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TWN Info Service on WTO and Trade Issues (Jul19/24)
19 July 2019
Third World Network


AB upholds compliance ruling against US in Chinese goods dispute

Published in SUNS #8949 dated 18 July 2019

Geneva, 17 Jul (Kanaga Raja) – The Appellate Body (AB) of the World Trade Organisation (WTO) has upheld the findings of a compliance panel report that had concluded that the United States had not fully complied with an earlier WTO ruling concerning countervailing duties imposed by the US on a range of Chinese goods.

In a ruling issued on 16 July, the AB recommended that the Dispute Settlement Body (DSB) request the United States to bring its measures found in this report, and in the panel report as modified by the AB’s report, to be inconsistent with its obligations under the SCM (Subsidies and Countervailing Measures) Agreement, into conformity with that Agreement.

In the AB report, one member of the three-member AB division bench has provided a separate opinion on several of the issues (see below).

The dispute (DS437) against the US was raised by China in 2012, and the panel reported on 14 July 2014. The Appellate Body reported on 18 December 2014. The AB report, and the panel report as modified by the AB, were adopted in January 2015.

[The United States Trade Representative sharply attacked the AB ruling, and claimed that it undermined WTO rules, making them less effective to counteract subsidies by Chinese State-owned enterprises. The USTR also suggested that the ruling illustrated the concerns the US had been raising about the AB’s functioning, repeating in general terms its 2-year-old oft-repeated criticisms of the AB, such as using earlier rulings as precedents, delay in issuance of reports, and continued service on the AB division of retired members (who were on the division bench when it began hearing the appeals). The US has been blocking processes for filling vacancies on the AB, which by year-end will only have one member and will be non-functional. In an obvious reference to this, the USTR added in his reaction, “The United States is determined to take all necessary steps to ensure a level playing field so that China and its SOEs stop injuring US workers and businesses.” SUNS]

BACKGROUND

According to the AB report issued on 16 July, the United States and China each appealed certain issues of law and legal interpretations developed in the compliance panel report, United States – Countervailing Duty Measures on Certain Products from China – Recourse to Article 21.5 of the DSU by China.

The dispute from which the present Article 21.5 compliance proceedings arise concerns the imposition by the United States of countervailing duties on a range of products from China, as well as the underlying investigations leading to the imposition of such duties.

Before the original panel, China challenged several aspects of the investigations conducted by the United States Department of Commerce (USDOC), including the application of an alleged “rebuttable presumption” used to determine whether Chinese state-owned enterprises (SOEs) qualify as public bodies within the meaning of the SCM Agreement.

China further challenged several aspects of the USDOC’s determinations stemming from such investigations.

In its report, circulated to WTO Members on 14 July 2014, the original panel found, among other things, that in 12 of the investigations at issue: (i) the USDOC’s determinations that SOEs are public bodies were inconsistent with the United States’ obligations under Article 1.1(a)(1) of the SCM Agreement; and (ii) the USDOC’s specificity determinations were inconsistent with the United States’ obligations under Article 2.1(c) of the SCM Agreement because they failed to take into account the duration of the subsidy programme and economic diversification.

Following the original dispute, the USDOC revised 12 of the countervailing duty determinations at issue and maintained the related duties in place.

In the revised determinations, the USDOC had concluded that Chinese state-owned and state-invested enterprises (SOEs/SIEs) provided inputs to Chinese firms – such as steel billets, stainless steel coils, hot-rolled steel and polysilicon – for less than adequate remuneration.

As a result, the countervailing duty measures in these 12 cases were maintained.

The USDOC had based its conclusion on two main findings: that SOE/SIE providers of inputs were “public bodies” in the sense of Article 1.1(a)(1) of the SCM Agreement; and that price distortions in the domestic market in China justified using third country prices as a benchmark for assessing the benefit granted to Chinese exporters under Article 14(d) of the SCM Agreement.

