The Regulation of International Trade, Volume 2: The WTO Agreements on Trade in Goods 0262029995, 9780262029995

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The Regulation of International Trade, Volume 2: The WTO Agreements on Trade in Goods
 0262029995, 9780262029995

Table of contents :
Contents
Preface
Introduction
1 Annex 1A Agreements Dealing with Customs Procedures
1.1 Clearing Goods through Customs
1.2 ILA
1.3 CVA
1.4 The Agreement on Preshipment Inspection (PSI)
1.5 Trade Facilitation
1.6 Concluding Remarks
2 Antidumping
2.1 The Legal Discipline and Its Rationale
2.2 The Relationship with GATT
2.3 Calculating the Dumping Margin
2.4 Injury Analysis
2.5 The Causality Requirement
2.6 Imposing Antidumping Duties
2.7 Administrative Review of AD Duties
2.8 Sunset Reviews
2.9 Duties Can Be Imposed Only Following Investigation
2.10 Special and Differential Treatment
2.11 The Standard of Review by WTO Adjudicating Bodies
2.12 Remedies against Illegally Imposed AD Duties
2.13 Institutional Issues
2.14 Is Dumping Unfair?
2.15 Concluding Remarks
3 Subsidies
3.1 The Legal Discipline and Its Rationale
3.2 The Relationship with GATT
3.3 Defining a Subsidy
3.4 Three Categories of Subsidies
3.5 Actionable Subsidies
3.6 Nonactionable Subsidies
3.7 Prohibited Subsidies
3.8 CVDs: Substantive Requirements
3.9 CVDs: Procedural Requirements
3.10 Administrative Reviews
3.11 Sunset Reviews
3.12 Special and Differential Treatment for Developing Countries
3.13 The Standard of Review Applied by WTO Adjudicating Bodies
3.14 Fisheries Subsidies
3.15 Institutional Issues
3.16 Concluding Remarks
4 Safeguards
4.1 The Legal Discipline and Its Rationale
4.2 The Legal Relationship with GATT
4.3 The Road to the SG Agreement
4.4 The Right to Safeguard Action
4.5 Applying Safeguards
4.6 Procedural Requirements
4.7 Special Safeguard Regime with Respect to China
4.8 Special and Differential Treatment for Developing Countries
4.9 Standard of Review
4.10 Institutions
4.11 Concluding Remarks
5 Technical Barriers to Trade
5.1 The Legal Discipline and Its Rationale
5.2 The Relationship with GATT
5.3 Coverage
5.4 International Standards
5.5 Technical Regulations
5.6 Standards
5.7 Conformity Assessment
5.8 Special and Differential Treatment for Developing Countries
5.9 Institutional Issues
5.10 Concluding Remarks
6 Sanitary and Phytosanitary Measures
6.1 The Legal Discipline and Its Rationale
6.2 The Relationship with GATT and the Other Annex 1A Agreements
6.3 Coverage
6.4 International Standards
6.5 Unilateral Measures Must Be Based on Science
6.6 Measures Based on Precaution
6.7 Measures Must Be Applied in a Nondiscriminatory Way
6.8 Measures Must Be Necessary
6.9 Consistency
6.10 Special and Differential Treatment
6.11 Transparency
6.12 Standard of Review 94
6.13 Institutional Issues
6.14 Concluding Remarks
7 Trade-Related Investment Measures (TRIMs)
7.1 The Legal Discipline and Its Rationale
7.2 The Relationship with GATT and the Other Annex 1A Agreements
7.3 Trade and Investment
7.4 The TRIMs Agreement
7.5 Institutions
7.6 Review of the Agreement
7.7 Concluding Remarks
8 Agreement on Agriculture
8.1 The Legal Discipline and Its Rationale
8.2 The Relationship with GATT and the Other Annex 1A Agreements
8.3 The Road to the AG Agreement
8.4 Product Coverage and Schedules of Concessions
8.5 Border Measures
8.6 Domestic Support
8.7 Export Subsidies
8.8 Minimum Access Requirements
8.9 Due Restraint (Peace Clause)
8.10 Public Stockholding for Food-Security Purposes
8.11 Special and Differential Treatment
8.12 Transparency
8.13 Institutional Issues
8.14 Concluding Remarks
9 Agreement on Textiles and Clothing
9.1 The Legal Discipline and Its Rationale
9.2 The Relationship with GATT
9.3 The Road to the ATC
9.4 ATC
9.5 Concluding Remarks
10 Government Procurement
10.1 The Legal Discipline and Its Rationale
10.2 The Relationship with GATT
10.3 Government Procurement: A Multifaceted Instrument
10.4 The Scope of the GPA
10.5 The Obligations Assumed
10.6 Procurement Methods
10.7 Transparency
10.8 Special and Differential Treatment
10.9 Enforcing the GPA
10.10 The Work Programmes
10.11 Institutional Issues
10.12 Concluding Remarks
11 The Civil Aviation Agreement
11.1 The Legal Discipline and Its Rationale
11.2 The Relationship with the GATT and Annex 1A Agreements
11.3 Membership
11.4 Product Coverage
11.5 Elimination of Customs Duties
11.6 Disciplines on Subsidies
11.7 Other Obligations
11.8 Institutions
11.9 Concluding Remarks
12 Transparency
12.1 The Legal Discipline and Its Rationale
12.2 Article X of GATT
12.3 The Trade Policy Review Mechanism (TPRM)
12.4 Into the Great Wide Open: Transparency Unlimited
Notes
References
Index

Citation preview

The Regulation of International Trade

The Regulation of International Trade Volume 2: The WTO Agreements on Trade in Goods Petros C. Mavroidis

The MIT Press Cambridge, Massachusetts London, England

© 2016 Massachusetts Institute of Technology All rights reserved. No part of this book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher. This book was set in Times New Roman by Toppan Best-set Premedia Limited. Printed and bound in the United States of America. Library of Congress Cataloging-in-Publication Data is available. ISBN: 978-0-262-02999-5 10

9

8

7

6

5

4

3

2

1

For Meritas always, as always

Contents

Preface xxxv Introduction 1 1

Annex 1A Agreements Dealing with Customs Procedures

1.1

Clearing Goods through Customs

1.2

ILA

1.2.1

The Legal Discipline and Its Rationale

1.2.2

Automatic Licensing

1.2.3

5

5 5

8

1.2.2.1

Definition

8

1.2.2.2

The Rationale for Automaticity

1.2.2.3

Conditions for Lawful Imposition

1.2.2.4

Approval Granted in All Cases

1.2.2.5

General Provisions

1.2.2.6

Presumption of Existence of Restrictive Effects

Nonautomatic Licensing 1.2.3.1

Definition

8 9 9

12

14

14

1.2.3.2

The Rationale for Nonautomatic Licensing

1.2.3.3

Conditions for Lawful Imposition

1.2.3.4

Disciplines Specific to Nonautomatic Licensing

1.2.4

Administration of Tariff Quotas

1.2.5

Transparency

19

Notification Requirements

1.2.5.2

The Record

20

1.2.6

Export Licensing

20

1.2.7

Special and Differential Treatment

1.2.8

Reservations

15

16

18

1.2.5.1

23

13

19

23

17

5

viii

Contents

1.2.9

Exceptions

23

1.2.10

Institutions

23

1.2.11

Relationship with Article XI of GATT

1.3

CVA

1.3.1

The Legal Discipline and Its Rationale

1.3.2

1.3.3

23

24

Transaction Value (Actual Price)

24

27

1.3.2.1

The Primacy of Transaction Value

1.3.2.2

Arm’s Length

27

1.3.2.3

Verifying the Truth and Accuracy of Information Received

28

Deviating from the Transaction Value

30

1.3.3.1

Hierarchy among the Statutory Methods

1.3.3.2

Fallback Method: Limited Discretion

1.3.3.3

Right of Appeal

30 32

34

1.3.4

Treatment of Confidential Information

1.3.5

Cooperation across WTO Members

1.3.6

Special and Differential Treatment

1.3.7

Exceptions

1.3.8

Reservations

1.3.9

Institutions

1.4

The Agreement on Preshipment Inspection (PSI)

1.4.1

The Legal Discipline and Its Rationale

1.4.2

1.4.3

1.4.4

34

34 35

35 35 35

Déjà Vu All Over Again?

36

36

1.4.2.1

Is PSI an NTB?

37

1.4.2.2

It Is Basically Companies We Are After

The Ambit of the Agreement 1.4.3.1

What Is a PSI Entity?

1.4.3.2

What Do PSI Entities Do?

38

39

39 39

Obligations Imposed on User Members 1.4.4.1

The Site of Inspection

1.4.4.2

Nondiscrimination

1.4.4.3

Contractual and International Standards

1.4.4.4

Transparency

1.4.4.5

BCI

1.4.4.6

Conflict of Interest

1.4.4.7

Timely Inspection

42

1.4.4.8

Price Verification

42

40

40 41

41

41 41

41

36

29

Contents

ix

1.4.5

Obligations Imposed on Exporter Members

1.4.6

Resolution of Disputes

42

1.4.6.1

Appeals Procedures

1.4.6.2

The Independent Entity

42 42

1.4.7

Special and Differential Treatment

1.4.8

Exceptions

44

1.4.9

Institutions

45

1.4.10

PSI Inspection and Trade Facilitation

1.5

Trade Facilitation

1.5.1

The Legal Discipline and Its Rationale

1.5.2

The Negotiating Process

1.5.3

The Evolution of Definition

1.5.4

For the Benefit of …

1.5.5

Cutting Red Tape in Customs

1.5.6

42

44

45

46 46

48 49

51 51

1.5.5.1

Transparency

1.5.5.2

Substantive Improvements in Customs Administration

52 52

1.5.5.3

Procedural Improvements in Customs Administration

55

Special and Differential Treatment 1.5.6.1

Categories of Commitments

58

58

1.5.6.2

Implementation: Sine Die (Until the Greek

1.5.6.3

Early Warning

Kalends)?

59 61

1.5.7

Institutions

61

1.5.8

Entry into Force

1.5.9

Where Does the Red Tape End?

1.6

Concluding Remarks

2

Antidumping

2.1

The Legal Discipline and Its Rationale

2.1.1

The Legal Discipline

2.1.2

The Rationale for the Legal Discipline

2.1.3

Discussion

62 62

64

67 67

67

72

2.1.3.1

Negotiating History

2.1.3.2

Economic Theory

2.1.3.3

Contingent Protection

72 73 73

67

x

Contents

2.1.3.4

Injury to Competitors

2.1.3.5

Combating Dumping Only through Antidumping

73

2.1.3.6

No Double Count

2.2

The Relationship with GATT

2.3

Calculating the Dumping Margin

2.3.1

NV Must Exceed EP

2.3.2

NV Can Be a Market Price

2.3.3

2.3.4

2.3.5

2.3.6

2.3.7

2.3.8

73

74

75 75

75 75

NV When Market Price Is Discounted 2.3.3.1

Ordinary Course of Trade

2.3.3.2

Low Volume of Sales

2.3.3.3

Particular Market Situation

76

76

77 77

Calculating NV when Market Price Is Discounted 2.3.4.1

Third-Country Sales

2.3.4.2

Constructed Price

Export Price (EP)

77

78 78

81

2.3.5.1

EP Can Be a Market Price

2.3.5.2

EP when Market Price Is Discounted

81 81

The Duty to Perform Fair Comparison between NV and EP 2.3.6.1

Prices Must Be at the Same Level of Trade

2.3.6.2

Due Allowances Can Be Made

2.3.6.3

Statutory Methodologies to Decide on the Dumping Margin

2.3.6.4

Zeroing: Dead and Loving It

84 85

87

Calculating the Amount of Dumping Margin

88

2.3.7.1

Dumping Margin Must Not Exceed the Statutory De Minimis Level

2.3.7.2

Calculating Duties for Individual Exporters

2.3.7.3

Sampling Exporters

2.3.7.4

New Shipments

90

2.3.7.5

Unknown Exporters

Single Entity/Collapsing

91 91

Calculating Dumping Margins for NMEs 2.3.8.1

Defining NMEs

89

91

2.3.7.6

92

93

2.3.8.2

The Rationale for Including Separate Calculation for NMEs

2.3.8.3

Third-Country Sales, Constructed Prices

2.3.8.4

The Case of China

93

2.4

Injury Analysis

94

2.4.1

Injury Must Be “Material” 2.4.1.1

Quantity Effects

2.4.1.2

Price Effects

95 96

94

82

83

93

93

88

Contents

2.4.2

xi

Injury to Competitors 2.4.2.1

Like Product

2.4.2.2

Major Proportion

99

99 101

2.4.3

Statutory Indicators of Injury

102

2.4.4

Cumulating Injury from Various Sources

2.4.5

Sampling in Injury Analysis

2.4.6

Threat of Injury

104

105

105

2.4.6.1

Factors of Threat of Injury

2.4.6.2

Reasoned and Adequate Explanation

105

2.4.6.3

The Special Care Obligation

2.4.6.4

The Standard of Review: Clear and Present Danger

107

107

2.5

The Causality Requirement

2.5.1

Causal Relationship between Dumping and Injury

2.5.2

Implications for Data Gathering

2.5.3

Genuine and Substantial Relationship

2.6

Imposing Antidumping Duties

2.6.1

The Decision to Impose Duties

2.6.2

Public Interest Clause

2.6.3

The Various Forms of Impositions 2.6.3.1

2.6.4

2.6.5

108 109

110 110

111 111

111

Provisional Duties

113

113

2.6.3.2

Definitive Duties

2.6.3.3

Variable Antidumping Duties

2.6.3.4

Price Undertakings

113 113

114

The Level of Permissible Imposition

115

2.6.4.1

Duties Cannot Exceed the Dumping Margin

2.6.4.2

Lesser Duty Rule

115

115

Duties Imposed Prospectively, Retrospectively 2.6.5.1

Prospective Assessment

2.6.5.2

Retrospective Assessment

115 115

2.6.6

Retroactive Application of Duties

2.6.7

Who Are Duties Imposed Against? 2.6.7.1

107

Known Exporters

118

2.6.7.2

Sampled Exporters

2.6.7.3

Nonsampled Exporters

118

2.6.7.4

New Shipments

2.6.7.5

Unknown Exporters

118

119 120

116 117

115

xii

Contents

2.6.8

Refunding AD Duties

122

2.7

Administrative Review of AD Duties

2.7.1

The Function and Rationale for Administrative Reviews

2.7.2

The Ambit of Review

2.7.3

Ex Officio and Upon Request Reviews

2.7.4

Reasonable Period of Time

2.7.5

Standard of Review

2.8

Sunset Reviews

2.8.1

Duties Will Lapse in Five Years, Absent Review

2.8.2

The Ambit of Sunset Review

2.8.3

The Standard of Sunset Review

123

124 125

125

127

128 128

129 129

2.8.3.1

Likelihood of Continuation or Recurrence of Injury

2.8.3.2

Positive Evidence

129

2.8.3.3

Irrelevance of Standards Applied in the Original Investigation

2.8.3.4

Zeroing in Sunset: Illegal as Well

130

Ex Officio and Upon Request Reviews

2.8.5

Due Process

2.8.6

Sunset Practice

2.8.7

Administrative and Sunset Reviews: The Overlap

2.9

Duties Can Be Imposed Only Following Investigation

2.9.1

Conducting Investigation Is a Legal Requirement

2.9.2

Who Can Request Investigation?

135

136 137

2.9.2.1

Ex Officio

2.9.2.2

Upon Request

137 138

138

138

138 138

Standing Requirements

138

2.9.3.1

The Rationale for Standing Requirements

2.9.3.2

Statutory Thresholds

138

139

2.9.4

The Content of Requests

2.9.5

The Decision to Initiate Investigation

2.9.6

132

134

2.8.4

2.9.3

123

141 142

2.9.5.1

The Duty to Examine Supplied Information

2.9.5.2

IAs Retain Discretion to Initiate

143

143

Rights and Duties of Investigating Authorities during Investigation 146 2.9.6.1

The Right to Request Information through Questionnaires

146

Contents

2.9.7

2.9.8

xiii

2.9.6.2

The Right to Conduct On-the-Spot Verification

2.9.6.3

The Right to Draw Inferences

2.9.6.4

The Duty to Observe Due Process

2.9.6.5

The Duty to Protect Confidential Information

2.9.6.6

The Duty to Respect Transparency

2.9.7.1

The Right to Access the File

2.9.7.2

The Right to Be Heard

153

2.9.7.3

The Duty to Cooperate

154

149

151

152

153

Balancing Rights and Duties: Recourse to BIA The Rationale for This Provision

154

154

2.9.8.2

When Is Recourse to BIA Appropriate?

2.9.8.3

Refusing Access to Necessary Information

2.9.8.4

Failure to Provide Necessary Information within a Reasonable Period of Time

155 157

159

2.9.8.5

Significant Impediment of Investigation

2.9.8.6

Special Circumspection

The Function of POI

159

160

The Length of the Period of Investigation 2.9.9.1

2.10

148

The Rights and Duties of Interested Parties

2.9.8.1

2.9.9

147

148

161

161

2.9.9.2

Recommendation on Length of POI

2.9.9.3

POI Ends before Initiation of Investigation

161

2.9.9.4

Recent Data Should Be Used

2.9.9.5

Shorter Periods Can Be Lawful

163

163 164

2.9.9.6

Cherry Picking Is Not Permissible

2.9.9.7

Overlap between Dumping and Injury POI

Special and Differential Treatment

164 166

166

2.10.1

What Are Constructive Remedies?

166

2.10.2

Constructive Remedies Must Be Explored

166

2.11

The Standard of Review by WTO Adjudicating Bodies

2.11.1

One or Two Standards of Review?

2.11.2

De Novo Review Is Not Total Deference

167

167 169

2.11.2.1

Panels Cannot Use New Evidence

2.11.2.2

Absence of a Reasoned and Adequate Explanation

169 171

2.11.3

Permissible Interpretations

2.11.4

Investigating Authorities: Honest Brokers or Active Investigators?

2.12

Remedies against Illegally Imposed AD Duties

2.13

Institutional Issues

175

172 174

173

xiv

Contents

2.14

Is Dumping Unfair?

2.14.1

The Origins of Modern Antidumping

2.14.2

Price Discrimination in Domestic Antitrust Statutes

2.14.3

2.14.4

In Defense of AD

175 176

180

2.14.3.1

Price Discrimination

2.14.3.2

Predatory Dumping

180 181

2.14.3.3

Strategic Dumping

2.14.3.4

Leveling the Playing Field

181

2.14.3.5

AD as Safeguard

182

182

AD and ... More Problems

183

2.14.4.1

A Procartel Instrument

183

2.14.4.2

AD Wars

184

2.15

Concluding Remarks

3

Subsidies

3.1

The Legal Discipline and Its Rationale

3.1.1

The Legal Discipline

3.1.2

The Rationale for the Legal Discipline

3.1.3

Discussion

184

185 185

185 185

186

3.1.3.1

Negotiating Subsidies in GATT/WTO

3.1.3.2

Subsidies in the Realm of Economic Theory

3.1.3.3

From Economic Theory to WTO Practice

3.1.3.4

Action against Subsidies

186 191 193

195

3.2

The Relationship with GATT

3.3

Defining a Subsidy

3.3.1

Financial Contribution by Government

3.3.2

178

196

200 202

3.3.1.1

Contribution by Government (or Public Body)

3.3.1.2

Government Acts Through a Private Agent

203 207

3.3.1.3

Direct Transfer of Funds by Government

3.3.1.4

Revenue Otherwise Due to Government Is Foregone

3.3.1.5

The Special Case of Double Taxation

3.3.1.6

Provision of Goods or Services by Government

3.3.1.7

Any Fo1.rm of Income or Price Support

Benefit to the Recipient

210 210

213 213

215

216

3.3.2.1

The Identity of the Recipient

3.3.2.2

“Private Investor” Test: Benefit That Market Does Not Yield

217

3.3.2.3

Cost of Production: An Appropriate Benchmark to Discern Benefit?

218 223

Contents

3.3.3

3.3.4

xv

Pass Through of Benefits to New Owners 3.3.3.1

The Issue

3.3.3.2

A Typology of Pass Through

3.3.3.3

The Test (in Full Mutation)

3.3.3.4

Extinction of Subsidies Bestowed

229

3.3.3.5

Extraction of Subsidies Bestowed

231

3.3.3.6

Change of Corporate Identity

3.3.3.7

Critique

3.3.5

225 227

232

232

Calculating the Amount of Benefit 3.3.4.1

224

224

233

Why Calculate Subsidies in Terms of Benefit Granted?

3.3.4.2

The Guidance Provided in Article 14 of SCM

3.3.4.3

Does Article 14 of SCM Reflect an Exhaustive List?

3.3.4.4

Allocation of Benefits over Time

3.3.4.5

Allocation of Benefit over Productive Assets

Specificity

233

233 234

238 239

240

3.3.5.1

De Jure Specificity

3.3.5.2

De Facto Specificity

242

3.3.5.3

Regional Subsidies

3.3.5.4

Positive Evidence

243 248 248

3.4

Three Categories of Subsidies

248

3.4.1

Classifying Subsidies: Actionable, Nonactionable, Prohibited

3.4.2

Legal Consequences of Classification

3.5

Actionable Subsidies

3.5.1

Three Forms of Adverse Effect: Injury, Nullification or Impairment, and Serious Prejudice 249

3.5.2

Injury

3.5.3

Nullification and Impairment

3.5.4

Serious Prejudice

248

248

249

250 250

251

3.5.4.1

Quantity Effects

3.5.4.2

Price Effects

252

3.5.4.3

The Causality Requirement

254 259

3.5.5

Remedies

261

3.6

Nonactionable Subsidies

3.6.1

The Statutory Criteria

3.6.2

The Limits of Nonactionability

3.6.3

The Origins of Nonactionable Subsidies

262

262 262 263

xvi

Contents

3.6.4

Back to the Future

3.6.5

They Did Not Overstay Their Welcome

3.6.6

Lo and Behold: Stimulus Packages

3.6.7

Are Nonactionable Subsidies Legally Irrelevant?

