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  • November 2, 2023

How Does The United States Calculate ‘Benchmarks’ Regarding Exporters?

by Sudarsanan Sivakumar, Law Clerk

  • International Trade Law
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If you are an exporter who is in receipt of:

1) direct transfers or potential direct transfers of funds;

2) liabilities or government revenue that is otherwise due but not collected;

3) If your government provides goods or services other than general infrastructure;

4) If it purchases goods;

5) If your government makes payments to a funding mechanism or entrusts or directs a private body to carry out one or more of the activities mentioned above.

Then as a result, you receive a benefit, then it is pertinent to note that you are receiving a subsidy from your government, public body, or sometimes even from a private body.[1]

Subsidies are widely regarded as unfair trade practices, as they disrupt the free flow of goods and have a detrimental impact on domestic American businesses operating in the global marketplace. The United States considers this practice to be unfair since a domestic industry should only compete against foreign industries, which improves the free flow of goods, rather than competing against a foreign industry combined with its government.

What is a Benchmark?

The United States calculates the level of subsidy accorded to the foreign industry and based on that calculation, will impose a countervailing duty to offset the unfair behavior. This calculation is done by using a concept called ‘Benchmarks.’

A benchmark is a point of reference that acts as a medium of comparison. It is “[s]omething that serves as a standard by which others may be measured or judged [2].” This benchmark has to reflect market conditions. A product’s benchmark acts as the “pricing point” for that product’s prices around the commercial world. These pricing points can be both “future” prices or “spot prices” of that product or, in simpler terms, the current prices at which the product is traded in the marketplace.

Investigation and Calculation of the Unfair Trade Practice of Subsidy

The two U.S. Federal Agencies that accomplishes trade remedies investigations are the U. S. Department of Commerce, The International Trade Administration within the U.S. Department of Commerce and the International Trade Commission.

19 CFR 351.511(a)(2) delineates the criteria for identifying appropriate market-determined benchmarks that enable the measurement of the adequacy of remuneration for goods or services provided by the government.

This legal provision brings about three benchmarks of comparison. These benchmarks are in hierarchy order and are listed in preferential order as Tier 1, Tier 2, and Tier 3, respectively:

  1. Market prices from actual transactions within the country under investigation (e.g., actual transactions between private parties, actual imports, or actual sales from competitively run government auctions) – Tier 1.
  2. World market prices that would be available to purchasers in the country under investigation – Tier 2.
  3. An assessment of whether the government price is consistent with market principles – Tier 3.

Why Does This Matter to You as a Foreign Industry?

In a Countervailing Duty case against Russia[3], The U.S. Department of Commerce decided to use Tier 2, i.e., World Market Prices, as the benchmark because Tier 1, i.e., Market Prices from actual transactions within the country, cannot be used as the prices within Russia were distorted as there was no existing market situations within the country. However, Benchmark prices are selected on a case-by-case basis based on location coupled with other factors. This is because the availability of local energy sources, access to imported energy (e.g., natural gas imported via pipelines versus LNG tankers), and procurement methods vary by location, and no one-size-fits-all benchmark price applies globally to all firms.[4] But sometimes, a pattern can be recognized.

For example, in certain cases, a discernible pattern may arise from the aforementioned factors. For instance, when trying to use a Tier 1 benchmark calculation method in China, the US Department of Commerce may face substantial difficulties. This is due to the minimal market situations that exist in China, largely as a result of the Chinese Government’s extensive involvement in the country’s market.

As a foreign industry looking to import into the U.S., try to read the pattern and determine:

1) Is there a subsidy, and is it bound to be calculated?

2) If so, what type of benchmark calculation will be used?

3) Once a pattern is established and an investigation is underway, how can the Department of Commerce’s questionnaire be tackled?

It is imperative to address the previously stated issues before importing into the U.S., or if you are receiving a subsidy from your government. Finally, do note that if you are part of a Countervailing Investigation by the U.S. Department of Commerce, it is better if the investigating authorities use Tier 1 prices for calculating purposes as these prices reflect market conditions within your country as compared to market prices around the world which could be distorted based on the existing conditions around the world.

[1] Article I, Agreement on Subsidies and Countervailing Measures, World Trade Organization,  https://www.wto.org/english/docs_e/legal_e/24-scm.pdf

[2] Benchmark, Merriam-Webster, https://www.merriam-webster.com/dictionary/benchmark#:~:text=%3A%20something%20that%20serves%20as%20a,may%20be%20measured%20or%20judged.

[3] See generally, A-821-831 and Phosphate Fertilizers from the Russian Federation: Final Affirmative Countervailing Duty Determination, 86 FR 9479 (February 16, 2021).

[4] Below-Market Energy Inputs, OECD trade policy paper n°268, P 21, https://www.oecd-ilibrary.org/trade/measuring-distortions-in-international-markets-below-market-energy-inputs_b26140ff-en?s=03, (Last accessed Mar. 18, 2023).