Appellate Body Reversal On 'Double Remedies' Sparks Angry U.S. Reaction

The March 11 reversal by the Appellate Body of the World Trade Organization of key parts of a dispute panel ruling involving the simultaneous application of countervailing duties and antidumping duties by the United States on imports from China is "as bad as it could be" for the United States and undermine U.S support for the WTO, according to a lawyer close to U.S. petitioners.

The AB reversed the original panel decision on two crucial points, according to sources close to the U.S. domestic industry and to China.

Most importantly, it found that the U.S. Commerce Department could not continue its practice of assessing against the same imports both countervailing duties (CVDs) and antidumping (AD) duties using the non-market-economy (NME) methodology without making sure that the price effects of the subsidies being countervailed were not also being taken into account when calculating the AD duties. This practice is known as "double counting" or "double remedy."

The other systemically important issue reversed by the AB was the panel's conclusion that the U.S. had properly shown that state-owned enterprises (SOEs) that are input suppliers for the targeted imports in the four U.S. trade remedy cases at issue in the dispute were "public bodies." Under WTO rules, they must be public bodies in order to be able to confer government subsidies, and the AB rejected that SOEs are necessarily public bodies.

U.S. Trade Representative Ron Kirk on March 11 called the Appellate Body decision "deeply troubling" and said it appeared to be "clear case of overreaching" by the AB. He said USTR was "reviewing the findings closely in order to understand their full implications."

The "Appellate Body overreach will only undermine confidence in the WTO as an institution -- and will only make it more difficult to reach new agreements to liberalize trade," said House Ways and Means Trade Subcommittee Ranking Member Jim McDermott (D-WA).

"Unfortunately, this is not the first time the Appellate Body has appeared to ignore the text of an agreement reached between WTO Members on issues related to trade remedies," McDermott added .

He said that this AB report is "the same movie we saw in the zeroing cases," a reference to another AB overrule that went against a U.S. trade remedy practice.

House Ways and Means Ranking Member Sander Levin (D-MI) also criticized the ruling on March 11. "The Appellate Body's findings will make it more difficult for market economy countries to confront the trade distortions inherent in the troubling trend toward 'state capitalism," he warned.

A petitioners' lawyer said the potential negative ramifications of the "profoundly disturbing," unappealable AB decision could be a reevaluation by the U.S. of its negotiating approach on trade-remedy issues. This would mean further complications for concluding the Doha round even if negotiating modalities are agreed later this year, he said.

"If you have an Appellate Body that is going to make [stuff] up like this, then the only way you can protect yourself is to negotiate every exception you may want to do," he complained.

The AB "fully endorsed China's interpretation of what the term 'public body' means." according to a lawyer close to the Chinese side. That view is, he said, that a public body is "an entity invested with authority to act on behalf of the government" and one that therefore "must have some kind of express governmental authority."

He said the AB's definition "obliterates" the rationale that the Commerce Department has used in its recent CVD investigations involving China: that SOEs "are the government" for purposes of the CVD laws. The AB did uphold the panel's finding that Chinese state-owned banks (SOBCs) could be considered public bodies for CVD purposes.

"It's important to bear in mind that in these four investigations … most of the subsidy margins come from alleged subsidies from these SOEs," said the source close to the Chinese side.

The source close to China called the AB ruling a "decisive" win for China's position on both the double remedies and public bodies aspects of the case, which he said were the two most important "systemic issues" raised by the challenge.

"Clearly there is a double remedy problem" in the way Commerce calculates CVDs and AD duties simultaneously against NMEs like China, he said. "It's not even debatable at this point."

He noted that the Court of International Trade has also ruled against the Commerce double remedy practice in a separate domestic ruling, on imports of tires made by the Chinese subsidiary of GPX International Tire, that is currently under appeal by Commerce.

Another lawyer close to domestic industry termed the appellate body's decision "very disappointing." He acknowledged that the reversals by the appellate body of the original panel's decision and of the original U.S. trade-remedy decisions in the four AD/CVD cases at issue constituted "pretty negative developments," but insisted it was too early to speculate on the full ramifications or what could be done to counteract it.