3.7

Prohibited Subsidies

3.7.1

Export Subsidies

3.7.2

3.7.3

264 265

266

267

268

3.7.1.1

The Changing Attitude toward Export Subsidies

3.7.1.2

De Jure Export Subsidies

3.7.1.3

De Facto Export Subsidies

3.7.1.4

The Evidentiary Standard

3.7.1.5

Permanent Group of Experts (PGE)

Local Content

267

268

270 270 271 272

272

3.7.2.1

Local Content and Production Subsidies

3.7.2.2

Local Content in the GATT, and the SCM Agreement

Remedies against Prohibited Subsidies 3.7.3.1

The Process

273 273

274

274

3.7.3.2

“Appropriate” Countermeasures

3.7.3.3

Benefit, Injury, and the Missing Incentives

274 277

3.8

CVDs: Substantive Requirements

3.8.1

CVDs, if Subsidies Cause Injury

3.8.2

Calculating the Amount of Benefit That Subsidies Have Conferred 279

3.8.3

278 278

3.8.2.1

The Rule: CVDs Cannot Exceed the Amount of Subsidy Granted

3.8.2.2

Calculating the Amount of Subsidy in Terms of the Benefit Granted

3.8.2.3

Investigated Exporters

3.8.2.4

Noninvestigated Exporters

Injury Analysis

279 280

280

3.8.3.1

Statutory Indicators of Injury

3.8.3.2

Injury to Competitors (Like Product Analysis)

280

3.8.3.3

Quantity Effects

3.8.3.4

Price Effects

3.8.3.5

Cumulating Various Sources of Injury

3.8.3.6

Injury Based on Positive Evidence

3.8.3.7

Threat of Injury

3.8.3.8

Public Interest Clauses

284 285

286 288

285 286

281

279 279

Contents

3.8.4

3.8.5

3.8.6

xvii

The Causality Requirement

288

3.8.4.1

Nonattribution

3.8.4.2

Temporal Correlation between Imports and Injury

3.8.4.3

Controlling for Factors Not Mentioned in the Agreement

The Types of CVDs

290 290

291

3.8.5.1

Provisional CVDs

3.8.5.2

Definitive CVDs

3.8.5.3

Price Undertakings

292 292 292

Imposition and Collection of Definitive CVDs 3.8.6.1

CVDs up to the Amount of Benefit Conferred

3.8.6.2

Lesser Duty Rule

3.8.6.3

Retroactive Application of Duties

293 293

293 293

3.8.7

Duties Imposed Prospectively, Retrospectively

3.8.8

No Double Counting: CVDs or Countermeasures

3.9

CVDs: Procedural Requirements

3.9.1

Duties Can Be Imposed Only Following an Investigation 295

3.9.2

Initiating an Investigation

3.9.3

294 295

295

296

3.9.2.1

Ex Officio

3.9.2.2

Investigation upon Request

296 296

Standing Requirements (Locus Standi) 3.9.3.1

The Rationale for Standing Requirements

3.9.3.2

The Statutory Thresholds

296 296

296

3.9.4

The Content of the Request

3.9.5

The Decision to Initiate an Investigation

3.9.6

291

296 296

3.9.5.1

IAs Must Examine the Accuracy of Supplied Information

3.9.5.2

Consultation with the Exporting WTO Member

3.9.5.3

IAs Retain Discretion

296

297

297

The Rights and Duties of IAs

298

3.9.6.1

The Right to Seek Information through Questionnaires

3.9.6.2

The Right to Conduct On-the-Spot Verifications

3.9.6.3

The Right to Draw Inferences

298

298

298

3.9.6.4

The Obligation to Observe Due Process

3.9.6.5

The Obligation to Protect Confidential Information

298

3.9.6.6

The Obligation to Ensure Transparency

301

300

xviii

3.9.7

3.9.8

3.9.9

Contents

Rights and Obligations of Interested Parties 3.9.7.1

The Right to Access the File

3.9.7.2

The Duty to Cooperate

301

301

301

Balancing Rights and Duties: Recourse to BIA

301

3.9.8.1

The Rationale for Recourse to BIA

302

3.9.8.2

Duty to Include Requested Information in the Questionnaire

3.9.8.3

Refusal to Supply Necessary Information

3.9.8.4

Significant Impediment of Investigation

The POI

303 303

304

3.9.9.1

The Length of the Investigation Process

3.9.9.2

The Function of POI

304

304

3.10

Administrative Reviews

3.10.1

The Function and Rationale for Administrative Reviews

3.10.2

The Ambit of Review

3.10.3

Initiating Reviews

3.10.4

305 305

305

306

3.10.3.1

Ex Officio

306

3.10.3.2

Review upon Request

Standard of Review

306

307

3.10.4.1

Standard of Initiation

3.10.4.2

Irrelevance of de Minimis Standards Applicable to Original Investigations

307

3.11

Sunset Reviews

3.11.1

Duties Will Lapse in Five Years Absent Review

3.11.2

The Ambit of Review

3.11.3

Initiating Reviews

3.11.4

303

307

307 307

307

308

3.11.3.1

Ex Officio

308

3.11.3.2

Review upon Request

308

The Standard of Review

308

3.11.4.1

Continuation or Recurrence of Injury

3.11.4.2

Positive Evidence

308

3.11.4.3

Irrelevance of Standards Applied to the Original Investigation

308 309

3.12

Special and Differential Treatment for Developing Countries

3.13

The Standard of Review Applied by WTO Adjudicating Bodies

3.14

Fisheries Subsidies

3.14.1

The Issue

3.14.2

The Negotiation

3.15

Institutional Issues

310

310 311 311

309 310

Contents

xix

3.16

Concluding Remarks

4

Safeguards

4.1

The Legal Discipline and Its Rationale

4.1.1

The Legal Discipline

4.1.2

The Rationale for the Legal Discipline

4.1.3

Discussion

311

313 313

315

Why Safeguards?

315

4.1.3.2

Costs Associated with the Imposition of Safeguards

4.1.3.3

Safeguards, Antidumping, and Countervailing

The Legal Relationship with GATT

4.3

The Road to the SG Agreement

4.3.1

The Original Safeguard Clause

4.3.2

Practice Evolves Contra Legem: VERs 4.3.2.1

Why VERs?

4.3.2.2

VERs and GATT

318

322 323

323 324

US Safeguard Practice

4.3.4

Onto the Agreement on Safeguards

4.4

The Right to Safeguard Action

4.4.1

Unforeseen Developments

4.4.4

317

318

322

4.3.3

4.4.3

313

4.1.3.1

4.2

4.4.2

313

325 325 327

329

4.4.1.1

The Rationale

4.4.1.2

The (Lack of) Definition

329

4.4.1.3

Unforeseen When?

4.4.1.4

Procedural Requirements

331

333 333

Increased Quantities of Imports

335

4.4.2.1

Recent, Sudden, Sharp, Significant Increase: Trends Matter

4.4.2.2

Recent, Sudden, Sharp, Significant Increase: No Injury Analysis

Injury to Competitors (Like Product Analysis) 4.4.3.1

Injury Must Be “Serious”

4.4.3.2

Statutory Factors Indicating Injury

4.4.3.3

Other Factors

4.4.3.4

Domestic Industry Producing the “Like” Product

Threat of Injury

340

340 340

341 342

345

4.4.4.1

Forward-Looking Evaluation

4.4.4.2

Standard of Review

345

4.4.4.3

Injury and Threat of Injury Based on the Same Facts

345 346

335 339

xx

4.4.5

Contents

The Causality Requirement 4.4.5.1

346

Genuine and Substantial Relationship

347

4.4.5.2

The Obligation to Review All Relevant Facts

4.4.5.3

Nonattribution (Separation)

4.4.5.4

Postseparation

4.4.5.5

Evaluation in Light of Alternative Explanations

4.4.5.6

Failure to Meet the Causal Requirement

4.5

Applying Safeguards

4.5.1

Types of Safeguards

349

350

354 354

356

356 356

4.5.1.1

Provisional Safeguards

4.5.1.2

Definitive Safeguards

356 356

4.5.2

Safeguards to the Extent Necessary

4.5.3

The Duration of Safeguards: Dynamic Use Constraint

4.5.4

The Obligation to Compensate

4.5.5

4.5.6

356

358

4.5.4.1

Affected Parties, Substantial Interest

4.5.4.2

Substantially Equivalent Level of Concessions

4.5.4.3

No Duty to Compensate during the First Three Years

Safeguarding against Whom?

358 359

360

4.5.5.1

Safeguards Must Be Nondiscriminatory

4.5.5.2

Quota Modulation

4.5.5.3

VERs

360

360

361

Who Imposes Safeguards?

361

4.5.6.1

Individual WTO Members

4.5.6.2

Individual WTO Members, Members of a PTA

361

4.5.6.3

PTAs in the Name of a Constituent

4.5.6.4

PTAs Imposing Safeguards as a Single Unit

362

363 363

4.5.7

The Form of Safeguards

363

4.6

Procedural Requirements

4.6.1

Safeguards Can Be Imposed Only Following an Investigation 363

4.6.2

Initiating an Investigation

4.6.3

The Request to Initiate

4.6.4

Standing Requirements (Locus Standi)

4.6.5

The Rights and Duties of IAs

363

364 364 364

364

4.6.5.1

The Right to Seek Information

4.6.5.2

The Duty to Observe Due Process

364 365

359

357

Contents

4.6.6

xxi

4.6.5.3

The Duty to Protect Confidential Information

4.6.5.4

The Duty to Observe Transparency

365

365

The Rights and Duties of Interested Parties 4.6.6.1

The Right to Access the File

4.6.6.2

The Duty to Cooperate

367

367

368

4.6.7

Consultations

4.6.8

The Length and Period of Investigation

4.7

Special Safeguard Regime with Respect to China

4.7.1

Four Types of Safeguards

4.7.2

Transitional Safeguard

4.7.3

Safeguarding against Safeguards

4.7.4

Textiles Safeguard

4.8

Special and Differential Treatment for Developing Countries

4.9

Standard of Review

4.10

Institutions

4.11

Concluding Remarks

5

Technical Barriers to Trade

5.1

The Legal Discipline and Its Rationale

5.1.1

The Legal Discipline

5.1.2

The Rationale for the Legal Discipline

5.1.3

5.2 5.3 5.3.1 5.3.2

Discussion

368 368

368

369 372

372 373

374 374 377 377

377 377

380

5.1.3.1

Why Standardize?

5.1.3.2

Standard Setting in the EU and US

5.1.3.3

The Cost of Divergent Standards

5.1.3.4

International Cooperation to Reduce Costs

380

The Relationship with GATT Coverage

380 382 385

387

388

Instruments Covered Private Standards 5.3.2.1

368

388

389

Private Standards Proliferate

391

5.3.3

The Origins of Private Standards

393

5.3.4

Certification

5.3.5

One International Standard, One Test, One Certificate

393 394

373

xxii

5.3.6

Contents

The Relevance of the TBT Agreement on Private Standards 5.3.6.1

GATT and Private Practices

5.3.6.2

The TBT Agreement and Private Practices

5.3.6.3

TBT Committee Practice

5.3.6.4

A Very Preliminary Conclusion

397

398 398

5.4

International Standards

5.4.1

The Primacy of International Standards

5.4.2

Defining International Standards

399

5.4.2.1

Statutory (Lack of) Definition

399

5.4.2.2

The International Standardizing Community

5.4.2.3

Practice

5.4.3

399 399

400

401

Litigating International Standards

406

5.4.3.1

Observing International Standards

5.4.3.2

Deviating from International Standards

5.5

Technical Regulations

5.5.1

Defining Technical Regulations

406 406

410 410

5.5.1.1

Document

411

5.5.1.2

Identifiable Group of Products

5.5.1.3

Product Characteristics and PPMs

5.5.1.4

Mandatory Compliance

411 412

413

5.5.1.5

Coverage of “Technical Regulation” Revisited

416

5.5.1.6

Return to the Good Old Days (Recommended)

416

5.5.2

Legitimate Objective

5.5.3

Necessity

5.5.4

396

396

417

419

5.5.3.1

Intervene When Necessary and Adopt Necessary Measures Only

5.5.3.2

Measures Based on International Standards Are Presumed Necessary

5.5.3.3

Appropriate Level of Protection (ALOP)

5.5.3.4

Necessity and Appropriateness

5.5.3.5

Necessity and the Relative Importance of the Objective Sought

5.5.3.6

Necessity and Consistency

5.5.3.7

Burden of Proof

Nondiscrimination

419

421

421 421

422

423

423

5.5.4.1

Like Products

5.5.4.2

Less Favorable Treatment (LFT)

424

5.5.5

Performance Requirements

5.5.6

Transparency

427

428

428

5.5.6.1

Reasonable Interval between Adoption and Entry into Force

5.5.6.2

Enquiry Points

430

429

420

Contents

xxiii

5.5.7

Recognition

5.6

Standards

5.6.1

Defining Standards

5.6.2

Standard-Setting Bodies

5.6.3

Code of Good Practice

5.7

Conformity Assessment

5.7.1

Defining Conformity Assessment

5.7.2

430 431 431 432 433 433 433

The Ambit of Conformity Assessment 5.7.2.1

Assessing Products

5.7.2.2

Assessing Procedures

434

434 436

5.7.3

International Standards

437

5.7.4

Unilateral Conformity Assessment

438

5.7.4.1

Nondiscrimination

438

5.7.4.2

Necessity

5.7.4.3

Confidentiality

5.7.4.4

Transparency

5.7.4.5

Local and Nongovernmental Bodies

438 439 439 439

5.8

Special and Differential Treatment for Developing Countries

5.9

Institutional Issues

5.9.1

The TBT Committee

441 441

5.9.1.1

Reviewing the Operation of the TBT Agreement

5.9.1.2

Promoting Transparency

5.9.1.3

Specific Trade Concerns (STCs)

441

443 443

5.9.2

Technical Expert Groups

5.10

Concluding Remarks

5.10.1

The Challenges Posed by the TBT Agreement

5.10.2

A Test for Addressing Complaints under the TBT Agreement 5.10.2.1

Errors Galore

439

444 444 445 447

447

5.10.2.2

GATT and TBT Are Not Like Products

5.10.2.3

TBT Is More Like Article XX and Less Like Article III of GATT

5.10.2.4

Why Sequence Matters

449

452

6

Sanitary and Phytosanitary Measures

6.1

The Legal Discipline and Its Rationale

6.1.1

The Legal Discipline

6.1.2

The Rationale for the Legal Discipline

455 455

455 455

451

xxiv

6.1.3

Contents

Discussion 6.1.3.1

457

Link to Agriculture

457

6.1.3.2

Science, Uncertainty, Ambiguity, Ignorance

6.1.3.3

Proxies to Detect Unlawful Behavior

458

459

6.2

The Relationship with GATT and the Other Annex 1A Agreements

6.2.1

The Relationship with GATT

6.2.2

The Relationship with the TBT Agreement

6.2.3

The Relationship with the AG Agreement

6.3

Coverage

6.3.1

SPS Measures

6.3.2

Private Standards

460 460 460

461 461 463

6.3.2.1

The Relevance of the SPS Agreement to Private Standards

6.3.2.2

SPS Committee Practice

6.4

International Standards

6.4.1

Defining International Standards

6.4.2

Measures That Conform to International Standards

6.4.3

Measures Based on International Standards

6.4.4

Measures Deviating from International Standards

6.5

Unilateral Measures Must Be Based on Science

6.5.1

6.5.2

463

463

466 466 468

Risk Assessment Based on Scientific Principles 6.5.1.1

Risk Must Be Identifiable

6.5.1.2

Two Types of Risk Assessment

6.5.1.3

The Content of Risk Assessment

6.5.1.4

The Methodology for Risk Assessment

6.5.1.5

Minority Scientific Opinions Suffice

6.5.1.6

Science, Not Junk Science

468 469 471

471

472 473 474 475 476

476

6.5.1.7

Is There a Procedural Requirement to Demonstrate Risk Assessment?

6.5.1.8

The Standard of Review

ALOP 6.5.2.1

478

478 Definition

478

6.5.2.2

Wide Discretion to Define ALOP

6.5.2.3

Expressing the ALOP

6.5.3

Recognition

6.5.4

Conformity Assessment

479

482 483

478

477

460

Contents

xxv

6.6

Measures Based on Precaution

483

6.6.1

Defining Precaution

6.6.2

The Legal Test for Consistency with Article 5.7 of SPS

6.6.3

Precaution and Science

6.6.4

Precaution, Nondiscrimination, Necessity, and Consistency

6.6.5

Is Precaution a “Carte Blanche”?

6.7

Measures Must Be Applied in a Nondiscriminatory Way

6.7.1

The Relationship between Articles 2.3 and 5.5 of SPS

6.7.2

Where Identical or Similar Conditions Prevail

6.7.3

Arbitrary or Unjustifiable Discrimination

6.7.4

Disguised Restriction of Trade

6.7.5

Geographic Scope of SPS Measures

6.7.6

Burden of Proof

6.8

Measures Must Be Necessary

6.8.1

Burden of Proof

483 484

484 486

487 488

488

489

489

490 490

492 492

493

6.8.1.1

GATT, TBT/SPS: Same Principle, Different Application

6.8.1.2

Practice

493

494

6.8.2

Judicial Review: Limited to Means; No Discussion of Ends

6.8.3

The Relationship between Articles 5.6 and 2.2 of SPS

6.9

Consistency

6.9.1

The Test for Compliance with the Consistency Requirement

6.9.2

The Guidelines on Consistency

6.10

Special and Differential Treatment

6.10.1

Parallel with the TBT Agreement

6.10.2

Standards and Trade Development Facility (STDF)

6.11

Transparency

6.12

Standard of Review

6.13

Institutional Issues

502

6.13.1

The SPS Committee

502

6.13.2

Specific Trade Concerns (STCs)

494

495

495 497 500

500

501 502

503

500

496

xxvi

6.13.3

Contents

The Treatment of Expertise by Panels 6.13.3.1

504

Panels Have Discretion to Invite Experts

504

6.13.3.2

The Ambit of Supplied Expertise

6.13.3.3

Selecting Court-Appointed Experts

6.13.3.4

Self-Disclosure Obligations

6.13.3.5

Due Process

6.13.3.6

Legal Value of Opinions Expressed by Court-Appointed Experts

504 505

505

506

6.14

Concluding Remarks

7

Trade-Related Investment Measures (TRIMs)

7.1

The Legal Discipline and Its Rationale

7.1.1

The Legal Discipline

7.1.2

The Rationale for the Legal Discipline

7.1.3

Discussion

507

510 513

513

513 513

514

7.1.3.1

Local Content, Export Performance

7.1.3.2

Negotiating TRIMs

514

515

7.2

The Relationship with GATT and the Other Annex 1A Agreements

7.2.1

The Relationship with GATT

7.2.2

The Relationship with the Other Annex 1A Agreements

7.3

Trade and Investment

7.3.1

From ITO to GATT

520

7.3.2

The GATT Regime

520

7.3.3

518

520

521

The WTO Working Group on Trade and Investment 7.3.3.1

7.3.4

517

Chronicle of a Death Foretold

521

7.3.3.2

Developing Countries Are Skeptical

7.3.3.3

Developed Countries Do Not Speak with One Voice

521

7.3.3.4

End Game: Drop It

522

523

Attempts outside the WTO: The MAI

523

7.3.4.1

An Ambitious Project

7.3.4.2

Content

523

7.3.4.3

Failure Explained: No Taxation without Representation

7.3.4.4

A Glimmer of Hope

524 524

526

7.3.5

Investment Protection in BITs and PTAs

526

7.4

The TRIMs Agreement

7.4.1

Measures Coming under the Purview of TRIMs

527 527

7.4.1.1

Measures Coming under the Purview of Article III of GATT

528

7.4.1.2

Measures Coming under the Purview of Article XI of GATT

528

517

Contents

7.4.2

xxvii

The Obligations Assumed

529

7.4.2.1

Thou Shalt Not …

529

7.4.2.2

Thou Shalt Not … in the Foreseeable Future

7.4.2.3

Transparency

7.4.3

De Facto TRIMs?

7.4.4

Special and Differential Treatment

7.5

Institutions

7.6

Review of the Agreement

7.7

Concluding Remarks

8

Agreement on Agriculture

8.1

The Legal Discipline and Its Rationale

8.1.1

The Legal Discipline

8.1.2

The Rationale for the Legal Discipline

8.1.3

Discussion

529

530

531 531

532 532

532 535 535

535 535

536

8.1.3.1

Farm Markets Are Volatile

536

8.1.3.2

The Political Economy of Farm Protection in the North

8.1.3.3

Farm Trade and Developing Countries

537

537

8.2

The Relationship with GATT and the Other Annex 1A Agreements

8.2.1

The Relationship with GATT

8.2.2

The Relationship between the AG and the SCM Agreements

8.2.3

The Relationship between the AG and the SG Agreements

8.3

The Road to the AG Agreement

8.3.1

The GATT Approach

8.3.2

The US Waiver (1955)

8.3.3

The CAP

538

544

544 546

546

8.3.3.1

Self-Sufficiency for Europe

8.3.3.2

Challenging the Consistency of CAP with the GATT Rules

547

8.3.3.3

Reforming the CAP

550

8.3.4

The Uruguay-Round Negotiation

8.3.5

The Doha-Round Negotiation

8.3.6

The AG Agreement in a Nutshell

555

8.3.6.1

Border Measures (Market Access)

8.3.6.2

Domestic Support

8.3.6.3

Export Subsidies

556 558

552 555 556

547

540 544

538

xxviii

Contents

8.4

Product Coverage and Schedules of Concessions

8.5

Border Measures

8.5.1

Goods Protected by Tariffs

8.5.2

560 561

Goods Protected by Other Measures: Tariffication 8.5.2.1

The Indicative List of Items to Tariffy

8.5.2.2

Similar Border Measures

Tariff Bindings Must Be Respected

8.5.4

Exceptions

567

568

8.5.4.1

Special Safeguard Mechanism

8.5.4.2

Special Treatment

8.5.4.3

Predominant Staple

568

569 570

8.6

Domestic Support

8.6.1

Aggregate Measurement of Support (AMS)

8.6.2

Payments Excluded from the Calculation of AMS

570 572 573

8.6.2.1

Development Subsidies

8.6.2.2

De minimis Payments

573

8.6.2.3

Direct Payments for Production-Limiting Programs (Blue Box)

8.6.2.4

Green Box

573

574

8.6.3

Calculating the AMS

8.6.4

Equivalent Measurement of Support (EMS)

8.7

Export Subsidies

8.7.1

Defining Export Subsidies

8.7.3

562

564

566

8.5.3

8.7.2

558

579

583 583

Commitments on Export Subsidies 8.7.2.1

Commitments on Budgetary Outlays

8.7.2.2

Commitments on Quantities

8.7.2.3

Scheduled Goods

8.7.2.4

Unscheduled Goods

Anticircumvention

587

587 587

587

8.7.3.1

Export Credits

588

8.7.3.2

Excess Exports

588

8.7.3.3

Food Aid

8.7.3.4

Standard of Review

589 591

8.7.4

Export Competition

591

8.7.5

Export Subsidies Revisited

591

586 586

582

574

Contents

xxix

8.8

Minimum Access Requirements

8.8.1

Minimum Access Opportunities

8.8.2

Current Access Opportunities

8.9

Due Restraint (Peace Clause)

8.10

Public Stockholding for Food-Security Purposes

8.10.1

India in Bali

8.10.2

India Was Serious

8.10.3

What Prompted This Action?

