TWN Info Service on WTO and Trade Issues (Jan22/15)
28 January 2022
Third World Network

China can seek $645 million in retaliation in US CVD dispute
Published in SUNS #9502 dated 28 January 2022

Geneva, 27 Jan (Kanaga Raja) – A panel of arbitrators at the World Trade Organization has determined that China may impose countermeasures at a level not exceeding USD 645.121 million annually as a result of the failure of the United States to comply with an earlier WTO ruling concerning countervailing duty (CVD) measures that the US has imposed on certain products from China.

In a decision (WT/DS437/ARB) issued on 26 January, the three-member panel of arbitrators (also referred to as the Arbitrator), determined that the level of N/I (nullification or impairment) of benefits accruing to China as a result of the WTO-inconsistent methodologies used by the United States in the CVD proceedings concerning products imported from China is USD 645.121 million per annum.

Therefore, in accordance with Article 22 of the Dispute Settlement Understanding (DSU), China may request authorization from the Dispute Settlement Body (DSB) to suspend concessions or other obligations at a level not exceeding USD 645.121 million per annum, said the Arbitrator.

A statement issued by USTR Spokesperson Adam Hodge on 26 January said: “The deeply disappointing decision today by the WTO arbitrator reflects erroneous Appellate Body interpretations that damage the ability of WTO Members to defend our workers and businesses from China’s trade-distorting subsidies.”

“Today’s decision reinforces the need to reform WTO rules and dispute settlement, which have been used to shield China’s non-market economic practices and undermine fair, market-oriented competition,” the statement added.

(On China’s statement on the WTO award, see separate story below, titled “China criticizes US for failing to implement WTO rulings.”)

Providing some background, the Arbitrator’s report said that the dispute between China and the US commenced on 25 May 2012, upon the filing of China’s original request for consultations with the United States.

According to the Arbitrator’s report, on 20 August 2012, China requested the establishment of a panel.

The panel and the Appellate Body in the original proceedings found that the United States acted inconsistently with certain provisions of the SCM (Subsidies and Countervailing Measures) Agreement.

The DSB adopted the Appellate Body report and the panel report, as modified by the Appellate Body report, on 16 January 2015.

On 9 October 2015, an arbitrator under Article 21.3(c) of the DSU determined that the RPT (reasonable period of time) for the United States to implement the DSB recommendations and rulings would expire on 1 April 2016.

The compliance proceedings started with China’s request, on 13 May 2016, for consultations with the United States with respect to the alleged failure of the United States to implement the recommendations and rulings of the DSB in this dispute.

On 8 July 2016, China requested the establishment of a compliance panel.

As upheld by the Appellate Body, the compliance panel concluded, in relevant part, that the United States acted inconsistently with: (i) Articles 1.1(b) and 14(d) of the SCM Agreement in the Pressure Pipe, Line Pipe, OCTG (oil country tubular goods), and Solar Panels Section 129 proceedings; and (ii) Article 2.1(c) of the SCM Agreement in the Section 129 proceedings with respect to all ten products at issue.

The DSB adopted the Appellate Body report and the panel report in the compliance proceedings, as upheld by the Appellate Body report, on 15 August 2019.

On 17 October 2019, China requested authorization from the DSB to suspend concessions or other obligations at an annual amount of USD 2.4 billion, with respect to goods under the agreements described in Article 22.3(g)(i) of the DSU.

On 25 October 2019, the United States objected to China’s proposed level of suspension.

At the DSB meeting of 28 October 2019, the DSB took note that the matter raised by China had been referred to arbitration pursuant to Article 22.6 of the DSU.

According to the Arbitrator’s report, in its methodology paper, China reduced the amount of concessions that it seeks to suspend to USD 1.02 billion.

During the proceedings, China further reduced this amount to USD 788.75 million as a result of adjustments to its approach, in part due to agreements with certain arguments made by the United States.

According to its latest calculations, the US considers that the proper level of N/I – and hence, the suspension of concessions that China could be authorized to impose – should be no more than USD 106 million annually.

“In light of the parties’ arguments and evidence in these proceedings, we have determined that the appropriate level of N/I is USD 645.121 million per annum,” said the Arbitrator.

The Arbitrator calculated this figure based on the parties’ agreement to use a two-step Armington model similar to that applied in the arbitration decisions in US – Washing Machines (Article 22.6 of the DSU – US) and US – Anti- Dumping Methodologies (China) (Article 22.6 – US).

