In an administrative review for a U.S. countervailing duty order for imports of crystalline silicon photovoltaic cells from China during 2019, the petitioners in the case alleged that Chinese currency undervaluation in this period constitutes a countervailable subsidy. The Department of Commerce (DOC) asked the Treasury Department for input on this issue. Treasury responded that while the renminbi (RMB) was undervalued during the relevant period, China did not undertake “government action on the exchange rate” that contributed to the undervaluation of the RMB, and the undervaluation was due to factors other than “government action on the exchange rate.” This piece describes each stage in the process in more detail.
The allegation and the DOC decision to investigate
On February 4, 2021, DOC initiated a countervailing duty administrative review of crystalline silicon photovoltaic cells from China. The period of review is 2019 (January 1, 2019 through December 31, 2019). In a July 19 submission, the American Alliance for Solar Manufacturing put forward several "new subsidy allegations" (NSA), including one related to currencies:
The GOC provides a countervailable subsidy to subject merchandise producers in the People’s Republic of China (“China”) by undervaluing its currency through intervention in the Chinese renminbi (“RMB”) – U.S. dollar (“USD”) exchange rate. This undervaluation provides an unfair subsidy to firms in China that receive more RMB in exchange for USD earned on their exports than they otherwise would receive absent GOC intervention.
On September 10, DOC issued a memorandum in which it decided to investigate this allegation. It analyzed the currency undervaluation issue as follows:
Financial Contribution: The Alliance alleges that the GOC’s currency undervaluation provides a financial contribution to Chinese exporters as: (1) a direct transfer of funds under section 771(5)(D)(i) of the Act, through the provision of RMB in exchange for U.S. dollars by Chinese state-owned commercial banks (SOCBs) or other state-controlled banks; and/or (2) through private entities entrusted or directed by the GOC, as per section 771(5)(B)(iii) of the Act, because they provide RMB to exporters for USD at rates that are controlled by the GOC.
Benefit: The Alliance alleges that the GOC’s currency undervaluation conferred a countervailable benefit as defined in 19 CFR 351.528(b).
Specificity: The Alliance alleges that the GOC’s currency undervaluation is specific to a group of enterprises under section 771(5A)(D)(iii)(II) of the Act and 19 C.F.R. § 351.502(c) because enterprises in China that buy or sell goods internationally are collectively the predominant users of the net foreign exchange supply. The Alliance estimates (based on analysis of International Monetary Fund Data) that this group accounts for 72.41 percent of all financial inflows, which includes currency inflow from exports of goods, exports of services, earned income from abroad, and financial account liabilities.
Support: We examined the evidence provided to support the allegation on pages 2 through 10 of the NSA Submission, including all exhibits referenced therein. We relied on all information submitted. Additionally, we note that Commerce also initiated an investigation on the same alleged program in Chassis and Subassemblies from China.
Recommendation: The team recommends initiating on the allegation as described in the NSA Submission based on the support provided therein.
The DOC letter to Treasury
On September 13, DOC sent a letter to Patricia Pollard, Acting Deputy Assistant Secretary, International Monetary Policy at the Department of the Treasury, requesting that Treasury provide its evaluation and conclusion. The letter stated in relevant part:
… As you are aware, on February 4, 2020, Commerce published the Modification of Regulations Regarding Benefit and Specificity in Countervailing Duty Proceedings that sets forth new rules in 19 CFR 351.528 regarding the existence of a benefit when examining a potential subsidy resulting from the exchange of currency under a unified exchange rate system.
Pursuant to section 351.528(c) of Commerce’s regulations, Commerce requests that the Department of the Treasury (Treasury) provide its evaluation and conclusion as to the determinations under both paragraphs (a) and (b)(1) of section 351.528, with respect to the allegation in crystalline silicon photovoltaic cells, whether or not assembled into modules, from China. The evaluation and conclusion should cover the period of administrative review, which is calendar year 2019. Commerce can also consider such information in relation to a part of 2019. Please also provide the underlying information on which Treasury’s evaluation and conclusion rely.
On October 18, Treasury submitted a letter concluding that while "the RMB was undervalued on a real effective basis, with respect to the determination required by 19 C.F.R. 351.528(a)(2), Treasury determines that this undervaluation was due to other factors than 'government action on the exchange rate.'” The full response was as follows:
In order to make our evaluation and conclusion as to the determinations requested by Commerce, Treasury has conducted an analysis using its Global Exchange Rate Assessment Framework (GERAF). GERAF provides a multilaterally consistent method for assessing the extent of any currency misalignment and the specific economic fundamentals and government policies that contribute to the misalignment. ...
Regarding the determination ... , Treasury assesses that the Chinese renminbi (RMB) was undervalued during the relevant period. Specifically, Treasury’s evaluation leads us to assess that in 2019 there was a gap between China’s real effective exchange rate (REER) and the real effective exchange rate that would achieve an external balance over the medium term under appropriate policies (equilibrium REER). Treasury’s assessment that the renminbi was undervalued in 2019 is independent of its finding of undervaluation as a result of government action on the exchange rate, which is the determination required by 19 C.F.R. 351.528(a)(2).
Regarding the determination under 19 C.F.R. 351.528(a)(2), Treasury assesses that in 2019 China did not undertake “government action on the exchange rate” that contributed to the undervaluation of the RMB. As noted in Treasury’s January 2020 Report on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States, monthly changes in the People’s Bank of China’s (PBOC) foreign exchange assets recorded small net sales as of December 2019. Treasury assesses the small net sales of foreign exchange had no effect on the bilateral exchange rate vis-à-vis the U.S. dollar in 2019. Although Treasury assesses ... that the RMB was undervalued on a real effective basis, with respect to the determination required by 19 C.F.R. 351.528(a)(2), Treasury determines that this undervaluation was due to other factors than “government action on the exchange rate.”
In Treasury’s previous assessment of RMB undervaluation and government action on the exchange rate for the year 2019, Treasury expressed concern over the transparency of China’s exchange rate regime, management, and practices. While Treasury retains these concerns, the GERAF model provides the most consistent and empirically robust approach to assessing the extent of any currency undervaluation and government policies that contribute to the undervaluation.
China continues not to disclose its data on foreign exchange intervention activities, and its lack of transparency warrants intensified attention. Treasury continues to closely monitor China’s use of exchange rate management, capital flow, and macroprudential measures and their potential impact on the exchange rate.
Interested parties can submit factual information to rebut, clarify or correct Treasury’s submission until October 28, 2021.