A notice issued by the Office of the U.S. Trade Representative (USTR) in the Federal Register on February 10 revised the list of developing and least developed economies in the countervailing duty (CVD) law. Since the revision didn't include China, some may conclude that the U.S. now considers China a developed country. But is this really the case?

The list designates members of the World Trade Organization (WTO) that are entitled to special treatment for purposes of countervailing measures. The change is the first since it was published in 1998. Thus, according to the list, the U.S. Department of Commerce will not treat China as a developing country in its handling of anti-subsidy cases.

Criteria used

The WTO Agreement on Subsidies and Countervailing Measures was adopted to discipline the use of subsidies. Under the agreement, members can seek remedies against export subsidies through the WTO dispute settlement mechanism and also impose countervailing duties according to their own procedures. The two measures can be applied simultaneously but not repeatedly.

The U.S. Congress amended the CVD law in 1994 to deal with issues related to export subsidies by WTO members. Congress also granted the USTR the power to identify the list of developing and least developed economies among the WTO members whose imports are treated preferentially.

U.S. Trade Representative Robert Lighthizer announced that the future list will no longer be published in forms of rules, but will be notified when changes are needed. This reform will reduce the administrative cost of adjusting the list and turn it into another tool for the U.S. to pressure trading partners during negotiations.

On the new list, 36 WTO members are defined as developing economies, while the former list had 42 entries. Since 1998, both the WTO membership and trade volume have increased significantly. Thus, the U.S. has squeezed the number of economies that can enjoy special treatment considerably.

According to the notice, the USTR determined the list based on per-capita gross national income (GNI), share of world trade and other factors. It substituted GNI for GDP used in the 1998 rule, separating high-income economies from those with lower per-capita GNI. This means that only WTO members with a per-capita GNI below $12,375 will be eligible for special treatment.

In addition, the USTR said it considers 0.5 percent to be a more appropriate indicator of a significant share of world trade rather than 2 percent, adding that according to the most recent data available from 2018, relatively few economies account for such a large share of world trade, and those that do include many of the wealthiest economies.

On the previous list, both EU and Organisation for Economic Co-operation and Development (OECD) members were excluded from developing economies, but now, the USTR has extended the exclusion to all OECD members and applicants, as well as Colombia and Costa Rica. With the expansion of the EU, Romania and Bulgaria which joined in 2007 are no longer qualified to remain on the list. All Group of 20 (G20) members have been excluded because of their significant impact on the global economy, according to the notice, including Argentina, Brazil, India, Indonesia and South Africa.

Moreover, members that did not declare themselves developing economies when joining the WTO have also been removed from the list, including Albania, Armenia, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Montenegro, the Republic of North Macedonia and Ukraine. Compared to the 1998 list, only 22 economies remain, accounting for 52.4 percent.

To be clear, it is not that these excluded economies have made great progress, but rather that the USTR has changed its standards.

Since China joined the WTO in 2001, it has always been excluded from the USTR list. So that alone is not an indication that the U.S. has dropped China's designation as a developing economy.

A workshop in a textile factory in Guyuan, Ningxia Hui Autonomous Region in northwest China, on June 21, 2019 (XINHUA)

Cautions needed

Still, the worries that the U.S. wants to drop the designation of China as a developing economy are not wholly unfounded. As early as July 2019, U.S. President Donald Trump signed a memorandum on reforming the developing country status in the WTO, noting that seven out of the 10 wealthiest economies in the world and three members of both the G20 and the OECD claim this status. In particular, it devoted three paragraphs to China's economic size and global impact.

To that end, Trump directed the USTR to take action. Thus the revised list could be one of the measures authorized by Trump. The USTR said in the notice that the 1998 rule omitted WTO members that in the past had been or could have been considered non-market economies not subject to the CVD law. But since non-market economies may now be subject to the CVD law, the list set forth in the notice does not omit non-market economies, laying the groundwork for follow-up action.

The impact of the new list has been concentrated in countervailing cases. Under WTO agreements, subsidy is financial assistance provided by a government or any government agency within the territory of a member. It stipulates that each member can levy countervailing duties only through investigations initiated and conducted in accordance with the provisions of the Agreement on Subsidies and Countervailing Measures and the WTO Agriculture Agreement.

In particular, the Agreement on Subsidies and Countervailing Measures provides that investigations should be terminated immediately if the amount of subsidy is small, or the actual or potential amount of the subsidized imports and the damage is negligible. Investigations should also be terminated if subsidies are less than 1 percent of the actual price, or if the amount imported from the WTO member is less than 3 percent of total imported goods. For developing economies, both criteria are correspondingly more lenient and they can enjoy special and differentiated treatment.

In December 2006, the U.S. initiated a countervailing duty investigation of coated freesheet paper from China. Since then, trade frictions between China and the U.S. have increased. The abuse of anti-subsidy measures against Chinese products has affected the international trade order. In May 2012, China requested consultations with the U.S. concerning the imposition of countervailing measures on certain products from China.

Both the WTO panel and the Appellate Body ruled that the U.S. measures violated WTO rules, arguing that the U.S. failed to explain how government intervention had resulted in price distortion. A WTO report in July 2019 ruled that the U.S. had not fully complied with the 2014 WTO ruling. The U.S. has never given China special and differentiated treatment, but used the prices of a third country as its benchmark for calculating the subsidy, which made its conclusion more unrealistic.

The China-U.S. trade is based on the markets and industrial structures of the two countries and its development is market-driven. Although the revised USTR list won't affect China's exports to the U.S. significantly, the resulting impact on market expectations and rule-making process cannot be underestimated. The unilateral behavior embodied in this modification will further affect other countries' confidence in U.S. compliance with international rules and bring more negativity into the international economic and trade order.

The author is a research fellow with the Chinese Academy of International Trade and Economic Cooperation

Copyedited by Rebeca Toledo

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