The AB did agree with the United States that certain subsidies were specific to the industries targeted, and also "appeared to agree" with the U.S. stance that Commerce could use benchmarks from outside China to measure the "benefit" of certain subsidies, said the source close to domestic industry. But he readily acknowledged that those "helpful parts" of the AB report were "not the most significant parts" of the decision.

The latter viewpoint was underscored strongly by a petitioners' attorney familiar with USTR thinking on the matter, who said the three members of the AB who made the ruling should be barred from reviewing future cases because they chose to substitute their own views for the rules negotiated by the WTO parties.

The three panelists were Presiding Member Ricardo Ramierez-Hernandez, the chair of International Trade Law at the Mexican National University (UNAM) in Mexico City, whose AB term expires in 2013; Lilia Bautista, a former chair of the Philippines' Securities and Exchange Commission who currently serves as a consultant to the Philippine Judicial Academy training school for justices, judges and lawyers, whose term expires this year; and Peter Van den Bossche, a professor of international economic law and head of the Department of International and European Law at Maastricht University in the Netherlands, whose term ends in 2013.

The AB's approach in this ruling is a "caricature" of proper WTO decision-making, charged the petitioners' attorney. Instead of remaining loyal to the WTO members' intent when they negotiated the the General Agreement on Tariffs and Trade 1994, the Antidumping Agreement, the Agreement on Subsidies and Countervailing Measures (SCM) and China's accession protocol, the AB members' instead appeared to try to find a way to overturn that intent, which they found "distasteful," rather than be "bound by the bargain the members made," according to this attorney.

From a "legal interpretation" standpoint, he said, the AB overturn thereby "makes a real mockery of the standard of review" that ought to properly be applied by appellate bodies when reviewing decisions, which should be limited in scope to assessing whether the panel correctly interpreted international trade rules.

"If the Appellate Body can make up something like this, it can make up literally anything, which is profoundly disturbing" and means "there is nothing in our entire AD/CVD system that it could not rule against," he said. Faced with that reality, the United States may feel compelled to change its relationship to the WTO and how it negotiates trade rules there, he warned.

Distrust of the fealty of the AB to the bargains reached in past rules negotiations could mean the U.S. and others who rely on trade remedy measures to address unfair trading practices will feel the need to negotiate more explicit rules that spell out every possible practice to which their administering agencies might resort.

This would be contrary to the commonly accepted international approach of negotiating only those practices that they, as sovereign bodies, agree to refrain from undertaking. Such a shift in approach would greatly bog down any rules negotiations that are part of the Doha round, he noted.

"The agreements will have to look like the phone book, specifying what you can do rather than what you cannot do," he said.

On double remedies, he said, the AB report specifically is wrong "both factually and legally" in asserting that the offsetting of domestic subsidies with CVDs produces double counting when the NME AD methdology is applied, as well as in suggesting that the U.S. ever agreed to refrain from using countervailing duties in tandem with NME AD methodology.

"If you look at China's [WTO accession] protocol, they agreed to be subject to CVDs and to the special AD approach," he said. "That could not be any clearer in the protocol."

In finding that there is double counting, the AB made the "fundamental error" of assuming that the CVD remedy exists only to offset the price effect of the subsidy rather than the subsidy itself, which is not the case.

"Whether subsidies affect the price or not is irrelevant, and that's the law we have lived with since 1947," which is what the original panel concluded and what should not have been overturned, he said.

The only mention in any agreement of limitations on the use of countervailing against subsidies in tandem with calculation of antidumping duties is in GATT 1947, and that reference explicitly only proscribes the simultaneous offsetting of export subsidies in tandem with the use of AD duties. The four cases at issue in the Chinese challenge involved domestic subsidies, not export subsidies.

"It's not that these Appellate Body people's idea, as a policy matter, is idiotic," he said. "It's just that it has never been agreed to -- and that' not how it's supposed to work."

Under WTO rules, the WTO will now formally adopt the AB ruling within 30 days of its issuance on March 11. If the U.S. agrees then that it wants to implement the ruling, then it receives a "reasonable period of time" to implement the decision and will probably begin what is known as the "Section 129" process to bring the targeted trade-remedy determinations into compliance with the decisions. The "reasonable period of time" in the past has frequently been about 15 months. -- Scott Otteman

Sources: Squire Sanders