Info Service on WTO and Trade Issues (Jan15/01)
21 January 2015
Third World Network
adopts ruling in US-China CVD dispute
Published in SUNS #7943 dated 20 January 2015
Geneva, 19 Jan (Kanaga Raja) -- The Dispute Settlement Body (DSB)
of the World Trade Organisation (WTO) on 16 January adopted the Appellate
Body (AB) and panel reports in the dispute concerning countervailing
duty (CVD) measures imposed by the United States on certain products
The AB on 18 December 2014 had upheld an earlier panel ruling that
found that the United States had acted inconsistently with certain
provisions of the Subsidies and Countervailing Measures (SCM) Agreement
over CVD measures that it imposed on certain Chinese products.
The AB had recommended that the DSB request the United States to bring
its measures found in its Report, and in the Panel Report as modified
by the AB's Report, to be inconsistent with its obligations under
the SCM Agreement into conformity with its obligations under that
In its ruling, the AB had reversed a number of the panel's findings,
and declined to rule on some of China's claims. (See SUNS#7942 dated
22 December 2014.)
In a related development, the DSB on 19 December 2014 had adopted
the AB and panel reports (DS436) in the dispute raised by India over
countervailing measures imposed by the US on certain hot-rolled carbon
steel flat products from India. The AB had largely upheld the panel
ruling and recommended that the DSB request the US to bring its measures
into conformity with the SCM Agreement.
In the US-China dispute, at the meeting of the DSB on 16 January,
China said that since 2006, when the US first began to apply its countervailing
duty laws to imports from China, China has been the target of more
than 40 US countervailing duty investigations.
In the overwhelming majority of these cases, the principal alleged
subsidy found by the US Department of Commerce (USDOC) has been the
alleged provision of inputs for less than adequate remuneration, it
On the issue of public body, China said that it challenged not only
the USDOC's continued application of the rule of majority government
ownership that was rejected by the Appellate Body in DS379, but also
the USDOC's underlying "rebuttable presumption" that majority
government-owned enterprises are "public bodies".
China was pleased that the Panel upheld China's "as such"
claim in relation to the USDOC's "rebuttable presumption"
and that the Panel also concluded that the presumption was unlawfully
applied in every investigation subject to challenge.
In reaching these conclusions, China added, the Panel properly applied
the legal standard articulated by the Appellate Body in DS379, and
rejected the United States' ill-considered invitation to abandon that
standard in favour of its position that a "public body"
is "an entity that is controlled by a government such that the
government can use the resources of that entity as its own."
China noted that the US attempted this same tactic in another recent
case, DS436, and again was emphatically rebuffed in the process.
In that dispute, the Appellate Body stated that the US theory that
a "public body" is "an entity that is controlled by
a government such that the government can use the resources of that
entity as its own", was "difficult to reconcile" with
the Appellate Body's statement that a public body within the meaning
of Article 1.1(a)(1) of the SCM Agreement "must be an entity
that possesses, exercises or is vested with governmental authority".
China also welcomed the Appellate Body's emphatic rejection of the
USDOC's entire construct for evaluating "market distortion"
in the context of determining whether the provision of a financial
contribution has conferred a benefit under Article 14(d) of the SCM
It said that when the USDOC decided to begin applying the US countervailing
duty laws to imports from China, one of the key findings that it made
in support of its decision was that "the PRC Government has eliminated
price controls on most products; market forces now determine the prices
of more than 90 percent of products traded in China."
Notwithstanding its determination that the vast majority of prices
in China are "freely set" by "market forces",
the USDOC has repeatedly concluded in the investigations initiated
since 2006 that prices in China for basic commodities are "distorted",
and hence unusable as benchmarks.
The USDOC has based this conclusion almost exclusively on the percentage
of the relevant input produced by SOEs (state-owned enterprises).
China said that if such SOEs provide at least a "substantial
portion" of the market for the input, then the USDOC concludes,
with no further analysis whatsoever, that private prices in the Chinese
market for that input are distorted because of the government's alleged
"predominant role" in the market.
In this case, said China, the Appellate Body unequivocally rejected
the USDOC's analytical framework for evaluating market distortion.
