TWN Info Service on WTO and Trade Issues (Nov19/02)
13 November 2019
Third World Network

China can seek retaliation against US up to $3.6 billion annually
Published in SUNS #9012 dated 5 November 2019

Geneva, 4 Nov (Kanaga Raja) - A panel of WTO arbitrators has determined that China can retaliate against the United States to the tune of USD 3,579.128 million annually over the US failure to comply with an earlier WTO ruling concerning certain methodologies used by the United States in anti-dumping (AD) proceedings involving products imported from China.

In a decision issued on 1 November, the three-member panel of arbitrators (referred to as the Arbitrator) determined that the level of nullification or impairment of benefits accruing to China as a result of the WTO-inconsistent methodologies used by the United States in anti-dumping proceedings concerning products imported from China is 3,579.128 million USD per annum.

Therefore, in accordance with Article 22.4 of the Dispute Settlement Understanding (DSU), China, in line with the decision, may request authorization from the Dispute Settlement Body (DSB) to suspend concessions or other obligations at a level not exceeding 3,579.128 million USD per annum, the Arbitrator said.

The next regular meeting of the DSB is scheduled for 22 November. However, China can request a special meeting of the DSB before this date, after providing 10 days' notice.

BACKGROUND

According to the Arbitrator's report, the arbitration proceedings arose in the dispute initiated by China concerning certain methodologies used by the United States in anti-dumping proceedings concerning products imported from China.

On 22 May 2017, the Dispute Settlement Body (DSB) of the World Trade Organization (WTO) adopted the Appellate Body report in this dispute, together with the report of the panel as modified by the Appellate Body.

In doing so, the DSB adopted the panel's findings, which were not appealed, that certain methodologies used by the United States are inconsistent with Articles 2.4.2, 6.10, 9.2, and 9.3 of the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (Anti-Dumping Agreement) and Article VI:2 of the General Agreement on Tariffs and Trade 1994 (GATT 1994).

In particular, the panel ruling found fault with (1) the US use of the weighted average-to-transaction (WA-T) methodology with "zeroing" in cases of "targeted" dumping, and (2) the treatment of multiple Chinese exporters as a single government-controlled entity (the "Single Rate Presumption").

On 19 January 2018, following referral to arbitration under Article 21.3(c) of the DSU, an arbitrator determined that the reasonable period of time for the United States to implement the DSB recommendations and rulings would expire on 22 August 2018.

On 9 September 2018, China requested authorization from the DSB to suspend concessions or other obligations to the United States with respect to trade in goods in the amount of USD 7.043 billion.

As a basis for its request, China included a total of 25 different products from China subject to anti-dumping duties calculated by the United States using the methodologies found to be inconsistent in the original proceedings.

On 19 September 2018, the United States objected to China's proposed level of suspension, and at a DSB meeting on 21 September 2018, the DSB took note that the matter raised by the United States had been referred to arbitration, as required by Article 22.6 of the DSU.

The three-member panel of arbitrators was constituted on 5 October 2018.

MAIN FINDINGS

The Arbitrator recalled the findings of inconsistency made in the original proceedings.

These findings of inconsistency fall into two categories, which are referred to as: (a) findings of inconsistency concerning the United States' use of the weighted average-to-transaction (WA-T) methodology with zeroing in calculating dumping margins; and (b) findings of inconsistency concerning the United States' treatment of multiple exporters as a single, government-wide entity under the so-called Single Rate Presumption.

With respect to the United States' use of the WA-T methodology with zeroing, the original panel made "as applied" findings of violation with respect to dumping calculations made for four exporters in four anti-dumping proceedings.

As for the Single Rate Presumption, the original panel made findings of violation with respect to the Single Rate Presumption "as such" and "as applied" in 38 anti-dumping proceedings covering 13 products.

The Arbitrator used a counterfactual based on a scenario of US compliance with the WTO ruling and calculated the level of nullification or impairment under the assumption that the anti-dumping measures would be modified (rather than removed in their entirety) to ensure compliance.

The calculation was based on trade flows in products subject to 25 dumping duty orders on Chinese imports, to account for the panel and Appellate Body findings that the methodologies used were "as such" or "as applied" inconsistent with WTO rules.

