A marathon lawsuit between China and the United States in the WTO was once again won by the Chinese side a month ago. "The United States has repeatedly made mistakes, has not corrected its mistakes, and has refused to implement WTO rulings. The WTO authorizes China to legally retaliate against American imports.".

 

This lawsuit in the WTO has finally revealed teeth that can bite.

 

This is the origin of the matter. More than a decade ago, the United States conducted a countervailing investigation on many products exported from China to the United States in accordance with United States law, claiming that these products were subject to various subsidies and subsidies from the Chinese government, resulting in high countervailing taxes, which prevented these products from entering the United States market. During this process, Chinese responding enterprises and their lawyers have found that the US countervailing investigations have repeatedly violated the WTO countervailing agreement. On May 25, 2012, China filed a series of countervailing measures against 12 products such as oil well tubes and solar cells from the United States with the WTO, which initiated a dispute resolution procedure for filing (Case No.: DS437, hereinafter referred to as the "Sino US Subsidy Case"). After two trials, the WTO expert group and the Appellate Body ruled that the United States violated WTO rules in calculating the amount of subsidies using external benchmarks and determining the specificity of subsidies (that is, only specific enterprises or industries receive subsidies).

 

Despite this, the United States refused to implement the WTO ruling within the prescribed time limit, so China continued to pursue enforcement lawsuits in the WTO in 2018, initiating enforcement actions in this case. On July 16, 2019, the enforcement appeals body issued a ruling declaring once again that the US measures violated the WTO rules. On October 17th of the same year, China requested the WTO Dispute Resolution Body ("DSB") to authorize China to impose legal retaliation of US $2.4 billion annually on products imported from the United States (i.e., to increase import tariffs on US $2.4 billion worth of products from the United States to restrict access to the Chinese market), but the United States raised objections to the amount of retaliation. The WTO initiated arbitration proceedings in accordance with Article 22.6 of the Understanding on Dispute Settlement Rules and Procedures ("DSU"). On January 26, 2022, the WTO issued an arbitration report, announcing that China could impose a trade retaliation of $645 million annually against products from the United States.

 

As an institution that regulates the trade laws and policies of member governments, the WTO has a complete set of international trade laws that govern trade in goods and products, service trade, and intellectual property rights. Its members have the obligation to enforce compliance. In the event of an illegal act, the injured party has the right to go to the WTO to file a lawsuit. The WTO dispute settlement mechanism ("DSP" for short) implements a system of two instances of final adjudication. In the first instance, a panel of three experts will adjudicate the case. If you are not satisfied with the decision of the first instance, you can appeal to the appellate body, and the final adjudication will be conducted by three appellate judges. However, in the case of the above-mentioned Sino-U.S. subsidy case, if the losing party does not implement the final judgment, it will have to go through another enforcement lawsuit, which is also a second instance final judgment. After the execution of the lawsuit, the WTO will authorize the aggrieved party to carry out legal retaliation against the losing party. However, if both parties fail to reach an agreement on the amount of retaliation, the WTO will also initiate arbitration on the amount of retaliation. According to the arbitration results, the aggrieved party may retaliate.

 

The basic principle of this retaliation lies in the contractual nature of the WTO. The WTO is a binding intergovernmental contract between various member states that opens their markets to each other. Members often conduct open market negotiations on each other's products and service industries (such as banking, insurance, telecommunications, lawyer services, shipping, express delivery, etc.), reduce tariffs on product imports, and allow each other's service industries to open up in their own countries. The results of these negotiations are recorded in the contract text and stored in the WTO. "Once a measure that violates the WTO is identified as a breach of contract by the WTO through dispute resolution, the breaching party must immediately correct the breach and withdraw the measure.". The WTO authorizes the aggrieved party to legally deviate from the open market contract previously negotiated with the other party, to enter the domestic market for the other party's products within a reasonable range, to raise the low tariff promised in the original contract, and to restrict the import of their products, if the party is found to have breached the contract and has not implemented the ruling. If this is not enough to work, restrictions can also be imposed on the service industry from the other party that has opened in the domestic market, such as limiting the scale of business, or even suspending business licenses. That is, if the product restrictions are not enough, take the business of the service department as an example, which is called "cross retaliation". It can be said that WTO law has such a set of "armed to the teeth" means to ensure the implementation of decisions.

 

As legal advisers who have assisted the Chinese government in multiple WTO disputes, we are well aware that this victory has not come easily. In foreign countervailing investigations against China, the investigating authority usually has extensive discretion to determine whether it constitutes a taxable subsidy. They require the Chinese side (especially the Chinese government) to submit massive amounts of data and information within a relatively short time frame, even if some alleged subsidy projects do not exist at all (such as subsidies for low-cost supply of raw materials). If the Chinese side fails to provide it within the time limit, the investigation authority will presume that the accusation against the Chinese side is established and subsequently take countervailing measures.

