May. 06, 2024
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-------Our factory is located
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------ Depending on the products' complexity and structure, it can range from 2 to 12 weeks.
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U.S.-China Trade: Eliminating Nonmarket Economy Methodology Would Lower Antidumping Duties for Some Chinese Companies (10-JAN-06, GAO-06-231). U.S. companies adversely affected by unfair imports may seek a number of relief measures, including antidumping (AD) duties. The Department of Commerce (Commerce) classifies China as a nonmarket economy (NME) and uses a special methodology that is commonly believed to produce AD duty rates that are higher than those applied to market economies. Commerce may stop applying its NME methodology if it finds that China warrants designation as a market economy. In light of increased concern about China's trade practices, the conference report on fiscal year 2004 appropriations requested that GAO review efforts by U.S. government agencies responsible for ensuring free and fair trade with that country. In this report, the last in a series, GAO (1) explains the NME methodology, (2) analyzes AD duties applied to China and compares them with duties applied to market economies, and (3) explains circumstances in which the United States would stop applying its NME methodology to China and evaluates the potential impact of such a step. Commerce agreed with our findings, commenting that our report provides timely and helpful information on the NME methodology and its application to China. -------------------------Indexing Terms------------------------- REPORTNUM: GAO-06-231 ACCNO: A44517 TITLE: U.S.-China Trade: Eliminating Nonmarket Economy Methodology Would Lower Antidumping Duties for Some Chinese Companies DATE: 01/10/2006 SUBJECT: Economic analysis Evaluation methods Foreign governments Foreign trade policies Import regulation Import restriction International economic relations International trade International trade regulation International trade restriction National policies Policy evaluation Prices and pricing Restrictive trade practices Trade policies China ****************************************************************** ** This file contains an ASCII representation of the text of a ** ** GAO Product. ** ** ** ** No attempt has been made to display graphic images, although ** ** figure captions are reproduced. Tables are included, but ** ** may not resemble those in the printed version. ** ** ** ** Please see the PDF (Portable Document Format) file, when ** ** available, for a complete electronic file of the printed ** ** document's contents. ** ** ** ****************************************************************** GAO-06-231 * Report to Congressional Committees * January 2006 * U.S.-CHINA TRADE * Eliminating Nonmarket Economy Methodology Would Lower Antidumping Duties for Some Chinese Companies * Contents * Results in Brief * Background * Commerce Employs a Special Methodology to Calculate China AD Duties * AD Calculations for NME Products Employ Third Country Information * NME Companies Must Meet Certain Criteria to Be Considered Eligible for Individual Duty Rates * Commerce Employs Different Approaches to Determine Duty Rates for Eligible and Ineligible NME Companies * Eligible NME Companies Receive Individually Determined or Weighted Average Duty Rates * Other NME Companies Receive Country-Wide Duty Rates * Commerce Has Applied AD Duties to China Frequently at Varied Rates * China Has Been the Most Frequent Target of U.S. Antidumping Orders * China, Market Economy Rates Varied Widely * Overall, China Rates Were Higher Than Market Economy Rates * Difference in Average Rates Due Primarily to High China Country-Wide Rates * Country-Wide Duty Rates Substantially Higher Than Market Economy All-Others Rates * Individual Company Rates in China and Market Economy Countries Not Substantially Different on Average * Ceasing to Apply NME Methodology Would Have Mixed Results * Commerce May Stop Applying NME Methodology to China in Certain Circumstances * Commerce Has Administrative Authority to Change China's NME Status * China's WTO Commitment Allowing the Use of Third- Country Information Expires in 2016 * Transition to Market Economy Methodology Would Bring Significant Procedural Changes * Eliminating Country-Wide Rates Would Likely Reduce Duty Levels for Companies Not Assigned Individually Determined Rates * Individually Determined Rates Would Vary, Depending Upon Cooperation * Impact of Applying Chinese Price Information Would Vary By Industry and Is Likely to Decline over Time * Duty Rates Will Continue to Display Great Variation * Trade Significance of Country-Wide Rates Appears to Be Declining * Concluding Observations * Agency Comments and Our Evaluation * Scope and Methodology * Additional Information on Duty Rates Applied to China and Market Economy Countries * Duty Rates Imposed on China * Duty Rates against China Have Fluctuated over Time * Average Duty Rates on 68 Orders against China and Subset of 25 Orders Matched to Market Economy Orders * Regression Analysis Results * Comments from the Department of Commerce * GAO Comments * GAO Contact and Staff Acknowledgments * cov1&2.pdf * Report to Congressional Committees * January 2006 * U.S.-CHINA TRADE * Eliminating Nonmarket Economy Methodology Would Lower Antidumping Duties for Some Chinese Companies * PDF6-Ordering Information.pdf * Order by Mail or Phone Contents Tables Figures January 10, 2006Letter The Honorable Richard C. Shelby Chairman The Honorable Barbara A. Mikulski Ranking Minority Member Subcommittee on Commerce, Justice, and Science Committee on Appropriations United States Senate The Honorable Frank R. Wolf Chairman The Honorable Alan B. Mollohan Ranking Minority Member Subcommittee on Science, State, Justice, and Commerce and Related Agencies Committee on Appropriations House of Representatives Imports from China have grown rapidly over the last decade, from a total value of about $42 billion in 1995 to over $196 billion in 2004.1 While the prices of these Chinese goods are often lower than U.S. prices and, therefore, benefit consumers, this growth has presented a major challenge for U.S. producers that compete with Chinese products in the U.S. market. Some U.S. companies adversely affected by this growth have alleged that Chinese success in the U.S. market has come partly as a result of unfair trade practices. U.S. companies that are adversely affected by unfair imports from China (or other countries) may avail themselves of a number of relief measures, including antidumping (AD) duties. The United States has classified China as a "nonmarket economy" (NME) country since 19812 and employs a special NME methodology to calculate AD duties on unfairly traded products from that country. This methodology is commonly believed to result in duty rates that are significantly higher than those applied to market economy countries. In light of increased concern about China's trade practices, the conference report on fiscal year 2004 appropriations legislation requested that GAO monitor the efforts of U.S. government agencies responsible for ensuring free and fair trade with that country.3 In subsequent discussions with staff from the House Appropriations Committee's Subcommittee on Science, State, Justice, and Commerce and Related Agencies, we agreed to provide a number of reports on import relief mechanisms and the manner in which these mechanisms have been applied to China. To date, we have issued three such reports, focusing on textile safeguards, safeguards applicable to other products, and countervailing duties.4 This fourth and final report on China import relief mechanisms focuses on AD duties. In this report, we o explain the special methodology that the United States employs to calculate AD duties on products from China and other NME countries, o analyze the application of AD duties to China over the last 25 years and compare the duty rates applied to Chinese products with the duty rates applied to products from market economy countries, and o explain the circumstances in which the United States would stop using its NME methodology to calculate AD duties on Chinese products and evaluate the potential impact of this step. To conduct our review, we examined applicable U.S. laws and regulations and World Trade Organization (WTO) agreements, including relevant portions of the agreement through which China acceded to WTO membership in 2001. We reviewed scholarly literature and consulted with trade and legal policy experts from the U.S. government, private sector trade associations, consulting and law firms, and academic institutions, as well as representatives of the WTO, the government of China, and other governments. In order to analyze U.S. application of AD duties to China and compare the duties applied to China with those applied to market economy countries, we used information from the Department of Commerce (Commerce) and the U.S. International Trade Commission (ITC), including notices of Commerce determinations appearing in the Federal Register, to construct a database on all U.S. antidumping investigations from 1980 through 2004. We verified this database to the official sources. Our analyses focused on the 68 AD duty orders that Commerce issued against Chinese products during this period and especially on the 25 cases in which Commerce also imposed duties on the same products from market economy countries.5 We performed additional (multivariate regression) analyses to determine the extent to which duty rate variations could be attributed to differences between China and these other countries, or to other factors, such as the type of product involved. Appendix I contains a detailed description of our scope and methodology. We conducted our work from June 2005 through December 2005 in accordance with generally accepted government auditing standards. Results in Brief Commerce's special methodology for calculating the AD duties that it applies to China and other NME countries differs from its usual (market economy) approach in two key respects. First, since prices in NME countries do not reliably reflect the fair value of the merchandise, Commerce uses price information from surrogate countries (like India) to construct the value of NME products-and thus provide an appropriate basis for calculating AD duty rates-rather than relying entirely on information from the exporting country itself. Second, Commerce requires NME companies to demonstrate that their export activities are not subject to government control in order to be considered eligible for individually determined duty rates, rather than considering all companies eligible for such rates, as it does in market economy cases. NME companies that do not meet these criteria, or do not participate in Commerce's investigations receive "country-wide" rates. Over the last 25 years, the United States has applied AD duties against China more often than against any other country. On 25 occasions, Commerce applied duties to the same products from both China and at least one market economy country. The duty rates assigned in these cases varied greatly. On average, however, the rates applied to China were over 20 percentage points higher than those applied to market economy countries. This difference is attributable primarily to the comparatively high country-wide duty rates applied to Chinese companies not eligible for individual rates. These country-wide rates averaged about 98 percent-over 60 percentage points higher than the average duty rates assigned to market economy companies not receiving individual rates. In contrast, when Commerce calculated individual