The Arbitrator began by setting out the scope of the products and anti-dumping orders that will form the basis of their determination of the level of nullification or impairment caused by the United States' failure to implement the DSB recommendations and rulings by the expiry of the reasonable period of time.

Despite providing calculations for both the "as applied" and "as such" findings of violation, China based its request for suspension in the amount of USD 7.043 billion only on the "as applied" findings of violation, arguing that these alone substantiate its request, the Arbitrator said.

In estimating a lower level of nullification or impairment than that China proposes and arguing that China's request for suspension in the amount of USD 7.043 billion does not meet the requirements of the DSU, the United States initially relied on all 13 anti-dumping orders that were subject to the "as applied" findings of violation as well as the 12 additional selected anti-dumping orders that were subject to the "as such" findings of violation.

Following China's decision to exclude Aluminum Extrusions from its calculations, the United States did so as well. Further, following the USDOC's (US Department of Commerce) revocation of the OTR Tires order on 10 May 2019, the United States asked the Arbitrator to also exclude this order from its determination, arguing that there can be no nullification or impairment concerning this order.

"While there is no disagreement between the parties concerning 23 of the 25 anti-dumping orders at issue, they have differing views on whether we should include Aluminum Extrusions and OTR Tires in our determination," said the Arbitrator.

On Aluminium Extrusions, the Arbitrator said that it saw no reason to prevent China from excluding Aluminum Extrusions from its own calculations while requesting that the Arbitrator not exclude Aluminum Extrusions if it were to use a calculation methodology other than the one China proposes.

"Further, we do not believe that this would deprive the United States of any due process rights."

Since Aluminum Extrusions was clearly identified in China's methodology paper, the United States had sufficient time and opportunity to develop its arguments and calculations with respect to this anti-dumping order.

Indeed, this is exactly what the United States did in its written submission as well as in its responses to the Arbitrator's questions.

On OTR Tires, the Arbitrator noted that the United States provided arguments and calculations concerning OTR Tires throughout these arbitration proceedings but explained, in its comments on China's responses to questions, that the USDOC revoked this anti-dumping order on 10 May 2019, effective as of 4 February 2019.

In light of this, the United States argues that there can be no nullification or impairment concerning OTR Tires, and that the Arbitrator should exclude it from the scope of its determination.

In its analysis, the Arbitrator said its mandate is to determine whether the level of suspension that China proposes is equivalent to the level of nullification or impairment caused by the United States' failure to implement the DSB recommendations and rulings by the expiry of the reasonable period of time.

Where relevant and appropriate, the Arbitrator said it takes into account modifications to the anti-dumping orders at issue implemented by the USDOC prior to the expiry of the reasonable period of time.

For OTR Tires, however, it is undisputed that this anti-dumping order was in full effect by the expiry of the reasonable period of time.

"Consequently, if we were to exclude OTR Tires from the scope of our determination, we would be ignoring the nullification or impairment caused by the failure of the United States to implement the DSB recommendations and rulings on OTR Tires by the expiry of the reasonable period of time. Such an approach would not be consistent with our mandate," said the Arbitrator.

However, a separate opinion was provided by one member of the three-member panel of Arbitrators, saying: "The reasonable period of time for the United States to implement the DSB recommendations and rulings expired on 22 August 2018. The anti-dumping order on OTR Tires was withdrawn by the USDOC on 4 February 2019. Thus, the DSB recommendations and rulings with respect to this order were fully implemented within less than six months following the expiry of the reasonable period of time. In light of this, I disagree with the majority's decision to take this order fully into account in estimating the level of nullification or impairment. In my view, the estimate of the level of nullification or impairment for this particular order should be prorated because it only remained in force for less than six months following the expiry of the reasonable period of time. Further, the DSB should authorize China to exercise its right to suspend concessions or other obligations with regard to this order for one year only, in an amount corresponding to the prorated level of nullification or impairment."

