

antitrust offenses, with the reasonableness standard to be assessed initially only

according to the material injury standard assessed by each recipient nation

individually. Further, material injury was not defined. Instead, a broad but

nonexclusive list of factors that might be germane to a material injury

determination was presented. The breadth of the factors to be considered did

not extend to the effect of the subsidised imports on downstream consuming

industries, however. Finally, some subsidies were defined unilaterally by the

2 An I897 statute required that the US government impose tariffs to offset foreign subsidies or imports

dumped on the American market. See Destler (I995), p. I39.

3 In addition to countervailing duties, other countermeasures were provided when the subsidies in

question were alleged to affect competition in third-country markets to which countervailing duties were

obviously not applicable. Such countermeasures are beyond the scope of this paper.




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580 THE ECONOMC JOURNAL NOVEMBER

United States to be non-actionable, or 'green light' subsidies. These 'safe

harbour' subsidies, to once again apply the antitrust analogy, have included

infrastructure investments of various sorts.

In practice, these definitions proved to be considerably less clear and the

coverage much less sweeping than the above discussion would suggest. In

particular, subsidies offered to such 'primary' product industries as agriculture,

forestry, and fisheries were excluded from coverage by the Tokyo Subsidies

Code. Since subsidies are endemic in these industries, the scope of the code was

greatly limited. Coverage was limited even for the products covered by the

Subsidies Code, for GATT members were not compelled to join the code as a

condition of their GATT member status. Non-signatories could face more

stringent tests by nations targeted for imports, but nevertheless, as of December

3I, I993, of I20 potential signatories, only 26 had signed the Tokyo Round

Subsidies Code.4

With the growth of countervailing duties and their companion, antidumping

measures, stimulated rather than limited by their treatment in the Tokyo

Round, the attention of the Uruguay Round negotiators to administrative

protection was compelled. The new Agreement on Subisidies and Counter-

vailing Measures modifies the prior GATT rules in several important respects.

Participation in the Subisidies Code was shifted from voluntary to mandatory

for GATT members. 'Red light subsidies' are to include 'local content'

requirements. A newly formed body, the World Trade Organization (WTO),

is charged with resolving disputes, and is intended to increase the visibility and

prestige of the dispute resolution process in order to induce an improvement

over past sporadic compliance with GATT decisions. Specific provisions are

included for subsidies matters. The WTO is to empanel a Dispute Resolution

Body advised by a Permanent Group of Experts helping to delineate subsidy

categories. These experts are to have more categories to delineate, for some

domestic subsidies have been given a presumption of serious prejudice.5 These

subsidies included those covering operating losses if the ad valorem subsidy

exceeded 5%0 of the cost of the product in question. Larger operating loss

subsidies are to be permitted only if they are temporary in nature, designed to

ease short-term adjustments to surging imports. But while these subsidies

spawned by competitive failures of domestic firms are not to be permitted,

success is also to be a reason for serious prejudice: if the subsidised product

displaces imports at home or in third countries, or if it increases its market share

world wide, serious prejudice is to be found. On the opposite end of the subsidy

spectrum, nonactionable subsidies are defined to include pre-com-

4 United States International Trade Commission, The Year in Trade: Operation of the Trade Agreements

Program, 45th Report, I993, USITC Publication 2769, June I994, Table I-2. 'Signatories to the Tokyo

Round agreements: Status as of Dec. 31, I993, pp. 43-45. (We refer to various annual issues of this report

below as OTAP.) This number of signatories is misleadingly small, however, as the European Community

is a signatory to the Subsidies Code, and US law therefore accords member countries the treatment accorded

to signatories.

5 Serious prejudice means that the material injury standard is not applied. Countervailing measures can

be forestalled only by a showing of no influence on trade whatsoever.

Subsidies to which the 'presumptive serious prejudice' label is attached have been dubbed 'dark yellow'

or 'amber', though 'bright orange' might better describe them. See OTAP, ibid, p. 5o, n. 59.

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995] COUNTERVALINGDUTES I58I

mercialization R & D subsidies, aid to meet enviornmental standards, and aid

to disadvantaged regions. The willingness to permit R & D subsidies is

particularly noteworthy, for it contrasts with the common concern of strategic

trade policy that by encouraging firms to achieve learning curve economies or

incur sunk costs, the subsidies could tempt trade-distorting government

intervention. Subsidies with de minimus effects are also permitted, though the

de minimus standard can be met by cumulating subsidies, rather than

evaluating them individually. Subsidies are defined for the first time, being

viewed as financial contributions (broadly viewed) measured according not to

the cost to the subsizing government but rather by the benefit to the recipient

industry.6 However, 'non-specific' subsidies such as job-training programmes

or tax cuts afforded to all firms irrespective of their status as exporters are

permitted. That is, subsidies may neither be offered to export-generating

industries nor made contingent on export performance. Finally, agricultural

subsidies remains outside of the scope of the Subsidies Code, being covered

instead by a separate agreement on agriculture.