8.10.4

Food Crises at Large

8.11

Special and Differential Treatment

8.11.1

Implementation Period for Developing Countries

8.11.2

Export Restrictions and Prohibitions

8.11.3

Net Food-Importing Developing Countries

8.11.4

Remaining Provisions

8.11.5

592 592

593 593

594 595

The Cotton Initiative

596

597 598

599

600 600

8.11.5.1

What Is the Initiative All About?

8.11.5.2

The Measures Envisaged

8.11.5.3

The Situation Now (Far from Xanadu)

600

601

Transparency

8.13

Institutional Issues

8.14

Concluding Remarks

9

Agreement on Textiles and Clothing

9.1

The Legal Discipline and Its Rationale

9.1.1

The Legal Discipline

9.1.2

The Rationale for the Legal Discipline Discussion

598

598

8.12

9.1.3

594

602

602 603 603 607 607

607 607

608

9.1.3.1

Estimating the Welfare Implications of MFA

9.1.3.2

From Manchester to Delhi: Changing Production Patterns

9.2

The Relationship with GATT

9.3

The Road to the ATC

9.3.1

Before the MFA

9.3.2

Why the MFA?

609 609

609

609

608 608

xxx

Contents

9.3.3

The MFA Regime

9.3.4

MFA and GATT

9.4

ATC

9.4.1

The Objective Sought

9.4.2

Product Coverage

9.4.3

Notification of Restrictions

9.4.4

Progressive Integration

9.4.5

610 611

612 612

613 613

613

Special Transitional Safeguard Mechanism

614

9.4.5.1

Conditions for Lawful Imposition

614

9.4.5.2

The Rationale

9.4.5.3

Injury, Threat of Injury

9.4.5.4

Domestic Industry Producing the Like Product

9.4.5.5

Attribution to a Source of Supply

9.4.5.6

The Requirement to Hold Consultations

9.4.5.7

Retroactive Application

614 615 616

617 617

618

9.4.6

Administering Restrictions during the Transitional Period

9.4.7

Anticircumvention

9.4.8

Institutions

9.5

Concluding Remarks

10

618

618 619

Government Procurement

621

10.1

The Legal Discipline and Its Rationale

10.1.1

The Legal Discipline

10.1.2

The Rationale for the Legal Discipline

10.1.3

Discussion

618

621

621 621

622

10.1.3.1

Gains from Liberalization

10.1.3.2

Why Plurilateral?

622

10.1.3.3

“Revised” GPA

10.1.3.4

UNCITRAL Model Law

10.1.3.5

Procurement by WTO Members That Have Not Joined the GPA

622 622 623

10.2

The Relationship with GATT

10.3

Government Procurement: A Multifaceted Instrument

10.3.1

Procurement and Industrial Policy 10.3.1.1

A Worldwide Phenomenon

10.3.1.2

Buy American

627

624

624

626

626

626

Contents

xxxi

10.3.2

Procurement and Competition Policy

10.3.3

Procurement and the Fight against Corruption

10.4

The Scope of the GPA

10.4.1

Plurilateral Agreement

10.4.2

Membership

631 631

631

10.4.2.1

Acceding to the GPA

631

10.4.2.2

Current Membership

631

10.4.3

Entities Covered

10.4.4

Measures Covered

10.4.5

Modification of Commitments

631 632 634

10.4.5.1

The Meaning of “Modification”

10.4.5.2

Procedure

634

634

10.4.6

Exemptions from Coverage

636

10.5

The Obligations Assumed

636

10.5.1

Nondiscrimination

10.5.2

Reciprocity

10.5.3

Government Procurement in PTAs

10.5.4

Electronic Procurement

10.5.5

Rules of Origin

10.5.6

Offsets

10.5.7

Technical Specifications

10.5.8

Exceptions

10.6

Procurement Methods

10.6.1

Common Elements to All Methods

10.6.2

629

636

637 637

639

639

639 640

640 641 642

10.6.1.1

Conditions for Participation

643

10.6.1.2

Supplier Registration System

643

10.6.1.3

Deadlines

10.6.1.4

Notice of Intended Procurement

644 644

Umbrella Categories Included in the GPA 10.6.2.1

Open Tendering

10.6.2.2

Selective Tendering

10.6.2.3

Limited Tendering

645 646 646

645

630

xxxii

10.6.3

Contents

Variations Not Included in the GPA 10.6.3.1

647

Competitive Procedures with Negotiation and/or Competitive Dialogue

10.6.3.2

Restrictive Procedures

10.6.3.3

BOT or BOOT

648

648

10.6.4

Awarding the Contract

10.7

Transparency

10.7.1

Ex Ante

650

10.7.2

Ex Post

651

10.7.3

Transparency, Every Step of the Way

651

10.8

Special and Differential Treatment

652

10.8.1

A Carrot to Increase Participation

10.8.2

Substantive Law

10.9

Enforcing the GPA

10.9.1

Trondheim: Who Lost What?

10.9.2

The Challenge Procedures

10.9.3

First Review by the Procuring Entity: What For?

10.9.4

Dispute Adjudication

10.10

The Work Programmes

10.11

Institutional Issues

10.12

Concluding Remarks

11

The Civil Aviation Agreement

11.1

The Legal Discipline and its Rationale

11.1.1

The Legal Discipline

11.1.2

The Rationale for the Legal Discipline

11.1.3

Discussion

647

649

649

653

654 654 655

656 658

658 659

660 660 663 663

663 663

664

11.1.3.1

Industrial Policy and Effects on Trade

11.1.3.2

Duopolies

664

664

11.1.3.3

US-EU 1992 Agreement on Civil Aviation

11.1.3.4

Who Is Hurting Who?

665

667

11.2

The Relationship with the GATT and Annex 1A Agreements

11.2.1

The Relationship with the GATT

667

667

Contents

xxxiii

11.2.2

The Relationship with the SCM Agreement

668

11.2.3

The Relationship with the TBT Agreement

668

11.3

Membership

11.4

Product Coverage

11.4.1

The Original Regime

11.4.2

The Protocol Amending the CA Agreement

11.5

Elimination of Customs Duties

11.6

Disciplines on Subsidies

11.7

Other Obligations

11.7.1

Quantitative Restrictions

11.7.2

Import Licensing

11.7.3

Procurement

670

11.8

Institutions

671

11.9

Concluding Remarks

12

Transparency

12.1

The Legal Discipline and Its Rationale

12.1.1

The Legal Discipline

12.1.2

The Rationale for the Legal Discipline

12.1.3

Discussion

668 668 668 669

669

670

670 670

670

671

673 673

673 674

674

12.1.3.1

Transparency, a Commodity

12.1.3.2

Beyond Trade Concerns

674

12.1.3.3

What Influences Transparency?

12.1.3.4

Transparency and Enforcement of Obligations

12.1.3.5

The Record of Transparency in the WTO

675 676 678

12.2

Article X of GATT

12.2.1

Laws and Other Acts of General Application

12.2.2

677

678

12.2.1.1

Defining Laws of General Application

12.2.1.2

The Rationale: Due Process

12.2.1.3

Prompt Publication

678

680

680

A Halt to (Unpleasant) Surprises

681

12.2.2.1

Advance in a Rate of Duty

681

12.2.2.2

New or More Burdensome Requirement

682

678

xxxiv

12.2.3

Contents

Uniform, Reasonable, and Impartial Administration of Laws 12.2.3.1

Three Distinct Obligations

682

12.2.3.2

Minimum Standards

12.2.3.3

Laws and Their Clarifications Are Covered

12.2.3.4

Uniform

12.2.3.5

Reasonable

12.2.3.6

Impartial

682 683

683 686 687

12.2.4

The Obligation to Maintain Independent Tribunals

12.2.5

Standard of Review

12.3

The Trade Policy Review Mechanism (TPRM)

12.3.1

The Objectives

12.3.2

The Record

12.3.3

Is the TPRM Really Useful?

12.4

Into the Great Wide Open: Transparency Unlimited

12.4.1

Transparency Obligations in the WTO

12.4.2

Three Generations of Transparency Provisions

12.4.3

689 692

692

693 693

The WTO: International Watchdog? 12.4.3.1

The March toward Transparency

12.4.3.2

Crisis-Related Reports and Beyond

12.4.3.3

Ball in the Geneva Camp

Notes 701 References 795 Index 827

688

699

694 696

697 699

695

694

682

Preface

Commerce is a perpetual and peaceable war of wit and energy among all nations. —Jean-Baptiste Colbert, economic minister for Louis XVI When goods do not cross borders, soldiers will. —Frédéric Bastiat, 19th-century political economist and member of the French Assembly

I consider myself very fortunate to have learned my trade by giants in this field, in law, in economics, and in political science as well. I spent precious time next to John Jackson at the University of Michigan at Ann Arbor, whose 1969 book World Trade and the Law of GATT made a coherent whole out of GATT Secretariat papers, negotiating documents, and panel reports. It is there that I met Bob Hudec, who very generously spent a substantial amount of his time in the years since sharing his work and thoughts with me. Bob’s and John’s works have been a major influence in the way I see the world trading system, and I think I will never thank them enough for all they have done for me and for the field where I (along with many others) now work. My economist friends are many, and I will name my close collaborators/coauthors alphabetically: Kyle Bagwell, Chad P. Bown, Aaron Cosbey, Gene Grossman, Bernard M. Hoekman, Henrik Horn, Doug Irwin, Phil Levy, Patrick Messerlin, Damien Neven, Tom Prusa, Kamal Saggi, André Sapir, and Bob Staiger; thank you all very much. Jagdish Bhagwati has been my inspirational coteacher and mentor over many years at Columbia Law School. My involvement in two research consortia has been a major catalyst in my understanding of the GATT/WTO regime. Lance Liebman included me in the American Law Institute (ALI) project on “Principles of International trade: The WTO,” where I served as chief reporter along with Henrik Horn. Mark Sanctuary led with skill and bonhomie the ENTWINED project on “Trade and Environment,” where I participated as an invited author, and contributed papers that I coauthored with Henrik Horn, but also with Aaron Cosbey and Bob Wolfe. Working with specialists in various fields made me aware that it is not just the devil, but the entire citizenry of hell that lies in the details. This explains the amount of work

xxxvi

Preface

presented here, and hopefully the decreasing number (when compared to previous work) of mistakes, for which I apologize a priori. As always, I had to rely on many people who, instead of going about their lives, generously dedicated a disproportionate amount of their time reading my work. My collaborators, Neil Teller and Carlo-Maria Cantore, pretended that they found it interesting to read my work, and occasionally I believed them when they said as much. But even when I did not, I still passed on chapters for them to read and comment upon. Jonathan Chevry and Marianne Karttunen at EUI also generously shared with me their expertise, and their work. Numerous academics and practitioners have shared their precious experience in their field of expertise with me: Alberto Alemanno, Steve Charnovitz, Antonio Cortês, Bill Davey, Henrik Horn, Rob Howse, Céline Kauffmann, Patrick Low, David Palmeter, ErnstUlrich Petersmann, Frieder Roessler, Alan O. Sykes, Edwin Vermulst, Reinhard Weissinger, and Bob Wolfe. Terry Stewart shared with me various negotiating documents from his priceless archives, and responded to my incessant demands in no time. At the WTO, current and former officials Inge Bauer, Jose Blanco, Tessa Bridgman, John Dickson, Richard Eglin, Marieme Fall de Perez Rubin, Alejandro Gamboa-Alder, Rodd Izadnia, Mark Koulen, Juan-Alberto Marchetti, Darlan Marti, Gabrielle Marceau, Andrea Mastromatteo, Julie Pain, Bruno Ventrone, Peter Williams, Donna Wood, RhianMary Wood-Richards, and Müslüm Yilmaz have helped me with dozens of queries that I have addressed to them, and always in the most satisfactory manner. At the WTO always, Diwakar Dixit, Taufiqur Rahman, Roy Santana, and Erik Wijkström read chapters of my book and provided me with precious comments. Any remaining errors are, of course, my own. Humberto Jimenez, delegate for Ecuador at the WTO, shared with me his experience from participating in various WTO fora. My editor at MIT Press, Jane Macdonald, has been encouraging and absolutely wonderful from the first time we met and shared lunch at the Columbia Faculty House in New York City. It really mattered an awful lot to me to work with an editor who shared my enthusiasm for this work. Susan McClung, Marcy Ross, Emily Taber, and the staff and reviewers for MIT Press provided me with invaluable help and comments that vastly improved the quality of my original manuscript. My debt to all the individuals mentioned above is huge, as is my debt to my family. My wife, Suja Rishikesh-Mavroidis, has yet again put her own career on the back burner in order to help me finish this book. It would have probably been a better allocation of our time if the opposite had happened. My only regret when writing this book is that I spent less time with her, and with our three daughters, Meera-Natalia, Riya-Valentina, and Tara-Elena. I started making up for all lost time at the precise moment that I had finished this preface. Petros C. Mavroidis Commugny, Switzerland May 2015

Introduction

I have changed my mind a dozen times (and probably will do so in the future) about the structure that a book aiming to explain the General Agreement on Tariffs and Trade/World Trade Organization (GATT/WTO) regime, like this one, should have. The objective I assigned to myself was to write a book that would be accessible to lawyers, political scientists, and economists. To do that, I wanted to ask first the question, “What is the problem the GATT framers tried to solve?” before explaining how they solved it. This is why, borrowing from previous work from economic historians and political scientists, I discuss at great length the negotiating history of each and every legal institution discussed in the two volumes, and have dedicated one full chapter (chapter 1 of volume 1) to the negotiating history of GATT, the cornerstone of the world trading system. I have adopted a uniform structure for every chapter in an effort to facilitate the reader accessing the material. With the exception of chapter 1, I have included in every chapter first a discussion of the legal discipline discussed, in its context. It is followed by a discussion of the “completion,” so to speak, of the original contract through subsequent practice (that is, secondary law; e.g., law created by the various WTO bodies, as well as case law). Now what do I mean by “context”? I do not use the term as lawyers typically use it. I intend to cover two different discussions under this umbrella. First is the rationale for the provision, as evidenced in the negotiating record and in case law (and point out discrepancies between the two, if any exist). Then, under what I categorize as “Discussion” in every chapter, I provide the basic economic rationale, as well as the policy background, for each provision discussed. I ask, in other words, what a particular provision is aimed to address, and show cases from the real world that illustrate each point. The reader can thus think about the legal institutions discussed in the two volumes in terms of two benchmarks: the negotiating record (that is, the problem that the authors of the legal institution aimed to solve), and the basic economic rationale explaining the necessity for the institution discussed. The theme “negotiating record meets the economic rationale” permeates the two volumes, and it is an issue that I try to address myself as well. The main part of each chapter consists in a discussion of subsequent practice; that is, the “life” of every legal norm. In this part, I aim to achieve three different goals:

2

Introduction

First, provide a detailed, and not sketchy, presentation of case law. I myself have found it always difficult to teach this field through one leading case. For many reasons, a leading case is often hard to find in GATT/WTO. In my view, the dominant explanation is that WTO adjudicating bodies have an eclectic view of precedent. They do not start their analysis from past case law and see to what extent they should simply confirm it, or, in the presence of “distinguishing factors,” adopt new rulings. They adopt their decisions and use precedent to support them—to the extent that this can be done, of course. They thus “endogenize” precedent in their privileged approach. So I have to follow a different path, discussing the cases that have contributed to the understanding of the various terms. I try to state what the state of the art is at the moment of writing; that is, highlight the prevailing understanding of the various terms today. At the end of the day, my aim is for the reader to know how the various terms in the legal provisions discussed have been, and are today, understood in case law. This is, if you will, a “positivistic” exercise, aiming to simply reflect the state of the art in terms of case law evolution today. Second, I provide the literature that has (in my opinion, of course) contributed useful criticism of the interpretations of the various legal provisions. Criticism could be useful, in my view, if it points to a logical error, but not only for this reason. It could be, for example, that literature criticizes WTO “courts” because they have behaved like principals, not like the agents that they are. The literature has pointed to the negative institutional externalities when this happens. Or, it could be that the WTO courts have been behaving inconsistently, and thus provoking the wrath of the addressees of their decision, and so on and so forth. Third, I offer my own criticism, to the extent that it does not overlap with voices already heard. It is here that I borrow from the methodology we had adopted in the American Law Institute (ALI) project, which I have adapted for the purposes of this work. The function of case law is not simply to settle disputes, for that could be done even without the help of adjudicating bodies. Courts complete the original contract in various ways: by customizing it to a particular transaction; by filling gaps where gaps exist, and absent some lawmaking (e.g., in the area of allocation of burden of proof), where it would be impossible to issue a final decision, and so on. At the end of the day, the picture that emerges will be law (primary and secondary) plus case law; and, looking at this picture, I ask whether the final outcome is reasonable. If the answer is yes, I do not stop the discussion immediately. It could be, for example, that a reasonable outcome is the result of impermissible judicial activism, in the sense that courts have behaved as if they were legislators, interpreting provisions against the will of the framers. Although this might a very efficient way to resolve disputes, it is not recommended. Judicial activism, if perpetuated, might also lead to unsatisfactory outcomes. In similar cases, the negative external effects for the institution should not be underestimated. The WTO members would need to amend the law to preempt similar behavior in the future,

Introduction

3

and amendment requires consensus across 161 divergent trading nations. Agency costs, so to speak, are quite high. If not (that is, if I find the outcome unreasonable), I go ahead and ask the additional question of whether the source of unhappiness lies in law (in which case the trade community should be thinking in terms of amending the original contract), or case law (in which case all that is required is a change in direction). My views on this score will be recapped in the concluding section. I pay particular attention in this volume to the various WTO organs. This is an area in which I have been influenced from political scientists with whom I have cooperated over the years. The legislative activity takes place every other decade, more or less, but it is day-to-day operations in the realm of the various WTO committees that move the world trading system forward. In the book Political Order and Political Decay,1 Francis Fukuyama describes institutions in the following manner: “since an institution is nothing more than a rule of law that persists over time, human beings therefore have a natural tendency to institutionalize their behavior.” This fits perfectly well with relational contracts, and there is ample evidence that GATT operated early on within these parameters. The framers of the WTO did not undo the institutional balance that had been struck in 1947. They added new committees, since new agreements were signed, and enriched it through new layers of institutional life, since the WTO provided the “roof” that the International Trade Organization (ITO) failed to provide. One can never say enough about the GATT/WTO institutions. Hudec’s monumental 1993 work, which that I cite extensively in my own research, explains how GATT pragmatism helped transform an agreement into an institution. In this book, I discuss the institution that is called to administer the life of each and every WTO agreement in a separate section, hoping to bring out this often forgotten aspect of GATT/WTO life by focusing on its interaction with the other WTO bodies. Volume 1 focuses on regulation of trade by GATT. Chapter 1 is long, but in my view that amount of detail is quite necessary. Both Jackson and Hudec spent much time trying to understand the negotiating record. Alas, modern WTO courts have relegated its importance by insisting on a narrow understanding of the Vienna Convention, the legal instrument that they use in order to interpret the various agreements. I quote from L. P. Hartley, an English novelist who famously wrote in his 1953 classic The Go-Between, “the past is a foreign country; they do things differently there.” Even if that is so, there is much to learn from the negotiating record, including, crucially, what the GATT framers were after. In my view, knowledge of the past is a key ingredient for a thoughtful understanding of the GATT/WTO regime. This is not to deny that adjustments are welcome—indeed necessary. The need for adjustment, though, is an elusive concept when the historical angle is missing. The next step in chapter 1 is to present in colloquial (but hopefully not vulgar) terms the explanations that modern economic theory has advanced for trade agreements. The

4

Introduction

scene is thus set for a “negotiators meet economics” play, and the consequences of this discussion. Chapters 2, 3, and 4 discuss the disciplining of border instruments—namely, quantitative restrictions and tariffs. It is in chapter 4 that I entertain the discussion on the most favored nation (MFN) clause, the cornerstone of GATT, which binds both border measures (tariffs) and domestic measures. Chapters 5 and 6 focus on the exceptions to MFN, the preferential trade agreements (PTAs), and the special and differential treatment for products originating in developing countries. Chapter 7 deals with all domestic instruments, whereas chapter 8 is dedicated to the discussion of disciplines imposed on state trading enterprises (e.g., state entities through which international trade is being channeled). In Chapter 9, finally, the discussion reverts to the obligations assumed under the GATT, and presented in the first eight chapters. While chapters 1–9 are dedicated to a discussion and analysis of GATT, I present the case law (and other relevant subsequent practice) under the various provisions until December 2014, since this is not a mere historic document, but still a living international agreement. Volume 2 covers the WTO Agreements regulating trade in goods. Since the Kennedy round (in the early 1960s), GATT has added to its institutional arsenal. The current institutional design is the outcome of the successful completion of the Uruguay round (mid1990s), as well as the few areas where agreement was reached during the Doha round (which started in 2001, and had not been concluded at the time of writing). Chapter 1 focuses on all agreements dealing with customs clearance. In chapters 2–4, I present the “contingent protection” instruments—e.g., the three agreements that allow WTO members to unilaterally add to the negotiated amount of protection when a certain contingency (e.g., dumping) has occurred. Chapters 5 and 6 are dedicated to an analysis of the Technical Barriers to Trade (TBT) and Sanitary and Phyto-sanitary Measures (SPS) agreements, which deal with some domestic instruments (e.g., environmental and health policy and consumer information). Chapter 7 is about a WTO innovation, the agreement on Trade Related Investment Measures (TRIMs). It is in this context that I entertain a brief discussion on the wider “trade and investment” issue. Chapters 8 and 9 focus on the two sector-specific agreements that remained outside the GATT disciplines and were reintroduced in the world trading system following the successful conclusion of the WTO (namely, Agriculture and Textiles). Chapters 10 and 11 concern the two plurilateral agreements (namely, Government Procurement and Civil Aviation); that is, the only WTO Agreements that bind only a subset of the total WTO membership. Finally, I discuss in chapter 12 the subject of transparency, a very important GATT/WTO institution aiming to curb uncertainty in trade relations. It is my hope that this book will be helpful to students and practitioners alike, and that the audience will encompass all those interested in the current and previous regulation of international trade.

1

1.1

Annex 1A Agreements Dealing with Customs Procedures

Clearing Goods through Customs

In this chapter, we discuss four agreements: namely, the Import Licensing Agreement (ILA), the Customs Valuation Agreement (CVA), the Agreement on Preshipment Inspection (PSI), and the Agreement on Trade Facilitation (ATF). These agreements explain the obligations assumed by WTO members when it comes to clearing goods through customs. The reader might think this is a mundane subject; and yet dozens of empirical studies point to the substantial costs on international trade that come from lengthy customs procedures, and unaccounted for controls. Worse, the boundary between lengthy procedures and uncertainty is quite often easy to cross. Consequently, exporters might have a disincentive to trade in the first place. Indeed, what is the value of tariff bindings if it takes weeks to clear goods through customs, or if the method for calculating the value of imports is totally haphazard? The importance of the four agreements can thus not be overstated enough. The agreements discussed in this chapter ensure that the value of traded goods has been properly reflected in invoices, while they also simplify customs procedures (and reduce deadweight losses),1 even when import licenses have been used. 1.2

ILA

1.2.1 The Legal Discipline and Its Rationale Article 1.1 of the ILA defines the term “import licensing” as follows: For the purpose of this Agreement, import licensing is defined as administrative procedures used for the operation of import licensing regimes requiring the submission of an application or other documentation (other than that required for customs purposes) to the relevant administrative body as a prior condition for importation into the customs territory of the importing Member.

