TWN Info Service on WTO and Trade Issues (Jan15/01)
21 January 2015
Third World Network  

DSB adopts ruling in US-China CVD dispute
Published in SUNS #7943 dated 20 January 2015
 
Geneva, 19 Jan (Kanaga Raja) -- The Dispute Settlement Body (DSB) of the World Trade Organisation (WTO) on 16 January adopted the Appellate Body (AB) and panel reports in the dispute concerning countervailing duty (CVD) measures imposed by the United States on certain products from China.
 
The AB on 18 December 2014 had upheld an earlier panel ruling that found that the United States had acted inconsistently with certain provisions of the Subsidies and Countervailing Measures (SCM) Agreement over CVD measures that it imposed on certain Chinese products.
 
The AB had recommended that the DSB request the United States to bring its measures found in its Report, and in the Panel Report as modified by the AB's Report, to be inconsistent with its obligations under the SCM Agreement into conformity with its obligations under that Agreement.
 
In its ruling, the AB had reversed a number of the panel's findings, and declined to rule on some of China's claims. (See SUNS#7942 dated 22 December 2014.)
 
In a related development, the DSB on 19 December 2014 had adopted the AB and panel reports (DS436) in the dispute raised by India over countervailing measures imposed by the US on certain hot-rolled carbon steel flat products from India. The AB had largely upheld the panel ruling and recommended that the DSB request the US to bring its measures into conformity with the SCM Agreement.
 
In the US-China dispute, at the meeting of the DSB on 16 January, China said that since 2006, when the US first began to apply its countervailing duty laws to imports from China, China has been the target of more than 40 US countervailing duty investigations.
 
In the overwhelming majority of these cases, the principal alleged subsidy found by the US Department of Commerce (USDOC) has been the alleged provision of inputs for less than adequate remuneration, it noted.
 
On the issue of public body, China said that it challenged not only the USDOC's continued application of the rule of majority government ownership that was rejected by the Appellate Body in DS379, but also the USDOC's underlying "rebuttable presumption" that majority government-owned enterprises are "public bodies".
 
China was pleased that the Panel upheld China's "as such" claim in relation to the USDOC's "rebuttable presumption" and that the Panel also concluded that the presumption was unlawfully applied in every investigation subject to challenge.
 
In reaching these conclusions, China added, the Panel properly applied the legal standard articulated by the Appellate Body in DS379, and rejected the United States' ill-considered invitation to abandon that standard in favour of its position that a "public body" is "an entity that is controlled by a government such that the government can use the resources of that entity as its own."
 
China noted that the US attempted this same tactic in another recent case, DS436, and again was emphatically rebuffed in the process.
 
In that dispute, the Appellate Body stated that the US theory that a "public body" is "an entity that is controlled by a government such that the government can use the resources of that entity as its own", was "difficult to reconcile" with the Appellate Body's statement that a public body within the meaning of Article 1.1(a)(1) of the SCM Agreement "must be an entity that possesses, exercises or is vested with governmental authority".
 
China also welcomed the Appellate Body's emphatic rejection of the USDOC's entire construct for evaluating "market distortion" in the context of determining whether the provision of a financial contribution has conferred a benefit under Article 14(d) of the SCM Agreement.
 
It said that when the USDOC decided to begin applying the US countervailing duty laws to imports from China, one of the key findings that it made in support of its decision was that "the PRC Government has eliminated price controls on most products; market forces now determine the prices of more than 90 percent of products traded in China."
 
Notwithstanding its determination that the vast majority of prices in China are "freely set" by "market forces", the USDOC has repeatedly concluded in the investigations initiated since 2006 that prices in China for basic commodities are "distorted", and hence unusable as benchmarks.
 
The USDOC has based this conclusion almost exclusively on the percentage of the relevant input produced by SOEs (state-owned enterprises).
 
China said that if such SOEs provide at least a "substantial portion" of the market for the input, then the USDOC concludes, with no further analysis whatsoever, that private prices in the Chinese market for that input are distorted because of the government's alleged "predominant role" in the market.
 
In this case, said China, the Appellate Body unequivocally rejected the USDOC's analytical framework for evaluating market distortion.
 
