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TWN Info Service on WTO and Trade Issues (Feb19/11)
15 February 2019
Third World Network


Korea can retaliate against US for $85 million annually over LRWs

Published in SUNS #8845 dated 13 February 2019

Geneva, 12 Feb (Kanaga Raja) – An arbitrator at the World Trade Organisation (WTO) has determined that Korea can seek authorisation from the Dispute Settlement Body (DSB) to retaliate to the tune of nearly $85 million annually over the US failure to implement the WTO ruling over anti-dumping and countervailing duties imposed by the US on large residential washers (LRWs) from Korea.

The authorisation to retaliate on request within 30 days is automatic unless the DSB, by consensus, decides otherwise.

In a ruling issued on Friday (8 February), the Arbitrator (the three original panellists in the dispute) determined that the level of nullification or impairment caused by the WTO-inconsistent anti-dumping and countervailing duty measures at the end of the reasonable period of time (for implementing the WTO ruling) amounts to USD 74.40 million and USD 10.41 million, respectively.

According to the Arbitrator, these amounts may be adjusted for inflation for the year 2018 and on an annual basis thereafter.

The Arbitrator suggested that Korea notify the DSB every year of the adjustment to the level of suspension.

In relation to non-LRWs, the Arbitrator has set out a specific formula to calculate the level of nullification or impairment on non-LRWs if and when the United States applies definitive duties to specific exporters of a given non-LRW, based on margins calculated under the W-T (weighted average-to-transaction) comparison methodology, as found to be WTO-inconsistent by the Panel and the Appellate Body in the underlying dispute.

The Arbitrator also noted that this is the first arbitration that was tasked with determining the level of nullification or impairment caused by essentially the same measures “as such” and “as applied” (see below).

BACKGROUND

According to the Arbitrator’s report (WT/DS464/ARB), arbitration proceeding s arose in the dispute initiated by Korea concerning certain methodologies used by the United States in anti-dumping investigations and administrative reviews , as well as certain anti-dumping and countervailing measures imposed by the United States on imports of large residential washers from Korea.

On 26 September 2016, the Dispute Settlement Body (DSB) of the World Trade Organization (WTO) adopted the Appellate Body Report in this dispute together with the Report of the original Panel as modified by the Appellate Body.

The Panel and the Appellate Body found the measures at issue to be inconsistent with various provisions of the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (Anti-Dumping Agreement), the Agreement on Subsidies and Countervailing Measures (SCM Agreement), and the General Agreement on Tariffs and Trade 1994 (GATT 1994).

On 13 April 2017, following referral to arbitration under Article 21.3(c) of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU), an arbitrator determined that the reasonable period of time (RPT) for the United States to implement the DSB’s recommendations and rulings would expire on 26 December 2017.

According to the Arbitrator, considering that the United States had failed to comply with the recommendations and rulings of the DSB within the RPT, Korea requested authorization from the DSB, on 11 January 2018, to suspend concessions or other obligations in the goods sector under the GATT 1994 pursuant to Article 22.2 of the DSU.

In its request, Korea sought to suspend “concessions and related obligations at an annual amount of USD 711 million with respect to the United States’ non-compliance with “as applied” recommendations and rulings on the washing machines from Korea.”

Korea further requested that this amount should be “adjusted by applying the annual growth rate of the washing machines market of the United States.”

In addition, Korea requested authorization “to suspend concessions and related obligations at an annual level based on a formula commensurate with the trade effects to be caused to exports from Korea other than washing machines by the United States’ non-compliance with “as such” recommendations and rulings.”

According to Korea, this request “is to reflect the possible nullification or impairment Korea will suffer if the “as such” violation continues to exist and apply to other exports from Korea in the future.”

On 19 January 2018, the United States communicated to the DSB its objection to Korea’s proposed level of suspension of concessions or other obligations.

At its meeting of 22 January 2018, the DSB took note that the matter raised by the United States had been referred to arbitration, as required by Article 22.6 of the DSU.

MAIN FINDINGS OF ARBITRATOR

With regards to Korea’s request pertaining to LRWs “as applied” findings, the Arbitrator said that the level of nullification or impairment shall be calculated using the Armington model, with an elasticity of substitution of 4.

For the other parameters of the model, the Arbitrator will use a demand elasticity of -0.55 and a supply elasticity of 6.

The size of the LRW market in 2017 is estimated to be 80% of the figure provided by AHAM (Association of Home Appliance Manufacturers) for that year, which comes to USD 3,718.4 million.

