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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.

 


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