According to China, in order to properly determine whether a price is a market-determined price, the Appellate Body explained that investigating authorities cannot focus exclusively on the type of entities operating in the market and their respective market shares, but also may be required to assess "the structure of the relevant market", "entry barriers", and "the behaviour of the entities operating in that market", all for the purpose of determining whether the government itself, or acting through government-related entities, exerts market power so as to distort in-country prices.
 
Looking at the four benefit determinations that were the subject of China's appeal, the Appellate Body concluded that the USDOC's violation of these principles was evident on the face of its determinations.
 
The Appellate Body found that in each of the challenged determinations, it was clear that the USDOC had simply assumed that the prices of the government-related entities were automatically distorted due to their relationship with the government, without conducting any evaluation of whether they were market-determined prices. The Appellate Body explained that "a finding of government ownership and control of certain entities alone cannot serve as the sole basis for establishing price distortion."
 
According to China, the Appellate Body emphasised the USDOC's failure to explain in its determinations whether and how the market shares held by SOEs actually resulted in the government's possession and exercise of market power, such that the price distortion occurred in a way that private suppliers aligned their prices with the "artificially low price" of the government-provided goods.
 
In relation to the USDOC's conclusion in each of the 14 challenged determinations that the alleged provision of inputs for less than adequate remuneration was specific to an enterprise or industry where China challenged four aspects of the USDOC's end-use approach, China noted that the Panel agreed with China that the USDOC had acted inconsistently with Article 2.1 of the SCM Agreement by failing to take into account the factors in the final sentence of Article 2.1(c), but the Panel rejected each of China's other claims.
 
On appeal, said China, the Appellate Body reversed the Panel's findings both in relation to the proper identification of a "subsidy programme" and in relation to the identification of the "granting authority".
 
While it regretted that the Appellate Body could not complete the legal analysis, China welcomed the Appellate Body's interpretive analysis in relation to both of these claims.
 
The Appellate Body made clear that the USDOC's consistent practice of reaching specificity determinations under Article 2.1(c) without ever identifying the "granting authority" or the relevant "subsidy programme" is inconsistent with the requirements of Article 2.
 
On the issue of facts available, China noted that the Panel declined to uphold its claims under Article 12.7, but the Appellate Body found that the cursory nature of the Panel's analysis was inconsistent with Article 11 of the DSU.
 
The Appellate Body explained that "in order to comply with the requirements under Article 12.7 of the SCM Agreement, the USDOC was required to provide an explanation [in its published report] that was sufficient to establish that it had engaged in a process of reasoning and evaluation of the various facts before it in order to determine which of the facts available could reasonably replace the missing ‘necessary' information."
 
China regretted that the Appellate Body could not complete the legal analysis on the specificity and the adverse facts available issues due to the insufficient analysis by the panel.
 
It appears that the divergence in quality between the reports of the panels and the Appellate Body has become a systemic issue within the dispute settlement process, China said.
 
China however believed that in this dispute, the Appellate Body's interpretive analysis in relation to China's facts available claims and in relation to its specificity claims plainly necessitates a significant change in the manner in which the USDOC conducts these aspects of its input subsidy investigations.
 
When combined with the USDOC's implementation obligations in relation to its public body and benchmark distortion analysis, it is evident that the time has come for the USDOC to fundamentally rethink its entire construct for input subsidy investigations, said China.
 
In its statement, the US said that the Appellate Body report contains two categories of findings that should be of wide concern to Members: first, the proper role of panels and the Appellate Body under the WTO dispute settlement system; and second, the Appellate Body's findings about how an administering authority needs to treat entities associated with the government for the purpose of determining market benchmarks.
 
On the first issue, the US said that the Appellate Body report suggests a view of dispute settlement that departs markedly from that set out in the DSU and reflected in numerous prior reports.
 
As the US understands it, the fundamental role of a panel is to consider the evidence and arguments put forward by the complaining party and the responses by the responding party, to make an objective assessment of the matter before it, and to issue a report explaining the basis of its findings.
 
