China, US Trade Remedy Dispute Advances to WTO Appeals Stage

10 September 2014

The WTO Appellate Body is set to hear appeals from both the US and China over a July panel ruling regarding Washington’s trade remedy practices, after both sides filed submissions on the subject during the past few weeks.

This particular case (DS437) focuses on 17 countervailing duty (CVD) investigations that the US Commerce Department conducted from 2007 through 2012, on products ranging from solar panels and wind turbines to kitchen shelving and steel sinks. These types of duties are meant to counter instances of unfair subsidies, should they be found to exist.

Beijing had charged that these particular investigations violated global trade rules, and the panel had largely ruled in its favour. However, the panel rejected the Asian economy’s claim regarding whether the US Commerce Department – which conducts trade remedy probes for the US – was correct in deeming that the alleged subsidies were specific to certain enterprises. (See Bridges Weekly, 17 July 2014)

Trade remedies have long been a major sticking point between the US and China, with the two economic giants having resorted to the WTO’s dispute settlement mechanism several times in the past to clarify what does and does not qualify as legal practice in this area.

For instance, of the 12 disputes that the Asian country has brought to the WTO since joining in 2001, approximately half have involved US trade remedy practices. The US has also lodged its own share of complaints on China’s procedures in this area.

Market price distortions

In its appeal, China has asked that the Appellate Body reverse the panel’s finding that upheld the US Commerce Department’s decision to use “out-of-country” prices as potential benchmarks in the CVD cases under scrutiny.

The US agency had chosen to use prices where these products were sold to other countries, rather than their private sector Chinese equivalent, on the grounds that the latter prices were distorted due to government intervention.

In its appeal, China claims that the panel should have used the legal standard for “financial contribution” outlined under a different section in the WTO’s Agreement on Subsidies and Countervailing Measures (SCM) when considering whether the relevant state-owned enterprises (SOEs) are public bodies. This would have been considered prior to determining any market price distortions, China said, and thus whether the use of out-of-country benchmarks was appropriate.

Enterprise-specific?

China has also asked the Appellate Body to review the panel’s interpretation and application of Article 2.1 of the SCM Agreement, which outlines how to determine if a subsidy is specific to certain enterprises of the country under investigation.

These principles include those scenarios where a subsidy appears to be specific, along with the factors required to conclude that a subsidy is in fact specific, such as the use of a “subsidy programme” by a limited number of certain enterprises.

Under the SCM Agreement, the provision of goods or services by a government shall not be considered as conferring a benefit, unless the provision is done in exchange for remuneration that is less – or greater – than adequate. What the level of “adequate remuneration” may be, the SCM Agreement says, depends on the prevailing market conditions for the relevant good or service in the country of provision or purchase.

In the appeal, China claims that the panel erred in deeming that “the consistent provision by the SOEs in question of inputs for less than adequate remuneration” provided an objective basis for the US Commerce Department to sufficiently identify “subsidy programmes” within the meaning of the relevant SCM article.

Facts available

China has also asked the Appellate Body to reverse the panel’s finding that the US did not violate Article 12.7 of the SCM Agreement in reaching its “adverse facts available” determination.

Article 12.7 permits investigative authorities to carry out trade remedy probes even in cases where the parties under review do not cooperate. In this case, investigators are allowed to replace missing information with whichever facts are at their disposal – known in trade shorthand as “facts available.”

China claims that the panel failed to apply the proper standard of review, namely by not examining in the case of each challenged “adverse available facts” determination whether there was a reasoned and adequate explanation – separate from the published determination itself – that provided the factual basis for the US Commerce Department’s conclusion.

US raises procedural questions

Five days after China’s appeal notice, the US submitted its own appeal, challenging the panel’s finding regarding a procedural aspect of Beijing’s panel request. In particular, the United States argues that the panel erred in finding that China’s request provided enough of a summary of the complaint’s legal basis in order to present the problem clearly.

The US has asked the Appellate Body to reverse the panel’s findings and as a consequence, to declare moot certain substantive aspects, given that China’s claims – such as the use of facts available – were outside the panel’s terms of reference.

Next steps

Under WTO rules, the Appellate Body can review certain aspects of law and legal interpretation in the original panel ruling, but will generally not interfere with any factual findings. The judges are expected to issue a report within three months following the close of the appeal period.

ICTSD reporting.

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