CAFC Judges Question Commerce's Specificity Analysis of Russian Natural Gas Provision
Judges at the U.S. Court of Appeals for the Federal Circuit on Aug. 5 heard oral argument in a case on the Commerce Department's finding in the countervailing duty investigation on Russian phosphate fertilizers that the Russian government's provision of natural gas was a de facto specific subsidy. Judges Sharon Prost, Jimmie Reyna and Raymond Chen pressed counsel for exporter Industrial Group Phosphorite and the U.S. government on whether the agency properly found that the agrochemical industry is the "predominant user of natural gas" in Russia (The Mosaic Company v. U.S., Fed. Cir. # 24-1593).
Sign up for a free preview to unlock the rest of this article
Timely, relevant coverage of court proceedings and agency rulings involving tariffs, classification, valuation, origin and antidumping and countervailing duties. Each day, Trade Law Daily subscribers receive a daily headline email, in-depth PDF edition and access to all relevant documents via our trade law source document library and website.
In the investigation, Commerce used Russian state-owned gas provider Gazprom's 2019 annual report to find that the agrochemical industry was the predominant user of natural gas, since its sector was the single largest industrial consumer of natural gas sold by Gazprom. The Court of International Trade upheld this position, finding that the record reflects that the agrochemical industry bought a "far greater amount than any other industrial user," due to the fact that it buys natural gas for power and as an input in the production of phosphate fertilizers (see 2209020061).
During oral argument, Jeremy Dutria, counsel for Industrial Group Phosphorite, argued that Commerce "jerry-rigged" the data to come up with its conclusion that the agrochemical industry was the predominant user of the subsidy.
Dutra said that Gazprom's provision of gas for less than adequate remuneration is ubiquitous in Russia, noting that all industries and households buy natural gas for power. The attorney argued that Commerce excluded sales of natural gas to households and other industries, including power-generating and electricity companies, to come to the conclusion that the fertilizer industry is the predominant user of natural gas subsidies.
Prost questioned Dutra on this point, asking if it's entirely fair to pull out household buyers of natural gas in comparing whether the fertilizer industry is the predominant user of the subsidy when compared to other industries. In response, Dutra said Commerce must incorporate all uses of the subsidy, repeatedly stressing that this is required by the Statement of Administrative Action (SAA) accompanying the Uruguay Round Agreements Act.
Dutra argued that, under the SAA, if a subsidy is widespread throughout an economy, it cannot be countervailed. The attorney argued that Commerce failed to identify in the SAA where they derive the authority to "manipulate the denominator" in the specificity analysis to lead to a certain conclusion.
In response to both Dutra's arguments and a question from Chen about why Commerce can divide up the denominator just to include the industrial sector, DOJ attorney Augustus Golden also referenced the SAA. He said the SAA specifically warns of a loophole through the specificity test by which a predominant user of a subsidy may avoid CVD given that the subsidy is provided to a large number of recipients.
Reyna then asked if Golden's read of the SAA could lead to countervailing duties related to the provision of all "consumables," including water, gas and oil. Golden said it "potentially" could. For instance, while all companies and households consume water, if an industrial company uses water as a major input in its production process, it could very well become a "disproportionate" user of water and thus unfairly benefit in the global marketplace from this subsidy.
During rebuttal, Dutra said Golden's discussion of the water hypothetical concerns the "disproportionate usage" factor of specificity, which is a different factor than the one claimed by Commerce in this investigation. Reyna then asked why Commerce would consider the household gas buyers at all, since they don't export any products. In response, Dutra again invoked the SAA, which lays out that country-wide subsidies aren't countervailable.
David Ross, counsel for petitioner The Mosaic Company, added to Golden's arguments, claiming that the statute "is focused on what are enterprises or industries receiving relative to other enterprises or industries." He said this is a "particularly appropriate approach in this case," since there are different prices Gazprom charges household and industrial gas buyers. After Prost questioned whether the parties actually knew if the prices are different, given a lack of data on this point in the record, Ross clarified that the parties know that Gazprom "differentiates" between these types of buyers.
Prost then questioned Ross on why, if Commerce is saying the fertilizer industry uses gas as an input, the agency didn't divide the analysis along those lines, differentiating between industries that use gas as an input vs. those that don't. In response, Ross said it's because the Russian government is "pervasively subsidizing but in different ways, through different programs and for different purposes."
During the argument, the parties also discussed Commerce's decision to use a Tier 3 benchmark for the provision of natural gas program, which compares Gazprom's prices to a world benchmark. The agency defended this move on the basis that the Russian gas market is heavily distorted by state involvement, precluding a comparison between Gazprom's prices and the standard Russian market.
Dutra rhetorically asked that if government involvement is the reason the agency is conducting a Tier 3 analysis and not doing a "normal" analysis, "why would you ever do" a normal analysis? The attorney said the agency "had the record to" conduct a normal analysis with the Russian market. In response, Ross said, if Dutra's claims were true, Commerce would never be able to find a countervailable subsidy, since the "distortion is what you're trying to measure."