This definition falls short of meeting the test that a logician would apply to definitions since it is self-referential. The absence of a more workable definition is not for lack of trying, though.

6

Chapter 1

During the Tokyo round, the first ILA was concluded (entered into force on 1 January 1980), and has since been superseded by the Uruguay round agreement. The Tokyo-round ILA numbered only 26 participants in 1986, that is, when the Uruguay round was launched.2 During the Uruguay round of negotiations, a number of trading nations continued to adhere to the Tokyo-round ILA. Mexico, for example, adhered in 1987.3 The increased participation facilitated the decision to transform ILA from a Tokyo-round code with limited participation to an Annex 1A Agreement, which binds all WTO membership. Why have import licensing? Import licenses are imposed for a variety of good reasons, but sometimes they are imposed abusively so. The members of the World Trade Organization (WTO) aimed through this agreement to reduce the potential for abusive behavior by disciplining recourse to import licensing. The ILA also aims at preventing trade distortions that could be caused by the use of import licenses, and also aims at simplifying and bringing transparency to import licensing procedures.4 But are not the procedures of the General Agreement on Tariffs and Trade (GATT) that concern import licensing enough? Do we really need an agreement on import licensing? GATT mentions import licenses in various places (i.e., Articles XI, XIII, and XV), without, however, regulating this area in detail. Actually, Article XI of GATT leaves the impression that import licensing is GATT-inconsistent, since it bans prohibitions or restrictions made effective through, inter alia, import licenses. We saw in chapter 2, volume 1, though, that in EEC—Minimum Import Prices, a GATT panel, had held that import licensing was not inconsistent per se, so long as the granting of licenses was automatic. It did not establish criteria for automaticity, and, as a result, we are in the dark as to which forms of import licensing are permitted or not. Article XV of GATT does not regulate in detailed manner the granting of licenses either, and refers to them to the extent warranted when addressing the relationship between the International Monetary Fund (IMF) and the WTO. The only noncontroversial regulation of import licenses is, thus, the requirement for transparency by virtue of Article XIII.3(a) of GATT. Trading nations might further be subjected to the disciplines of Article VIII of GATT, to the extent that granting a license is considered to be a service at customs clearance, although, in the absence of case law on this score, it is doubtful that this is the case. The conclusion from our analysis so far is that GATT contains sporadic references to import licensing, but no detailed regulation of the issue. Practice, nevertheless, did develop, since the disciplines discussed above leave ample leeway to those interested to practice at least some of forms of import licensing (like automatic import licensing). The Tokyo-round ILA crystallized the prevailing practice into law and sanctioned the distinction between “automatic” and “non-automatic licensing.” It did not go any further than that, though. The US went so far as to characterize it as a “reporting” (as opposed to an “operational”) agreement.5 The limits of the approach adopted during the Tokyo round soon became evident. It is in the context of the biennial reviews that took place following the advent

Annex 1A Agreements Dealing with Customs Procedures

7

of the Tokyo-round ILA that trading nations became increasingly sensitized to the distortions for international trade that can result from the operation of import licensing schemes. The objective of the Uruguay round negotiators was, thus, quite naturally (in the words of the US delegation) to ensure that “... licensing procedures themselves do not constitute an obstacle to international trade.”6 Negotiators were divided into two main camps during the negotiation of the Uruguayround ILA: those who wanted to constrain recourse to import licensing and those who thwarted similar attempts. Those wishing to constrain import licensing did not want to eliminate it altogether. It should be mentioned that even the US, a very severe critic of import licensing that submitted various proposals during the negotiation and a joint proposal with Hong Kong, China,7 that was heavily relied upon by other trading nations as well, did recognize that import licensing could, in principle, serve legitimate purposes. The US aimed to ensure that import licensing would not be widespread and that it would be “functional”; i.e., that it would be used whenever necessary to achieve a particular, agreed-upon objective. Recourse to it would occur only when the agreed-upon conditions had been met.8 It managed to push this view through in the preamble, as well as in some substantive obligations: Article 2.2(b) of ILA, for example, recognizes that recourse to automatic licensing will be made when other, more appropriate means are not available. In a similar vein, nonautomatic licensing (often referred to as “discretionary” licensing) must respect the necessity discipline; e.g., it must not be more burdensome than what is required to serve the measure to which it is linked. Negotiators fell short in their attempts to define “import licensing” in a more detailed manner than in the Tokyo-round agreement. The EU had, during the Uruguay round of negotiations, proposed that an indicative list of import licensing procedures be added to this provision in order to better explain the negotiating intent. It also proposed that criteria be agreed on that would help distinguish between customs clearance procedures that would not be covered by the new ILA and other procedures with “licensing elements,” which should be covered.9 It proposed to this effect that import licensing ... covers any document that is required as a prior condition for importation by virtue of an import regime, including customs documents when they have this function.10

This definition was not retained. The failure to agree on a definition is not inconsequential. As we will see later in this chapter, in Argentina—Import Measures, the consistency of an import licensing scheme was discussed under Article XI of GATT instead of the various provisions of the ILA. This is probably because the interpreter did not have a definition of what an import licensing scheme was, under which it would have subsumed the challenged measure.11 A license might be warranted either when no quantitative restriction (QR) is in place (say, for statistical reasons), or if a legal QR (say, on balance of payments grounds) has been introduced. What matters is, in the words of Article 1.2 of the ILA:

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... that the administrative procedures used to implement import licensing regimes are in conformity with the relevant provisions of GATT 1994 including its annexes and protocols, as interpreted by this Agreement, with a view to preventing trade distortions that may arise from an inappropriate operation of those procedures ...12

It is easy to contemplate how additional deadweight losses (i.e., excess burdens) can result from import licensing. Lengthy licensing procedures might in and of themselves dissuade traders from pursuing transactions. The various obligations included in this agreement aim at reducing them (and ideally, eliminating them altogether). The ILA disciplines licensing and not licenses—that is, the process and not the outcome. There are two types of licensing provided for in the ILA: “automatic licensing” (Article 2 of the ILA), and “non-automatic licensing” (Article 3 of the ILA). 1.2.2 Automatic Licensing 1.2.2.1 Definition Automatic import licensing is defined in Article 2.1 of the ILA as follows: “Automatic import licensing is defined as import licensing where approval of the application is granted in all cases, and which is in accordance with the requirements of paragraph 2(a).” The wording in this provision represents an improvement compared to the definition endorsed during the Tokyo round. There, the corresponding provision (Article 2.1) read: “Automatic import licensing is defined as import licensing where approval of the application is freely granted.” The wording “freely granted” was criticized for being too imprecise, and probably confusing as well, since it denotes free-of-charge licensing schemes and says nothing about the exercise of discretion by the administering authority.13 But, of course, the amount of money paid is not what necessarily counts. True, if the amount is prohibitive, it could, in and of itself, render licensing nonautomatic, since some traders might find it economically nonviable to pay the requested sums. On the other hand, it could be that licenses are granted free of charge, but the granting authority retains discretion regarding the entities that will receive it. This is why, following the US lead in this respect, the text was amended to ensure that no discretion would be allowed in the context of automatic licensing, and also that the conditions for lawful imposition would be explicitly spelled out in Article 2.2(a) of the ILA.14 1.2.2.2 The Rationale for Automaticity The natural question to ask in order to understand the rationale for automatic import licensing is this: Why have recourse to licensing at all, if licenses will be automatically granted to all applicants? The ILA recognizes in its preamble the usefulness of automatic licensing, without however adding instances where this is the case. All we know is that automatic import licensing may be necessary when other appropriate procedures for reaching a regulatory

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objective sought are not available (Article 2.2(b) of ILA). Take thus, the example of import licensing for the purposes of procuring statistical information. A WTO member will have recourse to automatic licensing in order to monitor imports if it cannot get the information it seeks through alternative channels, and so long as the circumstances that gave rise to the need to gather similar information are present. Meeting this test should not be taken for granted. Statistical information, for example, could be easily obtained by simply monitoring import trade at the various customs offices without imposing a licensing regime.15 WTO members, consequently, might have to explain why the use of automatic licensing was necessary in the first place. It follows that the only rationale for automaticity explicitly acknowledged in the ILA is the nonavailabilty of the first best instrument to reach an objective. It is for this reason that, according to Article 2.2(b) of the ILA, import licensing may be maintained so long as the circumstances that gave rise to its introduction persist and its underlying administrative purposes cannot be achieved in a more appropriate way. 1.2.2.3 Conditions for Lawful Imposition Three conditions must be cumulatively met for automatic licensing to be WTO-consistent: • All applications must be approved (Article 2.1 of the ILA). • The “general provisions” applicable to both automatic and nonautomatic licensing have been observed (Article 1 of the ILA). • The requirements in Article 2.2(a) of the ILA must be satisfied: WTO members that have recourse to automatic licensing must also ensure that their administration of licensing procedures is such that no restrictive effects result for international trade. It is, of course, anything but a simple exercise to measure similar effects and attribute them to the administration of automatic import licensing procedures. This is why this provision creates a presumption that restrictive effects exist unless a series of obligations embedded therein have been observed. We discuss all this in what follows. 1.2.2.4 Approval Granted in All Cases By virtue of Article 2.1 of ILA, approval must be granted in all cases for licensing to be automatic. Does this mean that the relevant authorities can impose no conditions at all that should be fulfilled for requests to be approved? It turns out that they can impose conditions but that what matters most is that anyone meeting the conditions will be granted a license. Conditions however, could be quite restrictive, and the question arises whether the agreement imposes a positive or negative list to this effect, e.g., whether it proscribes some or explicitly approves of other conditions. There are two types of conditions that can be imposed: monetary security that must be paid for licensing to occur, and other (nonmonetary) trading conditions. We take them in turn.

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Monetary Conditions To understand this condition, we need to revert to the first ILA signed at the Tokyo round. Article 2.1 of the Tokyo-round ILA read: “Automatic import licensing is defined as import licensing where approval of the application is freely granted.” The term “freely granted,” though, should not be equated to the absence of monetary burden. Footnote 1 to Article 2.1 of the Tokyo-round ILA read: “Those import licensing procedures requiring a security which have no restrictive effects on imports, are to be considered as falling within the scope of paragraphs 1 and 2 of Article 2 below.” This footnote became footnote 4 in the current ILA, where it has been reproduced verbatim. One might legitimately, of course, ask: What security has no restrictive effect on imports? The only way that a security will not have restrictive effects would be if traders might find it consistently economically unjustifiable to pay it. Consequently, the amount of security should not act as disincentive and reduce the volume of transactions that would otherwise have taken place. In 1978, a GATT panel was requested to review the consistency of the licensing scheme practiced by the EU on some farm goods, including tomatoes. In EEC—Minimum Import Prices, the panel qualified as “automatic licensing” a scheme whereby, for the issuance of a certificate to import goods, traders would have to pay a guarantee (“security”). The panel reached this conclusion based on the fact that the scheme was consonant with prevailing practice at the time. In this case, it paid attention to a number of facts: other trading nations had similar schemes in place; the amount of “security” was not exorbitant; and the security paid would be reimbursed after importation had taken place. Nonmonetary Conditions Article 2.1 of the ILA defines “automatic licensing” as import licensing where all applications are approved, and where the requirements of Article 2.2(a) of the ILA are met. “Automaticity,” though, should not be equated with “unconditionality.” The ILA accepts as much when, in Article 2.2(a)(i), it states the following: any person, firm, or institution which fulfils the legal requirements of the importing Member for engaging in import operations involving products subject to automatic licensing is equally eligible to apply for and to obtain import licences.

Goods traded under import licenses could, thus, be subjected to trading conditions. Automaticity, thus, should be understood as an obligation not to add to preestablished conditions. It could be, for example, that only qualified traders could import explosive materials in Home, for reasons of public safety. This provision would suggest that any trader who was qualified to this effect should be in a position to obtain an import license. In the case, thus, of automatic licensing, national administrations retain no discretion regarding who will obtain the license once they have published the relevant statute. Anyone who conforms to the criteria established (which must respect the remaining conditions

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for legality that we discuss in the following sections of this chapter) should obtain an import license. Conversely, national administrations retain the discretion to decide who will be granted a license in the context of nonautomatic licensing. It is not at all accidental that, throughout the Uruguay round of negotiations, nonautomatic licensing was referred to in various negotiating documents as “discretionary” licensing. The type of measures that could serve as a basis for conditioning the granting of import licensing have been also discussed during the various negotiations of the ILA, albeit without much success. During the negotiations of the Tokyo-round ILA, participants tried first to dissociate automatic from nonautomatic licensing by defining the former in the following manner: Automatic import licensing is defined as licensing which is not used to administer import restrictions such as those employed pursuant to the relevant provisions of inter alia Articles XI, XII, XVII, XVIII, XIX, XX, and XXI of the General Agreement and when foreign exchange is granted automatically. The term “automatic licensing” covers technical visa requirements, surveillance systems, exchange formalities related to imports, and other administrative reviews of an equivalent kind effected as a prior condition for entry of imports.16

Had this provision been retained, we would have some clarity as to the scope of automatic licensing, with respect to both what comes under the term and what does not. The indicative list is very useful. WTO panels, alas, routinely avoid to make good use of the historic record, although in this (as in other) occasion they would greatly benefit from the study of the negotiating record of the Tokyo round. During the Tokyo round of negotiations, the following definition for “nonautomatic licensing” was proposed: Licensing procedures adopted and practices applied for the issue of licences for administration of quotas and other import restrictions such as those employed pursuant to, inter alia, the relevant provisions of Articles XI, XII, XVII, XVIII, XIX, XX, and [XXI] of the General Agreement.17

Note that the list is quite broad, since Article XX of GATT covers all “general exceptions.” Alas, this definition was not retained either. Some clarification was provided during the Uruguay round with the advent of Article 2.2 of the ILA: Non-automatic licensing shall not have trade-restrictive or -distortive effects on imports additional to those caused by the imposition of the restriction. Non-automatic licensing procedures shall correspond in scope and duration to the measure they are used to implement, and shall be no more administratively burdensome than absolutely necessary to administer the measure.

So there is a switch in the focus: instead of enumerating the subject matter of measures that could legitimately serve to condition the granting of import licenses, the framers called the attention of trading nations to the need to avoid trade-restrictive effects beyond whatever is necessary to serve the objective sought through nonautomatic licensing.18

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1.2.2.5 General Provisions Article 1 of the ILA includes various disciplines applicable to both types of licensing. Conformity with GATT WTO members must, by virtue of Article 1.2 of the ILA, ensure that their licensing regimes respect the relevant rules of GATT. The quintessential elements of GATT concern nondiscrimination and only sporadically impose specific conduct-type obligations (like Article VIII of GATT, which requires that payments for services at the border be limited to the cost of service provided). The remaining part of Article 1 of the ILA imposes additional, more specific obligations. Neutral Application of Import Licensing Procedures Article 1.3 of the ILA imposes a general obligation on WTO members to the effect that: The rules for import licensing procedures shall be neutral in application and administered in a fair and equitable manner.

The Appellate Body (AB), in its report on EC—Bananas III, held that this legal provision should be also understood as imposing on WTO members the obligation to apply the same procedures for import licensing to all other WTO members (§§ 196–198). It saw thus, an MFN requirement in Article 1.3 of the ILA, beyond the requirement for fair and equitable administration. (The term “fair and equitable is discussed in chapter 12, where we discuss transparency.) Prior Publication The products for which import licensing procedures are in place, the criteria for eligibility of persons/economic operators interested in procuring an import license, as well as the administrative agency entrusted with the granting of licenses, shall be published a period of time (ideally 21 days) before the effective date when the regime is in place (as per Article 1.4 of the ILA). Obligation to Simplify Procedures Article 1.5 of the ILA requests that WTO members guarantee that application and renewal forms are “as simple as possible.” The same obligation is imposed by virtue of Article 1.6 of the ILA with respect to application and renewal procedures. There is no additional guidance in this respect, and no panel so far has been called on to interpret this provision. Simplifying procedures and increasing transparency of import licensing regimes lay at the heart of the joint US—Hong Kong, China proposal discussed earlier in this chapter. To a large extent, it was an exercise in second best. Since the US could not totally push its line through (namely, to reduce recourse to licensing procedures to the bare minimum), it had to content itself with a half-victory on this score. To compensate for its losses, it pushed for extra transparency and simplification of procedures. Transparency and simplification reduce the restrictive effect of import licensing schemes, of course.

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Thou Shall Not Reject Lightheartedly (Ex Ante) Article 1.7 of the ILA makes it clear that applications will not be rejected for minor documentation errors that do not alter the basic data, and no disproportionate penalties will be imposed for omissions or mistakes in the documentation submitted. Thou Shall Not Reject Lightheartedly (Ex Post) In a similar vein, minor variations in value, quantity, or weight from the amount designated in the license (due, for instance, to differences occurring during shipment) will not provide grounds for refusing a license (Article 1.8 of the ILA). The agreement, thus, wants to ensure that authorities entrusted with the competence to decide on the granting of licenses will not unduly burden international trade by refusing a license for errors that do not materially affect the request. It stops short of requesting authorities to justify rejections, though. Treatment of Confidential Information The treatment of confidential information is regulated in Article 1.11 of the ILA: The provisions of this Agreement shall not require any Member to disclose confidential information which would impede law enforcement or otherwise be contrary to the public interest or would prejudice the legitimate commercial interests of particular enterprises, public or private.

Conditions for Availability of Foreign Exchange To avoid disadvantaging trade (as opposed to a situation where no license is required), the agreement requests from WTO members that the availability of foreign exchange be guaranteed under the prevailing conditions when no import license is required (Article 1.9 of the ILA). 1.2.2.6 Presumption of Existence of Restrictive Effects The “presumption of existence of restrictive effects” provision raises a presumption that even automatic import licensing can have restrictive effects, unless the following three conditions mentioned in Article 2.2(a) of the ILA have been met, at a minimum: • Any person, firm, or institution that fulfills the legal requirements of the importing member for engaging in import operations involving products subject to automatic licensing is equally eligible to apply for and to obtain import licenses. • Applications for licenses may be submitted on any working day prior to the customs clearance of the goods. • Applications for licenses when submitted in appropriate and complete form are approved immediately on receipt, to the extent administratively feasible, but within a maximum of ten working days.

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The agreement is not explicit in this respect, but it should be the case that the three conditions must be cumulatively met. Indeed, what is the use of fulfilling the first two conditions if licenses are granted five years after the date of the request?19 The three grounds mentioned here (from Article 2.2(a) of the ILA) are of an indicative character. So what other activities could be deemed to have restrictive effects (and consequently, WTO members must avoid having recourse to them)? The Agreement implicitly suggests that there is nothing wrong with imposing conditions regarding the marketing of specific goods, which would apply irrespective of whether these goods are subjected to an import licensing regime or not. Similar conditions have of course restrictive effects since arguably the volume of imports would have been bigger if they had not been in place. What the Agreement cautions against is restrictive effects resulting from the use of import licensing, e.g., additional to whatever marketing conditions, unrelated to the licensing regime, existed before. Think of the following illustration. Governments imposing QRs might have the incentive to auction off import licenses to interested importers. Indeed, this would be the case any time there is substantial discrepancy between the world and the home price. In this case, the price for acquiring an import license (auction price) will depend on the difference between the price of the domestic good and that of the imported good.20 Should auctioning of import licenses be equated to restrictive effect (and, thus, outright banned) whenever recourse to automatic licensing is being made? An affirmative response seems appropriate in light of the definition of automatic licensing in Article 2.1 of the ILA. In the case of auctioning, there is no approval of applications in all cases, since only the winner of the auction will be allowed to import. If at all, auctioning could come under nonautomatic licensing, as discussed next. 1.2.3

Nonautomatic Licensing

1.2.3.1 Definition Nonautomatic import licensing is defined in Article 3.1 of the ILA by default and encompasses all forms of licensing that do not qualify as “automatic”: “Non-automatic import licensing procedures are defined as import licensing not falling within the definition contained in paragraph 1 of Article 2.” Recall also from the discussion earlier in this chapter that nonautomatic licensing is linked to a measure with restrictive effect, which, for all practical purposes, it is serving. Article 3.2 of the ILA reads that nonautomatic import licensing “... shall not have traderestrictive or -distortive effects on imports additional to those caused by the imposition of the restriction.” Since lawful automatic licensing presupposes that all requests will be accepted, nonautomatic licensing should encompass cases where some requests will not be granted. In other words, discretion should not, in and of itself, be punishable in the case of nonauto-

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matic licensing. Exercise of discretion should be punished only if it amounts to a restriction in addition to that resulting from the presence of the restrictive measure that it serves. The ILA does not contain, as we saw before, even an indicative list of measures that can come under nonautomatic licensing. This is regrettable. Practice sheds some light, but only some. A few disputes have arisen that concern import licensing regimes, the majority of which did not lead to the issuance of a panel report. The problems associated with the coverage of nonautomatic licensing are thus expounded by the absence of an indicative list of nonautomatic licensing, but also by the absence of an indicative list of objectives that can be pursued through nonautomatic licensing, and the very reduced number of notifications of import licensing regimes, most likely because through similar notifications WTO members would be supplying self-incriminating information.21 The negotiating record could thus be of help here. Recall that we referred above to the un-adopted proposal tabled during the Tokyo round to introduce an indicative list of instances of automatic licensing. Recall further that items such as technical visa requirements, surveillance systems, exchange formalities related to imports, and other administrative reviews of an equivalent kind had been included in that list. In contrast, practices notified as nonautomatic licensing that we discuss further on, include items such as protection of national security, environment, and public health. The inference is that whereas automatic licensing is concerned with essentially statistical information regarding international trade, nonautomatic licensing is primarily concerned with the protection of social preferences. 1.2.3.2 The Rationale for Nonautomatic Licensing The rationale for imposing a license is not prejudged in the ILA. Practice, to which we will return later in this chapter, reveals that WTO members have notified few import licensing schemes for a variety of reasons, ranging from national security to protection of public health. In fact, Article 1.10 of the ILA explicitly acknowledges the applicability of Article XXI of GATT, thus indirectly accepting that import licensing could serve objectives relating to national security. Thus pursuance of social preferences through import licensing is a possibility. It could also be that a government might simply want to pocket a percentage of the price differential between the world and the domestic price. Recall the discussion to this effect earlier in the chapter. We assume once again that Home’s price of widgets is substantively higher than the world price, and Home does not protect its widgets producers either. We also assume that trading of widgets is reserved to widgets experts. Home’s importers make, thus, substantial profit importing and reselling widgets. Home wants to pocket some of this money, and to this effect, it introduces an import licensing regime. Is there a guarantee that auctioning of import licenses will always be immune to restrictive effects? The price (assuming that the government does not intervene at all in setting it) could not be per se assimilated to a restrictive effect, since private entities will decide its level. It could, of course, be the case that the winner of the auction might be prepared

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to pay in order to exclude imported goods from the market. Some importers might, for strategic reasons, purchase licenses and contribute toward eliminating imports from their domestic market in case, for example, they are the makers of a substitutable product to the imported item. Since a restriction is in place, it might make good business sense to engage in similar action, depending, of course, on the circumstances (i.e., volume of quota, duration of quota, price of imported goods). Is there any insurance policy against similar behavior? Indirectly, yes. Under Article 3.5 of the ILA, past performance must be taken into account. In this context, members must take into account cases where the winner of an auction has not utilized the quota in full and has not provided an adequate explanation as to why this happened. There is no obligation to exclude similar importers from future auctions, but there is an obligation to demonstrate that authorities are well aware of similar behavior and have addressed it. In what follows, we have included some typical illustrations of notifications of import licensing regimes. Human/Animal Life/Health The Republic of Korea (which will be referred from here on as just “Korea”) notified the WTO of an import licensing scheme for specific goods to this effect.22 Protection against Importation of Pests and Diseases The US had notified the WTO of measures to protect against the importation of pests and diseases.23 Similar measures often work in conjunction with the procurement of certificates by international organizations mandated to act in these ways.24 Environmental Protection Cuba had put in place a regime for importation of substances that have the potential to deplete the ozone layer.25 National Security Several WTO members have notified the organization of import licensing schemes relating to the importation of military goods.26 Humanitarian Purposes New Zealand notified an import licensing scheme for antipersonnel mines. Antipersonnel mines are only allowed to be imported by the Anti-Personnel Mines Prohibition Act 1998 for the purposes of training in mine detection, deactivation, clearance, etc.27 1.2.3.3 Conditions for Lawful Imposition WTO members must respect two sets of obligations: • Obligations common to both automatic and nonautomatic licensing (Article 1 of the ILA) • Obligations specific to nonautomatic licensing (Article 3 of the ILA)

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We have already discussed the first set of obligations supra, so now we turn to a discussion of the latter set. 1.2.3.4 Disciplines Specific to Nonautomatic Licensing Article 3.2 of the ILA requests that WTO members ensure that no trade-restrictive effect in addition to the restriction in place will result from the adoption of the import licensing scheme. The key for understanding this discipline is that the regime will not entail restrictive effects in addition to whatever is necessary to serve the sought objective, e.g., national security or plant health, or whatever the objective might be. The terms “trade-restrictive or -distortive effects on imports” circumscribe the ambit of the obligation imposed. The second sentence of the same provision reads: Non-automatic licensing procedures shall correspond in scope and duration to the measure they are used to implement, and shall be no more administratively burdensome than absolutely necessary to administer the measure.