A compliance panel was established in July 2016 to examine China’s claims, and in its ruling issued on 21 March 2018, the compliance panel had found amongst others that:

* China had failed to demonstrate that the USDOC’s public body analysis was inconsistent with the DSB’s rulings and recommendations and with Article 1.1(a)1 of the SCM Agreement, and China had not otherwise demonstrated that the USDOC erred in treating Chinese providers of steel and other inputs as public bodies;

* China had demonstrated that the USDOC’s recourse to third country prices for assessing the benefit granted to Chinese exporters was inconsistent with Article 14(d) of the SCM Agreement;

* China had demonstrated that the USDOC’s revised specificity determinations were inconsistent with Article 2.1(c) of the SCM Agreement.

AB FINDINGS AND CONCLUSIONS

On the issue of the Panel’s terms of reference, the Appellate Body (AB) said that the Panel correctly assessed the scope of the measures falling within its terms of reference in these Article 21.5 proceedings based on the criteria of their relationship in terms of nature, timing, and effects.

The AB therefore upheld the Panel’s findings, in paragraphs 7.320, 7.347, 8.1.g, and 8.1.h.i-ii, iv, and vi of the Panel Report, that the subsequent reviews at issue and the Final Determination in the original Solar Panels investigation fell within the Panel’s terms of reference under Article 21.5 of the DSU.

With respect to Article 1.1(a)(1) of the SCM Agreement, the AB said the central focus of a public body inquiry under Article 1.1(a)(1) is not whether the conduct that is alleged to give rise to a financial contribution under sub-paragraphs (i)-(iii) or the first clause of sub-paragraph (iv) – i.e. the particular transaction at issue – is “logically connected” to an identified “government function”.

Rather, the relevant inquiry hinges on the entity engaging in that conduct, its core characteristics, and its relationship with government, seen in light of the legal and economic environment prevailing in the relevant Member.

This comports with the fact that a “government” (in the narrow sense) and a “public body” share a degree of commonality or overlap in their essential characteristics – i.e. they both possess, exercise, or are vested with governmental authority.

Once it has been established that an entity is a public body, then the conduct of that entity shall be directly attributable to the Member concerned for purposes of Article 1.1(a)(1).

While the conduct of an entity may constitute relevant evidence to assess its core characteristics, an investigating authority need not necessarily focus on every instance of conduct in which that relevant entity may engage, or on whether each such instance of conduct is connected to a specific “government function”.

The Panel was thus correct in rejecting China’s reading of Article 1.1(a)(1) as requiring that an investigating authority inquire into whether an entity is exercising a government function when engaging in one of the specific conducts listed in sub-paragraphs (i)-(iii) and the first clause of sub-paragraph (iv).

The AB therefore upheld the Panel’s finding, in paragraphs 7.36 and 7.106 of the Panel Report, that the legal standard for public body determinations under Article 1.1(a)(1) of the SCM Agreement does not prescribe a connection of a particular degree or nature that must necessarily be established between an identified government function and the particular financial contribution at issue.

The AB also upheld the Panel’s conclusion, in paragraph 7.36 of the Panel Report, that “China has failed to demonstrate that the USDOC’s public body determinations in the relevant Section 129 proceedings are inconsistent with Article 1.1(a)(1) of the SCM Agreement because they are based on an improper legal standard.”

Having upheld the Panel’s interpretive findings, the AB said, “we do not further address China’s additional claims with respect to the Panel’s findings in paragraphs 7.72, 7.103, and 7.105-7.106 of the Panel Report.”

According to the AB, the Panel correctly found that the Public Bodies Memorandum bears a “close relationship” to the declared “measure taken to comply”, namely, the USDOC’s public body determinations in the relevant Section 129 proceedings, and with the recommendations and rulings of the DSB in the original proceedings.

The Panel was also correct that China could not have challenged the Public Bodies Memorandum as part of its complaint in the original proceedings.

The AB therefore upheld the Panel’s finding, in paragraph 7.120 of the Panel Report, that the Public Bodies Memorandum falls, “as such”, within the scope of these Article 21.5 proceedings.

It noted that China’s claim on appeal with respect to the WTO-consistency of the Public Bodies Memorandum “as such” is premised on China’s reading of Article 1.1(a)(1) as requiring, in each case, the establishment of a “clear logical connection” between a “government function” identified by the investigating authority and the conduct alleged to give rise to a financial contribution.