rates for Chinese companies, these rates were not substantially different, on average, from those assigned to individual market economy companies. Commerce has administrative authority to declare China a market economy, or find individual Chinese industries to be "market-oriented" in character-provided that China overall or individual Chinese industries meet certain criteria. Such a declaration would end application of the NME methodology to China, in whole or in part. This would (1) eliminate country-wide duty rates against China and (2) eliminate use of surrogate country information to calculate AD duty rates on Chinese products. These changes would have a mixed impact. Eliminating country-wide rates would likely reduce duty rates applied to companies not receiving individual rates. Individually determined rates would likely diverge into two distinct groups, with companies that do not cooperate in Commerce investigations receiving rates that are substantially higher than those that do cooperate. The impact of applying Chinese price information would likely vary by industry, and AD rates applied against China would continue to vary widely, both within and among cases. However, it appears that the significance of the NME country-wide rates is declining as more Chinese companies receive individual rates, although data that would permit quantification of the potential trade impact of these changes is not available. This suggests that the trade significance of the NME methodology now applied to China will likewise decline over time. Commerce provided written comments on a draft of this report, which are reprinted in appendix IV. Overall, Commerce agreed with our findings. In addition, Commerce, the Department of Homeland Security, and the Office of the U.S. Trade Representative, provided technical comments. We took these comments into consideration and made revisions throughout the report as appropriate to make it more accurate and clear. Background Dumping refers to a type of international price discrimination wherein a foreign company sells merchandise in a given export market (for example, the United States) at prices that are lower than the prices that the company charges in its home market or other export markets. When this occurs, and when the imports have been found to materially injure, or threaten to materially injure, U.S. producers, U.S. law permits application of antidumping duties to offset the price advantage enjoyed by the imported product.6 Any domestic industry that believes it is suffering material injury, or is threatened with material injury, as a result of dumping by foreign companies may file a petition requesting imposition of AD duties. Interested domestic industries file petitions simultaneously with Commerce and ITC. If Commerce determines that the petitioning parties meet certain eligibility requirements,7 ITC determines whether the domestic industry has suffered material injury as a result of the alleged dumping (or is threatened with material injury).8 While ITC is completing its work, Commerce conducts an investigation to establish the duty rates, if any, that should be applied. To determine the duty rates to apply in an antidumping investigation, Commerce identifies (1) the foreign product's export price entering the U.S. market and (2) its "normal value." Commerce then compares these prices to determine whether-and by how much-the product's export price is less than its normal value. AD duty rates are based on these differences, which are called dumping margins.9 To establish a product's export price, Commerce generally refers to the prices charged in actual sales of that product to purchasers in the United States.10 To establish its normal value, Commerce generally refers to the prices charged for the product in the exporting company's home market. In the event that the product is not sold in the exporter's home market, Commerce may refer to prices charged for the product in another export market or construct a normal value based on costs of production in the exporting country, together with selling, general and administrative expenses, and profit.11 The two agencies make preliminary and, after additional investigation, final determinations as to whether injury has occurred (ITC) and the size of the duty, if any, that should be imposed (Commerce). When warranted, Commerce issues "duty orders" instructing Customs and Border Protection to apply duties against imported products from the countries under investigation. Both ITC and Commerce publish their decisions in the Federal Register. Since AD duties address unfair pricing practices, and pricing decisions are generally made by individual companies, Commerce generally calculates and assigns AD duty rates on an individual company basis. As a result, AD investigations generally produce a number of individually determined, company-specific rates, reflecting differences in the extent to which companies have dumped their products-that is, exported them at less than their normal value.12 In addition, AD duty orders also generally specify a duty rate for other companies that have not been assigned an individually determined rate. In principle, Commerce bases its AD duty determinations on information obtained from interested parties-including foreign producers and exporters. Commerce obtains needed information from foreign companies by sending them questionnaires and following up with additional questions, as needed, and with on-site visits.13 However, both U.S. law and WTO rules recognize that, in some cases, officials charged with completing these investigations will be unable to obtain sufficient information. In such cases, Commerce officials apply facts available to complete their duty determinations.14 This may include secondary information, subject to corroboration from independent sources. Moreover, if Commerce finds that an interested party, such as a foreign company under investigation, "has failed to cooperate by not acting to the best of its ability to comply with a request for information" then, in selecting among the facts available, Commerce may apply an inference that is adverse to the interests of that party. In applying adverse inferences, Commerce can use (among other things) information contained in the petition filed by the domestic industry seeking imposition of AD duties, the results of a prior review or determination in the case, or any other information placed on the record.15 This authority provides an incentive for foreign companies to provide the information that Commerce needs to complete its work. For example, in a 1993 case that involved two Brazilian companies, one company attempted to cooperate in the investigation but nonetheless was unable to provide the information that Commerce needed, while the other declined to provide any information at all. Commerce used facts available to determine that the first company should be subject to a duty rate of 42 percent. For the second company, Commerce selected adverse inferences from among the facts available and applied these to calculate a duty rate of 109 percent.16 Commerce Employs a Special Methodology to Calculate China AD Duties The methodology that Commerce employs in NME cases differs from Commerce's usual (market economy) approach in two key ways. First, rather than rely entirely on information from the exporting country itself to establish a product's normal value, Commerce uses price information from surrogate countries to construct these values. Second, rather than consider all companies eligible for individually determined duty rates, Commerce requires NME companies to meet certain criteria to be considered eligible for such rates. Commerce generally employs different approaches to calculate duty rates for companies that do and do not meet these criteria. AD Calculations for NME Products Employ Third Country Information In AD investigations involving products from NME countries, U.S. law requires Commerce to use a special methodology to calculate duty rates in view of the absence of meaningful home market prices and information on production costs. When a product from China or another NME country is the target of an AD investigation, Commerce officials use price information and financial data from an appropriate market economy country to construct a normal value for the product under investigation.17 India is the most commonly used surrogate for China. To apply this methodology, Commerce (1) identifies and quantifies the factors of production (e.g., various raw materials) used by the NME producers, (2) identifies market prices for each factor in a surrogate country; (3) multiplies volume times cost for each factor; and (4) adds the results, together with a reasonable margin for selling, general and administrative expenses, and profit (based on surrogate country financial data), to produce a constructed normal value.18 The dumping margin-and consequently the AD duty rate-is then determined by comparing this normal value with the NME company's export price to the United States. NME Companies Must Meet Certain Criteria to Be Considered Eligible for Individual Duty Rates While all companies from market economy countries are eligible for individually determined or weighted average AD duty rates, companies from China and other NME countries must pass a separate rates test to be eligible for such rates. This test requires NME companies to meet two closely related criteria: they must demonstrate that their export activities are free from government control both in law and in fact.19 To provide a basis for deciding whether companies meet these criteria, Commerce requires these companies to submit information regarding o whether there are restrictive stipulations associated with an individual exporter's business and export licenses, o any legislative enactments decentralizing control of companies, o any other formal measures decentralizing government control of companies, o whether export prices are set by or subject to approval by the government, o whether the company has authority to negotiate and sign contracts, o whether the company has autonomy in selecting its management, and o whether the company retains the proceeds of its export sales and makes independent decisions regarding disposition of profits or financing of losses.20 Commerce Employs Different Approaches to Determine Duty Rates for Eligible and Ineligible NME Companies As shown in figure 1, Commerce uses fundamentally different approaches to calculate duty rates to be applied against companies that do and do not pass the separate rates test. Figure 1: Different Approaches to Determining AD Duty Rates Eligible NME Companies Receive Individually Determined or Weighted Average Duty Rates As shown in figure 1, Commerce treats companies from China and other NME countries that pass Commerce's separate rates test like market economy countries when assigning duty rates. When practical, Commerce fully investigates and establishes individually determined duty rates for each eligible NME company, just as it does for each market economy company. To the extent that fully investigated NME companies cooperate with Commerce, they receive rates based on the information that they provide. As explained in the background section of this report, Commerce uses facts available, and may use adverse inferences, to calculate duty rates when the companies under investigation cannot or will not provide the information that Commerce needs. In both NME and market economy cases, Commerce may limit the number of companies it fully investigates when it is faced with a large number of companies. In such situations, Commerce generally calculates individual rates for the companies that account for the largest volume of