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WTO Rules on CV Duties Imposed by U.S. on Various Mainland Chinese Products

The World Trade Organisation Appellate Body ruled in a 104-page decision issued on 16 July that the United States has violated certain multi-lateral subsidy rules and, as a result, it could face retaliatory trade sanctions from mainland China if it does not change or remove the violative countervailing duties. The dispute concerned 17 CV duty investigations carried out by the U.S. Department of Commerce between 2007 and 2012 (during the George W. Bush and Barack Obama administrations) on various products exported from mainland China. The products include solar panels, wind towers, thermal and coated paper, tow-behind lawn groomers, kitchen shelving, steel sinks, citric acid, magnesia carbon bricks, pressure pipe, line pipe, seamless pipe, steel cylinders, drill pipe, oil country tubular goods, wire strand and aluminium extrusions.

In its CV duty analysis, the DOC classifies state-owned enterprises as “public bodies” if they are majority owned by the government, with their financial contributions to other companies then considered countervailable subsidies. Commerce’s methodology on non-market economies then incorporates third-country prices to calculate the actual CV duties.

Although the Appellate Body agreed with the United States that SOEs can be considered public bodies, it disagreed with the DOC’s CV duty calculation method in 12 of the 17 cases under scrutiny, arguing that third country prices can only be considered after the DOC has sufficiently analysed “how these interventions actually resulted in distortion of in-country prices for the inputs subject to the determinations at issue.”

This ruling was issued at a time of great uncertainty for the Appellate Body. This entity was established with a mandate for seven members and its rules dictate that three judges rule on each case, but the Trump administration has blocked the appointment of any new judges. The report at hand was issued and signed by Appellate Body members Thomas Graham, Ujal Singh Bhatia and Shree Servansing. Singh Bhatia is from India and Servansing is from Mauritius, while Graham, a U.S. national, previously served as deputy general counsel at the Office of the U.S. Trade Representative and chaired the international trade practice of a leading U.S. law firm.

Notably, one of these three members anonymously dissented from the majority opinion in a fairly lengthy discussion. The dissenting opinion focused on the specific precedent for defining a “public body” and especially on the appropriate calculation of subsidy values and prices. The dissenter argued that the majority opinion “appears also to have required an analysis of in-country prices as a condition for recourse to an alternative benchmark, even in cases where in-country prices are not available on the record.” After issuing this extended reasoning, the dissenting member supported the future use of his dissenting section as precedent, along with the majority ruling. “I respectfully suggest that it would be beneficial for the dispute settlement system if future litigants, and panels in adherence to their mandate under Article 11 of the DSU, would continue to take into account separate opinions such as this along with relevant past Appellate Body reports, without regarding either as necessarily determinative,” the dissenter observed.

In a 16 July press release, USTR said that while the ruling “recognizes that the United States has proved that China uses State-Owned Enterprises (SOEs) to subsidize and distort its economy” it also calls for the use of “distorted Chinese prices to measure subsidies, unless the U.S. provides even more analysis than the hundreds of pages in these investigations.” USTR further argued that the ruling “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.”

If the United States does not comply with the WTO ruling by recalculating the violative CV duties, mainland China could impose retaliatory sanctions against U.S. goods. Beijing has previously asserted that the U.S. measures affected about US$7.3 billion in annual mainland Chinese exports, which could translate into the amount of retaliation it might seek, but a final amount would have to be determined by the WTO. In the meantime Beijing has given no initial indication as to whether and when it might retaliate, instead calling on the United States to “take concrete measures immediately” to comply with the ruling.

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