This discipline requires from WTO members to adopt the least restrictive import licensing regime in order to serve the sought objective. The term “absolutely” appearing before the term “necessary” underlines the legislative will to minimize, if not eliminate altogether, all restrictive effects resulting from the operation of the import licensing regime. Interpreting this provision, the AB, in its report on EC–Poultry, held that WTO members must ensure that, when applying import licensing schemes, distortive effects will be caused neither for the trade covered by the scheme nor for the trade not covered by the scheme. The onus is, however, on the complainant to show that distortive effects have resulted from the introduction of a licensing scheme. In EC–Poultry, the AB held that the complainant must demonstrate a causal relationship between the existence of the licensing procedure and the claimed distortion (§ 67): These arguments, however, do not address the problem of establishing a causal relationship between imposition of the EC licensing procedure and the claimed trade distortion. Even if conceded arguendo, these arguments do not provide proof of the essential element of causation. (italics in the original)

Additional obligations regarding nonautomatic import licensing—in fact, a number of them—have been reflected in Article 3.5 of the ILA: • The period of application should not be excessively long. • The period of validity of the license should not be unreasonably limited. • WTO members should not discourage full utilization of quotas. • The desirability for issuing licenses for products in economic quantities must be taken into account by the WTO member issuing an import license. • When allocating import licenses, the previous import performance of the petitioner must be taken into account.

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• If a quota is administered through a license that is not specific to country of origin, importers shall be free to choose the source of imports. • In the case of variations between the amount designated in the license and the amount actually imported (which can occur, as Article 1.4 of the ILA itself acknowledges), Article 3.5(l) of the ILA calls for compensatory adjustments to ensure that trade flows continue unimpeded. In Turkey–Rice, the panel had to entertain a claim by the US that Turkey was running afoul of its obligations under Article 3.5 of the ILA by restricting access to traders who had previously purchased a larger quantity of domestic rice with respect to in-quota rice.28 This was, in the view of the complainant, an impermissible distortive effect. The panel, for reasons of judicial economy, did not formally rule on this issue, yet the overall context and discussion in the panel report lend strong support to the view that similar practices should be considered inconsistent with the obligations assumed under the ILA (§§ 7.294ff). 1.2.4

Administration of Tariff Quotas

The “Bali package” included an Understanding on Tariff Rate Quota Administration Provisions of Agricultural Products as Defined in Article 2 of the Agreement on Agriculture.29 This document makes it clear that the administration of tariff quotas for farm goods shall be deemed to be an instance of import licensing, and, consequently, must respect the ILA (§ 3). Licensing regimes have often been in place when tariff quotas have been legally imposed, and similar measures have also led to disputes between WTO members. The AB report on EC–Bananas III accepted the legality of imposing a licensing scheme when a tariff quota is in place (§§ 193–195). Problems can of course arise since import licensing regimes might affect the marketing of the in quota imports, that is, the volume of imports that benefits from the lower rate. We referred previously to the discipline imposed through Article 3.5(j) of the ILA: this provision aims to ensure that licensees manipulate the market by excluding from it low tariff in quota regime, while promoting their own competing products. The Understanding adds to this discipline. The negotiators of the Understanding benefited from the hindsight and experience that they gained from practice in import licensing. They thus were in a good position to address many of the shortcomings that had been observed in practice in the area of import licensing. A series of new disciplines were introduced aiming to minimize the risk of additional restrictive effects resulting from the operation of the import licensing regime. For example, the WTO must be notified of “fill rates”—e.g., the quantity (i.e., percentage) of tariff quota that has been absorbed (§ 6).30 In an effort to comply with Article 3.2 of the ILA, unfilled quotas will not be subjected to administrative procedures that are more burdensome than what is required (§ 7).

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In other words, procedures to fill a quota should not become an obstacle in and of themselves and contribute to quotas being underfilled. If quotas are not filled by private operators, and there are reasons to believe that this would not be the case had a normal commercial operator been the beneficiary of the in-quota rate, then the allocating WTO member shall take into account this element when allocating new quotas as per Article 3.5(j) of the ILA (§ 8). WTO members should take action when quotas are underfilled for no reasonable commercial reason. To this effect, they should ask operators who are in charge whether they would be prepared to make unused quotas available to other potential users (§ 9). WTO members should further provide for a “reallocation mechanism” (§ 12): they may raise a specific concern before the Committee on Agriculture when fill rates have not been notified or are below 65 percent (this is the “underfill mechanism” reflected in Annex A, § 1). Once the underfill mechanism has been initiated, if the fill rate remains below 65 percent for two consecutive years, a WTO member may request that the importer modify the administration of the quota. The importer might do that, or it might take any other action it deems appropriate. If, as a result, a solution is found or the fill rates rise above 65 percent, then the issue will be “resolved”; otherwise, requests for modification might (and can) persist (Annex A, § 2).31 If, in this context, from the third year onward, fill rates do not increase beyond 65 percent (and not by 8 percent if the fill rate is 40 percent, or 12 percent if the fill rate is more than 40 but less than 65 percent), then the importing member should either adopt a “first come, first served” approach, or an automatic, unconditional license-on-demand system within the tariff quota (Annex A, §§ 3–4). 1.2.5

Transparency

1.2.5.1 Notification Requirements WTO members must observe three different notification requirements in order to comply with their obligations under the ILA. The Committee on Import Licensing has adopted procedures for notification.32 First, as we already have discussed, Article 1.4(a) of the ILA imposes a general obligation of transparency on all WTO members. They are under a duty to publish and notify the WTO of all laws, regulations, and other measures, that regulate import licensing as well as initiations of licensing procedures. The conditions for obtaining a license must be public, and the WTO must be notified of them. Publication must take place twenty-one days before the effective date of import licensing requirement in a given case, but never after the effective date of the requirement. This obligation must be read together with Article 8.2(b) of the ILA, which reads: Each Member shall inform the Committee of any changes in its laws and regulations relevant to this Agreement and in the administration of such laws and regulations.

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Second, under Article 5 of the ILA, the member must indicate the list of products, the contact points for information on eligibility, the authority deciding on applications. To cement this transparency obligation, Article 5.5 of the ILA allows the possibility of crossnotifications of licensing procedures. Finally, by virtue of Article 7.3 of the ILA, WTO members are also obliged to annually complete and transmit the Questionnaire on Import Licensing Procedures by 30 September each year.33 Also, following the submission of the questionnaire, they might be requested to provide additional, detailed information about both their legislation and practice regarding import licensing. 1.2.5.2 The Record The record of notifications is not good by any reasonable standard.34 This might be explained by the fact that there are various overlapping disciplines regarding notifications, which increase transaction costs. Moreover, the agreement does not establish a so-called one-stop shop that will be notified of all issues relating to import licenses.35 Most importantly, WTO members might on occasion be lacking the incentive to notify, because they might fear that they are providing self-incriminating information. The few disputes that have arisen so far can be explained by detection costs associated with discovering licensing regimes. Since licensing regimes often do not concern an important volume of trade (e.g., few products would come under nonautomatic licensing to promote national security anyway), and since many other WTO members often mimic licensing practices by others, the incentive to bring forward a dispute is often missing. Still, there is an undeniable problem regarding the volume of notifications, and the best evidence to this effect is that since 2009, the committee has focused on members’ compliance with the transparency obligations in the agreement. As noted in the 2011 report of the committee (G/L/968), improvements have been seen at the level of compliance with the mandatory notification obligations, particularly under Articles 1.4(a), 8.2(b), and 7.3 of the ILA. Recently, the WTO Secretariat proposed a simplified format that could be used for notification purposes.36 Information regarding the publication of the import licensing scheme, a translation into one of the three WTO official languages (English, French, or Spanish), if necessary, as well as the domestic institution in charge is provided. WTO members are encouraged to use the new format on a voluntary basis.37 1.2.6 Export Licensing The ILA deals with import licensing, not with export licensing. In fact, there is no agreement on export licensing since WTO members have refused to enter similar negotiations. There is indeed an argument that can be made in favor of establishing export licensing regimes. Improving terms of trade, protection of processing industries, raising revenue,

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domestic price stabilization, and conservation of exhaustible natural resources were the reasons previously mentioned for restricting exports. Sovereignty concerns linked to, for example, national minerals might provide WTO members with an incentive to place restrictions on the export side. In the same spirit, a country with monopoly power in the global market with respect to its rare minerals might seek to place restrictions on exports in order to facilitate price discrimination across different foreign buyers. Export licensing can thus undermine a liberal world trade order. There is some embedded discipline on export licensing, although it was far from being comprehensive. Because of most favored nation (MFN), a WTO member cannot price discriminate by issuing discretionary and discriminatory export licenses, and hence some of the incentive to impose restrictions (such as export licenses) on the export side evaporates. On the other hand, however, WTO members can always provide their domestic market (and domestic producers) with an advantage through export licenses: the size of the advantage to its domestic producers will depend on how liberal investment is in this market. One of the first discussions on export licensing was recorded in 1949. Czechoslovakia complained about the system of export licensing that the US was practicing. The US responded by arguing, inter alia, that the regime it had put in place was necessary to protect its national security. By 1949, Czechoslovakia had become communist, and the US had tightened security controls imposed on imports from and exports to similar countries. Czechoslovakia pushed its claim forward, and requested the establishment of a panel to review the legitimacy of its complaint. In US–Export Restrictions (Czechoslovakia), the panel rejected the claim by Czechoslovakia. Czechoslovakia had argued that US export licenses were discriminatory. The panel decided that no discrimination resulted from the application of the export license and consequently exonerated the imposing trading nation from any responsibility.38 The first attempt, thus, led nowhere. During the Tokyo round, there was an attempt to negotiate on export restrictions. Winham (1986, pp. 277ff) reflects the consensus view at the time when stating that similar measures were occasionally adopted in order to confer an advantage to domestic industries. Negotiations would be a means to distinguish wheat from chaff so to speak. They led yet again nowhere. It is clear from the record that a negotiation on export restrictions was not a priority.39 This was the case essentially because trading nations were, in principle, unwilling to commit on this score, fearing the repercussions of a similar commitment on their sovereignty over natural resources. The Tokyo round coincides in time with the ideas expressed by scholars promoting the so-called New International Economic Order, a central pillar of which was the permanent sovereignty over natural resources. Many developing countries had espoused these views and, under the circumstances, consensus was impossible. A Tokyo round Code between the few like-minded countries (the OECD members) would have been hardly useful, since (most of the) export licenses in the trade between OECD countries.40

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The Tokyo round though had still something to show on this front, albeit not a Code. Following a proposal in 1976 by George A. Maciel, then the Brazilian Ambassador, a negotiating group called the “Framework Group” was established. This group was, inter alia, requested to negotiate an agreement on export licensing. The end product of the negotiation was the issuance of an Understanding Regarding Export Restrictions and Charges, which dealt head on with this issue41 but which essentially called for treating export restrictions as a priority issue for the negotiators in the post-Tokyo era.42 The discussion continued for some time immediately after the conclusion of the Tokyo round, and the Consultative Group of Eighteen (CG18) was asked to advise the GATT Council on the forum and modalities of the negotiation. This body issued a document explaining the impact of export restrictions on international trade, and added an annex reflecting illustrative examples.43 This provided the impetus for further work in this area. During the preparations leading to the Ministerial Conference of the GATT CONTRACTING PARTIES in 1982, one delegation suggested the inclusion in the agenda of export restrictions, with a view to pointing to the trade-distorting effects of similar practices. The absence of wide support, though, led to this issue not being included in the Ministerial Declaration.44 Trading nations spent some time negotiating this issue in the context of the Uruguay round as well. The GATT Secretariat issued a very elaborate document45 in which it discussed the rationale for imposing export restrictions, as well as a few illustrative examples. Nothing much happened during the Uruguay round negotiations following the issuance of the Secretariat document, and the Uruguay round did not include an agreement on export licenses. Only a few of the negotiators favored introducing disciplines on export licensing. They were a minority, and there was no push for plurilateral agreements as we saw in chapter 1 of volume 1. The Uruguay round epitomizes the switch from clubs-driven trade integration to the single undertaking approach. Eventually, those willing to negotiate export licensing they had to give in to the majority that did not.46 In the absence of an agreement to deal specifically with export licenses, the question arises of how export licenses should be treated in WTO law. We stated supra that by virtue of the MFN clause export licenses cannot be discriminatory. The Panel on China—Raw Materials added that export licenses must be assessed in the context of Article XI of GATT. They do not necessarily violate this provision unless they have restrictive effects of their own, that is, additional to the objective they want to achieve. For example, an authority that requests from potential exporters a document attesting that they retain the right to export is not violating Article XI of GATT (§§ 7.881, 7.917–918). An authority that retains discretion to request a number of unidentified documents as a precondition for issuing a license is acting inconsistently with this provision (§§ 7.957–958).47 Since export licenses come under the ambit of Articles I and XI GATT, one can safely assume that, in case the WTO member issuing is found to violate any one of these provisions, it can seek to justify its measures through recourse to Articles XX or XXI of the GATT, as the case may be.

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Special and Differential Treatment

There is no special and differential section in this agreement other than Article 3.5(j), which states that: Consideration shall also be given to ensuring a reasonable distribution of licenses to new importers, taking into account the desirability of issuing licenses for products in economic quantities. In this regard, special consideration should be given to those importers importing products originating in developing country Members and, in particular, the least developed country Members.48

What exactly “special consideration” amounts to is hard to tell in absence of panel practice on this score. It seems though, that this is a procedural requirement and WTO members will be satisfying it if they can prove that they did consider the issue even though they decided to act otherwise. 1.2.8

Reservations

Reservations to the ILA are possible, assuming that the other WTO members have provided their consent to this effect (Article 8 of the ILA). This is a remarkable provision, which cannot be found in other WTO agreements. It allows, in principle, for a two-tier regime. So far, though, no WTO member has availed itself of this possibility. 1.2.9

Exceptions

Article 1.10 of the ILA explicitly provides for the relevance of the national security exception included in Article XXI of GATT. Chapter 9, volume 1, discussed the relevance of Article XX of GATT, where we concluded that indeed violations of the ILA can be justified through satisfaction of the criteria embedded in this provision. 1.2.10

Institutions

A Committee on Import Licensing was established by virtue of Article 4 of the ILA. This committee is the depository of all laws regarding import licensing. A soft conciliation procedure is established before the committee, where members can bring forward their complaints.49 If submitted complaints do not get resolved at this stage, then the complaining party can always submit its concerns to a WTO panel. 1.2.11

Relationship with Article XI of GATT

In Argentina—Import Measures, complainants argued that DJAI (the acronym stands for the Spanish translation of “Advance Sworn Import Declaration”) was in violation of the obligations of Argentina under the ILA. DJAI was a document that all importers had to fill for importation to take place (§ 6.364):

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Importers are required to submit a DJAI providing the stipulated information prior to the issuance of an order form, purchase order, or similar document issued to purchase items from abroad that are destined for consumption in Argentina. The filing of a DJAI by the importer initiates the DJAI procedure.

The procedure would require importers to fill out documents with standardized information, and, once this had been done, importers would have 180 days to import the authorized goods (§ 6.372). This looks very much like an import licensing scheme, as discussed previously. Complainants had argued that this scheme violated both GATT (specifically, Article XI) and the ILA. The panel adopted an order of analysis of claims whereby it first reviewed the claims under GATT, rather than the ILA, the more specialized agreement to deal with this issue. It did not even pronounce on whether the DJAI came under the purview of ILA. It held that, regardless of this issue, nothing stopped it from examining first the consistency of the Argentine regime with Article XI of GATT. Having established the inconsistency of DJAI with GATT, it held that it was unnecessary to also pronounce on its alleged inconsistency with the ILA (§ 6.448). This is the wrong approach. Standing case law in every other Annex 1A Agreement that we examine in this volume suggests that panels always start from the agreement dealing more specifically with the matter before it. In the case of DJAI, this is the ILA, and not Article XI of GATT. Alas, the panel report was not appealed, and the AB was deprived of the opportunity to confirm here its case law regarding the relationship of Annex 1A Agreements and the GATT. 1.3 1.3.1

CVA The Legal Discipline and Its Rationale

Customs valuation has been regulated since the inception of GATT in Article VII. Article VII of GATT however, did not provide for detailed regulation of customs valuation, and it was not long before practice in the area of customs valuation surprised trading nations, and it was felt that a separate, more detailed agreement was necessary. The CVA, the first detailed regulation of customs valuation, was successfully concluded during the Tokyo round. The CVA was a Code, to which only a few GATT contracting parties adhered. The Uruguay Customs Valuation Agreement, which is currently in force, is the successor to the CVA, Tokyo-round Code. Paradoxically, there is nothing like a statutory definition of “customs valuation.” The only available so-called official definition comes from case law (Colombia—Ports of Entry), where the panel defined the term in a rather open-ended way (§ 7.83): Essentially, customs valuation involves the process of determining the monetary worth or price of imported goods for the purpose of levying customs duties.

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The rationale for the CVA is expressed in both the preamble, as well as in various provisions that underline the aim to ensure that the customs value of goods entering a market will be properly assessed; e.g., that duties will be imposed on the “true” value of goods, not on an overvalued or undervalued commodity. As we will see later, the incentives to over- or undervalue are frequently present, and the resulting impact on international trade flows undeniable. Some transactions might, for example, never take place because of overvaluation, and the CVA aims to rid the world trading system from similar deadweight losses. It was the most sophisticated customs administrations that took the lead on drafting the discipline during the GATT negotiations, and the final text corresponds to a US proposal, with input from the UK delegation, submitted already during the London Conference.50 Negotiators felt that through manipulation of the valuation of merchandises, tariff concessions would be manipulated. There was for example, widespread agreement that underinvoicing should not be allowed, and that customs authorities would follow agreed-on procedures that would enable them to apply customs duties on the true value of traded goods. In more general terms, the driving idea of the negotiation of this provision was that, absent proper invoicing, tariff concessions on customs duties would be circumvented. The expressed fear was that similar practices would lead to an unwillingness to commit to generous tariff concessions since the incentives to this effect would have been eviscerated because of underinvoicing that could lead to increased and un-anticipated volumes of imports. This was what the GATT framers wanted to avoid at any cost. The negotiations produced already at the London Conference of 1946 a draft that reflected the spirit, but not necessarily the actual wording, of the current GATT provision. This happened through subsequent streamlining of the language.51 The final text of Article VII of GATT, though, did not manage to clarify all issues that negotiators occupied themselves with. Besides the lack of definition of “customs valuation,” the text suffers from other defects: it is a mere recognition of principles that should (as opposed to shall) apply to the valuation of imported goods. Trading nations retained, as a result, substantial discretion when designing their national valuation policies. Indeed, nothing captures this point better than Article VII.5 of GATT: The bases and methods for determining the value of products subject to duties or other charges or restrictions based upon or regulated in any manner by value should be stable and should be given sufficient publicity to enable traders to estimate, with a reasonable degree of certainty, the value for customs purposes.

