TWN Info Service on WTO and Trade Issues (Jul17/08)
13 July 2017
Third World Network
EU's CV duties on PET from Pakistan held WTO-illegal
Published in SUNS #8498 10 July 2017
Geneva, 7 Jul (Kanaga Raja) - A dispute panel at the World Trade Organisation
(WTO) has largely ruled that provisional and definitive countervailing duties
(CVD) imposed by the European Union on imports of certain polyethylene
terephthalate (PET) from Pakistan were inconsistent with the EU's obligations
under the WTO.
In a ruling issued on 6 July 2017, the Panel, however, made no recommendation
to the Dispute Settlement Body (DSB), given that the measures at issue in this
dispute have expired.
The Panel concluded that, to the extent that the measures at issue have been
found to be inconsistent with the SCM (Subsidies and Countervailing Measures)
Agreement, they have nullified or impaired benefits accruing to Pakistan under
that agreement.
According to the Panel, the European Union asserted that because the challenged
measures in this dispute had expired, the measures cannot nullify or impair
Pakistan's rights under the WTO agreements.
The European Union thus considers that it has rebutted the presumption of
nullification or impairment referenced in Article 3.8 of the DSU (Dispute
Settlement Understanding).
The Panel rejected the European Union's argument, saying that because the
expiry of the measures had no retroactive effect, such expiry cannot eliminate
any nullification or impairment existing at the time of the Panel's
establishment.
Moreover, the legal status of a measure and the presence of actual impacts
resulting from its WTO-inconsistency are, in the Panel's view, conceptually
distinct and should not be equated without further evidence.
"Further, we do not know what the condition of the EU PET market would be
if the WTO-inconsistent measures had not been imposed," the Panel said.
"Given that the measures at issue in this dispute have expired, we make no
recommendation to the DSB pursuant to Article 19.1 of the DSU," the Panel
concluded.
The Panel report said the dispute concerns countervailing measures imposed by
the European Union on imports of certain polyethylene terephthalate (PET, a
plastic resin used in some products) from Pakistan pursuant to the Council
Implementing Regulation (EU) No. 857/2010 of 27 September 2010 imposing a
definitive countervailing duty (CVD) and collecting definitively the
provisional duty imposed on imports of certain polyethylene terephthalate
originating in Iran, Pakistan, and the United Arab Emirates (the Definitive
Determination).
According to the Panel, the previously applicable provisional measure
challenged by Pakistan had been imposed pursuant to Commission Regulation (EU)
No. 473/2010 of 31 May 2010 imposing a provisional countervailing duty on
imports of certain polyethylene terephthalate originating in Iran, Pakistan,
and the United Arab Emirates (the Provisional Determination).
Pakistan had requested consultations with the European Union on 28 October
2014, and consultations were held on 17 December 2014, but failed to resolve
the dispute.
On 12 February 2015, Pakistan requested the establishment of a panel, and at
its meeting on 25 March 2015, the Dispute Settlement Body (DSB) established a
panel.
Meanwhile, the European Union had informed the Panel on 1 October 2015 that the
measures at issue in this dispute no longer exist as of 30 September 2015.
Subsequently, in March 2016, the European Union requested that the Panel
terminate its work. Pakistan however asked that the Panel continue its work.
According to the Panel report, amongst the claims put forth by Pakistan are
with regard to the Manufacturing Bond Scheme (MBS), which the European
Commission found to be a countervailable subsidy contingent on export
performance; the Long Term Financing of Export-Oriented Projects (LTF-EOP),
which the Commission found to be a countervailable subsidy contingent on export
performance; and the basis on which the Commission found a causal link to exist
between subject imports and the injury to the domestic industry.
Pakistan's MBS permits licensed companies to import duty-free production input
materials if such materials are consumed in the production of a product that is
subsequently exported.
Under the MBS, when a licensed company imports inputs, it posts securities in
the amount of import duties due on those inputs.
Pakistan remits the security to that company upon export of the company's
products if the company presents documents indicating that inputs for which
remissions are requested were used in its production of the exports.
Systems like the MBS (i.e. systems allowing domestic producers to obtain
reductions on duties paid on production inputs if they are consumed in the
production of exports) are commonly referred to as duty drawback schemes.
