TWN Info Service on WTO and Trade Issues (Dec10/12)
18 December 2010
Third World Network

US claims victory in tyre dispute with China
Published in SUNS #7061 dated 15 December 2010

Geneva, 14 Dec (Kanaga Raja) -- A dispute panel of the World Trade Organization (WTO) has ruled in favour of the United States in a dispute brought against it by China over measures imposed by the United States on imports of certain passenger vehicle and light truck tyres from China.

In the ruling issued on Monday (13 December), the panel found that in imposing the transitional safeguards measure on 26 September 2009 in respect of imports of the tyres from China, the United States "did not fail to comply" with its obligations under Paragraph 16 of the Protocol (Protocol on the Accession of China to the WTO) and Articles I: 1 and II: 1 of the GATT 1994.

Subject to any appeal that either party may prefer on grounds of law to the Appellate Body (AB) and the AB's ruling, the panel report and recommendations (if any) are to be automatically adopted by the Dispute Settlement Body (DSB) within 60 days.

According to media reports, China has indicated its intention to appeal the panel ruling.

In a press release, US Trade Representative Ron Kirk said: "This is a major victory for the United States and particularly for American workers and businesses. We have said all along that our imposition of duties on Chinese tires was fully consistent with our WTO obligations. It is significant that the WTO panel has agreed with us, on all grounds."

"Along with our recent panel win in China's challenge to our simultaneous use of antidumping and countervailing duties on Chinese imports, this outcome demonstrates that the Obama Administration is strongly committed to using and defending our trade remedy laws to address harm to our workers and industries," he added.

According to the US release, on 11 September 2009, US President Barack Obama imposed additional duties on imports of certain passenger vehicle and light truck tires from China for a period of three years in order to remedy the market disruption caused by those imports, as determined by the US International Trade Commission (USITC).

This safeguard measure, said the US, was imposed in response to a petition filed by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers Union under section 421 of the Trade Act of 1974, as amended (19 U. S. C. 2451). Section 421 implements the transitional safeguard contained in Section 16 of China's Protocol of Accession to the WTO.

On 14 September 2009, China requested consultations with the United States with regard to certain measures taken by the United States allegedly affecting the import of certain passenger vehicle and light truck tyres from China.

On 19 January 2010, the DSB established a panel pursuant to the request of China, and the Director-General of the WTO accordingly composed the panel on 12 March 2010.

The three panellists are Professor Celso Lafer, a former trade minister of Brazil, Professor Donald M. McRae of Canada, and Mr Luis M. Catibayan of the Philippines.

In a background to the dispute, the panel said that this case is about a transitional product-specific safeguard measure under Paragraph 16 of the Protocol that has been applied on imports of certain passenger vehicle and light truck tyres from China pursuant to Section 421 of the Trade Act of 1974.

A petition was filed by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (USW) on 20 April 2009, requesting the USITC to initiate an investigation under Section 421(b) of the Trade Act of 1974. The USITC instituted the investigation effective on 24 April 2009. It determined that there was market disruption as a result of rapidly increasing imports of subject tyres from China that were a significant cause of material injury to the domestic industry.

Following a Presidential decision, additional duties have been imposed on imports of subject tyres for a three-year period, in the amount of 35% ad valorem in the first year, 30% ad valorem in the second year, and 25% ad valorem in the third year. The tyres measure took effect on 26 September 2009.

China had several specific claims in this dispute and requested the panel to find that: (i) the United States failed to evaluate properly whether imports from China were in "such increased quantities" and "increasing rapidly" as required by paragraphs 16.1 and 16.4 of the Protocol; (ii) the US statute implementing the causation standard of paragraph 16 into US law is inconsistent "as such" with paragraphs 16.1 and 16.4 of the Protocol; (iii) the United States failed to evaluate properly whether imports from China were a "significant cause" as required by paragraphs 16.1 and 16.4 of the Protocol; (iv) the United States has imposed a transitional safeguard measure that goes beyond the "extent necessary", and thus it is inconsistent with paragraph 16.3 of the Protocol; and (v) the United States has imposed a transitional safeguard measure for a three-year period that is beyond "such period of time" that is "necessary", and thus it is inconsistent with paragraph 16.6 of the Protocol.

