On November 24, 2020, the U.S. Department of Commerce (“Commerce”) issued a preliminary affirmative determination in the countervailing duty (“CVD”) investigation of twist ties from China. What is particularly noteworthy about this preliminary determination is Commerce’s decision to countervail the undervaluation of China’s currency, the Renminbi (“RMB”). This marks only the second occasion – following the investigation of Passenger Vehicle and Light Truck (“PVLT”) Tires from Vietnam earlier this year – that Commerce has countervailed a country’s undervalued currency, and the first time it has done so against China. As discussed further below, Commerce’s determination relied on an analysis of the RMB from the U.S. Department of the Treasury (“Treasury”) which differed in meaningful respects from Treasury’s analysis of the Vietnamese Dong (“Dong”) in the investigation of PVLT Tires from Vietnam, suggesting that a less objective, more qualitative analysis may be applied against the RMB in future cases.

Under U.S. law, a subsidy program is countervailable when it meets three criteria. Specifically, the program must constitute (a) a financial contribution provided by a government authority or public body, (b) to a specific firm or industry, that (c) yielded a benefit to the recipient.

The currency undervaluation allegations examined in the PVLT Tires from Vietnam and Twist Ties from China investigations were based on regulations issued by Commerce earlier this year to interpret these terms in the context of currency undervaluation. Regarding the requirement of specificity, Commerce’s new rule provides that enterprises that buy or sell goods internationally (i.e., enterprises in the traded goods sector) may comprise a “group” of enterprises for specificity purposes.

With respect to benefit, the final rule established that the undervaluation of a country’s currency may constitute a benefit to this group of companies. The analysis for determining such benefit is comprised of two primary steps.

  • First, Commerce must determine whether a foreign currency is undervalued, which normally means that a gap exists between the country’s real effective exchange rate (“REER”)[1] and the equilibrium REER, namely, the REER that achieves an external balance over the medium term and reflects appropriate policies. A finding of currency undervaluation can only be made where, in addition, Commerce determines that government action on the exchange rate has contributed to that undervaluation. Such determination may include consideration of the government’s degree of transparency regarding actions on the exchange rate.
  • Second, and following the determination of currency undervaluation, Commerce must determine the existence of a benefit by measuring the difference between (a) the nominal, bilateral United States dollar rate consistent with the equilibrium REER and (b) the actual nominal, bilateral United States dollar rate during the relevant time period, taking into account any information regarding the impact of government action on the exchange rate. The amount of the benefit received will be the additional domestic currency (g., RMB) earned by a firm when it converts U.S. Dollars into its domestic currency as a result of this gap.

Pursuant to the new regulations, Commerce may request that Treasury provide an evaluation with respect to both the undervaluation of the currency at issue and the existence of a benefit.

These regulations were relied on in the context of Commerce’s preliminary determination in the PVLT Tires from Vietnam investigation, issued on November 10, 2020. First, Commerce determined that the exchange of currency by authorities (i.e., state-owned commercial banks) and private Vietnamese and/or foreign owned banks that are entrusted or directed by the GOV constituted financial contributions in the form of direct transfers of funds. Next, Commerce determined that the currency undervaluation program was de facto specific because it was used predominantly by a group of enterprises constituting the traded goods sector.

Commerce’s benefit determination consisted of three parts, based on the new regulations discussed above, with all relevant evidence provided by Treasury. First, Commerce considered whether the Vietnamese Dong was undervalued, taking into account the gap between the country’s REER and the equilibrium REER. Commerce also considered whether government action on the exchange rate contributed to the undervaluation. And, finally, Commerce determined the existence of the benefit, using the methodology described above.

With respect to both the existence of currency undervaluation and benefit, Commerce relied on Treasury’s analysis, which utilized the Global Exchange Rate Assessment Framework (“GERAF”).  The GERAF aims to determine undervaluation, namely the gap between the REER and the equilibrium REER, and the extent to which government action contributed to that undervaluation by failing to adhere to desired policies. The results of the model (namely the undervaluation of the REER or the part of that undervaluation due to government intervention/distortion) can be translated into the equivalent bilateral undervaluation of that foreign currency against the U.S. Dollar. The GERAF thus produces numerical determinations with respect to undervaluation and the government’s contribution to it through policy interventions/distortions, and also provides some measure of objectivity, given the methodology and results of the model could, in theory, be replicated by a third party. Based on the GERAF, Treasury determined that GOV actions on the exchange rate had the effect of undervaluing the Dong vis-à-vis the U.S. Dollar by 4.7%, with the uncertainty range around this assessment ranging from 4.2% to 5.2%.

In the preliminary determination in Twist Ties from China, though, Treasury abandoned the GERAF model in favor of a more qualitative analysis. Citing, among other things, specific concerns regarding “transparency-related factors outside the scope of the model {which} make GERAF incomplete for analyzing the impact of China’s exchange rate management actions,” Treasury instead provided a less-detailed analysis of the RMB, relying on “any information regarding government action on the exchange rate” including “China’s degree of transparency regarding such action.” Based on such information, including tools utilized by the People’s Bank of China to manage the RMB, Treasury determined that the RMB was undervalued, and that GOC actions on the exchange rate had the effect of undervaluing the RMB vis-à-vis the U.S. Dollar by about 5% in 2019, with the uncertainty range around this assessment ranging from 3% to 7%. According to Treasury, such figures reflect a “holistic assessment of the likely impact of the full range of tools that are used to manage the exchange rate” by the GOC.

Although only a preliminary determination, Commerce’s approach in the Twist Ties from China investigation reflects what may well become a mainstay in countervailing duty proceedings involving products from China. It appears likely, based on Commerce’s determination to countervail the undervaluation of the RMB, that U.S. domestic petitioning parties will include claims of currency undervaluation in CVD petitions against China, considering that the template for such an allegation has been clearly laid out. Moreover, it seems likely that Treasury will continue to use this more subjective approach to assessing currency undervaluation in future CVD investigations involving China. As a result, Commerce’s approach to addressing allegations of undervaluation of the RMB may continue to be handled differently as compared to allegations against other countries’ currencies.


[1] The REER is a weighted average of exchange rates between the currency under investigation against other currencies (e.g., the RMB against the USD, the RMB against the Euro, the RMB against the Yen, and so on) which takes into account the price level within each of the countries.