Pakistan's LTF-EOP programme provided government-financed loans through
pre-approved banks for certain qualifying companies. The banks were prohibited
from charging interest rates above a specified level, which consisted of a base
interest rate that was to be determined by the State Bank of Pakistan (SBP) on
an annual basis, plus a further mark-up of up to three percentage points.
Pakistan's claims proceeded under various provisions of the SCM Agreement and
the GATT 1994.
According to the Panel report, the European Union requested that the Panel
reject each of the claims presented by Pakistan.
In the request for a preliminary ruling, the European Union also argued that
the Panel should terminate its work in this dispute because the challenged
measures have expired, and, in the alternative, that certain of Pakistan's claims
were outside the Panel's terms of reference under the standards set forth in
Article 6.2 of the DSU.
On 3 March 2016, the European Union filed a request for a preliminary ruling.
The request asked the Panel to: (a) cease all work on this dispute because the
relevant EU CVD measures on certain PET from Pakistan terminated on 30
September 2015 (the Termination Request); and (b) if the Panel denied the
Termination Request, find that certain of Pakistan's claims are outside the
Panel's terms of reference under the standards set forth in Article 6.2 of the
DSU.
According to the Panel report, the European Union argues that the Panel should
terminate its work in this dispute because the purpose of these proceedings has
already been fulfilled, i.e. to secure the withdrawal of the challenged
measures.
The European Union asserts that because the challenged measures no longer
exist, they have been "withdrawn" within the meaning of Article 3.7
of the DSU, and thus a positive solution has been secured.
As an additional justification for terminating this proceeding, the European
Union refers to the backlog of cases in the WTO dispute settlement system,
cases which could be more rapidly addressed if the Panel were to terminate this
dispute.
Pakistan asks the Panel to reject the Termination Request because it
"lacks any basis in the text of the DSU or the practice of panels and the
Appellate Body".
Pakistan asserts that, "[f]rom a strictly legal perspective ... the core
issue here is ... that the measures were in force on the date on which the
panel was established. In these circumstances, the Panel must rule on
Pakistan's claims".
According to Pakistan, the Appellate Body has explained that the expiry of a
measure does not limit a panel's jurisdiction to issue findings regarding that
measure and a panel cannot decline to rule on the entirety of the claims over
which it has jurisdiction.
Pakistan notes that many GATT and WTO panels have made findings with respect to
expired measures, and that no panel has declined to exercise its jurisdiction
over a measure that expired after the panel's establishment and where the
complainant asked the panel to issue findings regarding that measure.
The Panel said that on 19 May 2016, it sent a communication to the parties
denying the Termination Request and indicating that the Panel will provide the
reasons for its decision in due course.
According to the Panel report, the challenged measures in this dispute are CVDs
on certain PET from Pakistan imposed pursuant to the Definitive Determination.
The legal effect of the Definitive Determination vis-a-vis certain PET from
Pakistan expired on 30 September 2015, at which time the associated CVDs on
certain PET from Pakistan were removed.
The challenged measures have thus expired and ceased to have legal effect. WTO
panel and Appellate Body jurisprudence indicates that panels have discretion
regarding whether to make findings regarding such expired measures.
"We have not identified any reason to depart from this current of
jurisprudence. We therefore have discretion as to whether to make findings with
respect to the challenged measures in this dispute."
In deciding how to exercise its discretion, the Panel noted certain other
circumstances surrounding this dispute.
First, and in particular, the challenged measures expired only after panel
establishment. Second, the complainant has continued to request that the Panel
make findings with respect to the expired measures.
Third, the Panel considered it a reasonable possibility that the European Union
could impose CVDs on Pakistani goods in a manner that may give rise to certain
of the same, or materially similar, WTO inconsistencies that are alleged in
this dispute.
In particular, the Panel noted that Pakistan claims, not contested by the
European Union, that a wide range of Pakistani exports benefit from the MBS and
that the parties dispute, on a fundamental level, how investigating authorities
should determine the extent to which duty drawback schemes like the MBS may
constitute countervailable subsidies within the meaning of the SCM Agreement.
"Given such circumstances, we proceed with this dispute," the Panel
stated.