The Arbitrator recalled that the counterfactual rates of the anti-dumping and countervailing duties are [redacted business confidential information] and 0%, respectively.

The Arbitrator declined to use both the actual level of LRW imports from Korea in 2017 as proposed by the United States, and Korea’s proposal to construct a market share for 2017 based on Korea’s 2011 import share.

Instead, the Arbitrator calculated a trade figure for 2017 that accounts for the depressing effect of the WTO- inconsistent duties applied in 2012 on Korea’s share of the United States’ LRW market.

On the basis of the Arbitrator’s findings on the appropriate economic model to use for LRWs, reference period, counterfactual anti-dumping and countervailing duties, values of the elasticities and other relevant economic variables, the Arbitrator determined that the level of nullification or impairment caused by the WTO-inconsistent anti-dumping and countervailing duty measures at the end o f the RPT amounts to USD 74.40 million and USD 10.41 million, respectively.

On Korea’s request to adjust the level of suspension annually, in the Arbitrator’s view, one way to ensure that the real value of the level of suspension is maintained over time is by adjusting for inflation.

In the Arbitrator’s view, adjustment based on inflation is not a mechanism to adjust the size of the LRW market or the level of imports but a means to maintain the real value of the annual level of suspension authorized by the Arbitrator in this case.

Moreover, adjustment based on inflation does not increase unpredictability, as maintaining the real monetary value of the amount of suspension is different from updating the level of suspension based on changes in the size of the LRW market in the future, which neither the Arbitrator nor the parties can predict.

In light of the foregoing, the Arbitrator concluded that the initial level of suspension of concessions authorized to Korea, may be adjusted for inflation on an annual basis.

The Arbitrator provided the following example illustrating how to implement this adjustment.

Assuming that Korea obtains DSB authorization to impose suspension of concessions or other obligations on the United States at a level of (i) USD 74.40 million for the WTO-inconsistent anti-dumping duty measures, and (ii) USD 10.41 million for the WTO-inconsistent countervailing duty measures, beginning in August 2019.

Korea may, therefore, impose this level of suspension of concessions or other obligations from August 2019 until July 2020.

For the subsequent period, from August 2020 to July 2021, Korea may increase the level of suspension by a percentage corresponding to the change in the producer price index for household appliance manufacturing during the preceding calendar year (i.e. 2019).

This is to be calculated by comparing the value of the index in December 2019 with its value in December 2018.

For the purpose of making this calculation, the latest version of this index published as of July 2020 shall be used.

If the index changed by 5% in calendar year 2019, then Korea may impose a level of suspension of concessions or other obligations equivalent to (i) USD 78. 12 million for the WTO-inconsistent anti-dumping duty measures, and (ii) USD 10.93 million for the WTO-inconsistent countervailing duty measures, 5% more than the amount authorized in 2019.

Accordingly, the level of suspension of concessions by Korea to the United States must not exceed, in US dollars, the amount resulting from the yearly application of this formula.

In summary, the Arbitrator determined that the level of nullification or impairment caused by the measures at issue on Korea at the end of the RPT is (i) USD 74.40 million for the WTO-inconsistent anti-dumping duty measures, and (ii) USD 10.41 million for the WTO-inconsistent countervailing duty measures.

In the years following the date of DSB authorization, Korea shall be entitled to increase the value of its level of suspension by a percentage corresponding to the United States’ rate of price inflation from the preceding calendar year.

On Korea’s request pertaining to the suspension of concessions or other obligations for products from Korea other than LRWs (non-LRWs), or “as such ” findings, the Arbitrator said they have developed a formula that reflects the economic context of this case and will permit Korea to quantify the trade effect flowing from the possible future imposition of inconsistent anti-dumping du ty measures, recognizing the range of products and markets that may be covered by such anti-dumping duty measures.

Following their analysis, the Arbitrator rejected the formula proposed by Korea, because being based on a model of perfect substitution, it is not appropriate for all traded products which may or may not be perfect substitutes.

In addition, Korea’s proposed formula does not find support in academic literature. Further, because Korea’s proposed procedure to obtain the inputs for its formula is not sufficiently clear, it makes it difficult to assess its appropriateness.

The Arbitrator nevertheless agreed that Korea should be granted authorization to suspend concessions equivalent to the level of nullification or impairment for non-LRWs, in any future instance of application of the “as such” inconsistent measure.