 

One of the issues in this dispute is the subsidy project for low-cost supply of raw materials. In the countervailing investigation, the United States and Europe claimed that Chinese enterprises (especially state-owned enterprises) provided raw materials to the exporters of the investigated products at prices below the market, which constituted subsidies. For example, in the US countervailing investigation against China's oil well tubing, as long as Chinese oil well tubing producers purchase raw materials (i.e., steel) from state-owned enterprises, the US Department of Commerce considers them to constitute subsidies. "Low price supply of raw materials" is a subsidy project artificially constructed by US and European investigation authorities, and it is also the project with the highest tax rate in the countervailing investigation. Since the project itself does not exist, it can be arbitrarily adjudicated by the investigating authority, making the defense of the Chinese government and enterprises the most difficult. The legal analysis made by the WTO expert group and the Appellate Body in this case is helpful in clarifying the determination rules of the project and the obligations of the investigating authority. A brief review of this will be provided below.

 

1、 Investigation Methods of Subsidies for Low Price Raw Materials Supplied by the United States and Europe

 

In order to achieve the purpose of taxation, US and European investigation authorities usually take three steps to demonstrate that the so-called low-cost supply of raw materials constitutes a subsidy.

 

1. Treat the raw material suppliers of the investigated products (especially state-owned enterprises) as enterprises that possess or exercise government power (referred to as "public institutions" in countervailing terminology);

 

2. The high selling price of similar raw materials found in foreign markets (referred to as "external benchmark" in countervailing terms) is compared to the price of raw materials purchased by Chinese exporters, and the difference is considered as the subsidy amount;

 

According to the five-year plan or other policy documents of Chinese governments at all levels, it is determined that the aforementioned subsidies are only granted to specific enterprises or industries (referred to in countervailing terms as "having specificity").

 

2、 Identification of public institutions (do state-owned enterprises possess or exercise government power?)

 

Article 1.1 of the WTO Anti Subsidy Agreement stipulates that the provision of financial assistance by the government or any enterprise (i.e., a public institution) that has or exercises government power is one of the constituent elements of subsidies. In other words, the main body issuing subsidies must be the government or public institutions. Therefore, the investigation authorities in the United States and Europe treat the raw material suppliers (especially state-owned enterprises) of the investigated products as public institutions, which is the prerequisite for artificially constructing low-cost subsidy projects for raw materials to be supplied.

 

In another previous countervailing dispute between China and the United States (DS379), the expert group considered that government controlled entities (such as state-owned banks or enterprises) belong to public institutions. The Appellate Body overturned the previous view and pointed out that only entities that own, exercise, or are granted government power constitute public institutions. "Just because the government is the controlling shareholder of an entity, it cannot be asserted that the entity owns or exercises government power.". [1]

 

In the first instance of the Sino US Subsidy Case (DS437), the expert group once again ruled that the United States Department of Commerce identified Chinese state-owned enterprises that should supply raw materials as "public institutions" based solely on state control, in violation of Article 1.1. a. (1) of the WTO Anti Subsidy Agreement. However, in the enforcement action in this case (DS437), when the Chinese side further raised the definition standard of "public institution", it failed to obtain the support of the expert group to hear the enforcement action, and the WTO dispute settlement mechanism has reservations on this issue. Specifically, China believes that when determining whether an entity constitutes a public institution, the investigating authority should rely on whether it exercises government functions when providing financial assistance. The Expert Group believes that this interpretation does not meet the legal standards of "public institutions". The Appellate Body upheld the expert group's opinion and determined that the enforcement measures taken by the United States Department of Commerce against public institutions in 11 countervailing investigations did not violate the WTO Countervailing Agreement. [2]

 

3、 Comparison and calculation basis of subsidy amount

 

Article 14. c of the WTO Anti Subsidy Agreement stipulates that to determine whether the government provides goods or services at a low price, it is necessary to compare the price, quality, and other sales conditions of the goods or services involved with the domestic market situation of the country before determining.

 

In the United States Canada Cork Case (DS257), the Appellate Body held that as long as the investigating authority had proven that the prices of private enterprises in the market of the exporting country had been distorted due to government intervention, the investigating authority could use the prices of raw materials from a third country (i.e., external benchmarks) to calculate the margin of subsidy. [3] According to this, investigation agencies such as the United States and Europe all use external benchmarks to calculate the subsidy amount under the so-called "low-cost supply of raw material subsidy projects" in their countervailing investigations against China.

 

In the second instance of the Sino US Subsidy Case (DS437), the Appellate Body stated that the investigating authority has the obligation to give priority to internal benchmarks, that is, when determining whether Chinese exporters obtain raw materials at low prices, the US Department of Commerce should give priority to using the raw material prices of other Chinese enterprises to compare them with the raw material prices sold by state-owned enterprises. [4]

 

In the enforcement lawsuit in the US US US Subsidy Case (DS437), China pointed out that the investigating authority cannot presume that government intervention inevitably leads to price distortions, but must demonstrate how government intervention leads to price distortions. This claim was supported by the Implementation Expert Group and the Appeals Body. Due to the fact that the United States Department of Commerce has not provided corresponding evidence in its ruling on products such as solar cells and annular welded pressure pipes, the Appellate Body has determined that the relevant countervailing measures violate Article 14. d of the Anti Subsidy Agreement.