FINDINGS AND CONCLUSIONS
The Panel concluded as follows:
In respect of the European Union's objections under Article 6.2 of the DSU:
i. the Panel found that Pakistan's claim that the Commission acted
inconsistently with Annex II(II)(1) and/or Annex III(II)(2) of the SCM
Agreement "because it failed to examine the "generally accepted
commercial [practices]" prevailing in Pakistan when examining the
verification system and procedures under the MBS" is outside the Panel's
terms of reference as the panel request failed to present the problem clearly;
ii. the Panel rejected the European Union's objection to Pakistan's claim under
Article 1.1(a)(1)(ii) of the SCM Agreement, and thus found that this claim is
within the Panel's terms of reference;
iii. the Panel rejected the European Union's objection to Pakistan's claim
under Article 12.6 of the SCM Agreement, and thus found that this claim is
within the Panel's terms of reference; and
iv. the Panel found that the remaining objections raised by the European Union
have become moot and therefore the Panel did not address them.
In respect of Pakistan's claims regarding the MBS:
i. the Panel found that the Commission acted inconsistently with Article
1.1(a)(1)(ii) of the SCM Agreement by failing to provide a reasoned and
adequate explanation for why the entire amount of remitted duties was "in
excess of those which have accrued" within the meaning of footnote 1 of
the SCM Agreement;
ii. the Panel found that the Commission also acted inconsistently with Article
3.1(a) of the SCM Agreement by improperly finding the existence of a
"subsidy" that was contingent on export performance; and
iii. the Panel exercised judicial economy or found that, for other reasons, it
need not address Pakistan's claims that the Commission: (a) failed to
investigate whether Pakistan's duty drawback system verification mechanisms
were based on generally accepted commercial practices in Pakistan; (b) failed
to provide Pakistan with the opportunity to assist the Commission's
determination of the excess amount; (c) failed to take into account evidence
regarding the amount of any excess drawback; (d) failed to make normal
allowance for waste; (e) violated Annexes II(II) and III(II) "as a
whole"; (f) violated Annex I(i); (g) violated Articles 1.1(b), 10, 19, and
32 of the SCM Agreement; and (h) violated Article VI of the GATT 1994.
In respect of Pakistan's claims regarding the LTF-EOP:
i. the Panel found that the Commission acted inconsistently with Article 14(b)
of the SCM Agreement by failing to properly identify what Novatex (a Pakistani
PET producer and exporter) would have paid on a "comparable commercial loan"
in calculating the benefit conferred by the LTF-EOP Loan;
ii. the Panel found that the Commission acted inconsistently with Article
1.1(b) of the SCM Agreement as a consequence of having acted inconsistently
with Article 14(b) of the SCM Agreement;
iii. the Panel found that the Commission acted inconsistently with the chapeau
of Article 14 of the SCM Agreement by failing to transparently and adequately
explain how it identified a "comparable commercial loan"; and
iv. the Panel exercised judicial economy in respect of Pakistan's claims that
as a result of violating Article 14(b) of the SCM Agreement and/or the chapeau
of Article 14 of the SCM Agreement, the Commission acted inconsistently with
Articles 10, 19 and 32 of the SCM Agreement, and Article VI of the GATT 1994.
In respect of Pakistan's claims under Article 15.5 of the SCM Agreement:
i. the Panel found that Pakistan failed to establish that the Commission's use
of the "break the causal link" methodology in this case was
inconsistent with Article 15.5 of the SCM Agreement;
ii. the Panel found that Pakistan failed to establish that the Commission acted
inconsistently with Article 15.5 of the SCM Agreement by failing to conduct a
proper non-attribution analysis of imports from Korea;
iii. the Panel found that Pakistan failed to establish that the Commission
acted inconsistently with Article 15.5 of the SCM Agreement by failing to
conduct a proper non-attribution analysis of the economic downturn;
iv. the Panel found that the Commission acted inconsistently with Article 15.5
of the SCM Agreement with respect to its analysis of competition from
non-cooperating producers; and
v. the Panel found that the Commission acted inconsistently with Article 15.5
of the SCM Agreement with respect to its analysis of oil prices.
In respect of Pakistan's claim under Article 12.6 of the SCM Agreement, the
Panel found that the Commission acted inconsistently with Article 12.6 of the
SCM Agreement because it failed to adequately provide the "results"
of the Novatex verification visit to Novatex.