Early assessments of the new Uruguay Round subsidies and CVD measures

have generally been positive. Finger (I 995) laments that 'while GATT

negotiations have proven to be an effective way to get rid of old trade

restrictions, GATT rules provide increasingly less discipline against countries

erecting new ones.' Yet while his condemnation of GATT arrangements that

permit protectionist barriers appears to cover such barriers generally, he has

kinder words for subsidies and countervailing duties, noting with approval that

'after decades of disagreement over use of subsidies... the major actors have

reached concrete agreement on what a government may or may not do, both

on subsidies and on countervailing measures.' Finger's assessment is echoed

elsewhere. Schott (I994) argues that '[i]n contrast to the antidumping

agreement, the negotiation of the Uruguay Round Agreement on Subsidies

and Countervailing achieved notable improvements in existing GATT rules'.

The common feature of these assessments is that they focus not on the

countervailing duties that might be imposed in response to changes in the

Subsidies Code, but rather on the prevalence of the subsidies themselves. Thus

Schott poses his assessment in terms of whether the new safe harbour subsidies

will do more harm than the good done by 'stronger discipline on export and

domestic subsidies...' (Schott, I994). Finger's concerns about the Subsidies

Code turn on a provision permitting least developed nations to continue to

employ subsidies for a transition period, and establishing a larger de minimus

exemption. In Finger's view, providing a GATT imprimatur for such subsidies

could generate more use of such subsidies, with the same adverse effects of the

expansion of the subsidy safe harbour.

While newly permitted subsidies may in fact constitute a cost associated with

the countervailing duty provisions of the Uruguay Round accords, it is difficult

to see benefits from the CVD measures in the form of reduced protection

pressure. For example, the steel industry, the leading source of CVD petitions,

6 This summary is based on OTAP, p. I6 ff., see also Hufbauer (I993) and Schott (I994).

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discounts the probability of the new subsidy provisions of the Uruguay Round

'substantially reducing the degree of protection available to it under the

current law'.7 Recall that Tokyo Round attempts to clarify countervailing

duties appear to have stimulated CVD use, and that the steel industry's

countervailing duty petitions are closely linked with protectionist antidumping

findings and themselves suspect as protectionist. Clearly an assessment of the

new rules requires an understanding of whether CVDs have been primarily

protectionist or instead have prevented or offset subsidy-induced distortions.

III. SIZE AND GROWTHOF COUNTERVAILING DUTY CASES

In order to determine the sources and impact of countervailing duties, it is

necessary to review their past use. This section provides descriptive statistics on

the history of CVD use in the United States as well as an indication of CVD

growth in the recent past in the rest of the world. The principal focus here on

American behaviour is a consequence of the early and continuing use of CVD

in the United States. The United States has been the leading exponent and

most intensive employer of CVDs. Our review of CVD activity touches in

passing on antidumping petitions as well. While theoretical distinctions may be

drawn between these two sources of administered protection, in practice they

are almost indistinguishable, linked in law and in incidence, as we show below.

These two types of protection are both covered by Title VII of the Tariff Act

of I930, in the section adopted by the United States in I979 in response to the

GATT Tokyo Round Antidumping and Subsidies Codes. Each type of petition

is evaluated by the ITA, which is responsible for determining whether the

alleged unfair practice, subsidy or dumping, has occurred, and then for

determining the appropriate ad valorem duty. Each is then subjected to a

common material injury standard by the ITC.

Since the adoption of the new antidumping and CVD rules, the United

States has actively exploited the opportunity to protect its import-competing

industries. Data on the volume of imports affecting by antidumping and

countervailing duty petitions to the ITC attest to the importance of

countervailing duties in the American protectionist arsenal.8 For fiscal years

7 Bill Schmitt, 'GATT seen mixed for steel', American Metal Market, November 9, I994, p. i, quoting a

report, 'Steel and the New GATT', prepared by the Congressional Research Service.

