WTO Panel Grants China Victory in US Dispute over State-Owned Enterprises

17 July 2014

A WTO dispute panel has found that the US was largely in violation of global trade rules in a series of countervailing duty investigations against Chinese exporters. The ruling, issued on Monday, brings back to the fore the long-running debate between the two economic giants over China’s state-owned enterprises (SOEs), and the impact these have on trade.

Washington has repeatedly argued that Chinese SOEs are the recipients of unfair government support – thus making it easier for their producers to be more competitive on the global market – and has lobbied for Beijing to reform them accordingly.

The WTO case (DS437) focuses specifically 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. Such duties are meant to counter instances of unfair subsidies, should they be found to exist.

China had challenged the initiation decisions, as well as the preliminary and final determinations issued by the US agency in these cases, as being inconsistent with international trade rules. The goods affected, Beijing has said, are worth US$7.2 billion in export value, and are thus of significant trade interest to the Asian giant.

State-owned enterprises in focus

In the dispute, Beijing had disagreed with the US Commerce Department’s findings in 12 of the 17 investigations that certain SOEs either majority-owned or controlled by the Chinese government were “public bodies” within the meaning of the Subsidies and Countervailing Measures (SCM) Agreement.

Under the SCM article in question, “a subsidy shall be deemed to exist if there is a financial contribution by a government or any public body within the territory of a member,” though that is not the only element involved in determining the presence of a subsidy.

The panel recalled a past ruling by the WTO Appellate Body, which serves as the global trade body’s highest court. The Appellate Body had found that the key consideration in identifying a public body is whether the latter has the authority to perform governmental functions.

Therefore, the panel said that a government simply owning or controlling an entity is not enough to establish that it is a public body, and a further inquiry would be needed. As a result, the panel found that the US Commerce Department’s rationale behind the “public bodies” finding in those 12 countervailing duty investigations cannot be justified under WTO rules.

Default policy?

Another key point in the case involved a July 2009 final determination that Commerce made involving kitchen shelving products. In this instance, the US agency had said that it generally considers majority government-owned enterprises to be public bodies unless that assumption is proven otherwise. For China, this “rebuttable presumption,” as it is known in legal jargon, is inconsistent with WTO rules.

The panel agreed with China that the scope of this policy concerns the default legal standard that the Commerce Department applies to determine whether a majority government-owned entity is a public body – going beyond simply using a certain methodology repeatedly across specific cases. For the panel, this made the policy susceptible to a WTO challenge.

Moreover, the panel said, this norm causes the US agency to consider majority-ownership enough to deem a company a public body, and restricts Commerce to considering any other evidence purely on its own initiative. Therefore, the panel concluded that this policy ran contrary to the past Appellate Body ruling that government ownership is not enough to establish that an entity is a public body.

Regional specificity, export restraints

China had also claimed that the US Commerce Department had failed to establish in seven of the investigations that the subsidies in question were indeed limited to enterprises located within a designated geographical region, as required under Article 2.2 of the SCM Agreement.

The panel supported China’s argument that the fact that the land in question is located within an industrial park or economic development zone – and that this area is within the seller’s jurisdiction – is insufficient by itself to establish that there are limits to accessing the subsidy.

As a result, the panel found that six of the seven challenged US investigations were inconsistent with WTO rules.

The panel also considered whether an investigating authority can launch a CVD investigation based on claims that a foreign government’s export restraints – and their effects on that same country’s domestic prices – constitute a financial contribution.

In investigations involving magnesia bricks and seamless pipe, the US Commerce Department had found that the information provided in the applications regarding certain Beijing export restraints was “adequate evidence tending to prove or indicate” the presence of a government-provided financial contribution, namely by entrusting or directing a private body to provide these products to domestic consumers.

The panel disagreed. The evidence in the applications is insufficient on conceptual grounds, they said, given that it pertains only to the export restraints themselves and their price-suppressing effects, and not to other Chinese government action. As a result, there was not enough evidence to prove that there was a financial contribution in the form of government-entrusted or government-directed provision of goods – making the launch of these two CVD investigations WTO-inconsistent.

Other claims

The panel ruling was not entirely in China’s favour, however, a fact that US officials were quick to note.

“The WTO panel’s decision to reject many of China’s challenges to US countervailing duties on unfairly subsidised Chinese imports is a victory for American businesses and workers,” US Trade Representative Michael Froman said in a statement.

Regarding the areas where Washington did not succeed, the trade official said that the US was now evaluating its options and would take “all appropriate steps” to ensure that American trade remedies continue to be strong and effective.

Among the areas where the US won was the panel’s decision to partially reject China’s claim regarding the US Commerce Department finding that the alleged subsidies were specific to certain enterprises.

The panel also rejected China’s claims against the US agency’s findings on benefit calculation, financial contribution by public bodies, and specificity to justify the initiation of countervailing duty investigations, as well as on the use of “adverse facts available.”

ICTSD reporting.

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