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TWN Info Service on WTO and Trade Issues (Sept20/14)
17 September 2020
Third World Network


US duties on Chinese goods held WTO-illegal
Published in SUNS #9191 dated 17 September 2020

Geneva, 16 Sep (Kanaga Raja) – A dispute panel at the World Trade Organization (WTO) has ruled that US measures imposing additional duties on certain goods imported from China are inconsistent with the provisions of the GATT 1994.

The duties had been imposed pursuant to the findings of an investigation under Section 301 of the US Trade Act of 1974 that the United States Trade Representative (USTR) had carried out into China’s practices relating to technology transfer, intellectual property, and innovation.

In a ruling (WT/DS543/R) issued on 15 September, the Panel concluded that the US measures at issue are inconsistent with Articles I:1, II:1(a) and II:1(b) of the GATT 1994.

The Panel further concluded that, to the extent that the measures at issue are inconsistent with certain provisions of the GATT 1994, they have nullified or impaired benefits accruing to China under that agreement within the meaning of Article XXIII:1(a) of the GATT 1994.

The Panel recommended that the United States bring its measures into conformity with its obligations under the GATT 1994.

BACKGROUND

According to the Panel report, the dispute concerns China’s challenge to US measures, imposing additional ad valorem duties on certain products imported from China, pursuant to the findings of an investigation that the USTR carried out into China’s acts, policies, and practices related to technology transfer, intellectual property, and innovation under Section 301 of the Trade Act of 1974.

On 4 April 2018, China requested consultations with the United States pursuant to Article 4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) and Article XXIII of the General Agreement on Tariffs and Trade 1994 (GATT 1994) with respect to the measures and claims at issue.

On 6 July 2018, 16 July 2018, and 18 September 2018, in addenda to its initial request for consultations, China requested further consultations with the United States on subsequent related legal instruments.

Consultations were held on 28 August 2018 and 22 October 2018 but failed to resolve the dispute.

On 6 December 2018, China requested the establishment of a panel, and at its meeting on 28 January 2019, the Dispute Settlement Body (DSB) established a panel pursuant to China’s request.

According to the Panel report, China challenged the following measures adopted by the United States:

* Additional ad valorem duties of 25%, imposed on 20 June 2018 on a list of 818 tariff sub-headings with an approximate annual trade value of USD 34 billion of products imported from China, as of 6 July 2018 (List 1).

* Additional ad valorem duties, imposed on 21 September 2018 on a list of 5,745 tariff sub-headings with an approximate annual trade value of USD 200 billion of products imported from China, as of 24 September 2018 (List 2).

The Notice of 21 September 2018 set the rate of additional ad valorem duties at 10% until the end of the year, and announced that the rate of additional duties would increase to 25% on 1 January 2019.

The increase in the rate of additional duties was postponed twice. On 9 May 2019, the United States increased the rate of additional duties on List 2 products from 10% to 25%, as of 10 May 2019.

China requested that:

* The Panel find that the United States has violated Article I:1 of the GATT 1994 through its application of additional tariffs that apply only to products originating from China; and

* The Panel find that the United States has violated Articles II:1(a) and (b) of the GATT 1994 through its application of additional tariffs in excess of those contained in its Schedule.

China further requested that the Panel recommend that the United States bring its measures into conformity with its obligations under the GATT 1994.

According to the Panel report, in response to China’s challenge, the United States raised three sets of arguments: (i) that the parties have reached a solution within the meaning of the last sentence of Article 12.7 of the DSU and the Panel should confine its report to a brief statement of the facts and a notation that a settlement has been reached; (ii) that the increase of the rate of additional duties on List 2 products from 10% to 25% falls outside the Panel’s terms of reference; and (iii) that in any case, the measures at issue are justified under Article XX(a) of the GATT 1994.

FINDINGS AND CONCLUSIONS

On whether the parties have reached a solution within the meaning of Article 12.7 of the DSU, the Panel noted that during the Panel’s second substantive meeting with the parties, the United States pointed to the Economic and Trade Agreement between the two countries (Phase One Agreement) as evidence that a bilateral negotiation process is ongoing and has been fruitful.