In its conclusion on this issue, the Arbitrator considered the scope of these arbitration proceedings to be as follows:

"For the purpose of assessing the level of nullification or impairment estimated by China, we will base our analysis on the 12 anti-dumping orders subject to the "as applied" findings of violation other than Aluminum Extrusions. These 12 anti-dumping orders are (1) Bags, (2) Coated Paper, (3) Diamond Sawblades, (4) Furniture, (5) OCTG (Oil Country Tubular Goods), (6) OTR Tires, (7) PET Film, (8) Ribbons, (9) Shrimp, (10) Solar Panels, (11) Steel Cylinders, and (12) Wood Flooring."

"If we find that the level of suspension that China proposes is not equivalent to the level of nullification or impairment stemming from these 12 anti-dumping orders and proceed to make our own determination using a different calculation methodology, we will base our determination on all 13 anti-dumping orders subject to the "as applied" findings of violation as well as the 12 additional anti-dumping orders subject to the "as such" findings of violation. These 25 anti-dumping orders are (1) Aluminum Extrusions, (2) Bags, (3) Coated Paper, (4) Diamond Sawblades, (5) Furniture, (6) OCTG, (7) OTR Tires, (8) PET Film, (9) Ribbons, (10) Shrimp, (11) Solar Panels, (12) Steel Cylinders, (13) Wood Flooring, (14) Copper Pipe and Tube, (15) Iron Pipe Fittings, (16) Passenger Vehicle and Light Truck Tires, (17) Residential Washers, (18) Sheet and Strip, (19) Steel Flat Products, (20) Steel Line Pipe, (21) Steel Nails, (22) Steel Pipe, (23) Steel Products, (24) Steel Standard, Line, and Pressure Pipe, and (25) Steel Wire Rod."

All of these 25 anti-dumping orders are covered by the original panel's findings of violation concerning the USDOC's use of the Single Rate Presumption. Only four of these anti-dumping orders, namely Coated Paper, OCTG, Steel Cylinders, and PET Film, are covered by the original panel's findings of violation concerning the USDOC's use of the WA-T methodology with zeroing, said the Arbitrator.

The Arbitrator also considered that 2017 is a reasonable reference period to use for determining the level of nullification or impairment caused by the United States' failure to implement the DSB recommendations and rulings by the expiry of the reasonable period of time.

The Arbitrator then went on to determine the appropriate counterfactual for all 25 anti-dumping orders, starting with the counterfactual for the USDOC's use of the WTO-inconsistent WA-T methodology with zeroing in four anti-dumping orders and moving on to the counterfactual for the USDOC's use of the WTO-inconsistent Single Rate Presumption in all 25 anti-dumping orders at issue.

On this issue, a separate opinion was again provided by one member of the three-member panel of Arbitrators, who said: "I generally agree with the majority that, for the purpose of arbitration proceedings under Article 22.6 of the DSU, a reasonable or plausible counterfactual should be one that, at least, is consistent with the covered agreements. I, however, disagree with the majority on how to assess whether a proposed counterfactual is consistent with the covered agreements. Specifically, in my view, when considering the possibility of taking into account potential inconsistencies with WTO obligations other than those that were found to have been violated in the original proceedings, particular and extra restraint should be exercised. Otherwise, the careful balance between, on the one hand, Articles 11 and 21.5 of the DSU and, on the other hand, Article 22.6 of the DSU may be disturbed. This difference in views necessarily leads me to reach conclusions different from those of the majority on two important issues related to the counterfactual adopted in these proceedings."

The first issue concerns the group of Chinese exporters within the PRC (People's Republic of China)-wide entity to which the counterfactual duty will apply, while the second issue concerns the rate of the counterfactual duty.

Following its analysis, the Arbitrator determined that it will use the following counterfactual for the purpose of estimating the level of nullification or impairment: "With respect to Coated Paper, we will use a 0.00% duty rate as the counterfactual for the exporter APP-China, for the exporters that receive the separate duty rate, and for the exporters within the PRC [People's Republic of China]-wide entity. With respect to OCTG, we will use a [[redacted Business Confidential Information]]% duty rate as the counterfactual for the exporter TPCO and for the exporters that receive the separate duty rate, and we will use a 0.00% duty rate as the counterfactual for the exporters within the PRC-wide entity. With respect to Steel Cylinders, we will use a 0.00% duty rate as the counterfactual for the exporters that receive the separate duty rate and for the exporters within the PRC-wide duty entity. With respect to Aluminum Extrusions, Bags, Diamond Sawblades, Furniture, OTR Tires, PET Film, Ribbons, Shrimp, Solar Panels, Wood Flooring, Copper Pipe and Tube, Iron Pipe Fittings, Passenger Vehicle and Light Truck Tires, Residential Washers, Sheet and Strip, Steel Flat Products, Steel Line Pipe, Steel Nails, Steel Pipe, Steel Products, Steel Standard, Line, and Pressure Pipe, and Steel Wire Rod, we will use a 0.00% duty rate as the counterfactual for all of the exporters within the PRC-wide entity. We will maintain all other duty rates imposed under the anti-dumping orders at issue, without any modification."

