The Pitfalls of the (Perfect) Market Benchmark: The Case of Countervailing Duty Law

Abstract:     
Market has long been used as a benchmark for economic value in various areas of law. However, a crucial question has received less than adequate attention: what type of market should be used in the market benchmark? More specifically, given all of the "imperfections" one typically finds in the day-to-day markets, how "perfect" does a market have to be in order to qualify as a benchmark for economic value? This Article discusses this question using the countervailing duty law as a case study. The countervailing duty law allows the United States to impose countervailing duties on imported merchandise to offset "subsidies" conferred by foreign governments upon such merchandise. In identifying and measuring subsidies, the countervailing duty law utilizes a market benchmark, i.e., whether the government action under investigation is on terms more favorable than those available in the market. After tracing the evolution of the market benchmark analysis in the countervailing duty law, I demonstrate that the market benchmark analysis, as currently formulated in the countervailing duty law, envisions a "perfect" or "near-perfect" market, i.e., a market that is "undistorted" by the government action under investigation. I further demonstrate the pitfalls of this perfect-market approach by critiquing the basis on which a market is rejected as distorted, the basis on which alternative benchmarks are selected, and the fundamental disconnect between the perfect-market approach and the purpose of the countervailing duty law.

Number of Pages in PDF File: 54

Keywords: Market benchmark, countervailing duty law, subsidy, market distortion, out-of-country benchmark, law of one price

JEL Classification: F13, K33

Accepted Paper Series