8 The data are reported in United States International Trade Commission, 'Antidumping and

Countervailing Duty Handbook', Washington, D.C., September I994, pp. E-3ff. The data include only

petitions for which an ITC initial determination was required. Petitions involving non-signatories of the

GATT Subsidies Code do not require material injury determinations, and did not therefore come before the

ITC. The degree of understatement of countervailing duty activity in these data appears to be minor, based

on comparisons with activity reported in The Year in Trade: Operations of the Trade Agreements Program, United

States International Trade Commission, various years. These publications are referred to below as OTAP.

The data for affected import values are derived from ITC investigations in individual cases. It is not

possible to obtain these data on a case-by-case basis, for in many instances they are based on confidential

materials supplied to the ITC.

I. M. Destler, supra n. 2 reports substantially more cases than those reported by the ITC. Destler, Table

6. i, p. i66, finds a total of 455 CVD cases for the calendar years I974-94, even though his tabulations fall

short of the number shown in the ITC statistics prior to the massive steel case filings beginning in I 982. Our

own tabulations, including cases not covered under Title VII, finds a small number of additional cases for

I 989-94. We have reported the ITC tabulations here in order to obtain comparable information on the value




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I980-93, such cases involved imports amount to nearly $34 billion. Subsidies

subject to countervailing duties were alleged in cases covering $I7 billion. A

number of the petitions in question alleged that imports were simultaneously

subsidized and dumped. Cases alleging only countervailing duties amounted to

nearly $I3 billion.9

Subsidy cases, once filed, have proven more difficult to carry to a 'successful'

conclusion, that is, imposition of a duty, then have antidumping petitions. For

the period I980-93, less than 22 % of countervailing duty petitions resulted in

successful final ITC determinations, compared with 390% of antidumping

cases. This success rate is deceptive, however, for two reasons. First, a large

number of unsuccessful countervailing duty cases come from the first three

years of the new rules. Since I 983, the ITC has affirmed 49 % of CVD peptitions,

compared with 55 0 of antidumping petitions. Secondly, many of the

investigations in question were terminated by the Department of Commerce.

In particular, the steel industry initiated a series of countervailing duty

petitions in the I 980s involving significant imports. These actions were

terminated in response to export restraints negotiated by the United States

with many of its principal trading partners. In I986, for instance, ten of 26

petitions resulted in affirmative ITC determinations, but clearly the seven

terminated petitions were considerably more important: the affirmative

determinations affected $8o million in imports in contrast to the $2.9I billion in

imports for which the process was terminated. The reason for many of the

terminations is not difficult to find: the United States negotiated specialty steel

quotas with Japan, Canada, Poland, Spain, Sweden, and Korea, and imposed

unilateral quotas on Taiwan and Mexico.' Indeed, the complaints by the steel

industry were clearly intended to force foreign steel producers to limit

of imports affected by countervailing duties. The patterns exhibited by all three tabulations are similar, with

large spikes attributable to steel petitions in 1982 and I992, and a lesser, broader spike in the mid-ig8o's

corresponding to a surge in the value of the dollar.

9 Cases involving countervailing duties exclusively are often linked, however, with related dumping

investigations. The largest stand-alone countervailing duty investigation appears to be the long-running

Canadian softwood lumber dispute.

10 Not all of these countries have been charged with imposing subsidies, however. Sweden, as a

non-signatory of the GATT Subsidies Code, was not subject to ITC investigation. Japan is often charged

with dumping, but does not rank in the leading nations in terms of countervailing duty petitions. That

ranking is as follows:

petitions

Brazl 43

France 33

Itay29

Germny23

Spn23

Canada 22

United Kngdom2I

Begum20

Krea 2

Oher 35

Tota 369

Source: derived from Figure I4 in US ITC, Antidumping and Countervailing Duty Handbook, Washington, D.C.,

September I994, p. E-I4.

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shipments to the United States. The Chairman of United States Steel indicated

that by flooding the ITC and Department of Commerce with complaints,

foreign competitors could be forced to enter into export restrictions to avoid the

legal and accounting burdens entailed in responding to the demands of the

investigations triggered.1 This mass petition filing was threatened again in

i989, but was forestalled by a two and one-half year extension of steel quotas.

When the steel quotas did finally expire in I 992, another flood of steel petitions

occurred, but in this instance, many were carried to final determinations. The

pattern of filings is shown in Fig. i.12

120

100

80 -

C_

0

5 60

z

40 -

20

0

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

Year

Fig. i. US countervailing duty cases, fiscal years I980-93. El, Terminated; O, negative; *,

affirmative.