Therefore, the Arbitrator said they have devised a formula to determine the level of nullification or impairment for non-LRWs that is practical to implement, predictable, and sufficiently generic to take into account the variations of products and markets. Further, the information to undertake the calculation is factual and verifiable.

According to the Arbitrator’s formula, the level of nullification or impairment is proportional to the value of imports from Korea times the change in the anti-dumping duty to make it WTO-consistent.

The constant of proportionality is a coefficient that varies by HS chapter and is a function of the market share of Korean imports as well as elasticities of demand, supply and substitution for the product under consideration.

With respect to determination of the value of imports, the Arbitrator said that they have set out a mechanism for Korea to obtain the required data inputs and for the United States to verify those data.

In sum, the Arbitrator’s approach enables Korea to calculate the level of nullification or impairment for future WTO-inconsistent measures on any non-LRW in a practical, predictable, and verifiable way.

The Arbitrator concluded that the nullification or impairment, and in turn the level of suspension, calculated by Korea with respect to non-LRWs on which WTO-inconsistent duties are applied, may be adjusted for inflation on an annual basis.

In the Arbitrator’s view, allowing Korea to adjust the level of suspension for non-LRWs to account for inflation is justified and does not increase unpredictability.

The Arbitrator also said that Korea shall be entitled to impose the suspension of concessions or other obligations equal to the level of nullification or impairment calculated using equation (6) during the first year following the date of DSB authorization.

In subsequent years (following the date of DSB authorization), if the Unite d States has not fully complied with the DSB recommendations and rulings, Korea shall be entitled to adjust the value of its level of suspension by a percentage corresponding to the United States’ price inflation rate for total manufacturing from the preceding calendar year.

The Arbitrator provided the following example on how this adjustment shall be implemented.

Assuming that, on 30 November 2019, Korea imposes suspension of concessions or other obligations on the United States at a level of USD 10 million, determined using the formula described in equation (6).

Korea is therefore authorized to impose this level of suspension of concessions or other obligations starting from 1 December 2019 until 30 November 2020.

For the subsequent period, from 1 December 2020 to 30 November 2021, Korea is authorized to increase the level of suspension of concessions or other obligations by a percentage corresponding to the change in the producer price index for total manufacturing during the preceding calendar year (2019).

This is to be calculated by comparing the value of the index in December 2019 with its value in December 2018.

When making this calculation, Korea shall use the latest version of this index published as of 30 November 2020.

If the index changed by 5% in calendar year 2019, then Korea can impose a level of suspension of concessions or other obligations equivalent to USD 10.5 million, which is 5% more than the amount authorized from 1 December 2019 to 30 November 2020.

Accordingly, the level of suspension of concessions by Korea to the United States must not exceed in US dollars, the amount resulting from the yearly application of this formula.

OVERALL AWARD BY THE ARBITRATOR

On Korea’s request pertaining to LRWs, the Arbitrator determined that the level of nullification or impairment caused by the WTO-inconsistent anti-dumping and countervailing duty measures at the end of the RPT amounts to USD 74.40 million and USD 10.41 million, respectively.

These amounts may be adjusted for inflation for the year 2018 and on an annual basis thereafter.

The Arbitrator suggested that Korea notify the DSB every year of the adjustment to the level of suspension.

On Korea’s request in relation to non-LRWs, the Arbitrator decided that Korea may apply a formula (set out by the Arbitrator in its report) to calculate the level of nullification or impairment on non-LRWs if and when the United States applies definitive duties to specific exporters of a given non-LRW, based on margins calculated under the W-T comparison methodology, as found to be WTO-inconsistent by the Panel and the Appellate Body in the underlying dispute.

SOME CONCLUDING OBSERVATIONS

In some concluding observations, the Arbitrator noted that this is the first arbitration that was tasked with determining the level of nullification or impairment caused by essentially the same measures “as such” and “as applied”.

In view of these particular circumstances, the Arbitrator has striven to use a similar approach for both, to the extent possible. However, certain adjustments were unavoidable.

The Arbitrator briefly highlighted the main similarities and differences characterizing the approaches adopted for LRWs and non-LRWs, in particular with respect to the counterfactuals, the economic model, the data employed, and the reference period.

“Our selection of the counterfactuals was driven by the notion of benefits accruing to Korea,” said the Arbitrator.

Against this background, and for the reasons explained (in the Arbitrator’s report), the proper counterfactual could not entail withdrawal of the orders.