the subject merchandise.21 In market economy cases, Commerce then calculates a weighted average of these rates and applies the resulting "all others" rate to companies that it has not fully investigated.22 Commerce does not routinely calculate weighted average duty rates in NME cases. However, when the number of NME companies eligible for individually determined rates exceeds the number that Commerce can fully investigate, Commerce calculates a weighted average rate and informs Customs of the companies entitled to this rate.23 Other NME Companies Receive Country-Wide Duty Rates In cases involving China or other NME countries, Commerce calculates a country-wide duty rate for companies that could not (or did not attempt to) pass Commerce's separate rates test. In NME cases, Commerce assumes that all exporters and producers of a given product are subject to common government control and that all of these companies should, therefore, be subject to a single country-wide duty rate. Commerce begins its NME antidumping investigations by requesting information from the government of the country in question and from known producers and exporters. If Commerce cannot identify all relevant producers and exporters, or if one or more of the identified companies refuses to cooperate in the investigation, Commerce relies on adverse inferences to calculate a country-wide rate. Commerce then instructs Customs to apply the country-wide rate against shipments from any company other than those specifically listed as eligible for an individually determined or weighted average rate.24 Commerce Has Applied AD Duties to China Frequently at Varied Rates Over the last 25 years, the United States has applied AD duties against Chinese products more often than against products from any other country. While AD duty rates have varied widely, on average the rates assigned to Chinese products have been higher than the rates assigned to the same products from market economy countries. We found that this is attributable primarily to the comparatively high country-wide rates applied to Chinese companies not eligible for individually determined or weighted average rates. When Commerce has calculated rates for individual Chinese companies, the average rates assigned to these companies have not been substantially different from those assigned to market economy companies. China Has Been the Most Frequent Target of U.S. Antidumping Orders Over the last 25 years, Commerce has both considered and actually applied AD duties against China more often than against any other country. From 1980 through 2004, Commerce processed 1,046 AD petitions and issued 455 AD duty orders. One hundred and ten of these petitions (11 percent) and 68 of these orders (15 percent) focused on China-both are the largest number against any U.S. trade partner.25 The number of orders applied to China varied from year to year. For example, Commerce issued no AD duty orders against China in 1998 but issued 9 in 2003. Commerce had 272 orders in place as of December 31, 2004. Fifty-five of these (20 percent) apply to China. As figure 2 shows, this is also the highest percentage of any country. As shown in table 1, these duty orders have targeted a wide variety of products but have been concentrated in chemicals and plastics, metal products, and agricultural products. Figure 2: U.S. AD Orders in Place by Country as of December 31, 2004 Note: From 1980 through 2004 Commerce applied 68 orders against China. Thirteen of these were revoked, leaving 55 in place as of the end of 2004. Table 1: Products Affected by AD Duty Orders against China, 1980-2004 Type of product Examples of affected Number of products orders Chemicals, plastics, Barium chloride 26 pharmaceuticals Polyethylene retail carrier bags Bulk aspirin Steel, other metals Carbon steel butt-weld pipe 20 fittings Chrome-plated lug nuts Pure magnesium Agricultural products Crawfish 5 Garlic Honey Other products Brake rotors 17 Hand tools Cotton shop towels Automotive replacement glass windshields Folding gift boxes Source: GAO AD database. Note: Product categories based on the Harmonized Tariff Schedule of the United States, Annotated. See appendix I for more information. Moreover, petitions for AD duties against China have resulted in application of duties more often than those against other countries. As shown in figure 3, 62 percent of the petitions filed against China over the last 25 years resulted in duty orders, while the equivalent figure for all countries was about 43 percent.26 Figure 3: Results of AD Petitions, 1980-2004 Note: Petitions may not result in an AD order for several reasons. For example, if ITC does not find the domestic industry to be materially injured, or threatened with material injury, or if Commerce does not find that dumping has occurred, then the case is terminated. Also, Commerce may suspend a case if the United States reaches an agreement with the foreign government that would eliminate the impact of dumping (e.g., restrictions on exports). In addition, the petitioners may decide to withdraw their petition before ITC and Commerce have completed their work. China, Market Economy Rates Varied Widely Over this 25 year period, Commerce issued duty orders against the same products from China and at least one market economy country on 25 occasions.27 In 18 of these cases, Commerce calculated individual rates for companies from China and at least one market economy country. Fifteen of these cases involved more than one market economy country. In all, the orders applying to these 25 products contained a total of 243 individual, weighted average, and country-wide duty rates. Appendix II provides detailed information on the rates applied in each of these cases, as well as another 43 cases that we identified wherein Commerce applied duty rates to China but not to any market economy country. These rates varied a great deal-both among the orders applied to different products and within the orders applied to the same products. Overall, these duty rates varied from zero to 218 percent for China and from zero to about 244 percent for market economy countries. Figure 4 shows the extent to which duty rates applied to a single product can vary.28 Figure 4: AD Duty Rates Applied against Imported Polyethylene Retail Carrier Bags (2004) Note: In addition to the five individual Chinese companies shown above, two Chinese companies received de minimus rates and were excluded from the order. Overall, China Rates Were Higher Than Market Economy Rates The average AD duty rates imposed on Chinese (NME) exporters over the last 25 years have been significantly higher than those imposed on market economy exporters of the same products. Taking all rates into consideration (including those calculated for individual companies, weighted averages of these rates, and country-wide rates applied to China) the average rate applied to Chinese companies in the 25 cases we examined was about 67 percent-over 20 percentage points higher than the average rate of 44 percent applied to market economy companies. As figure 5 shows, the overall average rates applied against China were higher for 18 of the 25 products in which there were AD orders against both China and at least one market economy. Figure 5: Differences between Overall Average Duty Rates-China and Market Economies, 1980-2004 Difference in Average Rates Due Primarily to High China Country-Wide Rates The difference between average China and average market economy duty rates was due primarily to the fact that the NME country-wide duty rates applied to China were substantially higher than the comparable all-others duty rates applied against market economy countries. In contrast, the individually determined duty rates assigned to Chinese companies in these cases were not substantially different, on average, from the individually determined rates assigned to market economy companies. Country-Wide Duty Rates Substantially Higher Than Market Economy All-Others Rates On average, the country-wide rates applied to China in these 25 cases were substantially higher than the comparable all-others rates applied to market economy countries. The country-wide duty rates applied against China averaged about 98 percent-over 60 percentage points higher than the average 37 percent all-others duty rate applied to market economy exporters of the same products. Figure 6 shows that the China country-wide rate was higher than the market economy all-others rate in 21 of 25 cases. As explained below, this difference was due largely to the use of different methodologies to calculate country-wide and all-others rates. Figure 6: Differences between China Country-Wide and Market Economy All-Others Duty Rates, 1980-2004 Note: In several cases, Commerce issued orders against several market economy countries, and we calculated an average all-others rate for all of the affected market economy countries. Country-wide rates were nearly always equal to or higher than the highest individually determined rate applied to any Chinese company, due to application of adverse inferences.29 According to Commerce, NME country governments themselves have never provided the information that Commerce needs to establish an appropriate country-wide duty rate. In addition, Commerce officials stated that, in most cases, participating NME companies have accounted for only a portion of known exports to the U.S. market from their country, indicating that others had not come forward. In most cases, therefore, Commerce has used adverse inferences to determine country-wide rates. For example, in its investigation of carbazole violet pigment, Commerce assigned three fully investigated Chinese companies individually determined rates of about 6, 27, and 45 percent. However, since other known Chinese producers did not respond to Commerce's request for information, Commerce used adverse inferences to determine that all other Chinese producers should be subject to an NME country-wide rate of about 218 percent.30 In contrast, the comparable market economy all-others rates were lower than the highest individual company rates assigned in any given case (if more than one other individual rate was assigned).31 This is because, as discussed earlier, Commerce generally calculates all-others rates by averaging individually determined rates-excluding those derived entirely through application of facts available and those that are de minimis or zero. With regard to carbazole violet pigment, for example, Commerce investigated not only China but also India. Commerce assigned two fully investigated Indian companies rates of about 10 and 50 percent and weight-averaged these rates to determine that shipments from all other Indian producers should be subject to a duty rate of about 27 percent. Individual Company Rates in China and Market Economy Countries Not Substantially Different on Average On average, there was little difference between the individually determined rates applied to companies from China and those applied to market economy companies. The average individually determined rate applied to Chinese companies in these cases was 53 percent-a little less than the average rate of 55 percent applied to market economy companies.32 The median rate for Chinese companies was 42 percent-the same as the median rate for market economy companies. Figure 7 displays the average individual company rates assigned to Chinese and market economy companies in the 18 cases in which Commerce assigned individual rates to both. As the figure shows, the rates assigned to Chinese companies were higher than the market economy rates in ten of these cases and lower in the other eight. Figure 7: Differences between Average Individual Company Duty Rates-China and Market Economy