How will changes in U.S. CVD law impact developing countries?

On February 10, 2020, the U.S. Trade Representative published an updated version of the "List of Developing and Least Developed Countries under U.S. Countervailing Duty Law" (CVD) in the Federal Register. Twenty countries, including India, Indonesia, South Africa, and Thailand, had their status as developing countries removed.

This amounts to a unilateral move to revoke WTO-permitted S&DT status using the US’s national CVD laws. Two questions arise: (1) What is the reasoning behind this move? (2) What will be the impact of changes in U.S. CVD law on developing countries who trade with the U.S.?

Non-reciprocal trade rules

The move should be understood in the context of proposed reforms to ‘Special and Differential Treatment’ (S&DT) in the World Trade Organization (WTO). Under WTO law, member states can identify themselves as “developing” countries, whereby they can leverage S&DT vis-a-vis negotiated outcomes.

For example, developed countries can offer non-reciprocal preferential treatment to products originating in developing countries, called the Generalized System of Preferences (GSP). Furthermore, under the Agreement on Subsidies and Countervailing Measures (“SCM Agreement”), developing country Members' exporters are entitled to more favourable treatment by developed countries with respect to the termination of investigations where the level of subsidization of specific products is small and/or the volume of imports, including an aggregate measure for the affected country’s exports to the U.S. as a whole.

The principle of S&DT is “non-reciprocal”, which is incompatible with President Trump's claimed trade philosophy- where trading relationships have to be fair and reciprocal. In early 2019, the U.S. submitted two documents to the WTO’s General Council advocating reforms to S&DT access. One document (WT/GC/W/757/Rev.1) is titled "An Undifferentiated WTO: Self-Declared Development Status Risks Institutional Irrelevance".

Another document (WT/GC/W/764), in the form of a draft general council decision, proposes member states no longer enjoy S&DT if (1) they are a member of the Organization for Economic Cooperation and Development (OECD) or are acceding to the OECD; (2) they are a member of the G20 Leaders group; (3) they are classified a “high income” state by the World Bank; or (4) they account for 0.5 per cent or more of global merchandise trade (imports and exports). Essentially, the U.S. has proposed a set of graduation criteria for S&DT status.

In response, two separate groups have produced alternative proposals. One, comprised of China, India, South Africa, Venezuela, Laos, Bolivia, Kenya, and Cuba, collectively submitted proposal WT/GC/W/765/Rev.1. By using different indicators to those favoured by the U.S., they aver that the “development divide” between developing and developed countries is very much present. They insist it is appropriate for developing countries to self-declare, concluding “no other members are entitled to interfere with such a self-declared decision”.

The second group, comprised of Norway, Iceland, New Zealand, Singapore, and Switzerland, submitted proposal WT/GC/W/770/Rev.2 titled “Pursuing the Development Dimension in WTO Rule-making Efforts”. They argued that there was no need to interfere with a developing country’s status since S&DT is a principle that can be utilized in various approaches, as summarized by the WTO Secretariat.

What will be the impact on China?

China is the largest and most important economy with “developing” status. However, China has never been on the United States’ “List of Developing and Least Developed Countries under the Countervailing Law”, which was originally devised in 1998, prior to China joining the WTO in 2001. After China joined, the U.S. still did not add China to its list of developing and least-developed countries under its CVD law.

Beginning in 2006, the U.S. started launching CVD investigations against Chinese exports; since then China has become the main target. As the U.S. has never granted China developing country status, the change in the list won’t cause any substantial damage to China.

The impact on India and Indonesia

Among the countries losing their developing status vis-a-vis the U.S. market, India and Indonesia have been most often targeted by the U.S. for countervailing investigations. Between 1 January 1995 and 30 June 2019, the total countervailing investigation cases for India and Indonesia were 88 and 24 respectively, in which investigations originating from the U.S. accounted for 37.5 percent and 45.8 percent respectively.

Since the de minimis threshold applies on a product basis it is likely that some exports from both countries have escaped the CVD net. Perhaps for this reason, both were expelled from the list because they meet the U.S.’s graduation criteria of trade accounting for 0.5 per cent or more of world trade, and G20 membership.

The U.S.’s unilateral initiative is likely to either force domestic reforms in the subsidy system in India and Indonesia or require both countries’ firms to bear the costs of U.S. CVD actions against them. The Trump administration’s canceling of preferential treatment of subsidies could have substantial impacts on both countries’ exports since the U.S. is the largest and the third largest export partner of India and Indonesia respectively.

For example, in October 2019 the U.S. won dispute settlement case DS541 against India’s subsidies where the panel report recommended that India withdraw the prohibited subsidies which are valued at more than $7 billion. Ironically, since the U.S. has blocked appointments to the WTO’s Appellate Body thereby freezing appeals, India has appealed the finding.

What next for S&DT?

The U.S. has shown the world that its tolerance for developing countries to benefit from non-reciprocal S&DT is rapidly diminishing. Likewise, its willingness to engage in unilateral actions pose difficult political economy questions for a WTO-based multilateral solution to S&DT.

Even if WTO members were to debate criteria to classify which country is qualified for S&DT according to the U.S. proposal, it is unlikely that affected members would agree. This is because even if they qualified for S&DT under agreed criteria, per U.S. proposals developing countries would still have to prove their individual needs in order to get S&DT in WTO negotiations on specific issues. Thus, the conditional S&DT would jeopardize the possibility to arrive at new negotiated outcomes.

For this reason, the U.S. wish to negotiate WTO criteria for designating Member’s access to S&DT is unlikely to be politically productive from the perspective of affected members. Whether from a technical or a political standpoint, the U.S. proposal for S&DT graduation is unlikely to make headway in the WTO.

A solution based on compromise seems a more effective and practical approach. In the S&DT clause in the Trade Facilitation Agreement (TFA), for example, developing and least developed countries can set their own timetables for implementation depending on their capacities to do so.

The method of giving more flexibility was met with positive response from 9 developing countries which agreed to enforce all TFA commitments immediately, and a further 30 countries including China and Brazil agreeing to implement more than 75% of their commitments immediately.

Clearly creative thinking is needed if the WTO is to find a way through the S&DT impasse

By Jaiwei Fu, IIT Visiting Reseacher

The views expressed here are the author’s, and do not necessarily represent the views of the Institute for International Trade