Having rejected this reading of Article 1.1(a)(1), the AB did not further address China’s claim concerning the Panel’s conclusion, in paragraph 8.1.b of the Panel Report, that China has not demonstrated that the Public Bodies Memorandum is inconsistent “as such” with Article 1.1(a)(1).

The AB also did not further address the participants’ claims concerning the Panel’s intermediate findings leading to that conclusion, namely: (i) the Panel’s finding, in paragraph 7.133 of the Panel Report, that the Public Bodies Memorandum “can be challenged “as such” as a rule or norm of general or prospective application”; and (ii) the Panel’s finding, in paragraph 7.142 of the Panel Report, that “the Public Bodies Memorandum does not restrict in a material way the USDOC’s discretion to act consistently with Article 1.1(a)(1).”

The Panel’s conclusion that China has not demonstrated that the Public Bodies Memorandum is inconsistent “as such” with Article 1.1(a)(1), therefore, stands, the AB said.

With respect to Articles 1.1(b) and 14(d) of the SCM Agreement, the AB disagreed with China’s proposition that the circumstances potentially justifying recourse to out-of-country prices under Article 14(d) of the SCM Agreement are limited to those in which the government effectively determines the price at which the good is sold, including more specifically, where the government sets prices administratively, is the sole supplier of the good, or possesses and exercises market power as a provider of the good so as to cause the prices of private suppliers to align with a government-determined price.

Central to the inquiry under Article 14(d) in identifying an appropriate benefit benchmark is the question of whether in-country prices are distorted as a result of government intervention.

What would allow an investigating authority to reject in-country prices is a finding of price distortion resulting from government intervention in the market, not the presence of government intervention itself.

Different types of government interventions could result in price distortion, such that recourse to out-of-country prices is warranted, beyond the situation in which the government effectively determines the price at which the good is sold.

The determination of whether in-country prices are distorted must be made case by case, based on the relevant evidence in the particular investigation and taking into account the characteristics of the market being examined, and the nature, quantity, and quality of the information on the record, said the AB.

The AB therefore upheld the Panel’s finding, in paragraph 7.174 of the Panel Report, that Article 14(d) does not limit the possibility of resorting to out-of-country prices to the situation in which the government effectively determines the price at which the good is sold.

The AB said the specific type of analysis that an investigating authority must conduct for purposes of arriving at a proper benchmark under Article 14(d), as well as the types and amount of evidence that would be considered sufficient in this regard, will necessarily vary depending on a number of factors in the circumstances of the particular case.

However, in all cases, the investigating authority has to establish and adequately explain how price distortion actually results from government intervention. There may be different ways to demonstrate that prices are actually distorted, including a quantitative assessment, price comparison methodology, a counterfactual, or a qualitative analysis.

The AB said while evidence of direct impact of the government intervention on prices may make the finding of price distortion likely, evidence of indirect impact may also be relevant. At the same time, establishing the nexus between such indirect impact of government intervention and price distortion may require more detailed analysis and explanation.

Independently of the method chosen by the investigating authority, it has to adequately take into account the arguments and evidence supplied by the petitioners and respondents, together with all other information on the record, so that its determination of how prices in the specific markets at issue are in fact distorted as a result of government intervention would be based on positive evidence.

“The Panel’s reasoning is consonant with our interpretation of Article 14(d),” said the AB.

It further agreed with the Panel’s conclusion that “[a]n investigating authority must explain how government intervention in the market results in in-country prices for the inputs at issue deviating from a market-determined price”, insofar as it clarifies that the investigating authority has to make a finding of price distortion resulting from government intervention.

“In sum, we do not see that the Panel required one single type of quantitative or price comparison analysis in all cases,” said the AB.

