White & Case WTO Report: US – Countervailing Measures (China) (Article 21.5 – China)

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SUMMARY:

Decision:

A WTO compliance panel has handed down a mixed ruling in China’s challenge to countervailing duties imposed by the U.S. Department of Commerce (USDOC).

Significance of Decision:

This dispute hinged principally on the technical yet critical issue of when an entity will be considered to be a "public body", and thus potentially subject to WTO subsidies rules.

The WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement) deems a "subsidy" to exist where there is a financial contribution by "a government or any public body" that provides a benefit to the recipient. The Agreement does not define "public body".

In many developing and developed countries, State-Owned Enterprises play an important role in the economy. Under what circumstances could their transactions be subject to the disciplines of the SCM Agreement? Disagreement on this issue has triggered several WTO disputes.

In earlier rulings, the Appellate Body found that the term "public body" means "an entity that possesses, exercises or is vested with governmental authority". It has stressed that "mere ownership or control over an entity by a government, without more, is not sufficient to establish that the entity is a public body". The Appellate Body has also indicated that as "no two governments are exactly alike, the precise contours and characteristics of a public body are bound to differ from entity to entity, State to State, and case to case".

In the present case, China argued that the USDOC was required to make a determination that the enterprises in the CVD investigations "were performing a ‘government function’ when they sold the specific inputs at issue to particular downstream purchasers" [original emphasis]. The panel rejected this position, finding that the SCM Agreement did not require "a particular degree or nature of connection in all cases between an identified government function and the particular financial contribution at issue". On this basis, it dismissed China’s "as applied" challenge to the USDOC determinations, as well as its "as such" challenge to USDOC policy. If appealed, the Appellate Body will likely be asked to determine if the formulation of "public body" suggested by China is justified by the SCM Agreement. Thus, the "precise contours" of the WTO’s public body principles continue to take shape.

Another notable feature of this decision was the compliance panel’s ruling on the determination of benefit. Article 14(d) of the SCM Agreement states that "the provision of goods or services or purchase of goods by a government shall not be considered as conferring a benefit unless the provision is made for less than adequate remuneration…." The Article adds that the "adequacy of remuneration" is determined "in relation to prevailing market conditions for the good or service in question in the country of provision…." China claimed that an investigating authority may resort to an out-of-country benchmark "only when it has established that in-country prices are effectively determined by the government". The panel dismissed this argument, stating that "an investigating authority may reject in country prices if there is evidence of price distortion, and not only if there is evidence that a government ‘effectively determines’ the price of the goods at issue".

This is the first time that a WTO panel has ruled on the issue of whether an investigating authority can "establish price distortion through government interventions that are not, or at least not primarily, the result of the government's market power regarding the product concerned". Thus, if appealed, a key issue for the Appellate Body will be whether in-country prices can be rejected in cases where there is some evidence of price distortion that falls short of the government "effectively determining" the price of the goods.

REPORT:

Background: implementation of 2014 WTO rulings

This was the compliance stage of a dispute relating to countervailing duties imposed by the USDOC on certain products from China. The panel and Appellate Body rulings in the original dispute were made in 2014. The original panel decided, among other things, that the U.S. acted inconsistently with the SCM Agreement because "the USDOC found that SOEs were public bodies based solely on the grounds that these enterprises were (majority) owned, or otherwise controlled, by the Government of China". In the current proceedings, China made a number of claims against the U.S. implementation of the original rulings, including on the grounds that USDOC had again failed to make valid "public body" determinations. The U.S. implementation challenged by China related in part to determinations made by USDOC under Section 129 of the Uruguay Round Agreements Act. A non-exhaustive summary of the key rulings of the compliance panel follows below. 

"As applied" public body claims dismissed: "USDOC did not misconstrue the substantive legal standard"

China claimed that the USDOC’s public body determinations in the Section 129 proceedings were based on a WTO-inconsistent legal standard. China argued that "the proper question for an investigating authority is whether an entity is performing a government function when it… provides a financial contribution". In China’s view, USDOC was required to determine whether the enterprises in the CVD investigations "were performing a ‘government function’ when they sold the specific inputs at issue to particular downstream purchasers" [original emphasis]. The panel rejected this position, stating that "we do not agree with China's understanding of the legal standard for public body determinations insofar as it would require a particular degree or nature of connection in all cases between an identified government function and the particular financial contribution at issue". It therefore dismissed China’s argument that the USDOC’s public body determinations were based on an improper legal standard.

The panel recalled the Appellate Body’s statement that mere "formal indicia of control" would be "insufficient on their own to establish that an entity is a public body, such as government ownership interest, appointment and nomination of directors, and other formal statements of ‘control’". It referred to the Appellate Body’s "consistent reiteration" that "meaningful control" is concerned with "the government’s exercise of control over an entity and its conduct".