The discretion of trading nations with respect to the customs valuation method used, thus, was not severely curtailed, and, as a result, regulatory diversity flourished. There is nothing wrong with regulatory diversity of course. Some however, used their discretion legitimately, and some abused their discretion when doing so. As a result, disputes regarding the consistency of methods of customs valuation with the spirit and sometimes the

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letter of the GATT emerged. Take the notorious American Selling Price (ASP) case as an illustration. Certain goods entering the US market would be valued for tariff purposes at the level of the domestically produced articles with which they competed. This regime was, of course, contrary to any reasonable understanding of “customs valuation” and ran against the heart of comparative advantage (and ultimately defeated the purpose of negotiating tariff concessions). The US had originally grandfathered this valuation method in order to keep it in place, at least provisionally.52 It would then negotiate its application on specific product markets. The US agreed, for example, not to apply this valuation method to chemical goods in the context of the Kennedy-round Agreement Relating Principally to Chemicals. Eventually, the US agreed to eliminate ASP during the Tokyo round because of the entry into force of the Tokyo-round Customs Valuation Agreement.53 In the Tokyo round, negotiators wanted to put an end to the arbitrariness resulting from national valuation systems by introducing uniformity in customs valuation. This much was achieved at that time. This agreement has since been superseded by the (even more detailed) Uruguay-round Customs Valuation Agreement (CVA).54 The main actors this time were not only the “usual suspects.” India and Brazil also played a very important role, second only to the EU and the US, in shaping the negotiation and its eventual outcome.55 The CVA started from a different baseline than its predecessor. A uniform regime was now well in place, albeit not a very detailed one. What was required of negotiators was to streamline the conditions under which specific methods for customs valuation would be legitimately used, while at the same time addressing key concerns of the trading community, like, for example, the lack of transparency regarding customs valuation methods used. As we will see in more detail later, the negotiators touched upon each and every provision of the Tokyo round agreements, but did not alter the scope of the CVA. The end product, the Uruguay round CVA, does not contain obligations concerning valuation for purposes of determining export duties or quota administration based on the value of goods, nor does it lay down conditions for the valuation of goods for internal taxation or foreign exchange control. Its sole preoccupation is the valuation of imported goods. In this respect, some important amendments were agreed, and most importantly the previous Code became a multilateral agreement. Trading nations that had not expressed their views on customs valuation in the GATT before, had now a forum to do so. They were led by Brazil and India. What were India’s and Brazil’s main preoccupations? The common ground was loss of income for the state because of improper customs valuation methods used. There were some differences, though. India paid a lot of attention to underinvoicing, since the importing state would thus be receiving less income than in the case where the proper value of goods had been declared.56 Brazil cared about “capital flight”: by overinvoicing, national producers could effectively be exporting capital abroad. For countries, like Brazil, with exchange restrictions, this was impermissible.57

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The problem with under- and overinvoicing is that exporters and importers might have divergent interests over the valuation method for the same transaction. Exporters often have an incentive to misrepresent the value of traded goods. The exporter would rather underinvoice, for example, in order to reduce the burden of ad valorem customs duties (India’s worry). The importing state, conversely, might have the incentive to overinvoice in order to increase the taxable income (especially for goods for which demand is inelastic), or for political economy reasons, since additional duties will shelter domestic products even more from foreign competition. The new CVA aims to address both under- as well as overinvoicing. Its main objective is to ensure that invoicing will correspond to the actual value of traded merchandise. It did take on the basic thrust of the Indian request, as it did address the incentive of customs authorities to overinvoice as well. It put in place a system of rules that aims at reducing (and ideally eliminating altogether) the possibility for similar behavior on both sides. While keeping the approach embedded in Article VII of GATT, whereby the actual price of traded goods is the price to be used on priority basis for valuation purposes, it adds a lot of significant detail in order to reduce the potential for abuses. 1.3.2

Transaction Value (Actual Price)

1.3.2.1 The Primacy of Transaction Value The CVA, following the approach already adopted in Article VII of GATT in this respect, states that customs valuation shall, in principle, be based on the “actual price” paid or payable for the goods to be valued, which generally appears on the invoice. This price, adjusted for certain elements featured in Article 8 of CVA, constitutes the “transaction value”—that is, the value on which duties will be calculated. Article 1 of CVA reads: “The customs value of imported goods shall be the transaction value, that is the price actually paid or payable for the goods when sold for export to the country of importation ...” Transaction value is understood as the value of imported goods upon which the buyer and the seller have agreed for the purposes of a particular transaction. It is, thus, a bargaining solution. This is the price that will be reflected on the invoice (the “invoice price”). The transaction value is elevated to the default mechanism that must be used for customs valuation purposes. Deviations will be allowed only to the extent that the conditions giving rise to them exist, as we will see in what follows. In a case where, for the reasons discussed later in this chapter, deviation from the “transaction value” methodology has occurred, customs authorities must communicate the grounds of doing so to the interested parties. The Panel on Thailand–Cigarettes (Philippines) entertained a claim to the effect that Thailand was violating its obligations under Articles 1 and 2(a) of CVA by enacting a general rule rejecting the transaction value and requiring the application of the deductive value. In §§ 7.105ff. of its report, the panel held that the grounds for rejecting the transaction value must be communicated to the importer

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by virtue of Article 1.2(a) of CVA.58 It further explained that this obligation is distinct from the obligation to provide an explanation of how the customs authority had proceeded with customs valuation (Article 16 of CVA). In its view (§ 7.218), communicating the grounds is tantamount to notifying the addressee of the customs authorities’ reasons for considering, in the light of information provided by the importer or otherwise, that the relationship influenced the price. (italics in the original)59

1.3.2.2 Arm’s Length The working hypothesis arguing in favor of using the transaction value is that the buyer and the seller are at arm’s length. The Interpretative Note of Article VII of GATT leaves no doubt to this effect. It defines “actual value” (“transaction value”) as the invoice price plus any additional legitimate expenses, provided that it is the prevailing price in the “ordinary course of trade” under “fully competitive conditions.” The term “ordinary course of trade” captures a situation where buyer and seller are unrelated. Customs authorities can exclude special discounts to exclusive agents since similar prices do not reflect “fully competitive conditions.” If not in the presence of an arm’s-length transaction, then customs authorities might legitimately have recourse to another method for calculating duties, provided that they have respected the statutory conditions for doing so, of course. Article 1 of CVA includes a series of conditions aiming to guarantee that the buyer and seller are indeed at arm’s length. It also specifies that some activities that the buyer might undertake on behalf of the seller that relate to the sold goods (such as advertising) will not be taken into account when deciding on the proper value of imported goods.60 In a similar vein, charges behind the border (such as internal taxes) cannot be added to the invoice price. If the buyer and seller are not at arm’s length, then the transaction value can be discarded. The latter, nevertheless, is not the automatic consequence of the former. The Panel on Thailand–Cigarettes (Philippines) held that the transaction value can be discarded if the buyer and seller are related [Article 1.1(d) of CVA], and if the relationship has affected the price. The relationship between buyer and seller does not, thus, automatically lead to the rejection of transaction value. Authorities must also demonstrate that their relationship has influenced the “invoice price” (“transaction value”). The panel held as much in §§ 7.169–171 of its report: The particular nature of the examination to be conducted by the customs authorities can further be inferred from Case Study 10.1 on the application of Article 1.2 of the Customs Valuation Agreement by the WTO Technical Committee on Customs Valuation: “Under Article 1.2 of the Agreement the responsibility for demonstrating that relationship [between buyer and seller] has not influenced price [sic] lies with the importer. While the Agreement

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requires Customs to provide reasonable opportunity to the importer to provide information that would indicate that prices are not influenced by the relationship, it does not require the Customs administration to conduct an exhaustive enquiry for the purpose of justifying the price difference. Thus, any decision in this regard must, to a significant degree, be based on the information provided by the importer.” The WTO Technical Committee’s comment supports the understanding that while customs authorities are responsible for providing a “reasonable opportunity” to the importer to provide information, once given this opportunity, importers are in principle liable for supplying the customs authorities with information that would indicate that the relationship did not influence the price. In sum, we consider that the customs authorities and importers have respective responsibilities under Article 1.2(a). The customs authorities must ensure that importers be given a reasonable opportunity to provide information that would indicate that the relationship did not influence the price. Importers are responsible for providing information that would enable the customs authority to examine and assess the circumstances of sale so as to determine the acceptability of the transaction value. Provided with such information, the customs authorities must conduct an “examination” of the circumstance of sale, which would require an active, critical review and consideration of the information before them.

1.3.2.3 Verifying the Truth and Accuracy of Information Received Customs authorities have the right to verify the truth and accuracy of information received (Article 17 of CVA). The Decision Regarding Cases where Customs Administrations Have Reasons to Doubt the Truth or Accuracy of the Declared Value, reached during the Uruguay round, explains that they are entitled to ask questions in order to verify whether the declared value corresponds to the amount that has actually been paid, as well as whether adjustments took place in accordance with Article 8 of CVA. This decision explains that customs authorities of WTO members must follow a particular procedure when they have reasons to doubt presented documentation: 1. When a declaration has been presented and where the customs administration has reason to doubt the truth or accuracy of the particulars or of documents produced in support of this declaration, the customs administration may ask the importer to provide further explanation, including documents or other evidence, that the declared value represents the total amount actually paid or payable for the imported goods, adjusted in accordance with the provisions of Article 8. If, after receiving further information, or in the absence of a response, the customs administration still has reasonable doubts about the truth or accuracy of the declared value, it may, bearing in mind the provisions of Article 11, be deemed that the customs value of the imported goods cannot be determined under the provisions of Article 1. Before taking a final decision, the customs administration shall communicate to the importer, in writing if requested, its grounds for doubting the truth or accuracy of the particulars or documents produced and the importer shall be given a reasonable opportunity to respond. When a final decision is made, the customs administration shall communicate to the importer in writing its decision and the grounds therefor. 2. It is entirely appropriate in applying the Agreement for one Member to assist another Member on mutually agreed terms.

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This provision was enacted very much at the request of India. India had insisted, during the negotiations, that the burden of proof should shift when customs authorities were presented with unreliable information regarding the value of imported goods. The question that was heavily debated during the negotiations was under what conditions the shift should occur. The final compromise, as reflected in the current text of the CVA, suggests that the burden of proof shifts every time the customs authority has “reasonable doubts” regarding the valuation, even when additional information had been provided following a request to this effect. This does not seem to be a very demanding test, since reasonableness standards, by definition, can accommodate divergent opinions.61 Note finally that, according to the General Introductory Commentary,62 which has been placed before the preamble to the agreement, Article 1 of CVA must be read in conjunction with Article 8 of CVA: Article 1 is to be read together with Article 8 which provides, inter alia, for adjustments to the price actually paid or payable in cases where certain specific elements which are considered to form a part of the value for customs purposes are incurred by the buyer but are not included in the price actually paid or payable for the imported goods. Article 8 also provides for the inclusion in the transaction value of certain considerations which may pass from the buyer to the seller in the form of specified goods or services rather than in the form of money. (italics in the original)

Of prime importance to the discussion here is Article 8.2 of CVA, which leaves it to the discretion of WTO members to privilege a free on board (FOB), or a cost, insurance, freight (CIF) price as the basis for valuing imported goods: In framing its legislation, each Member shall provide for the inclusion in or the exclusion from the customs value, in whole or in part, of the following: the cost of transport of the imported goods to the port or place of importation; loading, unloading and handling charges associated with the transport of the imported goods to the port or place of importation; and the cost of insurance.

Under this provision, adjustments are possible when calculating the transaction value. Article 8 of CVA contains a list of items that can be lawfully adjusted depending on who incurred the mentioned costs.63 1.3.3

Deviating from the Transaction Value

1.3.3.1 Hierarchy among the Statutory Methods The CVA purports to strike a balance that will allow authorities to deviate from using the transaction value when calculating customs duties, but will narrow their discretion to ensure that the overall purpose of customs valuation—to impose duties on the true price— is served. It thus provides a hierarchy among five methods that can be used when recourse to transaction value has not been the case. The amount of discretion of customs authorities increases as we go down from the first to the fifth method, recourse to which is legitimate only when no other method can be appropriately used. The five methods that the CVA provides that can be used for the purposes of customs valuation are:

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1. “Transaction value of identical goods” (Article 2 of CVA) 2. “Transaction value of similar goods” (Article 3 of CVA) 3. “Deductive method” (Article 5 of CVA) 4. “Computed method” (Article 6 of CVA) 5. “Fallback method” (Article 7 of CVA) These methods should be applied in the hierarchical order listed here. If the transaction value has been rejected, customs authorities must first make an attempt to locate prior transactions of identical goods, and use their transaction value for customs valuation purposes (Article 2 of CVA). If this has proven impossible, then they can legitimately use previous transactions of “similar” (a wider category than “identical”) goods (as per Article 3 of CVA). The term “identical” is defined in Article 15 of CVA as referring to goods that are the same in all respects, including physical characteristics, quality, and reputation. Minor differences in appearance would not preclude goods otherwise conforming to the definition from being regarded as identical.64

The same provision defines “similar” goods as: goods which, although not alike in all respects, have like characteristics and like component materials which enable them to perform the same functions and to be commercially interchangeable. The quality of the goods, their reputation and the existence of a trademark are among the factors to be considered in determining whether goods are similar.

If this is not feasible, customs authorities can legitimately have recourse to the “deductive value,” loosely defined as the price at which the importer sells the imported good to an unrelated buyer (arm’s-length transaction). Customs authorities can deduct from this price a percentage reflecting the profit of the importer, as well as expenses relating to the sale of the good to the buyer. If recourse to the deductive value is not feasible, then customs authorities must rely on the “computed value,” which reflects a calculation by the customs authorities: they must calculate the production cost of the seller to which they can add general expenses, profit, and transport costs to the port of entry. Absent cooperation with the foreign producer (seller), recourse to the computed value will be difficult, if not altogether infeasible.65 The CVA does not make room for recourse to the “best information available” in case of noncooperation by the seller, as does, for example, the WTO Antidumping (AD) Agreement, which we discuss in the next chapter. As a result, customs authorities do not have a credible weapon at their disposal to enforce cooperation. On the other hand, it is, in principle, in the interest of investigated parties to cooperate; otherwise, they might find themselves in an awkward situation where they have to bear an unfavorable-to-them customs duty.

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1.3.3.2 Fallback Method: Limited Discretion Finally, and assuming all prior methods cannot be used, customs authorities can use the fallback method, which would allow customs authorities to devise their own procedure so long as it is reasonable and consistent with the principles of Article VII of GATT and the CVA. Some flexibility is, of course, inherent in any reasonable method devised without much legislative guidance. Too much flexibility, though, could be problematic in light of the incentives of domestic customs authorities.66 The agreement contains some insurance to ensure that flexibility has not been exercised in an abusive manner. Article 7 of CVA includes a list of criteria that cannot be used as a basis for deciding the customs value under any circumstances, which are described in what now follows. Minimum Customs Value The customs value cannot fall below a certain threshold under any circumstances. In practice, the term “minimum customs value” is used interchangeably with the term “reference price.” The minimum threshold that must be respected is taken from a “valuation (price) database” maintained by the customs administration. The World Customs Organization (WCO) has adopted the Guidelines on the Development and Use of a National Valuation Database as a Risk Assessment Tool, the basic message of which is that, where customs maintain a “valuation database,” prices reflected therein should only be used as part of a risk-based approach (i.e., as an indicator of possible undervaluation), and that the provisions of the WTO Decision Regarding Cases where Customs Administrations Have Reasons to Doubt the Truth or Accuracy of the Declared Value should be followed. Developing countries, nevertheless, can have recourse to this method if they have made a reservation to this effect and have shown good cause: the Decision on Texts Relating to Minimum Values and Imports by Sole Agents, Sole Distributors, and Sole Concessionaires, adopted during the Uruguay round, says as much.67 Arbitrary or Fictitious Value This term appears in Article VII.2(g) of GATT as the opposite of the term “actual value.” The term denotes that it is not only prices that simply diverge from actual value that cannot be used as basis for valuation, but prices that do so in evidently disproportionate manner. Price of Goods in the Exporting Market Prices are endogenous, in the sense that the degree of competition in a given market will define their level. It could be the case that the producer enjoys a dominant or even monopoly position in the exporting market, while facing ferocious competition in the importing market. Using the price of the exporting market for customs valuation purposes could thus lead to gross misrepresentation of the actual value of the imported good.

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Price of Goods in Third Markets The same reasoning could apply by analogy in this scenario of the price of goods in third markets as well. Cost of Production Calculated without Recourse to the Computed Value The method of calculating the cost of production without considering computed value applies in cases where the value for identical or similar goods has been calculated without figuring their value as per the requirements of the CVA. Obviously, this could lead to unrepresentative values. Allowing the Use of the Higher of Two Alternative Values There is no reason why the higher value should be privileged. On the other hand, it is clear that in this scenario, imports will be burdened—probably unduly so. The Selling Price of Goods in the Importing Market The rationale for this prohibition has to do with the decision to eliminate the so-called ASP, which functioned almost like a variable import levy that would equate the world price to the domestic price, and which had been grandfathered in until the advent of the CVA.68 So much for what customs authorities should not do. A note to Article 7 of CVA explains what customs authorities should do and, thus, sheds some additional light on how discretion should be exercised whenever recourse to the fallback method is made: previously determined customs values, for example, should be privileged. There is some litigation regarding the exercise of discretion when recourse to the fallback method has been taken. The standard of review that a WTO panel would employ when facing a challenge against the fallback method would, by construction, be more deferential than when facing a challenge against the use of one of the five previous methods. A reasonableness standard seems suitable here. In Colombia–Ports of Entry, the panel found (§§ 7.152ff) that Colombia, by basing its customs valuation of imported goods on “indicative prices,” was in violation of various provisions of the CVA (Articles 1, 3, 5, and 7). Indicative prices could be totally unrelated to market reality, of course. Indeed, this was the case in Colombia–Ports of Entry since an indicative price would serve as a basis to calculate the dutiable imposition every time the transaction value was lower than a statutory threshold (§ 7.147). In Thailand–Cigarettes (Philippines), the panel concluded that the failure of Thai Customs to properly consult the importer on the information necessary for the requested deductions rendered its decision not to deduct sales allowances, provincial taxes, and transportation costs in the determination of the customs value of the entries at issue inconsistent with Article 7.1 of CVA (§ 7.332). In practice, as Rosenow and O’Shea (2010, pp. 122ff) mention, the fallback method is typically used when imports concern repaired items, and/or damaged goods. In this con-

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text, for example, customs authorities might use one of the methods mentioned previously in an adjusted form. For example, they could look at the transaction value of similar goods by enlarging the ambit of this concept and review the price of goods with lower-than-usual substitutability.69 1.3.3.3 Right of Appeal WTO members must provide affected parties with a forum to launch an appeal against decisions of their customs authorities adopted in the context of customs valuation (Article 11 of CVA). They should not run the risk of penalty when doing so. 1.3.4 Treatment of Confidential Information It is often the case that confidential information has to be disclosed to customs authorities for customs valuation purposes. Protection of similar disclosures is quintessential for parties to disseminate it in the first place, and it is guaranteed by Article 10 of CVA. If this were not the case, competitors of the disclosing company could gain an advantage through their knowledge about pricing, or volumes of trade of their competitors (not to mention that those possessing the information might have found themselves between a rock and a hard place). In Thailand–Cigarettes (Philippines), the panel held that disclosure by the customs authorities of information regarding the pricing of a company and its overall volume of imports that had been submitted and classified as confidential constitutes a violation of this provision (§§ 7.405ff). The problem, of course, is that similar findings are little consolation for companies that have in good faith disseminated confidential information. The more serious issue is that irresponsible behavior by customs authorities might provide those interrogated with the wrong incentives and might increase the probability of recourse to the fallback method. This is one area where trading nations need to reflect and probably rework the remedies in case of a violation. 1.3.5 Cooperation across WTO Members The CVA incites WTO members to cooperate when appropriate. When, for example, recourse to the computed value is being made (such as if they suspect fraud), customs authorities could need information that they could obtain only through cooperation with the authorities in the country of origin of the imported good. The WCO has agreed on a template of the Model Bilateral Agreement on Mutual Administrative Assistance in Customs Matters, the use of which it encourages for this purpose. The WTO membership has further adopted a decision during the Doha Ministerial Conference that allows customs authorities to inquire about the accuracy of the importer’s declaration in cases of reasonable doubt. The inquired authority can legitimately refuse to respond if the request is not consistent with its domestic public order.70

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1.3.6

35

Special and Differential Treatment

The CVA provides special and differential treatment for developing members in its Article 20 and in Annex III. Article 20 of CVA allowed developing countries to delay the application of the agreement for a period of five years (counting from January 1, 1995, that is, the date of entry of the WTO Agreement). This right was not available to WTO members who had been signatories to the Tokyo-round CVA code. Several WTO members, including Bahrain, Bolivia, Jamaica, Kuwait, Senegal, Tunisia, and Sri Lanka, have used this provision. Paragraph 2 of Annex III permits developing members to retain minimum values [prohibited by Article 7.2(f) of CVA] on a limited and transitional basis under terms and conditions to be agreed to by WTO members. WTO members that have been granted this possibility include Colombia, Gabon, Honduras, Morocco, and Nicaragua (see WTO Document G/VAL/2 and its revisions).71 There is a recognition that developing countries might encounter difficulties in applying the CVA without technical assistance. Article 20.3 of CVA deals with this issue. In light of the increased number of developing countries required to implement the CVA, the Committee on Customs Valuation agreed that it was necessary to reinvigorate technical assistance. In July 2001, the committee agreed to a work program to this effect.72 1.3.7

Exceptions

We discussed in chapter 9, volume 1 the relevance of Articles XX and XXI of GATT to the CVA. 1.3.8

Reservations

As is the case with the ILA, reservations can be entered if the membership so agrees (Article 21 of CVA). 1.3.9

Institutions

In Article 18 of the CVA, a Committee on Customs Valuation is established in the WTO, in which all WTO members participate and which is entrusted with the administration of the CVA. The committee operates an annual review of the implementation of the agreement (Article 23 of CVA). In addition, it is notified of all national legislation dealing with customs valuation matters, as well as of any modifications thereof (Article 22 of CVA). Article 18.2 of CVA gave birth to the Technical Committee, also composed of representatives of all WTO members (usually customs experts), which meets twice a year in Brussels in the headquarters of the WCO. Annex II discusses in detail the various tasks of the Technical Committee. In short, it reports to the Committee on Customs Valuation and prepares technical documents aimed at helping WTO members when dealing with customs valuation issues.73 Its output comes under different denominations (explanatory

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notes, advisory opinions) and is included in a publication issued by the WCO: the WCO Compendium.74 1.4 1.4.1

The Agreement on Preshipment Inspection (PSI) The Legal Discipline and Its Rationale

Through preshipment inspection (PSI), traders aim to ensure that the value of exported goods conforms to the specifications reflected in a sales contract, as well as other relevant information, such as the quality and quantity of goods shipped. Article 1.3 of the PSI Agreement reads: Preshipment inspection activities are all activities relating to the verification of the quality, the quantity, the price, including currency exchange rate and financial terms, and/or the customs classification of goods to be exported to the territory of the user Member.

It is at the initiative of a WTO member, known as a “user member,” that recourse to PSI will take place. The term “user member” is defined as follows in Article 1.2 of the PSI Agreement: The term “user Member” means a Member of which the government or any government body contracts for or mandates the use of preshipment inspection activities.

