currency undervaluation

U.S. modifies its regulations to provide path for countervailing undervalued currencies in certain circumstances

On February 4, 2020, the Commerce Department’s modification of its countervailing duty (“CVD”) regulations was published in the Federal Register specifically to outline when Commerce would investigate allegations of subsidies on certain imported goods flowing from undervalued foreign currency achieved at least in part through government action. 85 Fed. Reg. 6031-6044. The modification to the U.S. CVD regulations “will apply to all segments of proceedings initiated on or after April 5, 2020”. The modification to the U.S. regulation is enclosed below.


The U.S. Department of Commerce International Trade Administration published its proposed modification of its regulations on May 28, 2019 (84 FR 24406) and received some forty-seven written comments on the proposal, including from some foreign governments (Brazil and India) and various business groups and law firms in China as well as from domestic parties (industries, workers, companies, law firms representing parties, trade associations, individuals) supporting or opposing or seeking modifications to the proposal.

Many domestic industries and their workers competing with imports believed to benefit from undervalued currencies had been seeking for years a modification to U.S. law to address what have been viewed over the years as periods of very active government interference in the market to achieve undervalued currencies by major trading partners. In recent years, China has been the main concern, but there have been ongoing concerns about past actions of the governments of Japan, Korea and others. Thus, the Commerce Department’s decision to develop modifications to its regulations has generally been viewed as a positive development by industries and workers who have competed with undervalued imported goods.

Article VI of the GATT, dealing with antidumping and countervailing duties, has had an Ad note to Paragraphs 2 and 3 which recognized that certain currency practices could be addressed by GATT Contracting Parties as either countervailable subsidies or as a form of dumping. Specifically, “2. Multiple currency practices can in certain circumstances constitute a subsidy to exports which may be met by countervailing duties under paragraph 3 or can constitute a form of dumping means of a partial depreciation of a country’s currency which may be met by action under paragraph 2. By ‘multiple currency practices’ is meant practices by governments or sanctioned by governments.” Article VI and the Ad notes remain part of the WTO.

While the multiple currency practices of the 1930s and 1940s are not the currency problems of the last thirty years, there is nothing in the WTO agreements that prohibits Members from addressing currency practices under the Agreement on Subsidies and Countervailing Measures (“ASCM”) where the terms of the Agreement are met. The Commerce Department modified regulations place certain undervalued currency situations within U.S. law which in turn reflects the U.S. understanding of its obligations under the ASCM.

The revisions modify the Commerce regulations on specificity and on benefit. 19 C.F.R. 351.502, dealing with specificity of domestic subsidies, is modified by adding a new subsection (c) which states that “In determining whether a subsidy is being provided to a ‘group’ of enterprises or industries within the meaning of section 771(5A)(D) of the Act, the Secretary will consider enterprises that buy or sell goods internationally to comprise such a group.” 85 FR at 6043.

A new section, 19 C.F.R. 351.528, is added to identify when exchanges of undervalued currencies will be viewed as countervailable. Commerce will examine whether there is a potentially actionable subsidy only where a country’s currency is undervalued during the relevant period. If that condition is met, Commerce will make an affirmative determination only where “there has been government action on the exchange rate that contributes to an undervaluation of the currency.” Government action will not generally include “monetary and related credit policy of an independent central bank or monetary authority”. Commerce may consider the foreign “government’s degree of transparency regarding actions that could alter the exchange rate.” 85 FR at 6043. This latter provision is presumably a reflection of the need for transparent actions by trading partners or the potential need to use adverse facts available where the actual actions of the foreign government can not be ascertained.

Finally, if there is currency undervaluation caused in part by government action, Commerce reviews how a benefit will be measured. Commerce will look to see if there is a difference between the nominal, bilateral United States dollar rate consistent with the equilibrium real effective exchange rate (REER) and the actual rate during the period of investigation or review. If yes, the benefit is the difference between the amount received by the foreign company and the amount that would have been received by the company if the currency had not been undervalued.

Commerce will seek input from the U.S. Department of Treasury on the questions of currency undervaluation, government action, and any difference between the equilibrium REER and the actual exchange rate. Treasury has expertise in exchange rate matters, but the determination of whether undervaluation constitutes a domestic subsidy is for Commerce to make. Information submitted by Treasury will be on the record and subject to comment and rebuttal by parties to the proceeding.

Part of the regulatory process in the United States includes the agency promulgating the regulations addressing issues raised by those who submit comments on the proposal. There were eleven categories of issues raised on the modifications to the CVD regulations. As the full Federal Register notice is available above, this note simply lists the range of issues addressed by Commerce in its final notice and encourages the reader to review the full Federal Register for the details of the Commerce Department comments on specific issues:

  1. Whether the CVD Law is an Appropriate Tool To Remedy Subsidies From Currency Undervaluation
  2. Statutory Authority to Promulgate This Rule
  3. Financial Contribution
  4. Determination of Undervaluation
  5. Government Action on the Exchange Rate
  6. Calculation of the Benefit
  7. Other Calculation Issues
  8. The Role of Treasury
  9. Specificity
  10. General Comments (Commerce’s Proposal Infringes on the IMF’s Authority, Possible Retaliation by U.S. Trading Partners, Other Methods To Combat Currency Manipulation/Misalignment May Be More Effective, Relationship to the Antidumping Law)
  11. Economic Impact

When Commerce published its proposal in May 2019, it noted that of the nineteen countries where the U.S. had one or more countervailing duty orders outstanding, twelve of the countries in 2017 were shown by either the IMF or by the Peterson Institute as having an undervalued currency (84 FR at 24411 n.13):

“13 In FY 2018, countervailing duties were deposited on various products imported from 19 countries. For 12 of these 19 countries, at least one of the two sources (IMF or Peterson Institute for International Economics) deemed
the domestic currency undervalued during 2017. Based on information from Customs and Border Protection, the total value of imports from these 12 countries with potentially undervalued currencies equaled roughly 32 percent of the total value of imports from all 19 countries.”

As reviewed, undervaluation is but the first step in any evaluation. Government action is another critical element and generally won’t cover monetary policy actions of governments. Nonetheless, using 2017 data, twelve countries had potentially undervalued currencies and hence could be subject of investigations or reviews to determine if the currency undervaluation constitutes a countervailable subsidy.


It is likely that 2020 will see one or more petitions or administrative reviews of existing orders where a petitioning party seeks to explore whether undervalued currencies constitute actionable subsidies under U.S. law. With Japan, Korea and China having changed the extent of government interference in their exchange rates in recent years, the first case or cases may go after other countries where government actions to depress currency value is identified by domestic industries or their workers. As is true in any area of new exploration, there are many unknowns that will presumably be answered as cases are brought and investigations or reviews conducted: whether Commerce will deem any such petitions or requests in administrative review to be sufficient to proceed on currency undervaluation; how the development of a record will proceed including provision of information from foreign governments whose practices are under investigation; how Treasury will proceed in providing information and its views and the extent of independent review by Commerce versus simple adoption of Treasury views — are just a few of the unknowns.

Trading partners may opt to challenge the modification in U.S. regulations as such at the WTO or may pursue as applied challenges should Commerce investigate their currency for undervaluation in a particular case. China has warned the U.S. that going after its currency would be problematic for any Phase 2 negotiations. The Director-General in response to a question about the new US regulations has opined that the WTO is not the right forum for currency issues (this despite the AD note to Article VI of the GATT).

But for domestic producers and their workers who face various forms of trade distortions through subsidies and/or dumping, the modification to U.S. countervailing duty regulations is a potentially important advance in permitting at least individual industries and their workers to obtain a more level trading field going forward.