The panel found that the USDOC relied upon the evidence and analysis to reach its conclusion that "certain state-invested enterprises are used ‘as instrumentalities to effectuate the governmental purpose of maintaining the predominant role of the state sector of the economy and upholding the socialist market economy’". In the view of the panel, the USDOC conclusions "were based on its analysis of ‘meaningful control’ as evidence that investigated entities exercise, possess, or have been vested with governmental authority to perform a government function". It found that "the USDOC did not misconstrue the substantive legal standard for a public body inquiry in its analysis". The panel therefore dismissed China’s "as applied" challenge to the USDOC determinations.

 "As such" public body claims dismissed: USDOC policy memorandum did not restrict discretion

China challenged the WTO-consistency "as such" of the USDOC "Public Bodies Memorandum". This Memorandum was issued by the USDOC in 2012 in connection with its implementation of US – Anti-Dumping and Countervailing Duties (China) [DS379]. The panel agreed with China that this Memorandum was subject to challenge "as such" because it provides "administrative guidance and creates expectations among the public and among private actors". The panel also referred to the "USDOC’s consistent reliance on the Public Bodies Memorandum in Chinese investigations".

Having found for China on that threshold issue, the panel ruled against China on the merits. As with the as applied claim, China argued that "the Public Bodies Memorandum is premised on the U.S. view that the ‘government function’ does not have to relate to the conduct at issue". The Panel rejected this position. It reasoned that "to the extent that China's claim against the Public Bodies Memorandum ‘as such’ is premised on the same grounds as its ‘as applied’ claim", China "failed to establish that the Public Bodies Memorandum is a measure that is inconsistent "as such" with Article 1.1(a)(1)". It added that "the nature of the Public Bodies Memorandum is that of a resource available to the USDOC for use in making public body determinations, but it does not restrict the USDOC’s discretion to supplement the record or take into account and rely on additional information that is provided in a particular investigation".

Benefit: "USDOC failed to adequately explain its rejection of in-country prices"

The USDOC had concluded that in-country prices in China were not "market-determined", and thus could not be used as a benchmark to assess the adequacy of remuneration under Article 14(d). China argued that the USDOC violated Article 14(d) by "relying on an incorrect legal standard… and on the erroneous conclusion that Chinese prices for the inputs at issue are not ‘market determined’".

The panel, applying earlier Appellate Body rulings, stated that "any benchmark for comparison purposes in determining the adequacy of remuneration must consist of market-determined prices for the same or similar goods in the country of provision" [original emphasis]. It added that "before resorting to an alternative benchmark, an investigating authority must determine whether market prices in the country of provision can be used as a benchmark to establish whether the recipient has benefitted from the financial contribution in question". If not, it added, "an investigating authority must adequately explain its decision before proceeding to determine an alternative benchmark".

China argued that "an investigating authority may resort to an out-of-country benchmark only when it has established that in-country prices are effectively determined by the government, either de jure or de facto" [original emphasis]. The panel rejected this position, reasoning that "[w]hile we agree that evidence of governmental intervention in the economy, or even in a specific sector of the economy, will not, in and of itself, suffice as the basis for rejecting in-country prices as benchmarks, we do not accept that the narrow legal standard advocated by China is required by Article 14(d)". The panel found that "an investigating authority may reject in country prices if there is evidence of price distortion, and not only if there is evidence that a government ‘effectively determines’ the price of the goods at issue". Thus, the panel "reject[ed] China's claim that the United States acted inconsistently with Articles 1.1(b) and 14(d) of the SCM Agreement by rejecting in-country prices without having first found that prices for the inputs in question were effectively determined by the government of China".

The Panel then considered China’s arguments concerning the alleged lack of evidence supporting the USDOC's conclusion that the in-country prices of the inputs at issue were distorted. The panel stressed that "it is important that a decision to reject in-country prices as a benchmark be supported by a reasoned and adequate explanation as to how government intervention distorts the price of the inputs at issue". It added that an investigating authority must "explain how government intervention in the market results in in country prices for the inputs at issue deviating from a market-determined price" [original emphasis]. The found that the USDOC fell short of this standard, as "the USDOC failed to adequately explain its rejection of in-country prices in light of the evidence before it…." The Panel thus concluded that the U.S. acted inconsistently with SCM Article 1.1(b) and 14(d).

The panel also ruled on other issues, including that part of the USDOC "specificity" analysis was WTO-inconsistent, as were some of USDOC findings in its administrative reviews.

The Report of the WTO Panel in US – Countervailing Measures (China) (Article 21.5 – China) (DS437) was released on 21 March, 2018.

[View source.]

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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