 

4、 Subsidy specificity (is the subsidy only granted to specific enterprises or industries?)

 

Specific subsidies refer to subsidies provided by exporting countries only to specific enterprises, industries, or regions. According to Article 1.2 of the Anti Subsidy Agreement, importing countries can only take countervailing measures against specific subsidies. Article 2.1 stipulates that the investigating authority may determine the specificity of the subsidy project under investigation based on written evidence or other factors under Article 2.1 (c) (referred to as "de facto specificity"). In practice, US and European investigation authorities usually infer the specificity of subsidy projects involved based on the five-year plan of the Chinese government or other policy documents referring to specific industries.

 

In the second instance of the Sino US Subsidy Case (DS437), the Appellate Body pointed out that the fact that only financial assistance was provided to certain enterprises was not sufficient to prove the existence of factual specificity under Article 2.1 (c) (i.e., only granting subsidies to specific enterprises or industries); The investigating authority must have sufficient evidence to prove that the subsidy issuer has taken a series of specific measures to provide benefits to certain enterprises or industries. [5]

 

In the enforcement lawsuit of the Sino US Subsidy Case (DS437), the US Department of Commerce issued a Memorandum of Understanding on the Specificity of Raw Materials, and based on the number of times that raw material manufacturers sold raw materials to the investigated enterprises, it was determined that the Chinese government had provided subsidies "systematically" in the measures involved. In response, the expert group believes that the United States Department of Commerce failed to prove the existence of any "subsidy plan" in 11 countervailing measures, thereby violating Article 2.1 (c) of the Anti Subsidy Agreement. The decision was supported by the enforcement appeals body. [6]

 

Summary

 

In order to clarify the WTO's countervailing investigation rules, the Chinese government submitted a consultation request to the United States as early as 2008 (also known as "China v. the United States' countervailing dispute" - DS379), and subsequently requested the WTO to review the illegality of multiple countervailing measures taken by the United States against China. The Sino US Subsidy Case (DS437) is the second dispute that China has questioned the legality of US countervailing measures after the WTO countervailing dispute between China and the United States (DS379). After nearly 14 years of review of the two cases, the WTO Expert Group and the Appellate Body have further clarified the WTO rules on countervailing measures, strengthened the burden of proof of the investigating authority, and to a certain extent restricted the investigating authority's discretion in identifying public institutions, interest calculation criteria, and subsidy specificity.

 

China's victory in the Sino US Subsidy Case (DS437) has provided an important basis for the Chinese government and enterprises to defend against foreign countervailing investigations against China in the future. On the other hand, the expert group and the appellate body have not completely denied the investigation methods of the United States Department of Commerce, and there is still room for explanation to continue the original approach. In addition, a small number of members of the appellate body advocate reducing the burden of proof and difficulty of the investigation authority. [7] These views represent the common positions of countries such as the United States and Europe. If the investigating authority collects more evidence in individual cases to prove that government intervention has led to market distortions, the WTO may draw review conclusions that are not conducive to China.

 

In view of this, for a long time to come, we will continue to challenge the legality of low-cost supply of raw materials subsidy projects under the WTO dispute settlement mechanism. Secondly, in foreign countervailing investigations against China, in addition to legal defenses, China can proactively submit price benchmarks in the domestic market to the investigating authority, and demonstrate the effectiveness of domestic market prices by comparing international raw material price trends, thereby preventing the investigating authority from using third-party raw material prices (i.e., external benchmarks) to calculate the subsidy amount.

 

References and Notes:

　　[1]Appellate Body Report,US-Anti-Dumping and Countervailing Duties(China),paras.317-318.

　　[2]Appellate Body Report,US–Countervailing Measures(China)(Article 21.5-China),para.5.101.

　　[3]Appellate Body Report,US-Softwood Lumber IV,para.90.

　　[4]Appellate Body Report,US–Countervailing Measures(China),para.4.64.

　　[5]Appellate Body Report,US–Countervailing Measures(China),para.4.143.

　　[6]Appellate Body Report,US–Countervailing Measures(China)(Article 21.5-China),para.5.233.

[7] Regarding the determination of a public body, individual members of the appellate body believe that, The law does not require the investigating authority to determine in a case whether the entity under investigation "owns, exercises, or grants government power. When the government has the ability to control an entity and/or its actions to convey financial value, the entity can be recognized as a public institution." "For another example, regarding the determination of the specificity of subsidies, individual members of the Appellate Body believe that Article 2.1 (c) of the WTO Anti Subsidy Agreement only requires confirmation of whether specific enterprises are using the subsidies involved, without requiring the investigating authority to review the transaction volume and/or frequency of 'benefits' to determine whether' subsidies' have been 'systematically' granted under the 'subsidy plan'.". Appellate Body Report,US–Countervailing Measures(China)(Article 21.5-China),para.5.273.