Countries, 1980-2004 Our statistical analyses provided additional support for the importance of the country-wide rates in accounting for the overall difference between the duty rates applied to China and to market economy countries. Using multivariate regression analysis, we found that a number of variables, such as the type of product involved, accounted for some of the overall variation in duty rates. However, after accounting for the China country-wide rates there was no statistically significant difference between the duty rates applied to China and those applied to market economy countries. As explained in more detail in appendix III, we found essentially the same results when we expanded our analyses to include data on AD actions against NMEs other than China.33 Ceasing to Apply NME Methodology Would Have Mixed Results In certain circumstances, Commerce may stop using its NME methodology in China cases-and thus begin applying its market economy methodology to determine AD duty rates against that country. Such a step would lead to important changes in the methods that Commerce employs to determine China AD duty rates and in the duty orders resulting from these proceedings. These changes would have mixed results. Eliminating country-wide duty rates would likely reduce duty levels for Chinese companies that are not assigned individually determined rates. Individually determined rates would likely diverge into two distinct groups, with companies that do not cooperate in Commerce investigations receiving rates that are substantially higher than those assigned to companies that do cooperate. The impact of applying Chinese price information to calculate the normal value of Chinese products would likely vary by industry. In any case, rates would continue to vary widely based on the circumstances of each case. While trade data that would permit analysis of the potential trade impact of these changes is not available, it appears that the trade significance of country-wide duty rates is declining. Commerce May Stop Applying NME Methodology to China in Certain Circumstances Commerce has administrative authority to reclassify China and other NME countries as market economies or individual NME country industries as market-oriented in character. Such reclassifications would end Commerce's authority to apply its NME methodology to such countries or industries. Also, China's WTO accession agreement specifies that members may apply third-country information to calculate AD duty rates against that country, but this provision expires in 2016. Commerce Has Administrative Authority to Change China's NME Status Commerce has the authority to reclassify China as a market economy country, in whole or in part. As we explained in more detail in a prior report,34 U.S. trade law authorizes Commerce to determine whether countries should be accorded NME or market economy status and specifies a number of criteria for Commerce to apply in making such determinations.35 Countries classified as NMEs may ask for a review of their status at any time.36 China has actively sought market economy status among its trading partners, and a number of them have designated China as a market economy. However, Commerce informed us that Chinese officials have not yet officially requested a determination as to whether their country merits reclassification under the criteria specified in U.S. law. In April 2004, the United States and China established a Structural Issues Working Group under the auspices of the U.S.-China Joint Commission on Commerce and Trade. This group is examining structural and operational issues related to China's economy that may give rise to bilateral trade frictions, including issues related to China's desire to be classified as a market economy.37 Commerce also has the authority to designate individual NME industries as market oriented in character, but has denied all such requests to date. Commerce determined in a 1992 case against China that, short of finding that an entire country merits designation as a market economy, it could find specific industries within such countries to be market oriented in character.38 Commerce officials noted that on several occasions Chinese industries responding to antidumping duty petitions have requested designation as market-oriented industries. To date, Commerce has denied such requests-primarily on the grounds that the Chinese companies in question submitted information that was insufficient or was provided too late in Commerce's process to allow an informed decision. China's WTO Commitment Allowing the Use of Third-Country Information Expires in 2016 When joining the WTO, China agreed that other WTO members could use third-country information to calculate normal values in antidumping actions against Chinese companies. Specifically, China's WTO accession agreement provides that in determining price comparability in antidumping investigations WTO members may use "a methodology that is not based on a strict comparison with domestic prices or costs in China."39 However, the accession agreement also specifies that this provision will expire 15 years after the date of the agreement-that is, by the end of 2016.40 After 2016, the ability of WTO members to continue using third-country information in AD calculations involving China would be governed by generally applicable WTO rules, according to officials at the Office of the U.S. Trade Representative. These rules recognize that when dumping investigations involve products from a country that "has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the state," importing country authorities may have difficulty making the price comparisons through which AD duty rates are normally established. In such situations, importing countries may "find it necessary to take into account the possibility that a strict comparison with domestic prices in such a country may not always be appropriate."41 WTO rules do not provide any specific guidance about how this provision should be implemented; such decisions appear to be left up to individual members. Transition to Market Economy Methodology Would Bring Significant Procedural Changes Ending application of the NME methodology to China would bring two significant procedural changes in AD duty investigations against Chinese products. First, such a step would eliminate NME country-wide duty rates from China AD orders. Commerce would instead assign an individually determined rate to every relevant Chinese producer or exporter. If the number of companies involved were too great to allow full investigation of all relevant companies, Commerce would apply an all-others rate-a weighted average of the individually determined rates to all other Chinese companies (excluding those rates based entirely on facts available or that are de minimis or zero). However, Commerce would retain its authority to use facts available to determine the rates that it applies to individual Chinese companies. Second, transition to the market economy methodology would end Commerce's use of surrogate country information to calculate the normal value of Chinese products. Application of the market economy methodology would generally require Commerce to set the normal value of Chinese products equal to their sales price in China. If the product were not sold in China, Commerce could refer to prices charged for the product in another export market or construct the product's normal value, or it could continue to construct the product's normal value-using factor prices from the Chinese companies under investigation rather than from surrogate countries. Eliminating Country-Wide Rates Would Likely Reduce Duty Levels for Companies Not Assigned Individually Determined Rates The elimination of country-wide duty rates against China would likely reduce the duty rates applied to some Chinese companies. If Commerce applied its market economy approach to China, duty rates for companies not receiving individually determined rates would, in most cases, no longer be determined by applying facts available. Rather, Commerce would, for the most part, determine these rates by averaging the rates applied to fully investigated Chinese companies, with some exclusions. The default rate for uninvestigated Chinese companies would move, in most cases, from being the highest rate found to the average rate found among companies that cooperate in Commerce investigations. Though not predictive, available evidence suggests that the all-others rates that Commerce would apply to China under the market economy methodology would be significantly lower than the country-wide rates currently applied to that country. As already shown, China country-wide rates have generally been significantly higher than the all-others rates that Commerce has assigned to market economy sources of the same products. As shown in table 2, the average country-wide rate for the 25 cases in which Commerce assigned duties to both China and one or more market economies was 98 percent, while the average market economy all-others rate was 37 percent. The average rate assigned to individual Chinese companies was 53 percent, and Commerce calculates all-others rates by weight averaging individually determined rates, excluding those that are derived entirely through application of facts available and those that are de minimis or zero. Table 2: Comparison of China, Market Economy AD Duty Rates, Methodological Changes, and Potential Effects Individual rates b Overall a Group a All Cooperative Adverse inferences Average 67% 98% 53% 51% (Rarely China (NME) applied)c rates (Country-wide) Average 44% 37% 55% 16% 77% market economy (All others) rates Change from Chinese Country-wide Separate NME to price rates rates test market information eliminated, eliminated economy replaces uninvestigated methodology surrogate companies for China price receive all companies information others rate Potential Effect Rates likely Rates Rates Rates likely effect on unknown but to be likely to likely to to be average likely to significantly fall into be relatively China rates vary by lower two relatively high for industry distinct low for uncooperative groups cooperative companies companies Source: GAO analysis of Commerce data. aAverages based on 25 products with comparable China and market economy cases (1985-2004). bAverages based on subset of 18 products with comparable China and market economy cases in which individual rates were applied. However, averages are nearly identical for full group of 25 products. cCommerce applied adverse inferences only three times, for an average rate of 78 percent. Individually Determined Rates Would Vary, Depending Upon Cooperation A simple comparison of the average individually determined duty rates calculated under the NME and market economy methodologies suggests that a change in methodology would not result in any significant overall change in duty rates applied to individual Chinese companies. For the comparable cases, individual AD duty rates for Chinese companies averaged 53 percent and were not substantially different from individual market economy company rates, which averaged 55 percent. However, a more detailed examination of the data indicates that the impact of a change in methodology on individual Chinese company duty rates would depend on the extent to which Commerce applies adverse inferences to calculate these rates. The rates assigned to individual companies under the market economy methodology fell into two distinct groups, depending on whether the companies cooperated with Commerce investigations. In the 25 cases that we examined in detail, about half of the fully investigated market economy companies cooperated with Commerce. On average, Commerce assigned a duty rate of about 17 