Nearly a month after losing a case to India at the World Trade Organization (WTO) after it ruled against the country in a solar domestic content requirement trade case, the United States has lost another case to a rising Asian economy, China.

The WTO’s appellate body has upheld the findings of a dispute panel which concluded that the United States had not fully complied with an earlier WTO ruling regarding U.S. countervailing (CV) duties levied on a range of imported Chinese goods. These goods also included solar panels and wind towers originating in China.

In upholding the compliance panel report in its entirety, the appellate body ruled that the U.S. Department of Commerce’s (USDOC) determination in the investigations was not inconsistent with the WTO’s Agreement on Subsidies and Countervailing Measures (SCM Agreement).  It also ruled that the USDOC’s benefit and specificity determinations were inconsistent with the SCM Agreement, respectively.

If this case is not successfully resolved in the Dispute Settlement Body, the ruling could lead to retaliation from China if the contested tariff is not removed. However, the US had recently exempted bifacial and a few other types of solar panels from the levy of safeguard duty, which was considered a big win for Chinese module suppliers. Any retaliation from China could further provoke the US.

The Case in a Nutshell

In May 2016, China had initiated a WTO dispute proceeding to determine whether the United States had complied with its earlier ruling regarding the U.S. countervailing duties imposed on certain imported goods from China.  The duties were imposed as the result of 17 investigations initiated by the USDOC between 2007 and 2012.

Following the original dispute, USDOC revised 12 of the CV duty determinations. In the revised determinations, USDOC concluded that Chinese state-owned and state-invested enterprises (SOEs/SIEs) provided inputs to Chinese firms– such as steel billets, stainless steel coils, hot-rolled steel, and polysilicon – for less than adequate remuneration. As a result, the U.S. CV duty measures in these 12 cases were maintained.

This USDOC conclusion was based on two main findings:

SOE/SIE providers of inputs were “public bodies” (state-owned) according to the SCM Agreement.

The price distortions in the domestic market in China justified using third-country prices as a benchmark for assessing the benefit granted to the Chinese exporters under the SCM Agreement.

China accused USDOC of continuing to apply unlawful standards and methodologies in its CV investigations. A compliance panel was established in July 2016 to review China’s claims.

In its ruling issued on March 2018, the compliance panel stated that China had failed to demonstrate that the USDOC’s public body analysis was inconsistent with the dispute settlement body’s rulings and recommendations and with Article 1.1(a) 1 of the SCM Agreement. It added that China had not otherwise demonstrated that the USDOC had erred in treating Chinese providers of steel and other inputs as public bodies.

According to the compliance panel, China had demonstrated that the USDOC’s recourse to the third country prices for assessing the benefit granted to Chinese exporters was inconsistent with Article 14(d) of the SCM Agreement and that China had demonstrated that the USDOC’s revised specificity determinations were also inconsistent with the agreement.

Later, the United States filed an appeal in April 2018 challenging several of the compliance panel’s findings. China filed its appeal in May 2018 challenging certain findings.

Appellate Body Ruling

The body upheld the compliance panel’s findings on public bodies.  In doing so, it rejected China’s claim, and agreed with the compliance panel, that Article 1.1(a)(1) does not prescribe a connection of a particular degree or nature that must necessarily be established between an identified government function and the particular financial contribution at issue.

“While an entity’s conduct or practice may constitute evidence relevant to the inquiry, an investigating authority need not necessarily focus on every instance of conduct in which that entity may engage, or on whether each such instance of conduct is connected to a specific government function,” it noted.

The appellate body also upheld the compliance panel’s finding that the USDOC’s public body determinations were not based on an improper legal standard.  Also, as a consequence of the rejection of other appeals by China, the appellate body let stand the compliance panel’s finding that China did not demonstrate that the USDOC’s Public Bodies Memorandum is inconsistent with the agreement.

Further, it upheld the compliance panel’s finding that Article 14(d) does not limit the possibility of resorting to out-of-country prices to the situation in which the government effectively determines the price at which the good is sold. The determination of whether the in-country prices are distorted must be made case by case, based on the relevant evidence in the particular investigation and taking into account the characteristics of the market being examined, and the nature, quantity, and quality of the information on the record.

The appellate body also upheld the compliance panel’s finding that the USDOC had failed to explain in several of the CV proceedings how government intervention in the market resulted in domestic prices for the inputs deviating from a market-determined price, and that the USDOC failed to consider the price data on the record. An investigator’s determination of how the prices in markets are in fact, distorted as a result of government intervention must be based on positive evidence, the body underlined.

It upheld the compliance panel’s finding that the United States had acted inconsistently with Article 2.1(c) in eleven of the proceedings in this dispute.  The body agreed with the compliance panel that while the evidence of ‘a systematic series of actions’ may be particularly relevant in the context of an unwritten program, the mere fact that the financial contributions have been provided to certain enterprises is not sufficient to demonstrate that such financial contributions have been granted pursuant to a plan for purposes of Article 2.1(c).

A Geneva-based trade official informed Mercom that the appellate body’s ruling and earlier compliance panel ruling will now go to the WTO’s Dispute Settlement Body, where WTO members will formally adopt the ruling.  That should take place within the next 60 days.

“There is no timeline for the U.S. to comply – they were given a timeline when the original panel in the dispute ruled against the U.S. measures (the deadline was 1 April 2016).  The U.S. had said it had revised the measures to bring them in line with the WTO requirements. China had said the U.S. did not comply by the deadline, and the compliance panel and the appellate body agreed with China on two aspects.  In line with a procedural agreement which China and the U.S. concluded in April 2016, China can now ask for the WTO authorization to “suspend concessions” (read impose retaliatory duties) against the U.S. for Washington’s failure to bring the duty measures in line with the WTO requirements.  If China makes such a request, the U.S. can contest the amount of sanctions proposed by China, after which a WTO arbitrator would be asked to determine the correct amount,” added the trade official.

USTR Stance on The Matter

After the ruling was circulated by the WTO, the Office of the United States Trade Representative (USTR) issued a communique stating that the WTO appellate report undermines WTO rules, making them less effective to counteract Chinese state-owned enterprises (SOEs) subsidies that are harming the U.S. workers and businesses and distorting markets worldwide.

According to USTR, the appellate report recognizes that the United States has proved that China uses state-owned enterprises (SOEs) to subsidize and distort its economy.  Nonetheless, the majority in the report says that the United States must use distorted Chinese prices to measure subsidies unless the U.S. provides even more analysis than the hundreds of pages in these investigations. This conclusion ignores the findings of the World Bank, OECD working papers, economic surveys, and other objective evidence, all cited by the United States.

The USTR reiterated that this report also illustrates the concerns the United States has been raising about the appellate body’s functioning, including adding to WTO member obligations and diminishing their rights, exceeding the mandatory 90-day deadline for reports, permitting individuals to continue to serve on appeals past the end of their terms, engaging in fact-finding on appeal, and treating prior reports as precedent. The United States is determined to take all necessary steps to ensure a level playing field so that China and its SOEs stop injuring U.S. workers and businesses.

This new ruling adds another wrinkle to the trade war between the US and China.

Image credit: By P199 – Own work, CC BY-SA 4.0