So what is the difference between CVA and PSI?75 While the CVA deals with the valuation of goods when they enter their destination market, PSI deals with the same issue when goods are exported to the destination market. The link between the two agreements is exemplified in Footnote 4 of the PSI Agreement: The obligations of user Members with respect to the services of pre-shipment inspection entities in connection with customs valuation shall be the obligations which they have accepted in GATT 1994 and other Multilateral Trade Agreements included in Annex 1A of the WTO Agreement.76

The PSI Agreement, thus, allows WTO members to outsource their customs operations. When doing so, however, they cannot deviate from the obligations established in Article VII of GATT and the CVA. All the PSI Agreement does is discipline the subjects that will perform customs valuation, without providing a different mode of customs valuation. 1.4.2

Déjà Vu All Over Again?

The divide between developed and developing countries was present during the negotiation of PSI, as it was in so many others. Developed and developing countries managed to reach an agreement to negotiate PSI activities—that much is certain—but for different reasons. On the one hand, developed countries believed that, through PSI, “user countries” were erecting a probably unnecessary nontariff barrier (NTB). Customs valuation, in their view,

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by and large should occur within the four corners of GATT and the CVA. They, thus, viewed PSI as rather unnecessary, and were at best after an agreement that would discipline PSI activities. Developing countries took a different perspective. They had been having recourse to PSI services, and were in favor of introducing it in the WTO legal order. They wanted, when doing that, to underline the contribution of PSI to development. Zaire went so far as to characterize PSI as a “fundamental instrument” in the service of developing countries.77 Indonesia, a very vocal negotiator in this context, claimed repeatedly that recourse to PSI was a necessity for developing countries that were endowed with suboptimal customs authorities and were facing numerous issues in the context of customs valuation ranging from capital flight to underinvoicing as the means to circumvent customs duties.78 Too much disciplining of PSI activities, in their view, would deprive them of a tool necessary for their development. It is worth revisiting the historical account and explaining why we ended up with this negotiation.79 1.4.2.1 Is PSI an NTB? PSI activities have been in place since the 1800s, and twenty-five developing countries in Asia, Africa, Central America, and Latin America were actively using them in 1986 when the Uruguay round was launched.80 It was private companies that had been performing PSI activities. The five major players in this area are Société Générale de Surveillance (SGS), a Swiss company established in 1878, which, with offices in more than 140 countries and over 250 subsidiaries, is the most frequently used entity; Inspectorate, another Swiss company; Socotel, from France; Veritas, from France; and finally, Inchcape, from the UK. They all belong, of course, to the International Federation of Inspection Agencies (IFIA), a nonprofit organization founded in 1982 that represents about forty of the world’s leading companies that provide testing, inspection, and certification services worldwide. Companies like the five mentioned here will usually charge 1–2 percent of the value of the goods shipped in exchange for providing inspection services. When goods leave the port for their destination market, they will, ideally, be furnished with a Clean Report of Findings—that is, a document attesting to the valuation made. Issuance of “Non Clean” reports would not per se prohibit a transaction, but if it took place, it would be under substantial uncertainty. Whereas a Clean Report will allow the transaction to proceed, traders will have to rebut the presumption of a Non Clean Report and establish the valuation. Why do countries have recourse to similar activities? The GATT Secretariat tried to compile in a paper the various reasons advanced: capital flight, underinvoicing, overcharging (overinvoicing), and substandard products.81 Well, isn’t that the subject matter of the CVA anyway? The short answer is yes. It is their inability to clear goods through customs in an effective manner and provide, thus, an antidote to capital flight, underinvoicing, and these other issues that led many developing countries to outsource customs valuation.82

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In practice, the operation of PSI companies led to a lot of acrimony and traders’ complaints over the years. The US first took Section 301 action against PSI companies, taking, thus, the view that the activities of these companies constituted an NTB attributable to the governments using their services. When exporting to developing countries, US exporters had to cooperate with PSI companies who were performing valuation for their clients. The US administration had been inundated with requests to the effect that PSI companies: • Requested too many documents • Took a long time to file Clean Reports of Findings (if they ever did) • Had adopted very costly procedures, which reduced the volume of export transactions from the US toward the countries using similar services • Were handling large amounts of business confidential information (BCI) • Were insisting in requesting US exporters to practice “one price,” even when market conditions justified more than one price It is against this background that the US went to GATT to request the development of an international code aiming to curb the activities of PSI companies.83 Indonesia responded positively to this request in the document cited earlier, other developing countries followed soon thereafter, and soon negotiations were initiated. Nothing in GATT barred developing countries from outsourcing similar activities. The basic idea from early on was, thus, not to eliminate but to discipline PSI activities. Ancillary disciplines on both the user countries and the exporting countries where PSI would typically take place were deemed necessary as well.84 A GATT Secretariat paper summed it up very appropriately: it was not recourse to PSI companies that would be questioned in the upcoming negotiations, but the concerns of exporters because of the “undisciplined” exercise of PSI activities by private operators.85 1.4.2.2 It Is Basically Companies We Are After The US and the EU took the lead and tabled a series of proposals, most of which eventually found their way into the agreement. The US proposals concerned substantive law. The US was keen in obliging PSI companies to use international standards whenever appropriate. PSI companies should also be obliged to avoid conflicts of interest. They should also be obliged to respect customs valuation as regulated in GATT. Finally, no PSI should be requested for shipment below a threshold value (set at $10,000).86 The EU submission was a complement to, not a substitute for, the US proposals. Without distancing itself at all from the US proposals to this effect, the EU focused on the adjudication of disputes. It was the architect of the adjudication of disputes before the Independent Review Entity that we discuss later.87 The final document circulated, which constituted the basis of the new agreement, reproduced the quintessential elements of the proposals advanced by the EU and the US.88

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There was, of course, an idiosyncratic element in the negotiations, to which we alluded earlier: negotiators aimed at imposing disciplines on private companies, and not on sovereign states only.89 GATT, however, was conceived as a government-to-government contract that addressed state, as opposed to private, practices. What should be done, then? The GATT Secretariat circulated a document (MTN.GNG/W/45 of 23 October 1989) that summarized the relevance of GATT to activities by private agents. This, as well as other documents prepared by the Secretariat, held clearly that the behavior of these companies could be attributed to sovereign states in light of past case law on this issue (Japan– Semiconductors). The test of the Panel on Japan–Semiconductors (which was discussed in volume 1, chapter 2) was, of course, largely met in the case where recourse to PSI companies was made for valuation purposes. Recall that in Japan-Semiconductors, the panel had held that behavior was attributed to a state even if conducted by a private agent if the state had incentivized the private agent to behave in a particular way. In the case of PSI, WTO members would not simply incentivize private agents to perform valuation, they would request them to perform PSI activities. Obligations were of course imposed on “user members,” and not on PSI companies. “User members” were requested to discipline PSI companies that they had mandated to perform customs valuation. The PSI Agreement imposes no direct obligations on private entities. It only grants them the right to access the Independent Review Entity and resolve disputes in a speedy manner.90 1.4.3 The Ambit of the Agreement The agreement covers PSI activities operated by PSI entities. Article 1.1 of the PSI Agreement defines the scope of the agreement: This Agreement shall apply to all preshipment inspection activities carried out on the territory of Members, whether such activities are contracted or mandated by the government, or any government body, of a Member.

The use of the term “government body” denotes that the PSI Agreement covers activities that have been contracted not only by governments, but by any public authority that has the legal power to do so. 1.4.3.1 What Is a PSI Entity? Article 1.4 of ILA defines “PSI entity” in a very open-ended manner: “The term ‘preshipment inspection entity’ is any entity contracted or mandated by a Member to carry out preshipment inspection activities. 1.4.3.2 What Do PSI Entities Do? “PSI activities” are defined in Article 1.3 of the agreement as follows: Preshipment inspection activities are all activities relating to the verification of the quality, the quantity, the price, including currency exchange rate and financial terms, and/or the customs classification of goods to be exported to the territory of the user Member.

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Inspections are government-contracted but performed by private companies. Typically, the government of an importing WTO member will contract a private company and ask it to perform an evaluation. The inspecting companies will perform two functions: • They will ensure that the goods conform with the terms of the sales contract (the “qualitative” element). • They will verify the invoice price (the “quantitative” element). Government contracts with PSI companies are typically divided into “foreign exchange contracts” (FOREX), where the basic objective of the government is to prevent the exodus of capital through overinvoicing; and “customs contracts,” where the main aim is to ensure that there is no loss in customs revenue as a result of undervaluation, or misclassification of the good. A PSI company might also provide a number of subsidiary services, which include, inter alia, the verification of the origin of the product, maintenance of data for statistical purposes, technical assistance, and training. Expertise by companies is not binding on customs authorities. They might decide to neglect it and perform their own evaluation.91 The PSI entity will issue a Clean Report of Findings, which will verify the price of the good (and depending on the request made, the quantity, quality, and other data). 1.4.4

Obligations Imposed on User Members

Obligations are imposed on “user members” (e.g., the WTO members having recourse to PSI activities). It is “user members” that are requested to ensure that PSI entities will abide by a series of disciplines included in the agreement. This should not come as no surprise, since the WTO binds governments, since governments sign it, and not private parties that have no say in drafting its disciplines. The disciplines imposed concern a variety of issues ranging from the site of inspection to the treatment of business confidential information (BCI). 1.4.4.1 The Site of Inspection The preamble of the PSI Agreement leaves no doubt as to the place where PSI activities will take place: “Noting that this inspection is by definition carried out on the territory of exporter Members” (italics in the original). Inspection activities will, thus, be carried out in the territory of the exporter member. In a rather paradoxical statement, though, it is the user member that must guarantee that PSI activities will be performed in the customs territory from which goods will be exported (Article 2.3). The problem is, of course, that for the guarantee to be meaningful, the exporting WTO member must cooperate and allow inspection to take place in its territory. Alas, the obligations imposed on exporting WTO members are very limited, and hardly guarantee a reasonable degree of cooperation that is very much needed to ensure that valuation will be properly conducted.92

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1.4.4.2 Nondiscrimination The same laws will apply with respect to PSI to all exporters, regardless of their origin (Article 2.1). Recall also from our discussion in chapter 4 of volume I, that MFN covers advantages both on the import as well as the export side. 1.4.4.3 Contractual and International Standards Traders might contractually agree on the use of (product) standards that quantity and/or quality inspections must conform with. They might even agree on the use of international standards to this effect. Unlike governments, which, as we will see in chapter 5 in this volume, must in principle use international standards, private operators are under no similar obligation. Consequently, the standards contractually agreed on between traders are what will apply. If none have been agreed on, then the relevant international standards will apply. The term “international standards” is defined in a footnote to Article 2.4 in the following manner: “An international standard is a standard adopted by a governmental or non-governmental body whose membership is open to all Members, one of whose recognized activities is in the field of standardization.” This is not an unproblematic definition since, for political reasons, some standardsetting bodies are not open to all WTO members, and yet their standards have been accepted as international standards in the context of the Technical Barriers to Trade (TBT) Agreement. We will return to this issue in chapter 5 of this volume. 1.4.4.4 Transparency Recall that lack of transparency regarding activities by PSI companies was one of the major grievances of US traders. The agreement dedicates four paragraphs (Articles 2.5– 2.8) to transparency. The quintessential requirement is that all relevant information be made available to traders in a timely manner, so that they can prepare their responses in a satisfactory manner. 1.4.4.5 BCI PSI companies routinely request information that qualifies as BCI, which traders might be unwilling to share absent guarantees that it will be treated with circumspection. The agreement contains five paragraphs relating to the protection of BCI (Article 2.9–2.13). The crux of the obligations is twofold: BCI will be circulated only between the PSI entity and the user member, and some information (e.g., profit levels, internal pricing, etc.) will not be requested at all. The treatment of BCI is thus accepted as legitimate exception to the obligation to provide transparency in the realm of PSI activities. 1.4.4.6 Conflict of Interest This provision (Article 2.14) is closely connected to the preceding provision on the treatment of BCI. It requests user members to ensure that PSI entities do not share information with other entities when they might have economic/financial interests.

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1.4.4.7 Timely Inspection Timely inspection was yet another pressing request by traders exasperated with the activities of PSI entities. In five paragraphs (Articles 2.15–2.19), the agreement aims to ensure that inspection will take place within strict deadlines and thus avoid jeopardizing trade transactions. 1.4.4.8 Price Verification Article 2.20 of the agreement reaffirms that the obligations of WTO members resulting from Article VII of GATT, as well as the CVA, must be observed when price verification is performed. It sets out in clear terms the various steps that need to be taken into account if the invoice price is to be discarded. 1.4.5

Obligations Imposed on Exporter Members

Exporter members incur fewer obligations than user members. After all, it is not the exporting member that requests inspection. It must not discriminate with respect to its exports (depending on the final destination), and it must publish all laws regarding PSI activities so that traders become acquainted (Article 3). As noted earlier, surprisingly, the exporting member is under no obligation to cooperate in a meaningful manner when inspection occurs in its sovereignty. 1.4.6

Resolution of Disputes

Article 8 of the agreement makes it clear that disputes between WTO members regarding its operation will be submitted to the normal Dispute Settlement Understanding (DSU) procedures. However, it aims for a speedy resolution of disputes between traders (exporters) and PSI entities. To this effect, it establishes a two-step procedure: 1. An appeals procedure 2. Review by an Independent Entity, if necessary 1.4.6.1 Appeals Procedures Disputes might arise between PSI entities and exporters concerning the evaluation/ classification of goods. User members must ensure that PSI entities have established “designated officials” that will listen to complaints by exporters (Article 2.21 entitles “appeals procedures”). The designated officials must accord “sympathetic consideration” to grievances expressed by exporters and try to work out an amicable solution. Two days following the submission of the request to a “designated official,” either party may refer the dispute to the “Independent Entity” established under Article 4 of PSI, which will be discussed next. 1.4.6.2 The Independent Entity The Independent Entity93 is an organization consisting of representatives of two organizations: PSI entities and exporters. Its composition, function, and powers are regulated in

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Article 4 of the PSI Agreement. It keeps a list of experts nominated by three different fora: the association of PSI entities; the association of exporters; and, finally, the Independent Entity itself. In practice, the lists are prepared by IFIA, acting on behalf of PSI entities, the International Chamber of Commerce (ICC), acting on behalf of the exporters’ associations, and the administrator of the Independent Entity—that is, the WTO Secretariat.94 Disputes will be heard by a three-person body, one nominated by the PSI entities, one by the exporters’ organization, and an independent trade expert nominated by the WTO. While objections against the first two can be raised, they are impossible against the nomination of the “independent trade expert.”95 All decisions by the Independent Entity are binding on their addressees and cannot be appealed.96 So far, the Independent Entity has been requested to adjudicate disputes only twice (an infrequent occurrence by any reasonable standard) in light of the number of PSI programs listed later in this chapter. A view expressed by the ICC, reflected in the 1999 “Working Party on Preshipment Inspection” report, noted: the non-use of the Independent Entity might be because the provisions of the Agreement have removed some of the principal sources of disputes between inspection agencies and exporters, or because of exporters’ concern that identifying themselves to the PSI companies could result in aggravating rather than alleviating the situation, or because of the costs associated with its use.

The view of IFIA, contained in the same report, was that “in many cases problems had been settled between the PSI companies and the exporters concerned.”97 It is also the case that over the years, the improvement in the capacity of local customs authorities has reduced the need for recourse to PSI. The advent of the ATF has further relegated the need for recourse to PSI. We will return to this discussion later in this chapter, when we examine the record of the agreement in more general terms. Table 1.1 PSI programs for customs purposes (revenue protection) Country

Mandated Members of IFIA PSI Committee

Basis of Member Choice

Angola Bangladesh Central African Rep. Chad Dem. Rep. of Congo Irana Mauritania Uzbekistanb

BIVAC, Cotecna, SGS BIVAC, Intertek, SGS, OMIC BIVAC BIVAC BIVAC BIVAC, Cotecna, OMIC, SGS SGS BIVAC, CUI, Intertek, OMIC, SGS

Importer Geographical — — — Importer — Importer/exporter

a. Physical inspection (quantity/quality only) for foreign exchange purposes. b. Including reporting for foreign exchange purposes. No programs now include intervention on invoiced price.

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Table 1.2 Customs Support Services ((including destination inspection, selective PSI, or both) Country a,b

Burkina Faso Burundia Cameroona,b) Chada Congoa,b Côte d’Ivoirea,b Equatorial Guinea Ghanab Guinea (Conakry)a,b Haitia Liberiaa,b Mali a,b Mozambique a,b Nigera Nigeriab Senegal a,b Togob

Mandated Members of IFIA PSI Committee

Basis of Member Choice

Cotecna SGS SGS Cotecna Cotecna BIVAC Cotecna BIVAC, Cotecna BIVAC SGS BIVAC BIVAC Intertek Cotecna Cotecna, SGS Cotecna Cotecna

— — — — — — — Air & land/sea-freight —

— — Port of Arrival — —

a. “Selective” means that only certain shipments are subject to physical PSI based on risk assessment. b. Cargo destination inspection, which may include price verification and classification on a preshipment or postshipment basis. Source: Taken from WTO Document G/VAL/W/63/Rev. 14, dated 8 November 2011, which lists countries using PSI regimes. It reproduces information compiled by the IFIA Preshipment Inspection Committee. According to the IFIA, the recent trend for PSI programs shows a reduction in traditional programs (e.g., PSI programs for customs purposes), with considerable growth in more modern programs (e.g., customs support services) that are less intrusive for exporters.

1.4.7

Special and Differential Treatment

The PSI Agreement does not contain a generic provision on special and differential treatment. Article 3.3 notes, though, that “Exporter Members shall offer to provide User Members, if requested, technical assistance directed toward the achievement of the objectives of this Agreement on mutually agreed terms.” A footnote specifies that technical assistance could be bilateral, plurilateral, or multilateral. The special and differential treatment, thus, is exhausted in technical assistance, an objective shared by the ATF, as we will see in the section on that agreement, as well. 1.4.8

Exceptions

In volume 1, chapter 9, we discussed the relevance of Articles XX and XXI to the PSI Agreement.

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1.4.9

45

Institutions

The PSI Agreement does not establish a committee to monitor the implementation of the agreement. It is the Committee on Customs Valuation that monitors the operation of the agreement. Article 6 of PSI states: At the end of the second year from the entry into force of the WTO Agreement and every three years thereafter, the Ministerial Conference shall review the provisions, implementation and operation of the Agreement ...

The Working Party on Preshipment Inspection was formed to perform this task. It submitted a first report in December 1997 (WTO Document G/L/214), and its life was extended by a year on two occasions. At the end of each of those extensions, a report was submitted to the General Council (WTO Documents G/L/273, in 1998; G/L/300, in 1999). In the last report, a recommendation that future monitoring of the agreement should be undertaken initially by the Customs Valuation Committee and that PSI should be a standing agenda item for this committee was adopted by the General Council. Another brief review of the PSI Agreement took place in 2006 in the Committee on Customs Valuation, and the report of the review was issued in WTO Document G/L/809. The reason for choosing the Committee on Customs Valuation to monitor the implementation of the PSI Agreement is logical given the linkages between customs valuation and PSI. One might still wonder why participants in the Uruguay round negotiating the PSI Agreement did not think that a committee on PSI was warranted. One reason might be that PSI activities were considered to be of a transitional nature. The third preambular paragraph of the PSI Agreement alludes to the transitional nature of PSI activities by recognizing the need for developing countries to have recourse to PSI “for as long and in so far as it is necessary to verify the quality, quantity or price of imported goods.” The Working Party report contained in G/L/300 also states, “All Members have accepted that recourse to PSI is a transitional measure to be used only until their national customs authorities are in the position to carry out these tasks on their own.” Exporter members and user members must notify the WTO Committee of laws and regulations implementing the PSI Agreement, any other laws and regulations relating to PSI, and changes in the laws and regulations relating to PSI. The WTO Committee must be notified immediately of all these measures after their publication (Article 5 of PSI).98 1.4.10

PSI Inspection and Trade Facilitation

In what follows, we will be discussing the Agreement on Trade Facilitation (ATF). There is an overlap, as we will see, between the two agreements, since the ATF shares the objective of facilitating customs clearance. The question arose during the negotiations whether there is still room for PSI activities following the advent of the ATF.

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The EU99 first requested that PSI activities be discontinued from the moment the ATF will be in place, only to receive a negative response by developing countries using PSI services.100 As things stand, the possibility to continue engaging in PSI activities following the advent of the ATF remains open. There is a request to reflect on the necessity of this endeavor, though, if not a clear dissuasion to do so altogether. Article 10.5 of the ATF101 reads: Members shall not require the use of preshipment inspections in relation to tariff classification and customs valuation. Without prejudice to the rights of Members to use other types of preshipment inspection not covered by paragraph 5.1, Members are encouraged not to introduce or apply new requirements regarding their use.

This provision is a toned-down variation of the original proposal, proposed by the EU, to the effect that no requirement for PSI inspections in general should exist.102 The difference between the two instruments is, of course, that ATF aims, through technical assistance, at improving the performance of customs authorities of developing countries. Technical assistance is not, as we saw earlier, at the heart of the PSI Agreement. It is at best incidental, and the continued dependence on services supplied by PSI entities is a very likely scenario with a PSI Agreement and without an ATF. Still, as we saw earlier in this chapter, some developing countries were unwilling to burn their bridges to PSI entities, the advent of the ATF notwithstanding. 1.5 1.5.1

Trade Facilitation The Legal Discipline and Its Rationale

The term “trade facilitation” is highly imprecise. Everything and anything in the WTO is meant to facilitate trade. But even if we were to take a narrower scope and think of trade facilitation as means to ensure that the basic GATT/WTO principles are implemented and do not remain empty shells, it is still difficult to delineate trade facilitation in precise manner. After all, isn’t trade facilitation what the ILA, the CVA, and the PSI Agreement are supposed to do? Thus, various questions can arise when it comes to attempting to define the scope of this term. Does trade facilitation cover only measures concerning customs clearance? Trade can, of course, also be facilitated by addressing concerns regarding behind-theborder measures. Should they also come under the concept of “trade facilitation”? It is unavoidably, one might add, a matter of definition. Various institutions in various agreements qualify as trade facilitation-related institutions. Negotiators felt that various issues had slipped through the cracks by addressing trade facilitation issues in various WTO agreements, that is, in compartmentalized manner. So a catch-all agreement was necessary (at least in their opinion) to address issues that had been insufficiently addressed

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by agreements aiming to facilitate customs clearance. Moreover, negotiators felt that various existing provisions could be streamlined and/or simplified in order to better serve the overall purpose of facilitating trade. The negotiation had to be limited to specific instruments, otherwise it would have become unmanageable. The next question was thus, which instruments should be covered in the new agreement, since various instruments come to mind when simplification of customs procedures and trade facilitation is the objective.103 The gains from cooperation would, of course, depend on the number of items included.104 Cutting red tape in customs procedures could prove to be a very ambitious endeavor. The size of gains from cooperation in this area would depend on the number of instruments committed. In principle, trade costs can take different forms ranging from border clearance procedures, to quality of transport and telecommunications infrastructure, to regulatory barriers, to the degree of competition in markets. One would not, of course, expect that they all be addressed through this agreement, since the negotiation could become a never-ending story. Furthermore, many of the instruments are already addressed in other agreements, even though some negotiators thought that the disciplines agreed were far from suitable. The negotiation of the ATF proved to be a case of discrepancy between what was finally committed by trading nations and what had originally been identified as the scope of an ambitious negotiation in literature, as we will see later in this chapter. Negotiators sized down their original aspirations to a realistic size, and eventually took a pragmatic view, and decided to narrow down the scope of the ATF to measures coming under three different GATT provisions: Article V, Article VIII, and Article X. It was not an easy ride, as we will see later, since negotiations regarding the scope of the endeavor were quite lengthy. And then there was the development dimension, quite prevalent during the negotiations. Negotiators felt that costly customs procedures represented a major hurdle especially for developing countries, which could neither access much needed imports, nor export markets. Trade facilitation would help them integrate more in the world trading system, as would Aid for Trade (that we saw in volume 1, chapter 5), which aimed at improving trade integration by addressing various behind the border issues, like infrastructure. Thus, negotiators consciously limited discussion to three instruments only while underlining the development dimension of their talks. A WTO document105 explains the rationale for negotiations on trade facilitation in the following terms: Industry and Trade gives high priority to simplification of import and export procedures as compliance with complex and numerous regulations and procedures could constitute a significant and time consuming burden to trade.

