On October 14, China’s Ministry of Commerce issued a preliminary ruling (link in Chinese) in the countervailing duty investigation on polyphenylene ether/polyphenylene oxide (PPO) (聚苯醚) imports from the United States and imposed 17.7% deposits on these U.S. imports. The preliminary ruling is open to public comments for ten days.
The countervailing duty investigation on U.S. PPO started on August 14, 2020, based on the domestic industry’s petition filed in June. The product in the case, PPO, falls under the tariff code 39072090, and can be used in components and parts in photovoltaics, automobiles, telecommunications, electronic appliances, medical equipment, and other products. China is also conducting an anti-dumping investigation on the same product and issued an affirmative preliminary ruling last month, resulting in anti-dumping duties of up to 48.6 percent.
In the ruling, the agency first went through 11 subsidy programs offered by the federal government on upstream industries including natural gas, petroleum, and fossil fuels:
- Innovative Technology Loan Guarantee Program
- Fossil Energy Research and Development
- Expensing of Intangible Drilling Costs/Expensing Exploration and Development Costs for Oil, Gas and other Fuels
- Percentage Depletion for Oil and Natural Gas Wells/Excess of Percentage over Cost Depletion for Oil, Gas and Other Fuels
- Two Year Amortization Period for Geological & Geophysical Expenditures
- Percentage Depletion for Hard Mineral Fossil Fuels
- Expensing of Exploration and Development Costs for Hard Mineral Fuels
- Enhanced Oil Recovery Credit
- Corporate Income Tax Exemption for Fossil Fuel Publicly Traded Partnerships
The agency then turned to local government subsidy programs. Among these were seven programs from Alaska, one from California, four from Colorado, 17 from Louisiana, two from North Dakota, five from Ohio, one from Pennsylvania, two from Texas, and one from Wyoming.
MOFCOM noted that the U.S. government and relevant companies failed to provide enough information on subsidies, and therefore it had to make its assessment based on available facts. It found that the U.S. government provides substantial subsidies to the oil and gas industry, and oil and natural gas suppliers, which are the upstream suppliers of the investigated products, have received relevant subsidies:
Based on evidence available, the American government, through legislation, industrial policies, and other acts, has intervened, controlled, restricted and managed the natural gas, petroleum and other strategic basic industries. The survey also showed that in order to implement the industrial plans, the U.S. federal and state governments have also provided a large number of subsidy programs that have seriously distorted market competition conditions. Oil and gas are the main upstream raw materials for the production of phenol. The price distortion of oil and gas has an impact on the costs and prices of downstream industries including phenol.
Phenol is one of the main raw materials for the production of polyphenylene ether. Because the market price of phenol in the U.S. is significantly lower than unsubsidized normal prices available on the open market, the U.S. polyphenylene ether industry has therefore reduced the main procurement cost of raw materials, and has gained competitive advantages. The subsidies received by phenol have a major impact on the production cost of polyphenylene ether.
In addition, MOFCOM looked into direct subsidy programs for electricity and water.
With regard to the price of electricity, the ruling concluded that both non-private power companies and private power companies are considered “public bodies” under the Countervailing Regulations:
... U.S. non-private power companies are actually not for profit. Instead, they would set the lowest price possible for electricity. Although they would consider the cost of power supply, the ultimate principle is to keep the price of electricity as stable as possible. According to the facts available, non-private electricity suppliers constitute “public bodies” in Article 3 of the Countervailing Regulations, judging from the perspective of ownership, management appointments and main functions. They are given a government function similar to that of the U.S. government agencies, which is, to help consumers obtain reliable, efficient and sustainable energy supply at a reasonable price. Its daily work is to perform government functions.
... U.S. Department of Energy, Federal Energy Management Program and the state regulatory agencies have de facto entrusted and directed suppliers through the supervision and approval of electricity generation, transmission and distribution, sales, market access, facility construction, contract terms and environmental compliance. Approved private power companies perform government functions, which is to ensure a safe and reliable energy supply at an affordable price. Therefore, the investigating agency determined that the private power suppliers constitute the entities entrusted and directed [by the government] to perform government functions in Article 3 of the Subsidy Regulations.
When determining the subsidy benefits, MOFCOM concluded that:
There is currently a lack of evidence to determine the benchmark price, and further investigation and evidence collection is needed. Therefore, the investigating authority will not rule on whether respondents benefited from the programs or the specific amount of subsidy benefits for now.
Similarly, the agency determined that U.S. water companies are considered “public bodies” but would not rule on whether respondents benefited from the programs or the specific amount of subsidy benefits at the moment.
In addition, MOFCOM announced that it would not rule on the other 83 subsidy programs but will continue the investigation after the preliminary rulings.
In the end, the agency calculated a 17.7% subsidy rate for SABIC Innovative Plastics US LLC and all other American companies.
With regard to the impact on the domestic industry, the agency ruled that the subsidized imports had largely increased over the investigated period; the subsidized imports have greatly reduced the prices of like products in the domestic industry; the domestic industry had suffered from material injury (in 2019, “all economic indicators of the domestic industry had deteriorated across the board.” “The operating rate, sales price, pre-tax profit, investment yield, cash flow, employment [of 2019] all reached the lowest level throughout the survey period, and the ending inventory reached the highest point during period.”).
Lastly, the agency found a causal relationship between the subsidized products and the material injury experienced by the domestic industry.