The Appellate Body report suggests that panels and the Appellate Body have quite a different role: namely, to conduct independent investigations and apply new legal standards, regardless of what either party actually argues to the panel, said the US.
 
In this dispute, said the US, the Appellate Body report has assumed the role of the complaining party by - for the first time - making China's prima facie case on appeal with respect to a number of different claims. The Appellate Body then went on to find in China's favour by upholding arguments that the Appellate Body itself developed.
 
Equally remarkable, according to the US, the Appellate Body has found that the panel breached its responsibilities under Article 11 of the DSU by failing to examine arguments never presented by China.
 
The US said that it responded to China's arguments in the manner that China presented them. The US rebutted all of China's incorrect legal positions and all of China's sweeping factual characterisations, said the US, adding that the Panel agreed that the US had rebutted China's arguments, and found - with respect to the vast majority of China's claims - that China had failed to establish any breach of the SCM Agreement.
 
According to the US, the Appellate Body developed legal interpretations of the SCM Agreement, and then sought to apply these interpretations to the US measures - without regard to the case made by China through the evidence and arguments it actually submitted to the panel.
 
In doing so, said the US, the Appellate Body assumed a role more like an investigative authority. "This role is not provided for under the DSU," said the US.
 
Second, said the US, Members should have concerns with certain substantive findings in the Appellate Body report, especially with respect to the treatment of entities associated with the government for the purpose of determining market benchmarks.
 
On the positive side, said the US, the report appropriately rejects China's central position that an investigating authority must determine that a state-owned enterprise (SOE) is a "public body" before it decides not to use the prices of the SOEs as potential benchmarks.
 
However, the Appellate Body then went on to repeat and rely on its problematic findings made just ten days earlier in another report (in reference to DS436) with respect to this issue, without any explanation and in a manner not even suggested by China's arguments in this dispute.
 
Despite these concerns, the US said it appreciated other elements of the Appellate Body report, such as where the Appellate Body - even when ultimately reversing the Panel's findings - rejected China's most extreme legal theories.
 
For example, on the subsidy program issue, the Appellate Body agreed with the US position that evidence of "systematic series of actions" may provide a sufficient basis to establish the existence of an unwritten subsidy program.
 
And the Appellate Body also rejected China's legal theory regarding an order of analysis of Article 2 of the SCM Agreement. This theory lacked any textual basis and, if adopted, would have placed unnecessary burdens on investigating authorities, said the US.
 
Speaking under the same agenda item, India said that this dispute along with DS436 which was adopted by the DSB in December 2014 is critical to establish a balanced interpretation of the SCM Agreement.
 
India highlighted two findings of the Appellate Body that it said are extremely crucial in our understanding and interpretation of the SCM Agreement.
 
First, India welcomed the Appellate Body finding on benchmark prices for the purposes of determining conferment of a benefit under Article 14(d) of the SCM Agreement.
 
The Appellate Body stated that the proper benchmark prices would normally emanate from the market for the good in question in the country of provision. Such in-country prices could emanate from a variety of sources, including private or government-related entities.
 
Second, India appreciated the Appellate Body's effort to further clarify the legal standard under Article 12.7 of the SCM Agreement regarding application of "facts available".
 
Where there are several facts available to an investigating authority that it needs to choose from, "it would seem to follow naturally that the process of reasoning and evaluation would involve a degree of comparison" in order to arrive at an accurate determination.
 
The Appellate Body stated that although the precise contours of the standard of review to be applied in a given case are a function of the substantive provisions of the covered agreements at issue, as well as the particular claims made, Article 11 of the DSU requires, inter alia, that panels scrutinise whether the reasoning of an investigating authority is coherent and internally consistent, and carry out an "in depth examination" of the explanations provided by an investigating authority, said India.
 
In the context of Article 12.7 of the SCM Agreement, such an "in depth examination" by a panel would entail, inter alia, assessing whether an investigating authority's published report provided an explanation that sufficiently disclosed its process of reasoning and evaluation such that the panel could assess how the authority chose from the facts available those that could reasonably replace the missing information.
 
This will increase the transparency and objectivity in the investigating process in countervailing investigations and benefit all WTO members, said India. +