percent to these companies.42 Commerce found the other half of the fully investigated companies uncooperative and, therefore, applied adverse inferences to determine the duty rates to be applied to these companies. On average, Commerce assigned a duty rate of about 77 percent to these uncooperative market economy companies.43 Though not predictive, this suggests that a change from the NME methodology for China would result in a significant number of (cooperative) companies receiving relatively low rates, while another significant group of (uncooperative) companies would receive relatively high rates.44 Our regression analysis confirmed the importance of adverse inferences as a determinant of variation in duty rates. As explained in appendix III, we found that application of adverse inferences tends to increase duty rates by a large margin. Impact of Applying Chinese Price Information Would Vary By Industry and Is Likely to Decline over Time The impact of using Chinese price information on China AD duty rates would likely vary from one industry to another under the market economy methodology. Chinese prices are widely viewed as distorted to varying degrees. Where prices for key inputs are artificially low, relying on Chinese price information would produce an artificially low normal value. The result would be an AD duty that is lower than would be obtained by applying surrogate country input prices. Conversely, where Chinese prices are artificially high, AD duty rates may be higher if based on Chinese prices. To the extent that Chinese economic reforms bring Chinese prices more into line with world markets, the impact of abandoning the use of surrogate country information can be expected to decline. At any point in time, however, the probable effect of such a methodological change in an individual industry investigation would depend on the particular facts applying to that industry. The net impact of changing the source of price information on overall China duty rates cannot be estimated with confidence. Duty Rates Will Continue to Display Great Variation Our multivariate regression analyses suggest that, regardless of changes in methodology, there will continue to be a great deal of variation among the AD duty rates applied to products from China and other countries. Our analyses showed that application of country-wide duty rates to China largely explained the difference between the overall average duty rates applied to China and to market economy countries. Eliminating these rates would likely have a substantial overall reducing effect on China rates. However, a number of other factors, such as the type of product involved, also helped to account for differences among rates overall, and these factors will continue to have an impact on duty rates, regardless of whether Commerce applies country-wide rates to China. Furthermore, even after taking these factors into account, our analyses still explained only about half of the total variation in duty rates.45 This means that about half of the variation in duty rates is attributable either to idiosyncratic factors or to systematic factors that we did not capture in any of our variables.46 Trade Significance of Country-Wide Rates Appears to Be Declining Available evidence suggests that the volume of trade affected by country-wide rates is declining and that, consequently, the trade impact of China duty orders will in the future depend increasingly on the magnitude of the individually determined rates. Commerce officials observed that in the early 1980s it was not unusual for China AD duty investigations to produce only a country-wide rate. However, as the Chinese economy has evolved, individual Chinese companies have become more likely to request-and receive-individually determined or weighted average rates. Since 1980, Commerce has applied country-wide rates alone in only 15 of 68 Chinese AD orders, and the last of these occasions was in 1995. The majority of all Chinese AD orders (about 78 percent), and all such orders issued over the last 10 years, have included at least one individual company rate. Neither Commerce nor Customs and Border Protection maintain trade data that would permit analysis of changes over time in the relative volume or value of products imported into the United States under the country-wide or various individual duty rates listed in AD duty orders. However, as figure 8 shows, the average number of Chinese companies assigned individually determined rates (or assigned a weighted average rate) has been growing, though there continues to be variation from year to year. For example, in 2004 Commerce placed duties on six Chinese products and in doing so assigned individually determined or weighted average rates to 53 Chinese companies. Anecdotal evidence suggests that along with this rise in company interest in obtaining individual rates has come an increase in the volume of trade covered by these rates. For example, in one recent case Commerce fully investigated and assigned individually determined rates to four companies accounting for more than 90 percent of Chinese exports to the U.S. market. Commerce then assigned a weighted average of these rates to 9 additional companies, leaving only a very small portion of all Chinese exports to be covered by the country-wide rate.47 Figure 8: Average Number of Individual Rates per Case per Year, All Orders against China, 1980-2004 Notes: This table includes only the companies assigned individually determined or weighted average rates in initial AD duty orders. Other companies may be assigned such rates in subsequent reviews of these orders. The annual figures are the number of individual companies granted such rates divided by the number of AD duty orders. Commerce did not issue any individual company duty orders against China in 1980, 1981, 1982, 1985, 1987, 1988, 1989, or 1998. In the tapered roller bearings cases, Commerce originally put an order in place in 1987, but amended it in 1990. We use the information from the 1990 amendment in the above graphic. Concluding Observations On average, Commerce's application of its NME methodology has produced AD duties on Chinese products that are substantially higher than those applied to the same products from market economy countries. Changing China's NME status-and thus eliminating the application of this methodology-would have a variety of impacts. The duty rates applied to companies that do not receive individual rates would likely decline. Chinese companies that cooperate in Commerce investigations may also receive comparatively low rates. However, the impact of these lower rates on overall China averages may be offset, to some extent, by application of adverse inferences to assign relatively high rates to individual Chinese companies that do not cooperate in Commerce investigations. The net effect of these changes cannot be predicted. Such a prediction would require knowledge of price distortions in diverse Chinese industries, changes in these distortions over time, pricing decisions by Chinese companies in reaction to these changes, and decisions by U.S. companies about whether they should seek relief. Nonetheless, while the NME methodology is applied, it appears that the actual trade impact of using this methodology will decline as the portion of total export trade conducted by Chinese companies assigned individual rates increases, and as the country-wide rates that largely account for the comparatively high average rates applied to China decline in importance. Agency Comments and Our Evaluation The Department of Commerce provided written comments on a draft of this report. These comments are reprinted in appendix IV. Overall, Commerce agreed with our findings, observing that the report provided timely and helpful information on the NME methodology and its application to China. Commerce identified a small number of apparent errors in our database. We re-examined our data, making corrections when necessary, and updated our analyses; these corrections did not have any significant impact on our findings. Commerce also made a number of technical comments, focusing primarily on our description of its NME methodology. We took these comments into consideration and made changes throughout the report to insure its clarity and accuracy. We also made a number of technical corrections suggested by the Department of Homeland Security and the Office of the U.S. Trade Representative. We are sending copies of this report to the Secretaries of Commerce and Homeland Security, the International Trade Commission, the U. S. Trade Representative, appropriate congressional committees, and other interested parties. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov . If you or any of your staff have any questions about this report, please contact me at 202-512-4347 or [email protected] . Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. Loren Yager Director, International Affairs and Trade Scope and Methodology Appendix I To address our objectives, we examined and summarized applicable U.S. laws and regulations, as well as relevant World Trade Organization (WTO) agreements. These included the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994-commonly known as the "antidumping agreement"-and China's WTO accession agreement. We conducted a literature search and reviewed relevant scholarly and legal analyses and Department of Commerce (Commerce) determinations.1 In order to corroborate and broaden our understanding, we consulted with trade and legal policy experts from the U.S. government, private sector trade associations, consulting firms, academic institutions, law firms with broad experience in trade actions involving China, as well as representatives of the WTO, the government of China, and other governments concerned about Chinese trade practices, including the European Union and Canada. In order to analyze the application of antidumping (AD) duties to China and compare duty rates applied to China with those applied to market economy countries (our second objective) and to evaluate the potential impact of ceasing to apply the nonmarket economy (NME) methodology to China (our third objective), we collected information from the Department of Commerce and the International Trade Commission, including notices of Commerce determinations appearing in the Federal Register. We used this information to construct a database on all U.S. AD investigations from 1980 through 2004. In addition to information on the countries and products involved and the status of each investigation, our database included the duty rates applied upon completion of each new antidumping investigation against China during this period, as well as the duty rates applied against any producers of the same products from other countries. This database is accessible on-line at www.gao.gov/cgi-bin/getrpt? GAO-06-652SP . We verified this database to the official sources and found the data to be sufficiently reliable for the purposes of this report. Our analyses focused on the 68 cases during this time period wherein Commerce imposed AD duties on Chinese products, and especially on the subset of 25 cases in which Commerce imposed duties against a similar product from one or more market economy countries.2 Specifically, the 25 cases included all market economy cases that had the same product name and were initiated within 1 year of an AD investigation against China. In all, we assembled data on 303 company-specific, weighted average, and country-wide duty rate determinations on Chinese products, and an additional 168 duty rate determinations on market economy products. Appendix II provides additional analyses of this data. As part of our examination, we also performed multivariate regression