TWN Info Service on WTO and Trade Issues (May17/04)
5 May 2017
Third World Network
   
US, China argue over subsidy notifications, support measures
Published in SUNS #8453 dated 2 May 2017

Geneva, 28 Apr (Kanaga Raja) - A meeting of the WTO Committee on Subsidies and Countervailing Measures (SCM) this week heard the United States and China arguing over US criticisms of China's record on subsidy notifications, as well as over each other's subsidy programmes.

The meeting of the SCM Committee on 25 April also heard Canada, the European Union, Japan and the United States calling for discussions to be held at the WTO on the role that subsidies play in contributing to industrial over-capacity (see below).

Under an agenda item of the SCM Committee, the US said that once again it is returning to the reoccurring issue of China's "abysmal" record of subsidy notifications.

According to trade officials, the US said that China routinely claims that it has fully adhered to the transparency requirements under the SCM Agreement.

However, this claim rings hollow and is undermined by the facts, the US said. According to the US, in the 16 years since it joined the WTO, China has only provided three subsidy notifications, and all of them were grossly incomplete.

China only notified for the first time subsidies granted at the sub-central level in 2016, with the notification only covering a small fraction of the subsidies granted. In addition, not all of China's provinces were included.

The US claimed that subsidies to key sectors such as steel, aluminium and fisheries were also excluded.

The US further claimed that the notification was "padded" with programmes that were not normally considered subsidies within the scope of the SCM Agreement, such as poverty alleviation and support for HIV treatment.

This is not an academic or technical shortcoming, the US maintained.

Given the important role of the Chinese government - both central and sub-central - in the country's economy, members are interested in having a complete understanding of China's subsidy regime, the US argued.

The US said China continues to resist providing the level of transparency required under the SCM Agreement. It argued that China is holding back critical information.

As a result, the US said that it has submitted "counter-notifications" in which it has identified over 470 Chinese subsidy measures that were not notified to the WTO.

It maintained that China refuses to provide written answers to questions posed by the US about the programs and even makes the claim that it will only answer questions on subsidies that China has notified to the WTO.

The US said it was unfortunate that it had to resort to counter-notifications but China's latest subsidy notification demonstrated that hundreds of measures are not being notified.

The US further claimed that China has not notified a single steel subsidy program in the 16 years it has been a WTO member, even though China now accounts for half of global steel production.

The 2008 financial crisis led to a severe global drop in demand for steel, yet China increased its steel production capacity by more than 160% since 2009 - or more than the total capacity of the US, Japan, India and Brazil combined, the US maintained.

According to the US, this excess production has resulted in an increase in Chinese steel exports from 5 million tons in 2001 to over 100 million tons in 2016, with a subsequent rise in trade remedy cases around the world against Chinese steel exports.

The US further said both it and the European Union have identified around 160 government subsidies or grants listed in the annual reports of six of the largest Chinese steel producers (G/SCM/Q2/CHN/70).

The US pointed out that it had recently submitted a counter-notification regarding China's "Famous Export Brand" (FEB) subsidy programme (G/SCM/Q2/CHN/71).

In its counter-notification, the US noted that in 2008, it had brought a dispute challenging China's Famous Export Brand program (and related programs), which appeared to provide prohibited export subsidies in the form of cash grants and other benefits to large, well-known exporters.

After the consultation request (DS387), the United States engaged in settlement talks with China pursuant to which China terminated or amended dozens of inconsistent measures and demonstrated that other challenged measures had expired. A mutually agreed solution was reached with China in 2009.

Since then, the United States said that it has discovered central and sub-central measures implementing the "Internationally Well-Known Brand" (IWB) program. Many of these measures, at both the central and sub- central levels, indicate that the new program is the successor to the Famous Export Brand program.

While China recently notified many of the terminated, amended or expired sub-central government Famous Export Brand measures, it does not appear to have notified any terminated, amended or expired central government Famous Export Brand measures.

Furthermore, said the US, it appears that none of the Internationally Well-Known Brand measures have ever been notified at the central or sub-central levels of government.

The lack of transparency raises questions about the program now in place and whether it is consistent with WTO rules, the US said.

According to trade officials, the EU said compliance with notification obligations was crucial for the work of the Committee, and that these notifications must include all covered subsidies. It maintained that China's notification excludes certain sectors such as steel.

Japan was of the view that it would be beneficial to strengthen the notification requirements under WTO rules.

In response, China said that it had done its utmost to make information on subsidies available to the Committee.

According to trade officials, China said it submitted notifications on central and sub-central subsidy programs in October 2015 and June 2016. It believed that these notifications addressed most of the concerns raised by the US.

On the issue of steel, China emphasised that it does not have specific subsidy programs for steel. The US claims regarding alleged subsidies for the sector are "groundless", it stressed.

The Chinese notifications identify programs which may be related to the steel industry but are not specific to steel.