According to China, in order to properly determine whether a price
is a market-determined price, the Appellate Body explained that investigating
authorities cannot focus exclusively on the type of entities operating
in the market and their respective market shares, but also may be
required to assess "the structure of the relevant market",
"entry barriers", and "the behaviour of the entities
operating in that market", all for the purpose of determining
whether the government itself, or acting through government-related
entities, exerts market power so as to distort in-country prices.
Looking at the four benefit determinations that were the subject of
China's appeal, the Appellate Body concluded that the USDOC's violation
of these principles was evident on the face of its determinations.
The Appellate Body found that in each of the challenged determinations,
it was clear that the USDOC had simply assumed that the prices of
the government-related entities were automatically distorted due to
their relationship with the government, without conducting any evaluation
of whether they were market-determined prices. The Appellate Body
explained that "a finding of government ownership and control
of certain entities alone cannot serve as the sole basis for establishing
According to China, the Appellate Body emphasised the USDOC's failure
to explain in its determinations whether and how the market shares
held by SOEs actually resulted in the government's possession and
exercise of market power, such that the price distortion occurred
in a way that private suppliers aligned their prices with the "artificially
low price" of the government-provided goods.
In relation to the USDOC's conclusion in each of the 14 challenged
determinations that the alleged provision of inputs for less than
adequate remuneration was specific to an enterprise or industry where
China challenged four aspects of the USDOC's end-use approach, China
noted that the Panel agreed with China that the USDOC had acted inconsistently
with Article 2.1 of the SCM Agreement by failing to take into account
the factors in the final sentence of Article 2.1(c), but the Panel
rejected each of China's other claims.
On appeal, said China, the Appellate Body reversed the Panel's findings
both in relation to the proper identification of a "subsidy programme"
and in relation to the identification of the "granting authority".
While it regretted that the Appellate Body could not complete the
legal analysis, China welcomed the Appellate Body's interpretive analysis
in relation to both of these claims.
The Appellate Body made clear that the USDOC's consistent practice
of reaching specificity determinations under Article 2.1(c) without
ever identifying the "granting authority" or the relevant
"subsidy programme" is inconsistent with the requirements
of Article 2.
On the issue of facts available, China noted that the Panel declined
to uphold its claims under Article 12.7, but the Appellate Body found
that the cursory nature of the Panel's analysis was inconsistent with
Article 11 of the DSU.
The Appellate Body explained that "in order to comply with the
requirements under Article 12.7 of the SCM Agreement, the USDOC was
required to provide an explanation [in its published report] that
was sufficient to establish that it had engaged in a process of reasoning
and evaluation of the various facts before it in order to determine
which of the facts available could reasonably replace the missing
China regretted that the Appellate Body could not complete the legal
analysis on the specificity and the adverse facts available issues
due to the insufficient analysis by the panel.
It appears that the divergence in quality between the reports of the
panels and the Appellate Body has become a systemic issue within the
dispute settlement process, China said.
China however believed that in this dispute, the Appellate Body's
interpretive analysis in relation to China's facts available claims
and in relation to its specificity claims plainly necessitates a significant
change in the manner in which the USDOC conducts these aspects of
its input subsidy investigations.
When combined with the USDOC's implementation obligations in relation
to its public body and benchmark distortion analysis, it is evident
that the time has come for the USDOC to fundamentally rethink its
entire construct for input subsidy investigations, said China.
In its statement, the US said that the Appellate Body report contains
two categories of findings that should be of wide concern to Members:
first, the proper role of panels and the Appellate Body under the
WTO dispute settlement system; and second, the Appellate Body's findings
about how an administering authority needs to treat entities associated
with the government for the purpose of determining market benchmarks.
On the first issue, the US said that the Appellate Body report suggests
a view of dispute settlement that departs markedly from that set out
in the DSU and reflected in numerous prior reports.
As the US understands it, the fundamental role of a panel is to consider
the evidence and arguments put forward by the complaining party and
the responses by the responding party, to make an objective assessment
of the matter before it, and to issue a report explaining the basis
of its findings.