For the “as applied” measures, the appropriate counterfactual is a hypothetical scenario in which the USDOC (US Department of Commerce) would have relied on the normal comparison methodology in the first sentence of Article 2.4.2 of the Anti-Dumping Agreement for the determination of the anti-dumping duty.

“In principle, the same scenario could have been envisioned with respect to non-LRWs; however, uncertainties related to the availability of information in future anti-dumping investigations and administrative reviews obliged us to use the value of zero, as a proxy figure, to take the place of anti-dumping duty rates based on W-T margins in future anti-dumping orders on non-LRWs.”

The Arbitrator then determined that it would be possible to apply a similar model – the Armington model – to calculate the level of nullification or impairment for LRWs and non-LRWs.

This model is flexible, because the elasticity of substitution can vary depending on the nature of the product and the market.

“In contrast, the perfect substitutes partial equilibrium model assumes that the elasticity of substitution is infinite, and we had no evidence, in the LRW context, and necessarily no means to obtain evidence, in the non-LRW context, to make that assumption,” said the Arbitrator.

For LRWs, the reasons to use the Armington model are, inter alia, that LRWs are differentiated products and evidence provided by the parties support a finite value of 4 for the elasticity of substitution of LRWs.

In the case of non-LRWs, the Armington model was deemed flexible to accommodate the different types of products and market settings where “as such” violations may occur.

This flexibility arises from allowing the elasticity of substitution to vary depending on the nature of the non-LRW, instead of assuming, without any evidence, that it is infinite, as would be the case in the perfect substitutes model.

Consequently, the size of the coefficient also varies, depending on the product and market under consideration.

This approach ensures that the suspension of concessions will be equivalent to the level of nullification or impairment, said the Arbitrator.

The Armington model requires data inputs such as the import share and the size of demand, supply, and substitution elasticities.

For LRWs the choice of each of these variables and parameters was made by the Arbitrator based on extensive submissions, responses to questions, and comments on each other’s responses by the parties.

This type of exchange was not possible for the not-yet-identified non-LRWs. Consequently, a procedure was required to reduce ambiguity in sources of data and calculations as much as possible.

“It is for these reasons that we have adopted the use of a formula for non-LRWs using the data sources and methodology described in section 4.4 [of the Arbitrator’s report],” said the Arbitrator.

While there is no difference in the variables used in the calculations for LRWs and non-LRWs the sources of data used for these variables differ, in particular with respect to (i) the value of imports, and (ii) the import share or size of the market.

First, the value of imports is at HS 10-digit level for LRWs, whereas it is either firm-level or product-level data for non-LRWs.

Second, the average import shares for the 98 HS chapters are employed for non-LRWs, whereas precise information on the value of sales of LRWs in the United States is used (i.e. AHAM data).

The reason for this difference is that no uniform source of data can be prescribed by the Arbitrator that could provide the same level of precision for yet unidentified products.

The Arbitrator said that the reference period to determine the value of imports that serve as input into the model differs for LRWs and non-LRWs.

For LRWs the market share in 2011, prior to the imposition of the measure, is employed and adjusted based on the economic model to arrive at a hypothetic al market share in 2017 representing a situation in which the WTO- inconsistent duties are in place.

The level of nullification or impairment is calculated in a counterfactual where the WTO-inconsistent duties are removed at the end of the RPT in 2017.

“For non-LRWs “old cases”, where the reference period is also the end of the RPT, we cannot adopt the same approach as for LRWs, because the information to undertake this analysis was not provided by Korea and the use of hypothetical import values for non-LRWs would be impractical and difficult to implement, ” said the Arbitrator.

For non-LRWs “new cases”, the reference period is the calendar year prior to the application of the inconsistent anti-dumping duty measure.

Notwithstanding the differences highlighted above, the use of the Armington model for both LRWs and non-LRWs will result in a similar approach to calculating the level of nullification or impairment.

In addition, both approaches “create an opportunity to ensure full cooperation from the parties and, hence, more precise and credible results”.

“Moreover, with a view to enhancing transparency, we suggested that Korea should notify the DSB every year of the amount of suspension resulting from the implementation of our Award,” said the Arbitrator.

The Arbitrator noted that, should the United States consider that the application of the suspension by Korea exceeds the level of nullification or impairment sustained by Korea, the United States may have recourse to the appropriate dispute settlement procedures.

 


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