China also claimed that the transitional safeguard measure is inconsistent with the GATT 1994 and requested the panel to find that: (i) the transitional safeguard measure is inconsistent with Article I: 1 of the GATT 1994 as the United States does not accord the same treatment that it grants to passenger vehicle and light truck tyres originating in other countries to like products originating in China; and (ii) the transitional safeguard measure is inconsistent with Article II: 1(b) of GATT 1994 as the tariffs consist of unjustified modifications of US concessions on passenger vehicle and light truck tyres under the GATT 1994.

China asked the panel to find that the United States is not in conformity with paragraph 16 of the Protocol and Articles I: 1 and II: 1(b) of GATT 1994, and that the panel recommend that the United States promptly comply with its obligations and withdraw the challenged measures.

In its preliminary observations, the panel said that it was aware that there are a number of features of this particular case that provide a background against which the case has to be considered and constitute a context for dealing with the matters raised.

First, said the panel, this is the first case under the transitional product-specific safeguard mechanism in paragraph 16 of the Protocol. It thus raises questions that have not yet been dealt with in WTO dispute settlement, including the question of the relationship of this particular safeguard measure to the global safeguards mechanisms under the WTO Agreements: GATT Article XIX and the WTO Safeguards Agreement. Thus, the case raises important questions of the interpretation of the transitional product-specific safeguard mechanism that will obviously be of interest to other WTO Members even though the mechanism expires in 2013.

Second, the safeguard measure imposed in this case under paragraph 16 of the Protocol on the Accession of China is country specific, but nevertheless such a measure has effects on non-subject imports of tyres into the United States with its own systemic implications.

Third, imposition of a safeguard measure in this case was based on a determination of the USITC that was not unanimous. Two commissioners dissented on the critical issue of causation. Such a circumstance warrants the panel giving very careful consideration in particular to that aspect of the USITC determination, said the panel.

Fourth, the investigation that led to the imposition of a safeguard measure in this case against the importation of tyres from China was initiated, unusually, as the result of a petition by a labour union in the United States and not by the domestic producers of tyres. This, of itself, alerted the panel to the possibility that there was something different about this case, particularly where the domestic producers, the normal petitioners in such cases, had indicated that they would not make any adjustments notwithstanding that a safeguard remedy was put in place with adjustment purposes.

Fifth, the issue of "material injury" was not in question before the panel and, indeed, the determination of the USITC on this point was unanimous. Thus, a key issue in this case was causation, a matter that was complicated by the fact that the period of investigation involved in part a period of massive global economic downturn or recession.

Sixth, said the panel, an important allegation in this case relating to this key issue of causation was that the US tyre manufacturing industry had voluntarily reduced its investment in the United States and had invested in manufacturing tyres in China instead. Thus, according to this view, the reduction in domestic manufacturing of tyres and the increase in imports from China were the consequences of deliberate economic decision-making by the US tyre industry.

In such circumstances, the argument went, this case involved the invocation of a mechanism designed to protect a domestic industry that did not want that protection and by its own actions had precipitated the events that were now being invoked to justify the application of the transitional product-specific safeguard mechanism of China's Protocol of Accession. Arguably, noted the panel, it explained too why the investigation had been initiated by a labour union, a body that was concerned with job losses resulting from this transfer of manufacturing capacity to China, and not by the domestic producers themselves.

Thus, the panel said it was aware that this aspect of the case raised the question of the suitability or relevance of safeguard mechanisms in the context of "outsourcing" and "globalization", matters of considerable systemic interest to WTO Members.

In order to properly assess the conformity of the United States' measure with paragraph 16 of the Protocol, the panel addressed the relationship between paragraph 16.1 and 16.4 of the Protocol.

Paragraph 16.1 of the Protocol provides: In cases where products of Chinese origin are being imported into the territory of any WTO Member in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of like or directly competitive products, the WTO Member so affected may request consultations with China with a view to seeking a mutually satisfactory solution, including whether the affected WTO Member should pursue application of a measure under the Agreement on Safeguards. Any such request shall be notified immediately to the Committee on Safeguards.