The pattern of petition filings in Fig. i is also present in antidumping duty

petitions. In each case, the number of petitions filed is positively related to the

US business cycle, but the relationship is more pronounced for CVD petitions.

Petitions are obviously most prevalent during the Reagan-Volker recession of

the early I98os and the I992-2 Bush administration recession. Combined with

the surge of cases in the mid- i 980s, a surge mirrored in the antidumping cases

and, as noted above, tied to the unusual strength of the dollar at that time, this

cyclical petition pattern strongly suggests that the most important determinant

of petition filing is material injury, rather than the mere existence of a subsidy.

Indeed, many of the subsidies challenged appear to have been construction

See Destler (I994). The petitioning industry or firm need merely file its complain with the ITC and

Department of Commerce. These agencies then seek detailed information from the firms wishing to export

to the United States, without further cost to the domestic petitioners.

Fig. I is from US ITC, Antidumping and Countervailing Duty Handbook, Washington, D.C., September

I994, p. E-5.

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9951 COUNTERVALNGDUTES I585

subsidies for long sunk costs, subsidies that should have had little impact on the

behaviour of importers during the recession. The impression that injury test is

more important than the subsidy test in determining if protection will be

granted is reinforced by the relative paucity of negative ITA determinations.

For example, of the forty countervailing duty cases filed in I992 claiming

subsidies of carbon steel products, the ITA determined that countervailable

subsidies were present in all cases, but in preliminary determinations, the ITC

found that twenty-four petitions did not involve imports causing material

injury.

Successful countervailing duty petitions differ substantially from their

antidumping counterparts and from petitions resulting in negative deter-

minations. While successful antidumping actions involved slightly more imports

than actions resulting in negative determinations, $35 million versus $29

million, the difference between CVD cases with positive and negative cases was

quite large, $9I million versus $I 7 million.13 The ITC data on value of imports

subject to countervailing duty petitions are shown in Fig. 2'4 Using data

gleaned from ITC decisions, Baldwin and Steagall (I994) compute probit

estimates of the differences between successful and unsuccessful CVD cases.

Their results suggest that affirmative ITC decisions are negatively related to

percentage changes in domestic shipment and capacity of the domestic industry

facing import competition and the larger the market share of imports.'5

A fuller appreciation of the application of countervailing duty laws in the

United States can be obtained by considering all of the petitions filed over some

time period. The ITC publishes an annual report, Operation of the Trade

Agreements Program, which contains a listing of all of the countervailing duty

cases active in the preceding calendar year. We have tabulated these cases for

the years I 898-93. The total number of cases active over this period was 82. Of

these 82 cases, 48 involved either steel products or products made primarily of

13 Data for the period I980-93.

14 Fig. 2 is from US ITC, Antidumping and Countervailing Duty Handbook, Washington, D.C., September

1994, p. E-8.

1 The Baldwin-Steagall results must be taken as merely suggestive due to problems with both the data

and the estimation procedures they employ. Baldwin and Steagall have I 72 observations for countervailing

duty case decisions with a 65 % rate of positive decisions. That is, they find i i i affirmative decisions versus

only 6 I negative results. These numbers must be contrasted with the results reported by the ITC for the fiscal

years i980-90: 6o affirmative and I43 negative decisions for a total of 203 petitions. The difference in

affirmative decisions is explained in part by the curious decision of Baldwin and Steagall to include as

separate observations both preliminary and final decisions by the ITC. Clearly, to the extent that

preliminary decisions by the ITC are reversed at the final decision stage, the same model is being used to

predict these opposite results. For decisions that are identical, the final decision is obviously a conditional

probability given the necessity of a positive preliminary decision. But the selection problems associated with

positive decisions are dwarfed by those posed by the negative side. It is troubling that fewer than one-half

of the negative determinations are in the Baldwin-Steagall sample, omissions due perhaps to missing data

in the ITC decisions. Nonetheless, the great disparity between the unreasonably large number of affirmative

decisions and the paucity of negative decisions leads to concern about the results obtained.

One final problem with the data should be noted. The regression results are based on independent

variables that are industry specific, as opposed to case specific. Recall that the ITC is charged with

determining material injury, not whether a particular country was guilty of subsidising its exports for the

product in question. Hence, material injury decisions for a particular industry can be expected to be closely

related, particularly for cases where imports are other than de minimus. Given that the number of industries

involved in these cases is relatively small and that cases for a particular industry are typically grouped in the

same year, the significance tests in the estimates are considerably overstated.