The Appellate Body report suggests that panels and the Appellate Body
have quite a different role: namely, to conduct independent investigations
and apply new legal standards, regardless of what either party actually
argues to the panel, said the US.
In this dispute, said the US, the Appellate Body report has assumed
the role of the complaining party by - for the first time - making
China's prima facie case on appeal with respect to a number of different
claims. The Appellate Body then went on to find in China's favour
by upholding arguments that the Appellate Body itself developed.
Equally remarkable, according to the US, the Appellate Body has found
that the panel breached its responsibilities under Article 11 of the
DSU by failing to examine arguments never presented by China.
The US said that it responded to China's arguments in the manner that
China presented them. The US rebutted all of China's incorrect legal
positions and all of China's sweeping factual characterisations, said
the US, adding that the Panel agreed that the US had rebutted China's
arguments, and found - with respect to the vast majority of China's
claims - that China had failed to establish any breach of the SCM
According to the US, the Appellate Body developed legal interpretations
of the SCM Agreement, and then sought to apply these interpretations
to the US measures - without regard to the case made by China through
the evidence and arguments it actually submitted to the panel.
In doing so, said the US, the Appellate Body assumed a role more like
an investigative authority. "This role is not provided for under
the DSU," said the US.
Second, said the US, Members should have concerns with certain substantive
findings in the Appellate Body report, especially with respect to
the treatment of entities associated with the government for the purpose
of determining market benchmarks.
On the positive side, said the US, the report appropriately rejects
China's central position that an investigating authority must determine
that a state-owned enterprise (SOE) is a "public body" before
it decides not to use the prices of the SOEs as potential benchmarks.
However, the Appellate Body then went on to repeat and rely on its
problematic findings made just ten days earlier in another report
(in reference to DS436) with respect to this issue, without any explanation
and in a manner not even suggested by China's arguments in this dispute.
Despite these concerns, the US said it appreciated other elements
of the Appellate Body report, such as where the Appellate Body - even
when ultimately reversing the Panel's findings - rejected China's
most extreme legal theories.
For example, on the subsidy program issue, the Appellate Body agreed
with the US position that evidence of "systematic series of actions"
may provide a sufficient basis to establish the existence of an unwritten
And the Appellate Body also rejected China's legal theory regarding
an order of analysis of Article 2 of the SCM Agreement. This theory
lacked any textual basis and, if adopted, would have placed unnecessary
burdens on investigating authorities, said the US.
Speaking under the same agenda item, India said that this dispute
along with DS436 which was adopted by the DSB in December 2014 is
critical to establish a balanced interpretation of the SCM Agreement.
India highlighted two findings of the Appellate Body that it said
are extremely crucial in our understanding and interpretation of the
First, India welcomed the Appellate Body finding on benchmark prices
for the purposes of determining conferment of a benefit under Article
14(d) of the SCM Agreement.
The Appellate Body stated that the proper benchmark prices would normally
emanate from the market for the good in question in the country of
provision. Such in-country prices could emanate from a variety of
sources, including private or government-related entities.
Second, India appreciated the Appellate Body's effort to further clarify
the legal standard under Article 12.7 of the SCM Agreement regarding
application of "facts available".
Where there are several facts available to an investigating authority
that it needs to choose from, "it would seem to follow naturally
that the process of reasoning and evaluation would involve a degree
of comparison" in order to arrive at an accurate determination.
The Appellate Body stated that although the precise contours of the
standard of review to be applied in a given case are a function of
the substantive provisions of the covered agreements at issue, as
well as the particular claims made, Article 11 of the DSU requires,
inter alia, that panels scrutinise whether the reasoning of an investigating
authority is coherent and internally consistent, and carry out an
"in depth examination" of the explanations provided by an
investigating authority, said India.
In the context of Article 12.7 of the SCM Agreement, such an "in
depth examination" by a panel would entail, inter alia, assessing
whether an investigating authority's published report provided an
explanation that sufficiently disclosed its process of reasoning and
evaluation such that the panel could assess how the authority chose
from the facts available those that could reasonably replace the missing
This will increase the transparency and objectivity in the investigating
process in countervailing investigations and benefit all WTO members,
said India. +