Paragraph 16.4 of the Protocol provides: Market disruption shall exist whenever imports of an article, like or directly competitive with an article produced by the domestic industry, are increasing rapidly, either absolutely or relatively, so as to be a significant cause of material injury, or threat of material injury to the domestic industry. In determining if market disruption exists, the affected WTO Member shall consider objective factors, including the volume of imports, the effect of imports on prices for like or directly competitive articles, and the effect of such imports on the domestic industry producing like or directly competitive products.

According to the panel, paragraphs 16.1 and 16.4 are interrelated. They should be read together, and each provision provides important context for interpreting the other. The interrelation between paragraphs 16.1 and 16.4, the joint reading of these provisions, and the definitional nature of paragraph 16.4, suggest that paragraph 16.4 clarifies the substance of the trigger conditions provided for in paragraph 16.1.

On the issue of whether the USITC was entitled to find that imports were "increasing rapidly" in accordance with paragraph 16 of the Protocol, the panel said that at first glance, taking into account the absolute import data that has been outlined, it saw no error in the USITC's conclusion that there was a rapid increase in subject imports from China in absolute terms. It concluded that the USITC did not fail to evaluate properly whether imports from China met the specific threshold under paragraph 16.4 of the Protocol of "increasing rapidly".

The panel also addressed China claims that Section 421 is "as such" inconsistent with paragraph 16 of the Protocol (irrespective of the way in which the USITC applied that standard in the tyres investigation), because it fails to fully implement the "significant cause" standard set forth in paragraph 16.4 of the Protocol. China asserts that the US implementing statute properly cites the appropriate causation standard as "significant cause", but then improperly defines "significant cause" as: a cause which contributes significantly to the material injury of the domestic industry, but need not be equal to or greater than any other cause.

The panel said: "... we do not consider that the Section 421 'contributes significantly' standard requires the United States to establish causation in a manner inconsistent with Paragraph 16 of the Protocol."

Also addressed by the panel was China's claims that the USITC failed to properly demonstrate that subject imports were a "significant cause" of market disruption, contrary to paragraphs 16.1 and 16.4 of the Protocol.

According to the panel, China's claim is based on three principal arguments: the USITC failed to show that the conditions of competition between subject imports and the domestic product support a finding of causation; the USITC failed to establish any temporal correlation between rapidly increasing subject imports and material injury to the domestic industry; and the USITC failed to address alternative causes of material injury to the domestic industry, in the sense that the USITC failed to ensure that injury caused by other factors was not improperly attributed to subject imports.

On the issue of the non-attribution of injury caused by other factors to increasing imports, the panel noted that China attributes the injury suffered by the US domestic industry to a number of factors other than subject imports from China, namely: the domestic industry's business strategy; changes in demand; non-subject imports, and various other factors.

China submits that, as a result of these other causes of injury, the domestic producers would have experienced the same injury even without imports from China. China contends that the USITC ignored or failed to assess fully these other causes of injury, or to establish that the injury caused by such other factors was not improperly attributed to the subject imports.

China further contends that the USITC relied on four factors to reject the argument that domestic producers had voluntarily ceded the low end of the market: (1) imports from China were increasing before plant closures in 2006 and 2008; (2) significant purchases of tyre-manufacturing equipment in China occurred over the past ten years; (3) US producers were not the largest importers of Chinese tyres during the period; and (4) a 2006 article noted that imports from China were expected to increase. China challenges the USITC's assessment of each of these factors.

The panel said that it was confronted with the fact that the majority of the USITC and the dissenting commissioners drew precisely the opposite conclusions on the issue of business strategy. The majority took the view that the strategy to reduce US production and locate production in China was itself a response to increased imports and thus it was not an alternative cause that prevented the increasing imports from China to be a significant cause.

The dissenting commissioners took the view that the business strategy of relocating production to China was an independent business strategy that began before imports were increasing. Yet both considered precisely the same evidence. There was no evidence considered by the dissenting commissioners that was not also considered by the majority. And, no further evidence that might have been considered by the majority but was not was adduced in this case.