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5 0

450-

4.0-

3.5

3-0

20 25

10

0 5 1

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993

Year

Fig. 2. Value of imports affected by US CVD petitions, fiscal years I980-93- El, Affirmative; Fl,

negative; *, terminated.

iron and steel, such as circular welded pipe and tube, malleable iron pipe

fittings, butt-weld pipe fittings, steel wire rope, steel wire nails, and steel rails.

As noted above, forty of these petitions, filed in I 992, involved either flat-rolled

carbon steel products or hot-rolled lead and bismuth carbon steel products.

These cases were brought at the expiration of steel import quotas which had

been in effect since the mid- i98os, quotas that emerged as the result of a

previous flurry of steel industry countervailing duty and antidumping actions.

These carbon steel countervailing duty petitions were accompanied by an

additional 24 antidumping petitions covering the same carbon steel products.

This close association between antidumping and countervailing duty filings

is mirrored in the experience for petitions filed for products other than iron and

steel. Table i lists products subject to countervailing duty petitions together

with related antidumping filings. The close linkage between these two forms of

administered protection, a linkage close in both law and filing practice,

combined with the cyclical behaviour of the petition filings, leads to a

presumption in favour of the view that the two types of petition stem from a

common source, the simple desire for protection from import competition.

This detailed list of products involved in US CVD actions is also useful for

characterising the types of products for which such protection is sought. In

particular, note that with the exception of a few food and apparel items, the

products in question are intermediate inputs into manufacturing, not final

consumer products. This pattern differs from that predicted by political

economy analysis and found in empirical investigation of tariffs resulting from

Kennedy Round tariff adjustments. The apparent explanation for the

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Table i

US Countervailing and Related Antidumping Petitions, by Product,

Active Cases, I989-93

Product CVD countries Related dumping countries

Alumniumsulfate Venezuela Sweden, Venezuela

Antifriction bearings Singapore, Thailand Germany, Italy, Japan, Romania,

Sweden, Thailand, UK

Atlantic SalmnNorwyNorwy

Ball bearings TurkeyArgentina, Austria, Brazil, Canada,

Hong Kong, Hungary, Mexico,

China, Poland, South Korea,

Spain, Taiwan, Yugoslavia

Butt-weld pipe fittings Thailand None)a

Circular wlded pipe and tube Brazil Brazil, Korea, Mexico, Romna,

Taiwan

Extruded rubber thread Malaysia Israel, Canada, Caribbean Basin

Ferrosilicon Venezuela Chna, Kazakhstan, Russia,

Ukraine, Venezuela

Flat-rolled carbon steel products Austria, Belgium, Brazil, Argentina, Australia, Belgium,

France, Germany, Brazil, Canada, Finland, France,

Italy, Korea, Mexico, New Germany, Italy, Japan, Korea,

Zealand, Spain, Sweden, Mexico, Netherlands, Poland,

Taiwan Romania, Spain, Sweden, UK

Hot-rolled lead and bismuth Brazil, France, Germany, UK Brazil, France, Germany, UK

carbon steel products

IbuprofenInda Inda

Industrial belts Korea, Singapore, Israel Italy, Japan, Taiwan, UK, West

Germany

Leather Argentn Nne

Leather wearing apparel Columbiab None)

Lmusnes Cnda Cnda

MagnesiumCanada, NorwayChna, Russia, Ukraine

Phthalic anhydridec Brazil, Israel, Mexico, Brazil, Hungary, Israel, Mexico

Venezuela

lastic corrugatorsa Canada (None

ort products Canada None

ortable seismgraphse Canada (None

ortland cemnt Venezuela Japan France

Portland hydraulic cement Costa Rica

Probe thermostatsg Taiwan Canada, Japan, Malaysia

ed raspberres Canada (None

Shoptowels Bangladesh Bangladesh

iliconmtal Brazil Argentina Brazil, China

Sodiumsulphur compounds Brazil Germny, Chna, UK

oftwre products Singapore (None

oftwood lumer Canada None

Steel rails Cnda Cnda

teel wre rope Thailand Chile

teel wre nails Mlayia (None

ulphanlic acid India Hungary

able wne France ItalyFrance Italy

a Antidumping petitions against Thailand and China were filed ten months after this CVD petition.

b Active case dating from i980.

c Used in making plasticiser that is used in turn in PVC production.

d We have been unable to find an ITC determination in this investigation.

de minimus subsidy.

f The dumping claims against Japan and France were not exactly contemporaneous.