analyses to determine the extent to which duty rate variations could be attributed to differences between China and these other countries, or to other factors, such as the type of product involved. Appendix III provides more information on these analyses and their results. In addition to comparing China and market economies, we also collected information on duty rates that Commerce applied to products from other NME countries at the same time as it applied them to similar products from either China or a market economy. Appendix III provides information on the results of our analyses of this data. We did not collect or analyze information on duty rates applied against market economy countries in cases where no parallel action was taken against China or any other NME country. Therefore, our analyses of market economy duty rates are specific to the sample of market economy orders in which a corresponding NME order was also in effect. Inclusion of other market economy product duty rates may have produced different results. However, we determined that the appropriate comparison between China and market economy countries was between the 25 similar products. We found through our regression analyses (discussed in app. III) that the product being investigated does help explain the variation among rates and it is, therefore, important to make an appropriate comparison. In addition, duty rates for the 43 remaining orders against China alone followed a similar pattern as those contained in the 25 cases where we drew comparisons with market economy duty rates. The average country-wide rate for these 43 orders against China was higher than the country-wide rate for the 25 orders (118 percent compared to 98 percent), and the average individual rate was lower (41 percent compared to 53 percent) for the 18 orders with individual rates. These results were consistent with our findings that the country-wide rates tend to be significantly higher than individual rates. In order to group specific products subject to AD orders into groups of similar products, we used the Harmonized Tariff Schedule (HTS) classifications for each product, as reported in the Federal Register announcement of the order. The HTS is the official U.S. classification of goods imported into the United States and includes 99 chapters covering all goods imports. In addition, the HTS chapters are grouped into larger sections that cover broad types of related products. The categories we used in this report are based on these HTS sections and chapters. Specifically, the category "Chemicals, plastics, pharmaceuticals" comprises HTS chapters 28 through 40 (which includes all chapters under the section "Chemical or allied industries"). The category "Steel, other metals" comprises HTS chapters 72 through 81 (which includes most chapters under the section "Base metals and articles of base metals" except those chapters covering articles of base metals). The category "Agricultural products" comprises HTS chapters 1 through 24 (which includes all chapters under the sections "Live animals; animal products," "Vegetable products," "Animal or vegetable fats, etc.," and "Prepared foodstuffs, beverages, spirits, and vinegar; tobacco and manufactured tobacco substitutes"). The category "Other products" comprises all other HTS chapters. We conducted our work from June 2005 through December 2005 in accordance with generally accepted government auditing standards. Additional Information on Duty Rates Applied to China and Market Economy Countries Appendix II This appendix provides additional information on the antidumping (AD) duty rate data that we assembled for this report and provides some additional analytical information, including brief discussions of variation in the duty rates applied to China over time, Department of Commerce (Commerce) determinations on whether Chinese companies should be considered eligible for individual rates, and duty rates applied to selected market economy countries. Duty Rates Imposed on China The overall average duty rate for all 68 orders against China from 1980 through 2004 was 65 percent. This was the result of 72 country-wide rates (on 68 products) with an average duty of 111 percent and 158 individual company rates with an average duty of 44 percent.1 These rates ranged from zero to about 384 percent (see table 3). In our analysis, we identified 25 orders against China in which there was also an order against a market economy country on the same product put in place within 1 year from the order against China. Table 3 shows overall average duty rates from the 25 orders against China that were matched to market economy cases and the 43 orders in which no market economy order was identified. Table 4 at the end of this appendix provides information on each of the 68 orders against China, and table 5 provides comparative information for each of the 25 cases in which duties were also applied against market economy producers. Table 3: Summary Data on China AD Duty Orders, 1980-2004 Type of rate Number of Mean Minimum Maximum rates (%) (%) (%) 25 orders matched to Individual company 50 52 0 162 similar market economy rates orders Country-wide rate 25 98 3 218 Total 75 67 0 218 43 orders not matched to Individual company 108 41 0 292 similar market economy rates orders Country-wide rate 47 118 1 384 Total 155 64 0 384 All 68 orders Individual company 158 44 0 292 rates Country-wide rate 72 111 1 384 Grand total 230 65 0 384 Source: GAO AD database. Note: The overall average individual duty rates listed in this table for the "matching" orders are for the 25 products with both China and market economy orders. However, only 18 of these products had individual rates imposed on both China and at least one other market economy. We use these 18 products for our comparison of individual company duty rates imposed on China and market economies, rather than the 25 products, in the rest of the report. The average individual company duty rate imposed on China for these 18 products is 53 percent, rather than 52 percent. About 78 percent (53 AD orders) of the 68 AD orders included not only country-wide rates but also individually calculated rates for at least one Chinese company. Of these, about 54 percent (37 orders) included company-specific rates that were lower than the country-wide rates imposed in the same cases. With regard to nonmalleable cast iron pipe fittings, for example, two Chinese companies submitted detailed information and met Commerce's criteria for assignment of individually determined rates. Other Chinese pipe fitting companies, however, did not provide any information. Commerce assigned the two cooperating companies duty rates of between 6 and 8 percent-a fraction of the 76 percent country-wide duty rate applied in this case.2 Only 15 orders issued against China during this period included just a country-wide rate. Most of these orders date from the period before 1991 when Commerce had not yet begun applying its separate rates test. However, from 1991 through 1995 Commerce issued six orders that contained only a country-wide rate. In most of these cases, Chinese companies failed to respond to Commerce requests for information. For example, in one case Commerce solicited information through both the Chinese government and the relevant Chinese industry association. However, the industry association responded that no Chinese producer or exporter wanted to participate in Commerce's investigation. Commerce, therefore, used facts available to establish a country-wide duty rate of about 156 percent.3 In 12 of the 68 orders, all the individual rates issued were equal to the country-wide rate. In some cases, Commerce specified an individual rate for one company and then used this rate as "facts available" to establish a country-wide duty rate at the same level.4 For example, in its investigation of refined brown aluminum oxide from China, Commerce requested information from the government of China and more than 20 Chinese companies. Only one of these companies responded. Commerce found that this company qualified for its own duty rate and determined that this rate should be about 135 percent. Commerce determined that the failure of the other companies to provide requested information justified application of an adverse inference to determine the country-wide rate. Since the rate established for the lone cooperating company was higher than any of the rates suggested in the petition requesting imposition of duties on this product, Commerce set the country-wide rate equal to the rate applied to the one cooperating company-135 percent.5 Duty Rates against China Have Fluctuated over Time We found that there was a slight tendency for duty rates applied against Chinese products to rise over the period of our analysis, as well as to fluctuate over time. As figure 9 shows, individual company and country-wide duty rates tended to be larger from 1992-2004 than from 1980-1991. In addition, the individual company rates demonstrate a cyclical pattern over time. In our regression analysis, we found that there was a small positive trend in AD duty rates against China over time that was statistically significant. This result is consistent with research that has shown that overall U.S. AD margins have increased over time.6 Figure 9: Average Country-Wide and Individual Rates, All Orders against China, 1980-2004 Note: Commerce did not issue any new AD duty orders against China in 1980, 1981, 1982, 1985, 1987, 1988, 1989, or 1998. In the tapered roller bearings cases, Commerce put an order in place in 1987 but amended it in 1990. We use 1990 information in the above graphic. Average Duty Rates on 68 Orders against China and Subset of 25 Orders Matched to Market Economy Orders Table 4 shows the duty rates on the 68 orders imposed on China between 1980 and 2004. Table 5 then shows the duty rates on the 25 orders imposed on China in which we also found matching orders imposed on market economies. Table 4: Average Duty Rates for 68 Orders against China, 1980-2004 Individual company rates Year and product Average Average Number of Average Minimum Maximum (all country-wide rates (%) (%) (%) rates) rate (%) (%) (1983) Cotton shop 35 36 2 34 30 37 towels (1983) Greig 22 22 polyester cotton print cloth (1984) Barium 15 15 1 15 15 15 chloride (1984) 58 58 1 58 58 58 Chloropicrin (1984) Potassium 40 40 1 40 40 40 permanganate (1986) Iron 12 12 construction castings (1986) Paint 127 127 brushes (1986) 67 67 Porcelain-on-steel cookware (1986) Steel wire 6 6 nails (1986) Wax candles 54 54 1 54 54 54 (1990) Industrial 78 78 1 78 78 78 nitrocellulose (1990) Tapered 3 3 2 3 1 5 roller bearings (1991) 42 42 1 42 42 42 Chrome-plated lug nuts (1991) Hand tools 36 36 (1991) Oscillating 1 1 8 1 0 2 fans and ceiling fans (1991) Silicon 139 139 metal (1991) Sparklers 59 76 3 54 2 94 (1991) Sulfur 28 28 chemicals (1991) Tungsten 151 151 ore concentrates (1992) Carbon 114 183 6 102 35 155 steel butt-weld pipe fittings (1992) Sulfanilic 52 85 1 19 19 19 acid (1993) Compact 127 127 ductile iron waterworks (1993) 138 138 Ferrosilicon (1993) Helical 89 129 2 70 70 70 spring lock washers (1994) Cased 14 45 4 6 0 17 pencils (1994) Garlic 377 377 (1994) Paper clips 73 127 3 55 46 61 (1994) Sebacic 98 243 4 61 44 85 acid (1994) 150 150 Silicomanganese (1995) Furfuryl 46 45 2 47 44 50 alcohol (1995) Glycine 156 156 (1995) Pure 108 108 magnesium 1 (1996) Manganese 33 143 4 6 1 12 metal (1996) Polyvinyl 78 117 2 58 0 117 alcohol 1 (1997) Brake 10 43 6 5 0 16 rotors (1997) Collated 39 118 2 0 0 0 roofing nails (1997) Coumarin 87 161 2 51 31 70 (1997) Crawfish 133 202 5 120 92 157 (1997) Melamine 2 7 4 1 0 3 dinnerware (1997) Persulfates 55 119 3 34 32 35 (1999) Mushrooms 155 199 4 144 121 162 (2000) Apple juice 19 52 7 14 0 28 (2000) Bulk 57 144 2 14 11 17 aspirin (2000) Creatine 47 154 6 30 0 58 (2000) Synthetic 96 130 2 80 80 80 indigo (2001) Certain 76 91 4 73 64 91 hot-rolled carbon steel flat products (2001) Foundry 109 215 4 83 49 106 coke products (2001) Honey 72 184 4 45 26 57 (2001) Pure 165 306 1 25 25 25 magnesium 2 (2001) Steel 133 133 1 133 133 133 concrete reinforcing bars (2002) Automotive 37 125 3 8 4 12 replacement glass windshields (2002) Certain 58 165 2 5 2 9 folding gift boxes (2002) Folding 28 71 2 7 0 14 metal tables and folding metal chairs (2003) Barium 58 81 1 34 34 34 carbonate (2003) Certain 31 111 4 11 7 16 malleable iron pipe fittings (2003) Cut to 62 129 5 49 17 129 length carbon steel plate (2003) 40 67 1 13 13 13 Ferrovanadium (2003) Lawn and 6 16 3 2 0 7 garden steel fence posts (2003) 30 76 2 7 6 7 Non-malleable cast iron pipe fittings (2003) Polyvinyl 52 98 1 7 7 7 alcohol 2 (2003) Refined 135 135 1 135 135 135 brown aluminum oxide (2003) Saccharin 288 330 3 274 249 292 (2004) Carbazole 74 218 3 26 6 45 violet pigment 23 (2004) Certain 27 78 5 17 5 26 color television receivers (2004) Hand trucks 105 384 4 35 26 46 (2004) Ironing 99 158 3 80 9 158 tables (2004) 27 78 8 21 0 41 Polyethylene retail carrier bags (2004) 137 137 1 137 137 137 Tetrahydrofurfuryl alcohol Total 65 111 158 44 0 292 Source: GAO AD database. Note: The average (all rates) is calculated as the average of the country-wide rate and each of the individual company rates that Commerce issued in its order. Table 5: Average Duty Rates for 25 Products with Orders against both China and Market Economies, 1980-2004 Individual company rates Product and year Country Average Average Number of Average Minimum Maximum and country-wide rates number of (all or all- (%) (%) (%) orders rates) others rate (%) (%) Carbazole violet China 74 218 3 26 6 45 pigment 23 (2004) Market 29 27 2 30 10 50 economies (1) Carbon steel China 114 183 6 102 35 155 butt-weld pipe Market 25 39 3 21 0 51 fittings (1992) economies (1) Certain hot-rolled China 76 91 4 73 64 91 carbon steel flat Market 24 23 11 25 3 48 products (2001) economies (7) Chrome-plated lug China 42 42 1 42 42 42 nuts (1991) Market 8 7 2 9 6 11 economies (1) Collated roofing China 39 118 2 0 0 0 nails (1997) Market 22 3 3 28 3 40 economies (1) Ferrosilicon China 138 138 0 (1993) Market 27 23 4 29 3 89 economies (2) Ferrovanadium China 40 67 1 13 13 13 (2003) Market 116 116 2 116 116 116 economies (1) Furfuryl alcohol China 46 45 2 47 44 50 (1995) Market 10 10 2 10 8 12 economies (2) Helical spring China 89 129 2 70 70 70 lock washers Market 32 32 3 32 32 32 (1993) economies (1) Honey (2001) China 72 184 4 45 26 57 Market 36 30 3 38 27 55 economies (1) Industrial China 78 78 1 78 78 78 nitrocellulose Market 37 37 6 37 4 66 (1990) economies (6) Iron construction China 12 12 0 castings (1986) Market 11 12 10 11 0 59 economies (3) Melamine China 2 7 4 1 0 3 institutional Market 18 6 6 22 0 53 dinnerware (1997) economies (2) Polyethylene China 27 78 8 21 0 41 retail carrier Market 81 44 10 88 2 123 bags (2004) economies (2) Polyvinyl alcohol China 78 117 2 58 0 117 1 (1996) Market 63 48 6 68 19 77 economies (2) Polyvinyl alcohol China 52 98 1 7 7 7 2 (2003) Market 103 54 5 123 39 144 economies (2) Porcelain-on-steel China 67 67 0 cooking ware Market 15 17 8 15 2 57 (1986) economies (2) Potassium China 40 40 1 40 40 40 permanganate Market 5 5 1 5 5 5 (1984) economies (1) Preserved China 155 199 4 144 121 162 mushrooms (1999) Market 86 57 7 98 6 244 economies (3) Silicomanganese 1 China 150 150 0 (1994) Market 41 18 1 65 65 65 economies (1) Silicon metal China 139 139 0 (1991) Market 58 50 3 63 9 93 economies (2) Steel concrete China 133 133 1 133 133 133 reinforcing bars Market 57 37 12 64 17 102 (2001) economies (4) Sulfanilic acid China 52 85 1 19 19 19 (1992) Market 115 115 0 economies (1) Sulfur chemicals China 28 28 0 (1991) Market 75 75 2 75 50 100 economies (2) Tapered roller China 3 3 2 3 1 5 bearings (1987) Market 54 65 2 36 36 37 economies (3) Total China 67 98 50 52 0 162 Market 44 37 114 48 0 244 economies (54) Source: GAO AD database. Notes: The average (all rates) is calculated as the average of the country-wide rate and each of the individual company rates that Commerce issued in its order. The overall average individual duty rates listed in this table are for the 25 products with both China and market economy orders. However, only 18 of these products had individual rates imposed on both China and at least one other market economy. We use these 18 products for our comparison of individual company duty rates imposed on China and market economies, rather than the 25 products, in the rest of the report. The average individual company duty rate imposed on China for these 18 products is 53 percent and for market economies it is 55 percent. Regression Analysis Results Appendix III In order to examine the difference between duty rates applied to China and those applied to market economy countries, we performed multivariate regression analyses on the cases in which the Department of Commerce (Commerce) applied duties to both China and at least one market economy country. These involved 25 different products, affected by 25 duty orders against China, and 54 duty orders against market economies. Multivariate regression analysis makes it possible to examine the simultaneous effect of several different factors on the duty rates and to determine the extent to which these factors, taken together, explain variation in these rates. To determine whether our analytical results for China held true for all nonmarket economy (NME) countries, we also identified six instances in which Commerce applied duties to a nonmarket economy other than China, and at least one market economy country, and reran our analyses using data for all 31 products. Table 6 shows the results of our multivariate regression analysis of variation in the dependent variable (the antidumping [AD] duty rate) attributable to the following independent variables: o China (a variable indicating whether the AD duty rate is for China or not) o the country-wide rate (a variable indicating whether the AD duty rate is a country-wide rate), and o year (a variable indicating the year in which the duty went into affect). We also included a constant term. The regression involved 25 products covered by 25 orders against China and 54 orders against market economies and included a total of 243 duty rates (the dependent variable) from these 79 orders. The results show that the variable for China as the target country had a coefficient of 3.002 percent, indicating that duty rates against China tended to be about 3 percentage points higher than those against market economies, on average. However, this coefficient is not statistically significant, meaning that there was no statistically significant difference between the rates assigned to China and market economy countries, when the other factors in the regression are included. The coefficient for the country-wide rate, on the other hand, shows that there is a 52 percentage point difference between country-wide rates against China and other rates. This result is statistically significant at above the 99 percent level. The variable for the year of the order is also statistically significant, but it has a small coefficient.1 The adjusted R-square measure shows that about 15 percent of the overall variation in duty rates is explained by the independent variables included here. Table 6: Results of Multivariate Regression Analysis of Duty Rates on Explanatory Variables for China, Country-Wide Rates, and Year Dependent variable = AD duty rate Independent Unstandardized Standard Standardized t-statistic Significance variables coefficients error coefficients of (Beta) t-statistic (B) China 3.002 7.511 .028 .400 .690 Year 2.095 .497 .252 4.218 .000 Country-wide 52.050 11.398 .316 4.567 .000 rate Source: GAO analysis of Commerce data. Note: R-square = 0.164; Adjusted R-square = 0.154; Observations = 243. We then included additional variables for product groups, such as agriculture and steel, and, in separate regressions, individual product variables for each type of product. The additional variables generally improved the overall "fit" of the regression; the adjusted R-square measure with the individual product variables included showed that the regression explained between 24 and 31 percent of the overall variation in duty rates across the sample compared with 15 percent in the regression above. Also, certain types of products, such as agriculture products, tended to have higher duty rates relative to other types. Table 7 shows the regression results when individual product variables are included. Once again the coefficient for China is insignificant, while the coefficient for the country-wide rate is significant at the 99 percent level. Some coefficients for individual products are significant (e.g., carbon steel butt-weld pipe fittings), but many are not. The overall adjusted R-square measure shows that this regression model explains about 31 percent of total variation in the duty rates. Table 7: Results of Multivariate Regression Analysis of Duty Rates on Explanatory Variables for China, Country-Wide Rates, and Individual Products Dependent variable = AD duty rate Independent Unstandardized Standard Standardized t-statistic Significance variables coefficients error coefficients of (Beta) t-statistic (B) China 2.055 7.302 .019 .281 .779 Year -6.022 20.636 -.726 -.292 .771 Country-wide rate 50.928 10.609 .309 4.801 .000 Carbazole violet 113.617 269.338 .380 .422 .674 pigment 23 (2004) Carbon steel 70.893 30.579 .294 2.318 .021 butt-weld pipe fittings (1992) Certain hot-rolled 82.479 207.275 .482 .398 .691 carbon steel flat products (2001) Collated roofing 46.480 126.162 .155 .368 .713 nails (1997) Ferrosilicon 40.090 58.403 .134 .686 .493 (1993) Ferrovanadium 136.023 249.034 .386 .546 .585 (2003) Furfuryl alcohol 30.585 86.044 .102 .355 .723 (1995) Helical spring 49.701 47.927 .166 1.037 .301 lock washers (1993) Honey (2001) 98.896 207.608 .373 .476 .634 Industrial 21.805 30.079 .101 .725 .469 nitrocellulose (1990) Iron construction -33.870 105.554 -.158 -.321 .749 castings (1986) Melamine 32.449 125.663 .146 .258 .796 institutional dinnerware (1997) Polyethylene 122.291 268.962 .686 .455 .650 retail carrier bags (2004) Polyvinyl alcohol 81.135 105.532 .337 .769 .443 1 (1996) Polyvinyl alcohol 147.492 248.661 .556 .593 .554 2 (2003) Porcelain-on-steel -25.756 105.698 -.107 -.244 .808 cooking ware (1986) Potassium -44.131 147.104 -.112 -.300 .764 permanganate (1984) Preserved 141.530 163.666 .680 .865 .388 mushrooms (1999) Silicomanganese 1 67.142 69.110 .148 .972 .332 (1994) Silicon metal 51.868 25.308 .161 2.049 .042 (1991) Steel concrete 111.738 207.339 .584 .539 .591 reinforcing bars (2001) Sulfanilic acid 51.956 41.151 .115 1.263 .208 (1992) Sulfur chemicals 44.355 26.424 .126 1.679 .095 (1991) Tapered roller -7.471 85.958 -.027 -.087 .931 bearings (1987) Source: GAO analysis of Commerce data. Note: R-square = 0.386; Adjusted R-square = 0.309; Observations = 243. In order to examine the effect of applying adverse inferences and facts available (other than adverse inferences) on the duty rates, we added additional variables indicating when Commerce used these approaches. The results show that application of adverse inferences is a significant variable and has a large effect on the duty rates, but that application of facts available (other than adverse inferences) is not. When adverse inferences are introduced, this results in the country-wide rate variable becoming insignificant (see table 8). However, this is likely due to the fact that the adverse inferences variable