China expressly stated that the Phase One Agreement is not legally relevant in the current dispute, because (i) it does not address the measures at issue, and (ii) the additional duties subject to this dispute remain in effect.

The Panel said that in its view, China’s responses to the United States’ arguments confirm that China has not relinquished any of its rights under the DSU to pursue proceedings against the United States in the current dispute.

“China’s strong opposition to the existence of a mutually satisfactory solution within the meaning of Article 12.7 serves to further underline that there is no mutually agreed resolution of the matter before the Panel.”

Additionally, there is no written document that might otherwise serve as evidence of the existence of a mutually agreed solution to the matters raised in this dispute, merely an assertion by the United States that the conduct of the parties in pursuing various bilateral discussions or dialogues on trade issues should be sufficient in this regard.

Without ruling on the implications of the absence of notifying the DSB of any such mutually agreed solution or settlement, the Panel also noted that no mutually agreed solution has been notified to the DSB under Article 3.6 of the DSU.

Against this background, the Panel concluded that the parties have not reached a mutually agreed solution that would deprive China of its right to adjudication and entitlement to recommendations and rulings by the Panel.

With regard to the measures covered by the Panel’s terms of reference in this dispute, the Panel noted that the parties disagree on the scope of the Panel’s terms of reference, specifically whether the Panel is entitled to and should make findings on the increase of the rate of additional duties on List 2 products from 10% to 25% of 9 May 2019.

The Panel said that in its view, it is appropriate to consider the increase of the rate of additional duties on List 2 products from 10% to 25% of 9 May 2019 as an amendment of the additional duties of 10% imposed on List 2 products on 21 September 2018.

For these reasons, the Panel considered that the measures covered by its terms of reference are:

a. The additional duties of 25% imposed on List 1 products on 20 June 2018; and

b. The additional duties imposed on List 2 products, at the initial rate of 10%, as imposed by the Notice of 21 September 2018, and at the rate of 25%, as imposed by the amendment of this measure in the Notice of 9 May 2019.

On whether the measures at issue are inconsistent with Articles I:1 and II:1(a) and (b) of the GATT 1994, the Panel concluded that the measures at issue are prima facie inconsistent with Article I:1, because the additional duties apply only to products from China and thus fail to accord to products originating in China an advantage granted to the like product originating in all other WTO Members.

The measures at issue are also prima facie inconsistent with Articles II:1(a) and (b), because the additional duties are ordinary customs duties applied in excess of the rates to which the United States bound itself in its Schedule and accord imports from China “less favourable treatment” than that provided in the United States’ Schedule.

The Panel then assessed the US argument that any inconsistency of the measures with provisions of the GATT 1994 is justified as necessary to protect US public morals pursuant to Article XX(a) of the GATT 1994.

According to the Panel report, the United States asserts that any inconsistency of the measures at issue with provisions of the GATT 1994 is justified as necessary to protect US public morals pursuant to Article XX(a) of the GATT 1994.

This is because, according to the United States, China’s acts, policies, and practices addressed in the relevant Section 301 Report amount to “state-sanctioned theft and misappropriation of US technology, intellectual property, and commercial secrets” which violates the public morals prevailing in the United States.

The Panel assessed (i) whether the United States has raised a public morals objective within the meaning of Article XX(a) of the GATT 1994; (ii) whether the measures are designed to protect the public morals objective as invoked by the United States; and (iii) whether the measures are necessary to protect this objective.

In its analysis, the Panel said that it considers that every case must be assessed on its own merits.

The Panel observed that the design test is a preliminary step aimed at assisting and informing the further analysis of whether a measure is provisionally justified under sub-paragraph (a) of Article XX.

That said, it will sometimes be the case that the application of this test at a general level will not necessarily provide useful information that informs this further analysis, it said.