9 Thermostatically controlled appliance plugs and internal thermostats therefore.

h This action dates from I980. An antidumping order against Canadian raspberries was entered in I985.

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Table 2

Products with US CVD Orders in Place, I993

Year of D = dumping

ommdityactionorderinforce

grcultural tillage tools I985

Aoymgnesum992D

Aumnumsuphte 989 D

Antfrctonbearngs 989 D

Apre 985

Aprn987

Atantc samnI99 D

Bl bearng 989D

Brass sheet andstrp987 D

razing copperrod and wre I985 D

utt-weld ppe fittings I990 D

Crbonstee wre rod986 D

Ceramc te I982

Certain castor oil products I976

Certain iron-metal castings I980

Circular welded non-alloysteel pipe I992 D

old-rolled flat products I984 D

Cold-rolled carbon steel flat products I993 D

Contructoncastngs 986 D

Corrosion-resistent carbon steel flat products I993 D

ottonsheeting and sateenI983

CottonyarnI977983

Cut-to-lengthcarbon steel plate I993 D

lectrcal conductorredrawrods I988 D

xtruded rubber thread I990 D

Ferrochrom 98

FerroiliconI993D

Freshcut fowrs 987 D

Freshcut roses 980

ndustral phosphorc acid I987

Lammat 985

Lathr990

ead and bismth steel I993 D

eatherwearng apparel I983

Lve swn 985

Lumr992

Mlleabe ppe fttngs I989 D

on-rubber footwear I979

l countrytubular goods I984 D

Pgron98

Ppes andtubes 985 986 D

omomchryanthemm 987

PorceaincookwarI986

Pure mgnesum992D

Rwpstachos 1986 D

Rbrs 985

R ce98

Roastedpstachos 986 D

Shoptows 984D

tainess steel cookware I987 D

Standardcarnton 987 D

tandard chryanthemm 987

Stee ral I989D

Steel wre nils I987

Steel wre rop 99 D

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Stee sre 986D

Sugr978 D

Suphnlic acidI993 D

extile mll products I985

scose rayonstape fibre I979 D

Welded carbon steel pipe and tube products I988

Wre rod986D

Wo 983

Woengarmts 978

difference says much about the dangers of rules-based trading regimes: the

rules may alter the ability of various interested parties to affect the outcomes

of the decision process. The economic analysis of regulation predicts that

concentrated interests will be better positioned to bring effective pressure to

bear on the political process than diffuse interests such as consumers. Hence,

one would normally anticipate that tariff protection afforded to final consumer

goods would be stiffer than that granted intermediate products, both because

of the difficulty of mobilising consumers and because for intermediate products,

downstream firms can be expected to provide formidable opposition to

protection. But for CVD actions (along with antidumping actions) the material

injury standard considers only the impact of imports stimulated by subsidies or

dumping on import-competing domestic producers. The rules based approach

here is inimical to liberalisation, though it would be naive to imagine that

decision makers such as the ITC could ignore downstream consequences of

their actions entirely. 6 Since the material injury standard appears to have a

major impact on the use and politics of administered protection, we return

below to the question of why such a standard was specified.

The patterns evident in the products for which CVD protection has been

sought are repeated in the set of products for which that protection has been

secured. Table 2 lists all products for which countervailing duty orders were in

effect as of December 31, I993.17 Products for which antidumping orders were

also in effect are denoted by a 'D' in the last column.'8 The Table reinforces

the lessons from Table i. Of all recent (i 989 and later) CVD orders, only two,

leather from Argentina and softwood lumber from Canada, are not paired with

antidumping orders. That is, the close association between antidumping and

CVD actions goes beyond the petition stage and extends to the duties put into

place. This association is not surprising given that the principal issue in

resolving petitions is not whether or not the challenged subsidy or dumping

16 For a particularly illustrative case, consider the countervailing duty imposed on electrical conductor

redraw rods from Venezuela. Possessing the important inputs for aluminium production, namely heavy

crude oil useful primarily for firing electric generating stations and ample supplies of bauxite ore, Venezuela

took a series of actions to stimulate its aluminium smelting industry. The smelters were constructed as joint

ventures with leading American aluminium producers. Indeed, of the American electrical redraw rod

producers, only one was not involved in Venezuelan production. That one non-participating producer was

the only firm to file a CVD petition against Venezuelan imports, and indeed, the remaining American

producers opposed the petition. Nevertheless, the petition was granted and substantial tariffs imposed.