With respect to the Panel’s finding, in paragraph 7.206 of the Panel Report, that “the USDOC failed to explain how government intervention in the market resulted in domestic prices for the inputs at issue deviating from a market-determined price”, the AB said it understands the Panel to have rejected as insufficient and problematic the USDOC’s determination that prices in the entire steel and solar-grade polysilicon sectors in China cannot be used as benefit benchmarks in the absence of a specific assessment of how government intervention had resulted in price distortion in the four input markets at issue.

“Furthermore, we understand the Panel to have been concerned with the focus of the USDOC’s analysis in the Benchmark Memorandum on the pervasiveness of government involvement in China’s SIEs’ decision-making in general and in the steel sector as a whole, rather than on how specifically this involvement influenced pricing decisions regarding the inputs at issue and resulted in price distortion with respect to the determinations at hand.”

Therefore, as the AB sees it, the Panel’s analysis of the determinations at issue led it to conclude that the USDOC did not provide a reasoned and adequate explanation of how the widespread government interventions described in the Benchmark Memorandum resulted in the distortion of in-country prices in the specific input markets and regarding the specific products subject to each of the challenged USDOC determinations at issue.

With respect to the Panel’s finding, in paragraph 7.220 of the Panel Report, that “the USDOC failed to adequately explain its rejection of in-country prices in light of the evidence before it”, the AB said it understands the Panel to have considered that the USDOC’s rejection of in-country prices was merely consequential to its findings of market distortion in the steel sector generally, which the Panel considered not to provide a reasoned and adequate explanation of how government intervention resulted in price distortion.

Furthermore, although the focus of the USDOC’s analysis in the Benchmark Memorandum was different from the one underlying the Ordover Report, the alternative explanations and pricing data on the record may have nevertheless been relevant for examining whether price distortion actually existed in the input markets at issue.

Yet, the USDOC determinations do not explain why, in light of the price data and alternative explanations, the conclusion it reached for the entire steel sector necessarily applies to all specific input markets, said the AB.

The AB therefore found that the United States has not established that the Panel erred in its interpretation and application of Article 14(d) of the SCM Agreement in finding that the USDOC failed to explain, in the Oil Country Tubular Goods (OCTG), Solar Panels, Pressure Pipe, and Line Pipe Section 129 proceedings, how government intervention in the market resulted in domestic prices for the inputs at issue deviating from a market-determined price.

In addition, the AB found that the United States has not established that the Panel erred in its finding that, in the Section 129 proceedings on Pressure Pipe, Line Pipe, and OCTG, the USDOC failed to consider price data on the record.

Consequently, the AB upheld the Panel’s findings, in paragraphs 7.223-7.224 and 8.1.c of the Panel Report, that the United States acted inconsistently with Articles 1.1(b) and 14(d) of the SCM Agreement in the OCTG, Solar Panels, Pressure Pipe, and Line Pipe Section 129 proceedings.

With respect to Article 2.1(c) of the SCM Agreement, the AB said as it sees it, where an investigating authority makes a finding of de facto specificity based on an analysis of whether there has been “use of a subsidy programme by a limited number of certain enterprises”, consideration of the length of time during which the subsidy programme has been in operation pre-supposes that the relevant programme has been properly identified.

The AB therefore disagreed with the United States to the extent it suggests that an investigating authority can be found to have complied with the requirement under Article 2.1(c) to consider the “duration” of a subsidy programme regardless of whether it has properly identified that programme in the first place.

Nor did the AB agree with the United States that the Panel was required to limit its review to the USDOC’s examination of the “duration” of the relevant subsidy programmes, without considering whether the USDOC had properly identified those programmes either in the context of the original investigations or in the context of the relevant Section 129 proceedings.

With respect to the Panel’s interpretation and application of Article 2.1(c), the AB agreed with the Panel that, while “evidence of “a systematic series of actions” may be particularly relevant in the context of an unwritten programme, the mere fact that financial contributions have been provided to certain enterprises is not sufficient to demonstrate that such financial contributions have been granted pursuant to a plan or scheme for purposes of Article 2.1(c).”

The Panel’s subsequent review of the USDOC’s analysis properly focused on “whether the information relied upon by the USDOC supports its finding of a systematic series of actions evidencing the existence of a plan or scheme pursuant to which subsidies have been provided”.