In these circumstances, the panel said that it would be inappropriate for it simply to make a choice between the views of the majority and the dissenting commissioners.

"In fact, our own assessment of the record indicates that it is difficult to separate out the business strategy from the increasing imports. It may well be, as the dissenting commissioners say, that the strategy of relocating to China began before 2004 and before the substantial increases in subject imports. But it is also true that plant closures occurred after the increase in imports and may well have been linked to the competition from imports. Indeed, the decision to locate production in China might have been the result of an independent business strategy, but the decision to close plants might well have been a response to imports."

The panel said it can see no basis for determining that the USITC's analysis of the alternative business strategy was in error. "It was for China to establish a prima facie case of such error and it failed to do so."

On the 2008 recession, the panel noted that China contends that the recession of 2008, and the near collapse of the US auto industry, greatly accelerated the contraction in demand. China claims that the USITC majority only mentions the 2008 recession dismissively and in passing.

The panel recalled the USITC's finding that: imports continued to increase rapidly even in 2008 when US apparent consumption was falling. Subject imports increased by 4.5 million tires in 2008, while US apparent consumption declined by 20.4 million tires. Imports from third countries declined by 6.0 million tires in 2008, or by 6.1 percent, roughly consistent with the 6.9 percent decline in US apparent consumption in 2008. Meanwhile, domestic production of subject tires declined by 20.0 million tires in 2008, or by 11.1 percent, and absorbed virtually all the decline in US apparent consumption that year.

In making this finding, said the panel, the USITC properly established that the injury to the domestic industry could not be attributed in whole to the fall in demand resulting from the 2008 recession. The fact that subject imports continued to increase significantly during that recession, forcing the domestic industry to absorb virtually all of the resultant fall in demand, indicates that subject imports were having an adverse impact on the domestic industry independent of the effects of the fall in demand during the 2008 recession.

Having carefully considered all of the arguments of the parties, and taking into account its standard of review, the panel found that the USITC did not fail to properly establish that rapidly increasing imports from China were a "significant cause" of material injury to the domestic industry.

On whether the transitional safeguard measure went beyond the "extent necessary", contrary to paragraph 16.3 of the Protocol, the panel found that China has failed to establish prima facie that the tyres measure exceeds "the extent necessary to prevent or remedy" the market disruption caused by rapidly increasing subject imports, contrary to paragraph 16.3 of the Protocol.

On the issue of the duration of the remedy exceeded the period of time necessary to prevent or remedy market disruption, China claims that the three-year duration of the remedy exceeds the period of time necessary to prevent or remedy the market disruption, contrary to paragraph 16.6 of the Protocol. The first sentence of paragraph 16.6 provides: A WTO Member shall apply a measure pursuant to this Section only for such period of time as may be necessary to prevent or remedy the market disruption.

The panel recalled that there was no obligation on the United States to explain why a three-year measure was needed to prevent or remedy the market disruption caused by subject imports. It further recalled that there was also no obligation on the United States to quantify the injury caused by increasing imports, or separate and distinguish that injury from injury caused by other factors. Accordingly, it is not enough for China to simply "demonstrate[e] that the USITC failed to ascertain the amount of the alleged effect of subject imports on the domestic industry". Instead, the onus is on China to establish prima facie that a three-year measure was excessive. China has failed to meet this burden, said the panel.

The panel found that China has failed to establish prima facie that the tyres measure exceeds the period of time necessary to prevent or remedy the market disruption, contrary to paragraph 16.6 of the Protocol.

On the issue of whether the US tyres measure is inconsistent with Articles I: 1 and II: 1 (B) of the GATT 1994, the panel said that China's GATT 1994 claims are entirely dependent on its claims under paragraph 16 of the Protocol. "Since we have not accepted China's claims under Paragraph 16 of the Protocol, we similarly do not accept China's claims under Articles I: 1 and II: 1 of the GATT 1994."

In its overall conclusions, the panel found that in imposing the transitional safeguards measure on 26 September 2009 in respect of imports of subject tyres from China, the United States did not fail to comply with its obligations under paragraph 16 of the Protocol and Articles I: 1 and II: 1 of the GATT 1994. +