In the present case, the Panel said it does not consider that the “design test”, if there is one, is an undemanding task to perform.

Having said this, the Panel said that it is not convinced that, in the absolute, the imposition of additional duties would always be incapable of protecting public morals or would never be incapable of protecting public morals.

In the circumstances of this case, the Panel said that it found it difficult to assess at any general level whether the measures at issue are “designed” to protect public morals and is therefore not convinced that the intermediate step of such a design test is helpful for its analysis.

The more detailed design aspects and consequential understanding of measures may only become apparent once an analysis of the necessity of the measures is advanced further, it added.

In this regard, the Panel agreed with the Appellate Body that it must not structure its analysis of the “design” step in such a way as to lead it to truncate its investigation prematurely and thereby foreclose consideration of crucial aspects of the “necessity” analysis.

The Panel recalled its preference for a holistic approach to determining whether the measures at issue are “necessary to protect public morals” within the meaning of Article XX(a).

In the process of this holistic analysis, the Panel said that it considers that whether an appropriate nexus exists between the products subject to the additional duties and the public morals objective as invoked by the United States pertains rather to the assessment of the line or balance between the trade-restrictive measures that are acceptable as necessary to protect public morals, and those that are not.

For this reason, the Panel said that it will address the parties’ (and third parties’) arguments related to the nexus between the products subject to additional duties and the public morals objective as invoked by the United States, in the context of the necessity analysis.

In its preliminary conclusion on “necessity” after the initial “weighing and balancing” of three factors, the Panel said that the public morals objective as invoked by the United States reflects societal interests and values that appear to be highly important in the United States, and that the measures at issue have significant effects on international trade.

Having assessed the measures adopted by the United States on a holistic basis, the Panel said that it considers, however, that the United States has not provided an explanation that demonstrates how the measures contribute to the public morals objective as invoked by the United States.

More specifically, the United States has not demonstrated that there is a genuine relationship of ends and means between the measures at issue and the public morals objective pursued by the United States.

With respect to the imposition of additional duties on List 1 products, the United States has not sufficiently explained how a genuine relationship of ends and means exists between the products subject to additional duties and the public morals objective as invoked by the United States.

This is also the case with respect to the initial narrowing of the range of List 1 products, or the adoption of Procedures for exclusion of particular products from the additional duties on List 1 products, said the Panel.

With respect to the imposition of additional duties on List 2 products, the United States has clearly stated that it imposed these additional duties because China had “made clear” that it would not change its policies and as a response to measures China had imposed on the United States following the imposition by the United States of additional duties on List 1 products.

The Panel said it does not consider that the contribution of the imposition of additional duties on List 2 products to the achievement of the public morals objective as invoked by the United States can be “derived” from the (potential) contribution of the imposition of additional duties on List 1 products.

Moreover, the Panel added, the United States has not provided any other evidence or explanation that would demonstrate a genuine relationship of ends and means between the measures comprising the additional duties on List 2 products and the public morals objective invoked by the United States.

In its conclusion on whether the measures are provisionally justified under sub-paragraph (a) of Article XX of the GATT 1994, the Panel said that the nature and purpose of Article XX – to allow WTO Members to adopt measures that would be otherwise WTO-inconsistent to protect their public morals – cannot be reconciled with a situation where WTO Members would be allowed to restrict any trade from any WTO Member with the mere invocation of what might, in an abstract sense, be considered a valid policy objective within the meaning of Article XX of the GATT 1994.

It said the scope of the restrictive measures justifiable under Article XX(a) is determined by the public morals objective invoked and by the requirement that the measures be necessary to achieve this objective.

In other words, there is a requirement that there be a nexus between the challenged measure and the interest protected by the policy objective at issue, the Panel added.

In the case of Article XX(a), this requirement is specified by the term “necessary to protect public morals”.

This is especially important in the context of Article XX(a), because the concept of “public morals” is a broad one, that may be based on considerations specific to individual WTO Members, said the Panel.

