CVDs are tariffs imposed on particular products to offset unfair subsidies. For CVDs to be imposed, Commerce must determine that there is a countervailable subsidy, which requires a financial contribution conferred by a foreign government authority that provides a benefit to a specific enterprise or industry or group of enterprises or industries that produce or export the product. The U.S. International Trade Commission must also determine that an industry in the United States is being materially injured, threatened with material injury, or materially retarded by reason of imports of the subsidized product.

Under the proposed rule, Commerce could find provision of foreign currency in exchange for U.S. dollars by state-owned banks, other government authorities, or private entities entrusted or directed by government authorities to be a countervailable financial contribution and to provide a countervailable benefit where done on terms more favorable than the market would provide, and Commerce could find government distortions providing an advantage to enterprises that primarily buy or sell goods internationally to be specific.

The proposed rule would also introduce a new agency into the analysis for allegations of currency undervaluation: the U.S. Department of the Treasury (“Treasury”). Specifically, the proposed rule would require Commerce to request that Treasury provide an “evaluation and conclusion as to whether the currency is undervalued as a result of government action on the exchange rate and the extent of any such undervaluation.” Treasury’s involvement may raise some questions about how the rule will be implemented in practice.

Treasury has monitored certain countries for potential currency manipulation but opted not to find other countries to be currency manipulators in the past, although it appears that its determinations of whether a country is a currency manipulator would be independent of the analysis in CVD proceedings.

From a procedural standpoint, the proposed rule does not explain at what point in the course of a CVD proceeding Treasury would provide its evaluation and determination or what Treasury’s deadline would be for making such a determination. This may become an issue because CVD proceedings are subject to tight statutory timelines.

The proposed rule would apply to any country where the criteria for currency undervaluation as a result of government action on the exchange rate are found to be met. Examples of countries that may have undervalued currency include China, Germany, India, Indonesia, Japan, South Korea, and Switzerland.

Interestingly, the proposed rule would treat currency undervaluation as a domestic subsidy rather than an export subsidy — even though it would apply to enterprises that primarily buy or sell goods internationally,

Commerce has indicated that it intends to focus on the advantages to exporters, and many believe that currency undervaluation is an export subsidy because it results in artificially cheaper exports. Because of the way CVD rates are calculated, as a practical matter the rates calculated by treating currency undervaluation as a domestic subsidy will be lower than if it were to be treated as an export subsidy. Commerce noted that it was difficult to estimate the economic impact of the proposed rule because CVDs are calculated based on fact-specific analyses in particular proceedings. Nevertheless, Commerce estimated that the rule change could generate $3.9 million to $21 million in additional CVDs collected each year.