“We have also taken into account the parties’ agreement on a “net-of-duties” approach whereby duty payments are excluded from the final calculation of N/I,” said the Arbitrator.

The Arbitrator noted that in its methodology paper, China indicated that the present proceedings cover a total of eleven CVD investigations, in particular the Section 129 proceedings relating to (i) Pressure Pipe; (ii) Line Pipe; (iii) Lawn Groomers; (iv) Kitchen Shelving; (v) OCTG; (vi) Wire Strand; (vii) Seamless Pipe; (viii) Print Graphics; (ix) Aluminum Extrusions; (x) Steel Cylinders; and (xi) Solar Panels.

The Arbitrator decided to exclude Lawn Groomers from these proceedings in light of the parties’ agreement that the relevant countervailing duty (CVD) measures had been withdrawn before the end of the reasonable period of time (RPT) and are thus out of scope.

In calculating the figure of USD 645.121 million, the Arbitrator said they did not accept certain methodological suggestions proposed by the parties, which they describe as “adjustments” to the two-step Armington model applied in US – Washing Machines (Article 22.6 – US) and US – Anti-Dumping Methodologies (China) (Article 22.6 – US).

The Arbitrator declined the United States’ suggestion to take into account the anti-dumping duties imposed on the ten products at issue largely contemporaneously to the CVDs in question.

It is not evident how any impact of those anti-dumping duties would translate into what both parties agree should be the focus of this arbitration: the impact of the CVDs at issue on China’s market shares, said the Arbitrator.

The Arbitrator also rejected the United States’ suggestion to take into account the alleged impact of certain private investments and government measures in third countries other than China, the so-called “Rising Suppliers”, for lack of direct evidence for such impact and absent sufficient explanation of its exogeneity to the CVDs at issue.

China proposed that the Arbitrator apply a “nested approach” to elasticities of substitution under which micro- elasticities (i.e. elasticities of substitution among different import varieties), would be larger than macro-elasticities (i.e. elasticities of substitution between domestic and imported varieties).

As regards the specific ratio under such a nested approach, China suggested a “Rule of Two”, whereby micro- elasticities would be the double of macro-elasticities.

Conversely, the US suggested a “Rule of One”, with equal micro- and macro-elasticities.

The Arbitrator concluded that the United States has not demonstrated this alternative “non-nested approach”.

That said, the US has successfully called into question applying a nested approach with China’s proposed Rule of Two, it said.

The Arbitrator, therefore, rejected China’s proposed Rule of Two.

The Arbitrator said their calculations are based on a nested approach, with the ratio between micro- and macro- elasticities at the square root of two (i.e. approximately 1.41), as the most reasonable figure in light of the parties’ limited evidence.

As regards the counterfactual compliance scenario, the Arbitrator said that they have relied on the final CVD rates determined by the United States Department of Commerce (USDOC) in the relevant Section 129 proceedings as a starting point for the calculation of the duties that would have been WTO-consistent, as suggested by the United States.

Although these rates took effect a few weeks after the end of the RPT, their calculation has been multilaterally determined to be WTO-inconsistent in the compliance stage of the present dispute, and China’s request for suspension of concessions is based on the WTO-inconsistency of these determinations, the Arbitrator added.

“In the interest of prompt dispute settlement, we have decided to rely on these rates instead of those in force at the end of the RPT as suggested by China,” said the Arbitrator.

The parties agreed that the remedy year is 2017, and the Arbitrator said their calculation is based on this calendar year.

As for the calendar year prior to the imposition of the WTO-inconsistent CVDs at issue (year-prior), the parties agreed on the year-prior for four products and disagreed with regard to six products.

“Again, where the parties agreed, we followed them. For the six products where the parties disagreed, we decided to accept the earlier years-prior suggested by China,” said the Arbitrator.

The Arbitrator agreed with China about the importance of relying on data un-contaminated by the preliminary CVDs imposed in the subsequent calendar years alternatively advanced by the United States.

While the parties agreed on the key elasticity figures, they disagreed on numerous other data points necessary for the Arbitrator’s calculation, it said.

These disagreements concern the market shares of the US domestic variety and the varieties imported from China and the rest of the world (RoW) for each product at issue in the year-prior, as well as the total market size for each product in the remedy year.

The Arbitrator said that they have addressed these disagreements based on what they considered to be the most solid evidence, the most reasonable calculation methodology and the best available data – developing their own calculations where necessary