As for the FEB/IWB programs, China said that it had received the US counter-notification shortly before the Committee meeting and would examine carefully the US claims before responding.

In turn, China requested certain information from the US relating to support programs granted or maintained by the US for the benefit of its steel sector (G/SCM/Q2/USA/70).

According to information obtained by China, the US is implementing or has implemented the following government support measures in the steel sector, which appear to provide subsidies as defined in paragraph 1 of Article 1 of the SCM Agreement and which appear to be specific within the meaning of Article 2.

The Chinese communication highlighted US steel subsidy policies at the federal level as well as at state and local level.

At the federal level, it pointed to pensions that are provided for steel enterprises by the Pension Benefit Guaranty Group (PBGC).

According to the law, PBGC currently provides 29,000 pension guarantee schemes for 47 million workers and retirees. Four of the ten enterprises that received the most pension payments from PBGC were steel enterprises, namely Bethlehem Steel, LTV Steel, National Steel and Weirton Steel.

PBGC paid US$3.7 billion, US$2.1 billion, US$1.3 billion and US$600 million respectively or a total of US$7.7 billion to the 15 single employer pension insurance programs of the above four enterprises, and the above insurance schemes have remained valid since 2003.

The main beneficiaries of the program are primary metal manufacturing (mainly steel) and air transport sectors. Of the 10 enterprises that received the most pension payments, 5 were from the air transport sector, and 4 were from the steel sector.

"Therefore, the application of the program in steel and air transport sectors was suspected to constitute de facto specificity," said China.

China also noted that since 2008, Customs and Border Protection under the United States Department of Homeland Security has paid the anti-dumping and countervailing duties levied to eligible steel enterprises in the form of compensation in accordance with the Continued Dumping and Subsidy Offset Act of 2000 (CDSOA, or the Byrd Amendment) which was abolished in 2007.

In the fiscal years of 2008-2015, Customs and Border Protection paid US$29.089 million, US$23.625 million, USD$14.6 million and US$9.083 million of compensation to ArcelorMittal, US Steel, AK Steel and Nucor Steel respectively. In the fiscal years of 2008, 2013 and 2014, Customs and Border Protection paid US$258,000, US$11,000, and US$106,000 of compensation to Gallatin Steel (which was acquired by Nucor Steel afterwards) respectively.

China held that such compensations were only provided to specific enterprises and therefore constituted de jure specificity.

China also highlighted several state and local subsidy programmes, namely, subsidy provided by the Government of Kentucky to Gallatin Steel, subsidy provided to Nucor Steel by the State of North Carolina, subsidy provided to Nucor Steel by the State of Louisiana, and subsidy provided to the steel companies in Virginia by the State of Virginia.

In response, the US maintained that no government funding has been provided to PBGC and that the pension insurance has to be paid for.

It said the Byrd Amendment was rescinded many years ago and that the state programs in question related to worker training and building skills and are not limited to any particular industry.

PAPER ON ROLE OF SUBSIDIES IN INDUSTRIAL OVER-CAPACITY

The Committee held a discussion on a revised paper put forward by Canada, the European Union, Japan and the United States (G/SCM/W/572/Rev.1) outlining what the proponents said are some initial thoughts and ideas aimed at fostering a more detailed debate among Members on how to tackle subsidies contributing to over-capacity.

According to the paper, the question of how and to what extent subsidies act as a contributor to overcapacity is complex. The answer depends on the circumstances prevailing in the specific sector of the economy in which excess capacity exists.

It is clear that market forces such as a decrease in demand may also play an important role in contributing to overcapacity, at least initially. However, the experience gathered in sectors currently experiencing high excess capacities, such as steel, aluminium, and solar panels, shows that governments often identify national strategic industries and systematically support them to boost their production, grow GDP, and expand or preserve employment, uncoupling these privileged sectors from supply and demand signals, and from other market indicators.

"In particular, the relevance of market forces diminishes when the state - functioning as the leading economic actor - owns, controls, or influences large numbers of important industrial enterprises and banking entities, and generally retains a significant role in resource allocation. In these circumstances, subsidization becomes a dominant contributor to excess capacity, which is further exacerbated as governments, both at the central and sub-central levels, often provide financial and other support throughout the entire lifetime of the preferred industries."

Indeed, the paper maintained, in pursuit of strategic industry objectives, governments can create overcapacity by providing concessional loans or equity to newly-established companies without due consideration of market conditions, such as projected future demand and profitability.

Similarly, when perceived strategically important companies begin to fail, governments may seek to maintain employment, production and capacity - especially in the absence of an exit mechanism.

The four proponents said that while the SCM Agreement requires WTO Members to notify subsidy programs, the continuously rising number of WTO Members that have failed to make the required notifications "is deeply worrying".

They noted that an alarming 65% of the Members have failed to submit their legally required notification for the 2015 cycle.

Equally worrying is the fact that, while notifications are required for subsidy programs implemented at both the central and sub-central levels of government, some Members do not notify sub-central subsidy programs.