17 Source: The Year in Trade: Operation of the Trade Agreements Program, 45th report, US ITC, publication

2769, June I 994, Table A 27, pp. i 83 ff. Two dates appear below when separate investigations for the same

product yielded CVD orders. Table 2 does not include products for which CVD orders were suspended.

18 Data from US ITC, id., Table A 25, p. I 75 ff.

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exists, but rather whether imports supposedly fostered by these practices have

resulted in material injury. It should not be surprising that virtually identical

standards yield parallel results.

The product characteristics in Table 2 also mirror the other characteristics

noted for the products in Table i. The products in the table are, again with the

exception of a few food and apparel items and several types of fresh flowers,

predominately intermediate manufactures, with heavy emphasis on iron and

steel. Few if any of these items can be considered to rely heavily on advanced

technology. Very few of the products are manufactured or grown in a limited

area of the world or by a small number of firms. Cotton and other textiles, steel

products, ball bearings, and foodstuffs are all produced by a large number of

potential suppliers. Few of these products appear to be produced by small

numbers of oligopolistic firms in settings conducive to strategic manipulation. 9

Table 3 reports the number of countervailing duty actions reported to

GATT during the period I989-93. While the United States has long been

responsible for the disproportionate share of CVD activity, the cumulative

world activity now exceeds that in the United States.20 The products covered

by these CVD actions are somewhat different from those subject to US CVD

petitions. Steel products are conspicuous by their absence. Over half (47 to 8o)

of the products are either foodstuffs or processed foods. An additional eleven

are textiles, apparel, or leather. Of the remaining products, none could be

considered 'high tech'. In many instances, the products are duplicated, with

simultaneous filings claiming subsidies by several foreign governments. Figure

3 shows that similar to the American case, CVD filings in the rest of the world

appear to have been stimulated by the I992-2 recession.

Table 3

Countervailing Duty Actions Reported by Signatories to the GA TT Committee on

Subsidies and Countervailing Measures, I989-93, by Country

ustralia 42

Autra 4

Brazl IO

Canada II

Che 9

European Community 2

ewZealand 2

Total 8o

The case of Australia is particularly instructive. Of the thirty cases for which

either provisional or final outcomes are reported, twelve (40 0) resulted in the

application of countervailing duties. As in the American case, Australian CVD

19 An exception to this characterisation is again softwood lumber from Canada. The subsidies Canada is

accused of offering, however, take the form of below-market prices for rights to standing timber. (Kalt, I 988)

This form of subsidy is very unlikely to have strategic effects versus American lumber producers, who are,

in any event, participants in a low concentration industry.

20 Compare the 8o cases for the rest of the world with the 6I in Fig. I. Destler reports 70 cases for the

United States for the same period. See Destler, supra n. 2, Table 6.I, p. I66. Finally, our own account of

active cases from OTAP for these years found 82 cases, but of these, nine were filed prior to I989.




17/19

995] COUNTERVALINGDUTES I59I

30

25

20 -

0 Y

0

0)

1 0

5

1989 1990 19911992 19

Year

Fig. 3. Number of non-US CVD actions reported to GATT.

actions are typically filed simultaneously with claims of dumping. Most of the

Australian complaints concern agricultural products. Subsidies are apparently

not found in isolation: only eight of the 42 Australian petitions were unique by

product. In each of the remaining cases, the product in question generated

filings against more than a single exporting nation. Of those eight, five CVD

petitions generated companion dumping claims. Of the remaining three CVD

cases without companion dumping charges, only brandy from France was

found to have met the conditions for imposition of a countervailing duty.21

Subsidies and Strategy

Thus far, we have considered countervailing duties as responses to subsidies

without considering the subsidies themselves. This omission is sensible if the

subsidies are taken to be the result of rent-seeking activities in the exporting

21 Brennan and Pincus (I 993) have offered a defense of Australian countervailing duties based upon the

need for a rules-based process for undoing the ill effects of foreign rent seeking behaviour. They argue that

even when other nations do not countervail, 'Australia can Do its Bit for economic rationality' (p. 5) by

attempting to deter trade-distorting foreign subsidies. While they recognise that Australia's own

implementation of countervailing duty decisions might itself be subject to rent seeking influence by domestic

interests, they (p. I 5) argue that with high administrative hurdles and transparency of decision making, this

threat can be minimised. The data above do not appear to support this view. The close association of CVD

and dumping petitions, the cyclical pattern of petitions, and the practice of filing simultaneous claims against

multiple exporting nations combine to suggest that the countervailing duties in Australia are the result of

domestic pressure for protection. Consider the multiple simultaneous filings of petitions. It may be that the

conditions necessary to influence political outcome are closely tied to product characteristics, thereby

explaining why the same product is subsidised by a number of different nations. But then those same product

characteristics would likely affect the subsceptibility of importing nations to claims of unfair subsidies coming

from their domestic industries. It seems unlikely that transparency and high hurdles in the CVD process can

easily undo the forces that permit rent seeking to succeed in the quest for subsidies.

