WTO Appellate Body Issues Report In China's Challenge To U.S. Trade Laws

by King & Spalding
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[author: Pat Togni]

On July 7, the World Trade Organization (WTO) Appellate Body issued its report in United States – Countervailing and Anti-Dumping Measures on Certain Products from China (DS 449). This proceeding traces its roots to 2006, when the U.S. Department of Commerce (Commerce) received a petition to initiate a countervailing duty (CVD) investigation on coated free sheet paper (CFS Paper) from China. As part of those proceedings, Commerce published a Notice of Opportunity to Comment on whether the current economic situation in China warranted the application of the U.S. CVD law to a non-market economy (NME). Commerce concluded that it could determine whether China granted a subsidy to a Chinese producer and, consequently, that the CVD law could be applied to imports from China.

In 2007, GPX, one of the respondents in a different CVD investigation on imports of tires from China, filed an appeal in the U.S. Court of International Trade (CIT) challenging Commerce's application of CVD law to China. GPX argued that the U.S. Court of Appeals for the Federal Circuit's 1986 decision in Georgetown Steel—which affirmed Commerce's decision not to apply the CVD law to NMEs—prevented the application of the CVD law to any country classified as an NME. The United States successfully defended GPX's challenge in the CIT, which found that Commerce had discretion to apply or not apply the CVD law to NMEs under particular circumstances. GPX appealed the CIT's judgment to the Federal Circuit.

The Federal Circuit ultimately concluded that Commerce could not apply the CVD law to China as long as China was classified as an NME. The Federal Circuit reasoned that, in "amending and reenacting the trade laws in 1988 and 1994, Congress adopted the position that the [CVD] law does not apply to NME countries." By remaining silent about the issue when it subsequently amended the CVD law, the court reasoned, Congress "legislatively ratified" Georgetown Steel, which the Federal Circuit interpreted to hold that it is impossible for Commerce to identify subsidies in a country treated as an NME under the AD law. The Federal Circuit's opinion, however, never became final because a "mandate" was not issued. The United States petitioned for rehearing, thus staying the issuance of the mandate until the petition was either granted or denied. While the petition was pending and prior to the issuance of the mandate, Congress enacted legislation overturning the Federal Circuit's decision.

The GPX Legislation made explicit that the CVD law was applicable to imports from an NME. The GPX Legislation confirmed Commerce's longstanding interpretation of the CVD law. The legislation provided that the CVD law applies to imports from all countries, including NME countries, except where Commerce is unable to identify a subsidy due to the extent of state control. The GPX Legislation stated that these provisions were applicable in "all proceedings initiated under [the CVD law] on or after November 20, 2006," which corresponds to the date on which the CFS Paper CVD investigation was initiated. Following the passage of the GPX Legislation, on May 9, 2012, the Federal Circuit granted the United States' petition for rehearing, acknowledging that Congress "sought to overrule our decision in GPX." The court also agreed that GPX had been overturned before it had become final. Thus, the Federal Circuit found that the legislation effectively nullified its earlier decision.

On September 17, 2012, China initiated a WTO appeal, challenging (1) the GPX Legislation, claiming that the United States was in breach of its obligations under Article X of the GATT because the GPX Legislation was not published promptly, was applied retroactively, and did not implement the GPX Federal Circuit decision; and (2) the United States' failure to investigate whether double remedies arose from 25 parallel CVD and antidumping (AD) proceedings, initiated during 2006–2012, pursuant to its obligations under Article 19.3 of the Subsidies Agreement.

A WTO Panel in March 2014 rejected China's claims that the GPX Legislation violated the United States' WTO obligations under Article X of the GATT. The Panel also found that the United States failed to satisfy its obligation under Article 19.3 of the Agreement on Subsidies and Countervailing Measures, because it did not investigate whether a double remedy results when AD and CVD duties are applied concurrently in NME cases. Both the United States and China appealed aspects of the Panel's ruling.

In a report released on July 7, 2014, the WTO Appellate Body agreed with China that the Panel applied the wrong legal standard in rejecting China's challenge to the GPX Legislation. The Appellate Body determined, however, that it could not complete the analysis and apply the correct legal standard based on the Panel's factual findings. Thus, the Appellate Body did not rule that the GPX Legislation violates any WTO obligation. The Appellate Body also agreed with China that it had jurisdiction to consider China's double remedies claims.

The Appellate Body does not have the discretion to remand matters back to a panel for further proceedings. Thus, the Appellate Body's reversal of the Panel's ruling will have no effect on the U.S. CVD law. Most observers anticipate, however, that China will file a new challenge to the GPX Legislation, asking a new panel to apply the legal standard set forth by the Appellate Body.

Once the Appellate Body report is adopted by the WTO Dispute Settlement Body (DSB), the United States must bring its measures into compliance with the DSB's recommendations and rulings within a "reasonable period of time." To address the DSB's recommendations and rulings on double remedies, the United States will initiate so-called Section 129 proceedings to determine the appropriate steps. We expect that Commerce will re-open the record in each affected case to (1) establish whether or to what degree its measures are offsetting the same subsidies twice by imposing AD duties calculated under its NME methodology concurrently with CVD duties and (2) make any necessary adjustments to the AD rates to eliminate the double remedy.

If Commerce applies the same methodology it has used to implement findings of double remedies violations in past WTO cases, then Commerce will make downward adjustments to the dumping margins to account for the impact of the subsidies on the dumping margin. Commerce's standard practice has been to reduce dumping margins by the extent to which Commerce estimates that input subsidies (as opposed to other types of subsides like loans or tax reductions) reduce export prices and thus inflate dumping margins.

In sum, the July 7 Appellate Body decision will not have any direct impact on the U.S. CVD law, but this case may portend similar challenges by China at the WTO in the future and may result in a reduction of dumping margins in some cases previously considered by Commerce.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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