On the determination of the appropriate methodology for estimating the level of nullification or impairment, the Arbitrator considered that it is appropriate to apply the Armington imperfect substitutes partial equilibrium model (Armington model) in two steps for the anti-dumping orders at issue.

(According to the Arbitrator, the Armington model is a partial equilibrium economic model that analyses a single market of a given product, ignoring linkages with other markets because those linkages are presumed to be negligible.)

"For 22 of the anti-dumping orders at issue, we will apply the Armington model with four varieties of the product, and for the remaining three anti-dumping orders at issue, we will apply the Armington model with five varieties of the product," said the Arbitrator.

The Arbitrator recalled that it has determined that it is appropriate to apply the Armington model in two steps, with either four or five varieties of the product, in order to estimate the level of nullification or impairment concerning the anti-dumping orders at issue.

"As the first step, we will apply the Armington model to the US market as it existed prior to the imposition of the anti-dumping orders in order to simulate, for each anti-dumping order, the impact of imposing the relevant anti-dumping duties on the market shares of the Chinese exporters (both the Chinese exporters subject to the WTO-inconsistent anti-dumping duties and the remaining Chinese exporters), the exporters from the rest of the world, and the US producers.

"We will then apply the market shares of the Chinese exporters simulated under the first step to the actual 2017 total value of the US market in order to obtain the simulated 2017 total value of US imports from China.

"As the second step, we will apply the Armington model to the actual 2017 US market with the market shares simulated under the first step in order to simulate, for each anti-dumping order, the impact of reducing the WTO-inconsistent anti-dumping duties from the actual duty rates to the counterfactual duty rates on the value of US imports from China (both the Chinese exporters subject to the WTO-inconsistent anti-dumping duties and the remaining Chinese exporters), the exporters from the rest of the world, and the US producers. The value of US imports from China simulated under the second step corresponds to the counterfactual value of US imports from China.

"We will then estimate the level of nullification or impairment concerning the anti-dumping orders at issue by calculating, for each order, the difference between the 2017 value of US imports from China, simulated under the first step, and the counterfactual value of US imports from China, simulated under the second step.

"For the 22 anti-dumping orders that concern only the USDOC's use of the WTO-inconsistent Single Rate Presumption, we will implement the Armington model with four varieties of the product: (i) variety produced in the United States; (ii) variety imported from the Chinese exporters subject to the WTO-inconsistent PRC-wide duty rates; (iii) variety imported from the remaining Chinese exporters; and (iv) variety imported from the rest of the world.

"For the three anti-dumping orders that concern the USDOC's use of the WTO-inconsistent WA-T methodology with zeroing as well as the WTO-inconsistent Single Rate Presumption, we will implement the Armington model with five varieties of the product: (i) variety produced in the United States; (ii) variety imported from the Chinese exporters subject to the WTO-inconsistent WA-T duty rates; (iii) variety imported from the Chinese exporters subject to the WTO-inconsistent PRC-wide duty rates; (iv) variety imported from the remaining Chinese exporters; and (v) variety imported from the rest of the world."

The Arbitrator then determined how to implement this calculation methodology with respect to each of the anti- dumping orders at issue.

Following its calculation, the Arbitrator determined that the level of nullification or impairment of benefits accruing to China as a result of the WTO-inconsistent methodologies used by the United States in anti-dumping proceedings concerning products imported from China is 3,579.128 million USD per annum.

Therefore, in accordance with Article 22.4 of the DSU, China may request authorization from the DSB to suspend concessions or other obligations at a level not exceeding 3,579.128 million USD per annum, said the Arbitrator.