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nations. But recent theoretical investigations have suggested that governments

may wish to subsidise their export industries for strategic reasons even if

unprompted by export firms to do so. Following Brander and Spencer (I985),

a number of authors22 investigated oligopoly models of subsidies, concluding

that when competition among small numbers of players takes place in

quantities, export subsidies can shift reaction functions for subsidised producers

out, thereby increasing their share at the expense of foreign nations and

increasing the ability of the subsidizing nation to capture rents available in

such settings.23 The Brander-Spencer argument is that such profit shifting, by

changing the rules of the game played by suppliers of the subsidised good, can

be a powerful incentive for governments to place subsidies in effect. Moreover,

Brander and Spencer (I 985) determine that the importing nation in such cases

has an incentive to adopt countervailing duties, though the duties should not

be as large as the subsidies offered. However, the pattern of countervailing

duties discussed above contains several troublesome aspects from the standpoint

of the strategic analysis. The quest for strategic rents should be most

pronounced when those rents are largest. This contrasts with the counter-

cyclical nature of CVD petitions and the use of a material injury standard. The

multiple filings of CVD petitions for the same product and their links with

antidumping claims suggests that the rents available in many of the affected

markets are apt to be restricted by competition. Many of the subsidies in

question appear to have covered fixed costs, and therefore may not fit the

requirements for shifting reaction functions. Subsidies that would lower

marginal cost and thereby shift reaction functions fall generally into the 'red

light category', which includes all such inducements targeted to particular

export industries. While the decision to file for CVD protection introduces

selection bias into our list of subsidies, so that the subsidies that generate CVD

petitions may not be those spawned by strategic factors, it appears unlikely that

the subsidies in CVD disputes are the product of Brander-Spencer strategic

profit shifting.

Strategic considerations can influence subsidy decisions in other ways,

however. One particularly contentious issue arising out of the strategic trade

policy literature is whether the ability to impose countervailing duties is

necessary to deter subsidies for high technology items requiring considerable

24-itnepoutar

infusions of R & D money. As we have noted, R & D-intensive products are

conspicuous by their absence from the products attracting countervailing duty

petitions. While subsidies to firms in the aerospace and semiconductor

industries have attracted widespread scrutiny as potentially trade-distorting,

such subsidies are not the target of CVD petitions. Given the 'green light'

22 For a useful summary of early work, see Krugman (I989).

23 It is well known that if competition is in price, not quantity, the optimal strategic policy is to impose

an export tax (Grossman and Eaton, I986). We here consider only the subsidy case, for export taxes can be

imposed without triggering countervailing measures.

24 For example, Laura D'Andrea Tyson ('Managing our high-tech trade', Los Angeles Times, September

17, I989, Part 4, p. 2) notes that '...a growing number of high-technology producers have become more

aggressive in seeking the relief afforded by the nation's trade laws. The number of anti-dumping and

countervailing-duty actions brought by U.S. companies skyrocketed in the I980's.' See also Dixit and Kyle

(i985).

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treatment of pre-commercialisation R & D in the Uruguay Round agreement,

there is little prospect of CVD effects in this area.

IV. SUMMARYAND CONCLUSIONS

The literature on countervailing duties contains a number of sophisticated

theoretical explanations of why governments might chose to adopt subsidies for

strategic purposes, and why countervailing duties may be necessary to counter

these subsidies. Our broad overview of countervailing duty use does not show

that these studies are misguided, but it does suggest that in considering the

benefits such duties may offer for reducing trade distortions, one must not lose

sight of the fact that these duties are themselves protection, that they appear to

be generated in the same industries and by the same forces as other less

attractive protection measures, and that they have apparently been stimulated

by rules designed to control their use. The recent Uruguay Round attempts to

rewrite the CVD rules offer the possibility that this experience will be repeated,

with new clarity in the rules legitimising countervailing duties, rather than

constraining them.

The Ohio State University

REFERENCES

Baldwin, R., ed. (i988). Trade Policy Issues and Empirical Analysis. Chicago: University of Chicago Press.

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