The Peninsula

Transnational Subsidies: Navigating a New Trade Terrain

Once dismissed as an abstract nuisance, transnational subsidies—where governments subsidize firms operating beyond their borders—have now become a central concern for countries. The World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures regulates subsidies that could potentially distort fair competition, generally applying a territorial criterion that mandates the subsidy recipient be located within the exporting member’s territory. However, rising Chinese investments through its Belt and Road Initiative (BRI) in special economic zones and abroad have blurred these neat confines. One concern is that companies established in third countries may gain an unfair advantage through financing from Chinese state-owned banks. The ambiguity is not lost on regulators: is a subsidy still prohibited if its beneficiary operates in another country? With no definitive WTO ruling to date, this legal gray area fuels new trade restrictions. The launch of the Donald Trump administration’s “America First Trade Policy,” which explicitly prioritizes reforming transnational subsidy regulations but lacks specific implementation details, is just the tip of the iceberg. As Chinese investment grows, South Korea should remain cautious of these new developments.

Countervailing Transnational Subsidy  

In a move that unsettles traditional trade orthodoxies, the European Commission has begun to countervail subsidies that straddle national borders. In April 2019, the commission received a petition to initiate an anti-subsidy investigation into imports of glass fiber fabrics originating from both China and Egypt. The complainant argued that the Suez Economic Trade Cooperation Zone, which is managed under a Sino-Egyptian agreement signed in 2016, was being controlled by the Chinese government. In this case, the commission held the Egyptian government accountable for receiving a Chinese subsidy based on the principle of state responsibility under Article 11 of the International Law Commission’s Articles on the Responsibility of States for Internationally Wrongful Acts. This pioneering approach, which later extended to stainless-steel cold-rolled flat products from Indonesia and India, is supported by the recent court rulings involving Jushi Egypt for Fiberglass Industry.

In a similar vein, the United States has shifted its approach as well. Spurred by concerns that foreign subsidies distort competition, U.S. lawmakers proposed revisions to extend countervailing duties (CVD) to encompass transnational subsidies. The final rule, which was published by the Department of Commerce and is effective from April 2024, eliminates the previous prohibition on investigating such subsidies, allowing the department to initiate investigations into transnational subsidies. This expanded mandate was quickly tested in the initiation of CVD investigations involving epoxy resins from China, India, South Korea, Taiwan, and Thailand.

During the investigation proceedings, the petitioners raised concerns that the Chinese government might be providing chemical inputs to Korean producers for less-than-adequate remuneration. They pointed to a memorandum of understanding between China and Korea associated with China’s BRI as evidence supporting this claim. Under Section 701(d) of the Tariff Act of 1930, which allows for the cumulation of countervailable subsidies when multiple countries are involved, the Commerce Department can include subsidies provided by the Chinese government to Korean producers if these producers are found to be part of an “international consortium.” Instead of merely considering the presence of affiliates in China, the Commerce Department must provide clear criteria for what constitutes an international consortium under the statute and sufficient evidence that such an operation qualifies as an international consortium to apply cumulative CVDs. Moreover, even if the companies do constitute an international consortium, the Commerce Department must establish that it meets the required elements of a subsidy—a financial contribution by a government or public body as well as a conferred benefit specific to the recipient.

While the final determination remains pending, countervailing transborder subsidies could open Pandora’s box for future CVD investigations. The Commerce Department has already expanded the investigations to other industries, such as Crystalline Silicon Photovoltaic Cells and Hard Empty Capsules. Interestingly, Korean companies are involved in both cases—one as a petitioner and the other as a respondent. Once a transborder subsidy is identified in one sector, petitioners will likely raise similar allegations against other exporting companies in the same industry, creating a domino effect. Also, transnational subsidy investigations present significant diplomatic and logistical challenges, particularly when a third country, such as China, must cooperate with the investigative procedures. Failure to cooperate or provide the necessary information within the given timeframe may compel the Commerce Department to rely on “facts available,” potentially resulting in escalated CVD rates as a penalty.

A Glimpse Ahead

As the global trade and investment landscape continues to evolve, the European Union is intensifying its regulatory focus on foreign subsidies through the implementation of the Foreign Subsidy Regulation (FSR), which has been effective since 2023. The FSR adds a new layer of regulatory complexity for Korean firms operating in the European Union, requiring greater transparency and compliance efforts. This landmark regulation broadens the scope of subsidies beyond the WTO rule to encompass financial contributions from both public and private entities, including foreign-state-owned or private companies and multinational corporations operating outside their home countries. Under the FSR, mergers-and-acquisitions transactions and public procurement deals above specific thresholds require ex ante notification, and the European Commission is empowered to launch ex officio investigations into any subsidies that may distort the internal market. Violations attract severe penalties, including repayment obligations. This evolution underscores a global trend toward tightening oversight on foreign subsidies, a concern shared by both the United States and the European Union.

The increased regulatory scrutiny and potential for CVD measures imply that investments from China, while potentially beneficial, come with risks that must be carefully managed. Companies must maintain comprehensive records and clear accounting of foreign investments, particularly those involving overseas branches. Recent data by the ROK Ministry of Trade, Industry and Energy indicate that China was the second-highest investor in Korea after Japan in 2024. While Chinese investments can be vital, there is growing concern that Korea might inadvertently become a haven for Chinese industries seeking to circumvent U.S. tariffs. In a recent proclamation, President Trump emphasized that exemptions granted to countries like South Korea created loopholes exploited by China, thereby undermining the intended effects of the tariffs. This was used as an impetus to readjust tariffs on imports of steel and aluminum.

Additionally, the Commerce Department has conducted circumvention inquiries into products such as aluminum wire and cable and aluminum foil. These accusations are worrisome for Korea, and its government must remain vigilant. The Korean government should enhance its capacity to prepare for potential increases in trade remedy investigations and collaborate with industries to ensure compliance with international trade regulations. Conducting fair and objective trade remedy investigations into unfair trade practices related to its imported products will help Korea avoid being implicated in circumventing trade restrictions. On the global stage, Korea must also actively engage in multilateral forums like the OECD and WTO to play a pivotal role in shaping global subsidy rules. While the WTO faces significant challenges, particularly as the United States may retreat further away from multilateral engagement with its plan to impose reciprocal tariffs in April that could undermine the fundamental “most-favored nation” principle of the WTO, it will still remain relevant as long as its members continue to engage in multilateralism. By actively contributing to these efforts, Korea can ensure that it remains a fair and responsible trade partner.

 

Hyerim Kim is Lecturer at Seoul National University’s Graduate School of International Studies and former Deputy Director at ROK Ministry of Trade, Industry and Energy. The views expressed here are the author’s alone.

Photo from Shutterstock.

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