"This is particularly troubling where a government's industrial policy objectives are crafted at a central level and subsequently implemented by sub-central governments, and where sub-central governments implement their own beggar-thy-neighbour policies in competition with other regions."

The quality of actual notifications, including the attempts by some Members to notify subsidy programs that clearly fall outside the scope of the SCM Agreement to create the appearance of transparency without subjecting actual industrial subsidies to global scrutiny, also deserve attention, they said.

In presenting the group's paper, the EU told the SCM Committee that it was important to examine the link between subsidies and overcapacity in various sectors.

According to trade officials, the EU said that at their meeting in Hangzhou, China last September, G20 leaders recognized that overcapacity was a major problem for the global economy and one of the key causes for distortions in international trade.

While the OECD's Global Forum on Steel Excess Capacity, established last December in response to the G20 meeting, can address other issues related to overcapacity, the SCM Committee has the capability and expertise to handle the subsidy side of the issue, the EU maintained.

The range of subsidy measures is enormous, and once overcapacity is created, the problem is transmitted to other countries to the detriment of their industries. The SCM Agreement does not seem to offer remedy for such situations, and such subsidies should be subject to more stringent disciplines, the EU said.

The US said that the impact of subsidies that contribute to overcapacity can be as distortive as prohibited export subsidies, and should be considered for more stringent disciplines. The first step however should be in improving transparency in line with notification requirements under the SCM Agreement.

Canada said that the Committee is uniquely situated to examine and address the problem, and improvements should be made through subsidy disciplines and transparency obligations.

Japan said that WTO members would benefit from deeper discussions on strengthened subsidy disciplines and transparency obligations, and that the problem of overcapacity exists in various sectors.

According to trade officials, Australia, Israel, Mexico, Korea, Russia and Turkey expressed support for the proposal, with Australia and Turkey asking the proponents to clarify what exactly they expected to result from the proposed discussions and what they meant by the need for more stringent disciplines.

Russia pointed out that the problem was not only about subsidies but also trade protectionism, and in particular the growing use of anti-dumping trade remedy measures. Russia said that looking at subsidies alone was a one-sided approach which would not solve the problem.

On the other hand, China underlined that the SCM Committee was not the appropriate forum for discussing the issue of overcapacity.

According to China, subsidies were not the major cause of overcapacity. It pointed out that the G20 leaders affirmed in Hangzhou that sluggish demand and the slow economic recovery since the 2008 financial crisis were the main cause, while trade protectionism and trade remedies were making the situation worse.

Focusing only on subsidies while ignoring other important elements will not help solve the problem, and could even trigger further protectionism, China cautioned.

In response, the EU said that focus of the proposed discussion would only be on subsidies. While it agreed that the underlying issue is the need for greater transparency in subsidy programs, this issue alone should not be the end of the road and that more should follow, it said.

China pointed out that only around 10 of the WTO's 164 members voiced support for the group's proposal. Thus, it was premature to conclude that the group's idea has strong support among the membership, it said.

SUBSIDY NOTIFICATIONS

Meanwhile, the Chair of the SCM Committee, Mr Jin-dong Kim of Korea, expressed concerns about what he said is the "discouraging" record of members in meeting their obligations to notify their subsidies to the WTO on an annual basis.

The Chair cited the latest report prepared by the WTO secretariat (G/SCM/W/546/Rev.8), and said that 79 members have yet to make their subsidy notifications for 2015, despite the mid-2015 deadline for making submissions.

He also said that 60 members had not yet submitted notifications for 2013, and 55 had not submitted notifications for 2011.

Many of these members either have never notified or have done so only in the distant past, the Chair said. "The chronic low compliance with the fundamental transparency obligation to notify subsidies constitutes a serious problem in the proper functioning of the (SCM) Agreement," the Chair added.

According to trade officials, the US said the compliance rate with notification requirements was "alarming" and that the figures for 2015 were the worst since 1998.

The Secretariat report does not talk about the "disturbing" quality of the notifications, with some citing only a handful of programs when many more exist, the US claimed.

According to trade officials, the EU, New Zealand, Canada, Australia, Russia and Chinese Taipei shared the US concerns.

Meanwhile, the US reiterated the need to improve transparency in fisheries subsidies. It circulated an informal paper which listed seven questions aimed at enhancing transparency and better understanding of the possible trade effects of such subsidies.

New Zealand, the EU, Canada and Australia said that they supported efforts to improve transparency. Australia underlined the importance of not duplicating the work being carried out in other international organizations.

Brazil voiced doubts on whether this issue should be addressed in the SCM Committee. It said that discussions on transparency should be linked to the negotiations on subsidy disciplines for the fisheries sector, thus making the Negotiating Group on Rules (NGR) the appropriate forum.

According to trade officials, India also cautioned against duplication of work. It pointed out that the issue of fisheries subsidies is being discussed in the NGR.