Moreover, in its findings, the Panel rightly contrasted the USDOC’s failure to explain “systematic activity … regarding the existence of an unwritten subsidy programme” with information before the USDOC merely indicating “repeated transactions”.

The AB therefore disagreed with the United States insofar as it argues that the Panel erred in its articulation of the standard to be applied under Article 2.1(c). Nor did the AB agree with the United States that the Panel erred in its interpretation of the term “subsidy programme” by reading it to mean a “systematic subsidy programme” consisting “entirely of acts of subsidization” where each provision of an input by the government confers a benefit to the recipient.

The AB also disagreed with the United States to the extent it claims that the Panel’s finding under Article 2.1(c) was based on an isolated reading of the USDOC’s specificity analysis.

Rather, the AB understands the Panel’s concern to have been that the USDOC’s reasoning and references to “subsidy programmes” were generic in nature and did not sufficiently discuss the steel sector or the provision of the inputs in the context of the specific determinations at issue.

It was not for the Panel in this regard “to conduct a de novo review of the evidence” or “to substitute [its] own conclusions for those of the competent authorities,” said the AB.

In light of the foregoing, the AB upheld the Panel’s finding, in paragraphs 7.293 and 8.1.e of the Panel Report, that China has demonstrated that the United States acted inconsistently with Article 2.1(c) of the SCM Agreement in the Pressure Pipe, Line Pipe, Lawn Groomers, Kitchen Shelving, OCTG, Wire Strand, Seamless Pipe, Print Graphics, Aluminum Extrusions, Steel Cylinders, and Solar Panels Section 129 proceedings.

SEPARATE OPINION BY ONE AB MEMBER

One AB division member provided a separate opinion that addressed the findings concerning public body, benefit and specificity.

On the issue of “public body”, the dissenting AB member concurred with the majority in: (i) rejecting China’s interpretation of the term “public body” under Article 1.1.(a)(1) of the SCM Agreement; (ii) upholding the Panel’s conclusion that China failed to demonstrate that the USDOC’s public body determinations in the relevant Section 129 proceedings are inconsistent with Article 1.1(a)(1); and (iii) leaving intact the Panel’s conclusion that China has not demonstrated that the Public Bodies Memorandum is inconsistent “as such” with Article 1.1(a)(1).

The AB member, however, said the following on the issue of “public body”:

“But I believe the majority has repeated an unclear and inaccurate statement of the criteria for determining whether an entity is a public body, and I disagree with the majority’s implication that a clearer articulation of the criteria is neither warranted nor necessary.

“I believe the continuing lack of clarity as to what is a “public body” represents an instance of undue emphasis on “precedent”, which has locked in a flawed interpretation that has grown more confusing with each iteration, as litigants and Appellate Body Divisions repeated the original flaw while trying to navigate around it. That is what I believe the majority has done here.

“The original mistake was the attempt, in US – Anti-Dumping and Countervailing Duties (China), to define the term “public body” as an entity that “possesses, exercises or is vested with governmental authority”. Certainly that is one way to identify a public body. But it is not the only way to give meaning to a concept that must be flexible because it depends for its meaning on specific circumstances. In each subsequent appeal where the issue has been presented, the Appellate Body has treated the phrase “possesses, exercises or is vested with governmental authority” as a necessary element for determining whether an entity is a public body – albeit while adding criteria that seemed to undermine the role of that element. That has sown confusion as participants and the Appellate Body have struggled to show how situational criteria fit with a rigid and limiting phrase.

“This case is the latest example. The participants and third participants all dutifully claimed that their positions fit the “possesses, exercises or is vested with governmental authority” criterion, while differing – sharply in the case of the two participants – in their understanding of what that criterion means. One participant, the United States, expressly asked us to clarify the meaning of the term “public body”. For this reason, and for the other reasons given above, I believe a clarification of the criteria for determining whether an entity is a public body is both necessary and warranted.