is highly correlated with the country-wide rate. Therefore, it is not surprising that the country-wide rate is no longer significant since the adverse inferences variable is already accounting for much of the variation. In addition, the variable for China once again becomes significant. As we discuss in the body of this report, Commerce uses adverse inferences in very few determinations for Chinese companies granted their own rates. Adverse inferences were applied in making only 3 out of the 50 individual determinations used in this analysis. However, Commerce used adverse inferences in nearly half of its determinations against individual market economy companies. Since adverse inferences are already factored into this model, as is the country-wide rate, the remaining differences accounted for by the China variable in table 3 are between individual (noncountry-wide) Chinese rates and individual market economy rates in which adverse inferences are not used. Table 8 shows that there is a statistically significant 27 percentage point difference between these rates. However, because there are methodological differences between the NME and market economy methodologies for individual companies, it is not clear how often adverse inferences would be used against individual Chinese companies should they move to a market economy methodology. In other words, we cannot predict the extent to which, under a market economy methodology, individual Chinese companies would cooperate with Commerce or Commerce would find it necessary to use adverse inferences in its determinations against Chinese companies. It is possible that some Chinese companies that currently have an individually determined rate under the NME methodology would face adverse inferences under a market economy methodology, whereas others would not. This could produce a result similar to the market economy cases we have examined in which the overall average (for example, 55 percent) is the result of some companies receiving comparatively high duty rates (e.g., 77 percent) when adverse inferences are used and others receiving comparatively low rates (e.g., 16 percent) when adverse inferences are not used (see table 2). In any case, these results show that there is a remaining difference between these two groups after accounting for the use of adverse inferences and the country-wide rate. Table 8: Results of Multivariate Regression Analysis of Duty Rates on Explanatory Variables for China, Country-Wide Rates, Adverse Inferences, Other Facts Available, and Individual Products Dependent variable = AD duty rate Independent Unstandardized Standard Standardized t-statistic Significance variables coefficients error coefficients of (Beta) t-statistic (B) China 27.342 6.856 .252 3.988 .000 Year 4.831 17.572 .582 .275 .784 Country-wide rate 9.910 10.064 .060 .985 .326 Adverse inferences 60.196 6.845 .587 8.794 .000 Facts available 10.135 8.495 .069 1.193 .234 Carbazole violet -40.728 229.493 -.136 -.177 .859 pigment 23 (2004) Carbon steel 39.749 26.189 .165 1.518 .131 butt-weld pipe fittings (1992) Certain hot-rolled -57.704 176.678 -.337 -.327 .744 carbon steel flat products (2001) Collated roofing -45.478 107.679 -.152 -.422 .673 nails (1997) Ferrosilicon -3.176 49.788 -.011 -.064 .949 (1993) Ferrovanadium -40.348 212.436 -.114 -.190 .850 (2003) Furfuryl alcohol -13.868 73.344 -.046 -.189 .850 (1995) Helical spring -18.938 41.354 -.063 -.458 .647 lock washers (1993) Honey (2001) -31.946 176.875 -.121 -.181 .857 Industrial 8.668 25.589 .040 .339 .735 nitrocellulose (1990) Iron construction 25.459 89.838 .118 .283 .777 castings (1986) Melamine -53.825 107.215 -.242 -.502 .616 institutional dinnerware (1997) Polyethylene -55.280 229.336 -.310 -.241 .810 retail carrier bags (2004) Polyvinyl alcohol -5.196 90.169 -.022 -.058 .954 1 (1996) Polyvinyl alcohol -22.256 211.996 -.084 -.105 .916 2 (2003) Porcelain-on-steel 32.037 89.998 .133 .356 .722 cooking ware (1986) Potassium 33.392 125.194 .085 .267 .790 permanganate (1984) Preserved 32.301 139.519 .155 .232 .817 mushrooms (1999) Silicomanganese 1 3.633 59.124 .008 .061 .951 (1994) Silicon metal 39.950 22.201 .124 1.799 .073 (1991) Steel concrete -41.334 176.900 -.216 -.234 .815 reinforcing bars (2001) Sulfanilic acid -1.893 35.427 -.004 -.053 .957 (1992) Sulfur chemicals -8.757 23.151 -.025 -.378 .706 (1991) Tapered roller 12.952 73.025 .046 .177 .859 bearings (1987) Source: GAO analysis of Commerce data. Note: R-square = 0.562; Adjusted R-square = 0.502; Observations = 243. In order to examine whether the above results hold for all NMEs, we ran the same regressions for a larger set of 31 products (compared with the 25 products above) in which we found matching cases between nonmarket economies other than China and market economies. The data set on these 31 products included rates from 128 orders (26 on China, 82 on market economies, and 20 on NMEs other than China) that contained 355 duty rates (dependent variable). These analyses confirmed our China-market economy only analyses but also showed that other NME countries tend to have duty rates that are statistically higher than market economy rates for this sample of matching cases. (Note that the number of additional products-six-is relatively small.) Controlling for both the NME designation and the country-wide rate, the NME designation itself is a significant variable at the 97 percent level of confidence with a coefficient of 23 percent (the coefficient for China is not statistically significant). The country-wide variable is also significant (99 percent level) and larger with a coefficient of 48 percent. As additional variables are added for individual products, the NME designation continued to be significant along with the country-wide rate variable. There may be other systematic factors not accounted for in this regression model that would explain some of the variability not accounted for by the variables we included. As shown in table 7, our model accounted for about 50 percent (half) of the variation in rates. Some of this variation may be idiosyncratic and related to differences in individual companies' practices, other may relate to how Commerce has implemented its analysis. However, these unexplained factors do not appear to be systematically related to whether the case involved China or a market economy since the regression analysis already controls for that difference. Comments from the Department of Commerce Appendix IV The following are GAO's comments on the Department of Commerce's letter dated December 8, 2005. GAO Comments 1.We re-examined our data, making corrections as appropriate, and updated our analyses. The report reflects these corrections, though they did not have a significant impact on any of our findings. 2.As discussed in the report, the overall difference between the duty rates applied to China and those applied to market economy countries is largely explained by the application of comparatively high country-wide rates to China. Therefore, the model allows us to conclude that elimination of the NME methodology-and thus these country-wide rates-would result in lower duties for some Chinese companies. Nevertheless, there would still be variation in duty rates among companies and products due to a range of other factors. GAO Contact and Staff Acknowledgments Appendix V Loren Yager (202) 512-4347 In addition to the individual named above, Adam R. Cowles, Monica Ghosh, R. Gifford Howland, Michael McAtee, Richard Seldin, Ross Tuttleman, Roberto Walton, and Timothy Wedding made significant contributions to this report. (320327) www.gao.gov/cgi-bin/getrpt? GAO-06-231 . To view the full product, including the scope and methodology, click on the link above. To view the database on antidumping case information against Chinese companies, click on the following link: www.gao.gov/cgi-bin/getrpt? GAO-06-652SP . For more information, contact Loren Yager at (202) 512-4347 or [email protected]. Highlights of GAO-06-231 , a report to congressional committees January 2006 U.S.-CHINA TRADE Eliminating Nonmarket Economy Methodology Would Lower Antidumping Duties for Some Chinese Companies U.S. companies adversely affected by unfair imports may seek a number of relief measures, including antidumping (AD) duties. The Department of Commerce (Commerce) classifies China as a nonmarket economy (NME) and uses a special methodology that is commonly believed to produce AD duty rates that are higher than those applied to market economies. Commerce may stop applying its NME methodology if it finds that China warrants designation as a market economy. In light of increased concern about China's trade practices, the conference report on fiscal year 2004 appropriations requested that GAO review efforts by U.S. government agencies responsible for ensuring free and fair trade with that country. In this report, the last in a series, GAO (1) explains the NME methodology, (2) analyzes AD duties applied to China and compares them with duties applied to market economies, and (3) explains circumstances in which the United States would stop applying its NME methodology to China and evaluates the potential impact of such a step. Commerce agreed with our findings, commenting that our report provides timely and helpful information on the NME methodology and its application to China. Commerce's methodology for calculating AD duties on nonmarket economy products differs from its market economy approach in that (1) since NME prices are unreliable, it uses price information from surrogate countries, like India, to construct the value of the imported products and (2) it limits eligibility for individual rates to companies that show their export activities are not subject to government control. Companies that do not meet the criteria or do not participate in Commerce investigations receive "country-wide" rates. China has been the most frequent target of U.S. AD actions. On 25 occasions, Commerce has applied duties to the same product from both China and one or more market economy. China (NME) duties were over 20 percentage points higher than those applied to market economies, on average. This is because average China country-wide rates were over 60 points higher than comparable market economy rates. Individual China company rates were similar to those assigned to market economy companies, on average. Comparison of China and Market Economy Antidumping Rates for 25 Products (1985-2004) Commerce can declare China a market economy if the country meets certain criteria, thus ending the use of surrogate price information and country-wide rates in China AD actions. These changes would have a mixed impact. Duties would likely decline for Chinese companies not assigned individual rates. Individual company rates would likely diverge, with those that do not cooperate with Commerce receiving rates that are substantially higher than those that do cooperate. In any case, it appears that the actual trade impact of the NME methodology will decline as the portion of total export trade conducted by Chinese companies assigned individual rates increases and as the country-wide rates that largely account for the comparatively high average rates applied to China decline in importance. Report to Congressional Committees January 2006 U.S.-CHINA TRADE Eliminating Nonmarket Economy Methodology Would Lower Antidumping Duties for Some Chinese Companies GAO's Mission The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO's commitment to good government is reflected in its core values of accountability, integrity, and reliability. Obtaining Copies of GAO Reports and Testimony The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO's Web site ( www.gao.gov ). 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