As it had earlier emphasized, the Panel said the invocation of each Article XX defence needs to be considered carefully based on the facts relating to the particular sub-paragraph of Article XX relied on and the challenged measures.

The Panel noted that the text of Article XX(a) itself limits the range of measures that WTO Members are allowed to rely on.

To fall within the limited scope of Article XX(a), the measures have to concern public morals. Moreover, the measures have to be “necessary” for the achievement of the public morals objective invoked.

In other words, if the adopting WTO Member does not explain how the challenged measures contribute to the achievement of the public morals objective pursued, by showing that there is a genuine relationship of “ends and means” between these measures and the public morals objective, this is a strong indication that the challenged measures have exceeded the limits acceptable under Article XX(a) of the GATT 1994, said the Panel.

As elaborated in its earlier analysis, having assessed the evidence on a holistic basis in the present dispute, the Panel concluded that the United States has not provided an explanation that demonstrates how the imposition of additional duties on the selected imported products contributes to the achievement of the public morals objective as invoked by the United States.

It follows that the United States has not adequately explained how the measures the United States has chosen are necessary to protect such public morals, said the Panel.

On whether the United States has demonstrated that the measures satisfy the requirements of the chapeau of Article XX of the GATT 1994, the Panel recalled its conclusion that the United States has not provided sufficient evidence or explanation to substantiate its assertion that the measures are necessary to protect the “standards of right or wrong” invoked by the United States and which are considered as public morals in the United States.

Prior WTO adjudicators have traditionally refrained from assessing the conformity with the chapeau of measures that they have found not to be provisionally justified under various sub-paragraphs of Article XX, the Panel noted.

In light of its conclusion that the United States has not adequately explained how the measures chosen by it are necessary to protect public morals, the United States has not met its burden of demonstrating that the measures are provisionally justified under Article XX(a).

Therefore, the Panel said that it does not consider it necessary to make findings on whether the United States has demonstrated that its measures satisfy the requirements of the chapeau of Article XX.

In its overall findings, the Panel concluded that:

a. the parties have not reached a mutually satisfactory solution within the meaning of Article 12.7 of the DSU, or otherwise relinquished their rights to pursue WTO dispute settlement action on the measures at issue in this dispute;

b. all measures challenged by China fall within the Panel’s terms of reference, and it is appropriate for the Panel to make findings and recommendations with respect to the first measure as identified in China’s panel request (additional duties of 25% on List 1 products), and the second measure as amended on 9 May 2019 (additional duties of 25% on List 2 products);

c. the challenged measures are prima facie inconsistent with Articles I:1, II:1(a) and II:1(b) of the GATT 1994; and

d. the United States has not met its burden of demonstrating that the measures are provisionally justified under Article XX(a) of the GATT 1994.

CONCLUDING COMMENTS BY THE PANEL

In some additional observations, the Panel said that it is very much aware of the wider context in which the WTO system currently operates, which is one reflecting a range of unprecedented global trade tensions.

“At the same time, it is not the role of this Panel to draw any legal conclusions or make recommendations on any matters other than those it has been specifically tasked to deal with through these dispute settlement proceedings,” it said.

In this connection, the Panel recalled that the Government of the United States has not, up to the present time, initiated action under the WTO Dispute Settlement Understanding with respect to any measures China has imposed in response to the United States’ measures at issue in this dispute.

The Panel emphasized that pursuant to the requirements of Article 11 of the DSU, it has sought to perform diligently its adjudicatory role in relation to the matters that fall within the terms of reference of these dispute settlement proceedings.

Additionally, the Panel noted that the panel process is structured in such a way that time is available for the parties to take stock as proceedings evolve and further consider opportunities for mutually agreed and satisfactory solutions.

Accordingly, recalling Article 3.7 of the DSU that highlights that the aim of the dispute settlement system is to achieve a positive solution to a dispute, the Panel expressed its ongoing encouragement to the parties to pursue further efforts to achieve a mutually satisfactory solution to the matters that have been raised before it in this dispute.

 


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