“The text of Article 1.1(a)(1) does not elaborate on the meaning of the term “public body”. The only textual indication is the collective reference to “a government or any public body” as comprising the entity “government”, which is the subject of the disciplines of the SCM Agreement. This text does not call for a single, abstract definition or basic criterion for the term “public body”. Instead, Article 1.1(a)(1) calls for an examination of whether a transfer of financial value is “by a … public body” and can therefore be attributed to a government. As I see it, that examination involves an assessment of the relationship between the relevant entity and the government. When that relationship is sufficiently close, the entity in question may be found to be a public body and all of its conduct may be attributed to the relevant Member for purposes of Article 1.1(a)(1). The relationship between an entity and a government may take different forms, depending on the legal and economic environment prevailing in the relevant Member. Certainly, as noted above, an entity may be found to be a public body when it “possesses, exercises or is vested with governmental authority”. But that is not, and should not be treated as, the essential criterion in every case. In my view, if a government has the ability to control the entity in question and/or its conduct, then the entity could be found to be a public body within the meaning of Article 1.1(a)(1). I do not believe the Appellate Body should elaborate on the meaning of the term “public body” in greater detail. Rather, it should leave space for domestic authorities to apply the criteria described above, and set forth in the paragraph immediately below, provided their decisions meet the requirements of objectivity, reasoned and adequate explanation, and sufficient evidence.

“In the hope of providing clearer guidance to future litigants and panels, and of encouraging them not to feel unduly constrained by past statements on this subject, I offer the following re-statement, which incorporates many of the concepts developed by the Appellate Body, while, I believe, clarifying the criteria properly: Whether an entity is a public body must be determined on a case-by-case basis with due regard being had for the characteristics of the relevant entity, its relationship with the government, and the legal and economic environment prevailing in the country in which the entity operates. Just as no two governments are exactly alike, the precise contours and characteristics of a public body are bound to differ from entity to entity, State to State, and case to case. An entity may be found to be a public body when the government has the ability to control that entity and/or its conduct to convey financial value. There is no requirement for an investigating authority to determine in each case whether the investigated entity “possesses, exercises or is vested with governmental authority”.”

On the issue of benefit, the dissenting AB member concurred with the majority in rejecting China’s interpretation of Article 14(d) of the SCM Agreement, including China’s claim that circumstances justifying recourse to out-of-country prices are limited to those in which the government “effectively determines” the price at which a good is sold.

But the AB member disagreed with the majority’s decision to uphold the Panel’s finding that China demonstrated that the United States acted inconsistently with Articles 1.1(b) and 14(d) of the SCM Agreement in the OCTG, Solar Panels, Pressure Pipe, and Line Pipe Section 129 proceedings.

On the issue of specificity, the dissenting AB member believed that the Panel and majority fundamentally misunderstand the role of Article 2.1 within the SCM Agreement, give the term “subsidy programme” a meaning that is not supported by the text and that is unreasonable, and ignore reasoning and analysis by the USDOC that was part of the case and should have been considered.

The AB member believed that the Panel and majority decisions would, if followed in the future, enable circumvention of the disciplines of the SCM Agreement and even discourage the transparent management of subsidies.

In summarising, the AB member said: “I respectfully suggest that it would be beneficial for the dispute settlement system if future litigants, and panels in adherence to their mandate under Article 11 of the DSU, would continue to take into account separate opinions such as this along with relevant past Appellate Body reports, without regarding either as necessarily determinative.”

[In a post on the IELP blog, Prof Simon Lester, a US trade law academic, said: “Dissents and concurrences seem pretty natural to me, and I have no problem with them in WTO dispute settlement. I also think it makes sense to provide the name of the author of a separate opinion, although in some instance we can figure it out pretty easily without any explicit identification.

[“The recent US effort to make slight changes to the importance of past Appellate Body reports, and the attempt in the case above to assign a particular role to majority and separate opinions (“without regarding either as necessarily determinative”), has been thought-provoking. I’m not sure there is much hope for providing additional clarity on these issues (it’s just something courts have to muddle through), but it’s interesting to watch people try.”

[See full post at: https://ielp.worldtradelaw.net/2019/07/separate-opinion-in-todays-appellate-body-report.html]

 


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