The costs can often exceed the cost of tariff duties as a percentage of the total value of goods traded. Cost savings can be obtained through rational procedures, but more signifi-

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cantly, they enable an uninterrupted physical flow of goods. As the cost burden falls especially heavily on smaller companies and on economic operators of the least developed countries (LDCs), trade facilitation also has a role to play in enabling them to participate more successfully in trade and increase their export potential, thus generating export-led growth in incomes and employment. More efficient procedures also bring greater certainty to delivery time, thus improving the service to customers. Economists are still debating on the rationale for a trade facilitation agreement. The most persuasive explanation offered so far is by Hoekman (2015). In his view, the ATF is aiming to solve an international coordination problem. Implementing commonly agreed trade facilitation measures will yield substantial economic gains as customs procedures will become more efficient and transparent. 1.5.2

The Negotiating Process

Because of the scope as described earlier, trade facilitation, in the WTO sense of the term, has to do with the reform of border management processes in order to reduce costs in this context. How did we end up with this compromise? The negotiation of the ATF was first earmarked in 1996. The Singapore Ministerial Declaration included §§ 21–22, where it was agreed that the Council for Trade in Goods (CTG) would106 undertake exploratory and analytical work, drawing on the work of other relevant international organizations, on the simplification of trade procedures in order to assess the scope for WTO rules in this area. In the organization of the work referred to in paragraphs 20 and 21, careful attention will be given to minimizing the burdens on delegations, especially those with more limited resources, and to coordinating meetings with those of relevant UNCTAD [(UN Conference on Trade and Development)] bodies. The technical cooperation program of the Secretariat will be available to developing and, in particular, least-developed country Members to facilitate their participation in this work.

In Neufeld’s (2014) account, the language quoted previously was a compromise between those that wanted a full-fledged multilateral agreement (developed nations) and those that preferred a noncommittal “work program” (developing countries). The language quoted suggests that trade facilitation was originally conceived in the WTO context as an integral part of measures in favor of developing countries. Paradoxically, the initial supporters were all developed countries, with only a few developing countries agreeing that a negotiation on a similar agreement was warranted.107 Neither the Singapore Ministerial Declaration nor the Doha Ministerial Declaration, though, included a negotiating mandate for trade facilitation. The latter (§ 27) contained a commitment to the effect that negotiations should take place after the Fifth Session of the Ministerial Conference, following, nevertheless, a decision made by explicit consensus regarding the modalities of negotiation.

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Neufeld (2014, p. 5) quotes unofficial documents demonstrating that, a month before the Cancun Ministerial Conference (2003), two diametrically opposed texts, one acknowledging that the time was ripe for a negotiation and one to the opposite effect, were submitted for consideration. The agreement to negotiate on trade facilitation was reached in 2004, in the “July package,”108 where in § 27 the negotiating mandate was included. Two groups dominated the negotiation: the “Colorado group,” consisting of the countries supporting the negotiation as mentioned previously, and the “Core group,” consisting of a group of developing countries that aimed to block, if not delay, the negotiation.109 Neufeld (2014, pp. 9ff.) mentions that Ambassador Muhamad Noor (Malaysia), the former chairman of the Core group, was selected to act as chairman of the negotiating group on trade facilitation—a rather clever choice, since he had to break away from partisan policies, and steer the group in objective manner. He, of course, enjoyed legitimacy with the Core group, and he managed to push issues that a delegate from the Colorado group or other entity might have found difficult to achieve.110 1.5.3

The Evolution of Definition

Defining the scope of the negotiation represented a challenging feature in and of itself. At one end of the spectrum, one could conceive the term “trade facilitation” to cover a very broad discussion of the customs and regulatory environment within which transactions take place, some sort of a multilateral effort to reduce the incidence of “behind-the-border” instruments that represent deadweight losses; in this reading of the term, it is very difficult to draw the line somewhere, and one could only arbitrarily decide what should and what should not come under this umbrella. Indeed, one could extend it to cover regulatory barriers of all sorts, including public health, environmental protection, and monetary charges. One could even go as far as Staples (1998) and argue that Vasco da Gama, by circumventing the Cape of Good Hope, facilitated trade, or agree with Sengupta (2007) that GATT, and now the WTO, quintessentially facilitate trade. Similarly wide definitions, their intellectual merit notwithstanding, risked rendering the ensuing negotiation on instruments to facilitate trade nonoperational. At the other end of the spectrum, a narrow definition would call for addressing issues related directly to moving goods through ports. In this vein, we could think of activities or policies that reduce transaction costs arising from eliminating or simplifying excessive and complex procedures, practices, and processes occurring at the border and relating to trade. Negotiations moved from early all-encompassing proposals to a narrow, workable definition that was eventually reflected in the agreement. Check, for example, the manner in which the WTO webpage defines “trade facilitation”: Once formal trade barriers come down, other issues become more important. For example, companies need to be able to acquire information on other countries’ importing and exporting regulations

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and how customs procedures are handled. Cutting red-tape at the point where goods enter a country and providing easier access to this kind of information are two ways of “facilitating” trade.

This phrase is a direct quotation from § 21 of the Singapore Ministerial Declaration entitled “Government Procurement,” since, as we saw earlier, there was no agreement in Singapore to add a separate entry calling for negotiations on trade facilitation. The first proposals were, thus, either too vague, or too comprehensive (including, for example, instruments such as payments and insurance that affect cross-border trade).111 Eventually, negotiators realized that, for an agreement to be concluded, both the “vagueness” and the “degree of ambition” had to be curtailed. Some welcome precisions came first in the Doha Ministerial Declaration (2001), where it was stated that the CTG would “review and as appropriate clarify and improve relevant aspects of Articles V (Freedom of Transit), VII (Fees and Formalities Connected with Importation and Exportation) and X (Publication and Administration of Trade Regulations) of the GATT 1994 and identify the trade facilitation needs and priorities of members, in particular developing and least-developed countries.”112 Annex D of the Doha Work Programme captured the essence of the agreement reached in Doha: “Negotiations shall aim to clarify and improve relevant aspects of Articles V, VIII and X of the GATT 1994 with a view to further expediting the movement, release and clearance of goods, including goods in transit.”113 It follows that negotiators have focused their attention on three types of measures: • Those covering goods in transit (Article V of GATT)114 • Those related to customs formalities and impositions at the border other than other duties and charges (ODCs) and ordinary customs duties (OCDs), as per Article VIII of GATT • Measures of general application regulating trade that must observe the transparency obligation of Article X of GATT anyway115 The narrow definition that was ultimately privileged has an undeniable benefit. The agreement became a realistic prospect. By placing fewer issues on the table, negotiators sped up the process.116 The downside is that lack of ambition means fewer benefits at the end, an issue to which we will return later in the chapter. This is not to say that there are no benefits when the scope is narrow. Production process is being gradually internationalized. This is the natural outcome of trade and investment liberalization, and the ensuing emergence of GVCs. Even modest differences in trade costs can decide who will jump on the bandwagon of GVCs, and who will not. In a world where exports depend increasingly on imports, there is an incentive to interconnect the production processes in the most efficient way. While there might be divergences regarding the scope of trade facilitation, and, in some circles, disappointment about the adopted narrow scope, there was never doubt that the WTO should be the forum to host this negotiation/agreement. The ICC, which represents the interests of the business community, went so far as to state, back in 2003:

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... a trade facilitation agreement is fundamental to the establishment of an improved and more efficient management process for international trade in goods on a global basis. Binding commitments are essential because only WTO can ensure the political support required for durable improvements in global trade.117

The WTO, the privileged forum, was not the first one to deal with this subject matter. Many institutions had looked at this issue in the past: the IMF, UNCTAD, and the WCO being among those that produced work that was usefully utilized in the WTO negotiation.118 The UN Centre for Trade Facilitation and Electronic Business (UN/CEFACT) has been particularly busy in this area, issuing a series of reports and recommendations aiming to smooth customs procedures. 1.5.4

For the Benefit of ...

There was no doubt about the forum, as there was no doubt about the intended beneficiary. Trade facilitation was conceived as the means to cut deadweight losses in developing countries, where customs procedures were laborious. From early in the negotiation, a number of initiatives were undertaken that aimed to provide the scaffolding for a development-oriented trade facilitation agreement. The Simpler Trade Procedures Board (SITPRO),119 for example, developed in tandem with the Commonwealth Business Council an initiative known as the “Boksburg Group.” The idea was to bring together customs officials and business from developing countries and brainstorm together on the eventual shape of the agreement. It should not, thus, come as surprise that a large part of the agreement consists of provisions on special and differential treatment, as we will see later. However, by facilitating trade indirectly, the agreement helps foreign companies as well, the trade of which will be eased as a result of the disciplines provided therein, and, depending on the implementation efforts, will also be substantially eased. This is probably why developed nations agreed to finance the implementation efforts, as we will see later in this chapter. There is a flip side to it, of course. When cutting red tape in customs, some parties will be unhappy—notably domestic competing industries and PSI companies, which will have less work as a result. 1.5.5

Cutting Red Tape in Customs

Beyond the general disciplines on transparency, the ATF includes two types of legal provisions: those dealing with substantive improvements and those dealing with procedural improvements to the current legal regime.120 The improvements to the existing legislative arsenal are not marginal. Even when improvements might seem mundane (such as the addition of an indicative list to measures coming under the purview of Article VIII of GATT, hardly a milestone), they still contributed to the overall objective of providing clarity regarding customs clearance while cutting

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down unnecessary red tape. Some important innovations were agreed to as well, which are detailed next. 1.5.5.1 Transparency Publication There are important innovations agreed to regarding the publication of laws dealing with customs clearance. WTO members must publish importation, exportation, and transit procedures, as well as fees and charges imposed in connection with them; applied rates; classification and valuation rules; general laws regarding rules of origin; import, export, and transit restrictions; penalties against infringements of formalities in connection with import, export, and transit trade; international agreements with other countries regarding import, export, and transit trade; procedures relating to tariff quotas; and appeals procedures relating to administrative decisions in the area mentioned previously (Article 1.1 of the ATF). Further, they must make available through the Internet information regarding import, export, and transit trade, as well as appeal procedures, and provide “enquiry points” within their sovereignty with the aim of familiarizing traders with the customs procedures applied (Articles 1.2 and 1.3 of the ATF). Thus, transparency has been extended both with respect to the measures that must be notified and the means (i.e., the Internet), in an effort to ensure that traders will possess ex ante the maximum of information regarding the conditions of competition within a given market. WTO members must, finally, provide opportunities for traders and other interested parties to comment on changes in measures regarding customs clearance (Article 2.1 of the ATF), and provide regular consultation between border agencies, traders, and other stakeholders (Article 2.2 of the ATF). Notification The WTO Committee on Trade Facilitation must be notified of all the measures mentioned previously (Article 1.4 of the ATF). As we will see later in this chapter, transparency ex post is also served since decisions regarding customs clearance cannot be opaque, and transparent appeals procedures have been introduced as well. Comparison with GATT It follows that there are important innovations here, compared to Article X of GATT. The use of the Internet for transparency purposes, the establishment of enquiry points aiming to disseminate information, consultations before publication, and advance rulings (and the ensuing right of appeal) are all improvements to the GATT regime. 1.5.5.2 Substantive Improvements in Customs Administration121 Reducing the Number of Necessary Documents WTO members cannot overburden traders by requesting from them unnecessary documents with respect to import, export, and transit formalities; they must limit themselves

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to asking for whatever is strictly necessary in light of the objective pursued through their requests [Article 10.1.1(c) of the ATF]. To this effect, they should accept electronic copies of documents, when appropriate (Article 10.2.1 of the ATF), and should not request original copies of export documentation submitted to the customs authorities of the exporting WTO member (Article 10.2.3 of the ATF). WTO members are encouraged to use international standards regarding formalities and documentation requirements. The Draft Agreement mentioned explicitly three international standards in Article 10.2: the “UN Layout Key” (“UNLK”), which provides a simplification and standardization of documents used in export trade;122 the “UN Trade Data Elements Directory,” which has a very comparable function to the UNLK; the UN/ CEFACT “Buy-Ship-Pay” model;123 and, finally, the “WCO Data Model,” which contains, besides customs-related documentation, information on regulatory agencies, health, and agricultural policies. Adoption of international standards in this context will undoubtedly reduce current transaction costs, since traders are required to compile different documentation depending on the port of exportation. Single Window There is no legal requirement to do so, but WTO members should endeavor to establish a single office (a “single window”) where traders submit documentation regarding import, export, and transit trade (Article 10.4 of the ATF). It is to be deplored that this provision was not adopted in the form of an unambiguous binding obligation, as it could have greatly contributed toward cutting red tape. Traders are routinely asked to visit different agencies in order to secure one trade transaction and absence of single window provision in the ILA has been raised, as we saw supra, as one of the main reasons why the notification record under that Agreement is poor. Practice shows that it is not wise to underestimate the cost of information about information. Still, even if expressed in best endeavors term, this provision holds a lot of promise, since it could still be implemented for simplifying customs clearance.124 Inspections WTO members can, respecting the procedures established in the Sanitary and Phytosanitary Measures (SPS) Agreement (discussed further in chapter 6 of this volume), adopt inspection procedures (or enhance the level of adopted procedures) at the border with respect to foodstuff, beverages, or feed in order to protect human, animal, or plant life or health in their sovereignty. When doing so, they must issue a notification based on risk [Article 5.1(a) of the ATF], and ensure that it applies uniformly in all relevant ports of entry [Article 5.1(b) of the ATF]. WTO members may, if requested to do so, perform a second test if, as a result of the inspection, the products concerned were found to be unfit for importation (Article 5.3.1 of the ATF). They can detain goods but must inform the concerned traders to this effect (Article 5.2 of the ATF).

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The Draft Agreement contained more elaborate provisions in this respect:125 Article 5 requested WTO members to respect a series of procedural obligations when introducing “import alerts” (the term used instead of “inspections”) regarding topics such as food safety. Crucially, similar measures should be based on “positive evidence.” The Draft Agreement wisely did not request that similar measures be based on scientific evidence since alerts could be legitimized based on observations the accuracy of which had yet to find support in scientific risk assessment. The requirement for positive evidence aimed at reducing the risk of seeing rapid alerts based on shaky or speculative foundations. Customs Fees and Charges This provision covers the same subject matter as Article VIII of GATT; Article 6.1.1 of the ATF underscores this point when explicitly stating that its coverage extends neither to customs duties (Article II of GATT) nor to internal charges (Article III of GATT). It reinforces Article VIII of GATT in two important ways: • The rationale for charges must be published (Article 6.2 of the ATF). • Penalties commensurate with the degree and severity of breach of provisions regarding charges covered by this provision are envisaged (Article 6.3 of the ATF). There is the possibility, though, for “plea bargaining” provided in the agreement (Article 6.3.6 of the ATF). Temporary Admission This provision, like the one discussed immediately hereafter regarding inward and outward processing, concerns the possibility of reducing import duties if certain conditions are met. WTO members may relieve goods imported temporarily into their market from payment of duties if they “have not undergone any change except normal depreciation and wastage due to the use made of them” [Article 10.9(a) of the ATF]. Inward/Outward Processing WTO members may further relieve goods, totally or partially, from the payment of import duties if the goods are meant for inward processing or for outward processing. “Inward processing” is the process whereby goods enter the market in order to undergo some processing and be reexported thereafter; “outward processing” refers to the process whereby goods are exported in order to undergo a specific production process and be subsequently reimported [Article 10.9(b) of the ATF]. Goods in Transit Transit was regulated in GATT as well, as we saw in chapter 7 of volume 1, albeit in a rather rudimentary manner. The ATF provides for some important additions to the regulation of goods in transit. It introduces a necessity requirement, and WTO members must consequently drop unnecessary regulation of transiting goods (Article 11.1 of the ATF). WTO members can impose on transiting goods only charges that are commensurate with administrative/transport expenses (Article 11.2 of the ATF).

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WTO members must further refrain from delaying transiting goods in an unnecessary manner (Article 10.7 of the ATF). They can apply a surety on transiting goods, limited, nevertheless, to ensuring that transport/transit requirements have been fulfilled (Article 11.11 of the ATF). Finally, technical regulations and conformity assessment procedures (in the TBT-sense of these two terms)126 will not apply on transiting goods by the WTO member allowing the transit. No Obligation to Perform PSI We briefly alluded to the relationship between the ATF and the PSI agreements when we referred to Article 10.5.1 of the ATF, which states that WTO members should not request the use of PSI as a prerequisite for tariff classification and customs valuation. Article 10.5.2 further requests WTO members to avoid adding to the existing requirements regarding the use of PSI procedures. The rationale for this provision is that skepticism regarding the activities of PSI companies is no longer due exclusively to the hostility of exporters. There is some awareness that outsourcing similar activities hardly helps developing countries improve the effectiveness of their customs procedures.127 There is also by now some empirical evidence to the effect that PSI, although it can have beneficial effects in clearing goods through customs, also adds substantially to the costs.128 1.5.5.3 Procedural Improvements in Customs Administration Advance Rulings An advance ruling is (Article 3.9(a) of the ATF): a written decision provided by a Member to an applicant prior to the importation of a good covered by the application that sets forth the treatment that the Member shall provide to the good at the time of importation with regard to: i. the good’s tariff classification, and ii. the origin of the good.

Advance rulings with respect to these two issues, of course, will greatly facilitate customs clearance. The latter, of course, crucially affects other factors as well—namely, customs valuation, exemption from duties, and requirements for quotas, tariff quotas, or both. Inconsistency of decisions by customs authorities is a real issue, and it has provoked a substantial amount of litigation in both national fora and the WTO. Moreover, inconsistency of tariff classifications is not the privilege of unsophisticated customs authorities, as the EC—Selected Matters dispute showed.129 This provision was modeled after the standard provision embedded in 9.9 of chapter 9 of the revised Kyoto Convention,130 which reads: The Customs shall issue binding rulings at the request of the interested person, provided that the Customs have all the information they deem necessary.

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Whereas WTO members must, if requested to do so, provide an advance ruling with respect to tariff classification and origin of goods to be cleared (Article 3.1 of the ATF), they are encouraged to do so only with respect to the remaining critical items. This is a shortcoming in the agreement, for sure. Advance rulings will be valid for a reasonable period of time (Article 10.3 of the ATF)131 but can be revoked or modified if the ruling was based on “incomplete, incorrect, false, or misleading information” (Article 10.4 of the ATF). In this case, written notice containing the reason for the change must be served to the applicant (Article 10.4 of the ATF). The requirements for applying for advance rulings, as well as the period for which it will be valid, must be published (Article 10.6 of the ATF).132 Release and Clearance of Goods Next to advance rulings, this is the other new major innovation helping to speed up the clearance process. The basic idea here is that goods will be cleared before importation occurs—even before the final determination regarding duties and charges has been made. Payment will be facilitated, and the following risk management procedures will be administered so as to avoid unnecessary delays: • Prearrival processing: This concept is introduced in Article 7.1 of the ATF. Traders can, when appropriate, submit information in electronic form regarding the upcoming importation before it happens, so as to expedite the release of goods. • Separation of release from payment of duties: Release of goods from customs can occur even if the final assessment of duties has not been completed (Article 7.3 of the ATF). A surety (guarantee) can be requested for separation to occur, the level of which, however, cannot exceed whatever is necessary for payment of customs duties and other charges (Article 7.3.3 of the ATF). • Electronic payment: Electronic payment is encouraged, but there is no obligation to accept this form of payment (Article 7.2 of the ATF). • Risk management:133 WTO members, when dealing with imports presenting a risk (to human/animal health/safety), must concentrate their endeavors on “high-risk” consignments and avoid delaying unnecessarily “low-risk” consignments (Article 7.4 of the ATF). • Postclearance audit: Postclearance audits of consignments are possible if two conditions are met: appropriate selectivity criteria are in place and transparency has been served (Article 7.5 of the ATF). • Expedited shipments: WTO members must adopt (or maintain) procedures for expedited shipments through air cargo facilities (Article 10.8 of the ATF). • Perishable goods: Finally, WTO members must ensure that they have adopted adequate procedures in order to ensure expedited release of perishable goods (Article 10.9 of the ATF).

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• Authorized operators: To facilitate clearance, WTO members shall provide additional measures to “authorized operators” who meet specific criteria (Article 7.7 of the ATF). To this effect, they shall provide at least three of the following measures: low data requirements; low rate of physical inspections; rapid release; deferred payment of duties, or other duties or charges.; reduced guarantees; single customs declaration; or clearance at the premises of an authorized operator. It is this last aspect (clearance at an operator’s premises) that could have substantial impact in practice, since authorized operators could facilitate imports and exports through their warehouses. Authorized operators must exhibit an appropriate record of compliance with customs and provide a system of managing records to allow internal controls, financial solvency, and supply chain security. In other words, they must be trusted based on their prior record.134 Customs Brokers WTO members cannot require the compulsory use of customs brokers. Customs brokers can continue to exist and operate trade facilitation tasks, but they will not be a bottleneck anymore since others can perform the same tasks as well. By broadening the scope of agents that will perform similar tasks, the agreement takes another step toward facilitating clearance. Note that, to the extent that national legislation provides for customs brokers (as one of the possibilities to perform trade-facilitation-related tasks), the criteria for acceding to this profession should be transparent (Article 10.7 of the ATF). Customs Cooperation and Border Agency Cooperation From early on during the negotiation, cooperation across customs authorities was high on the agenda. To facilitate the flow of goods across customs, cooperation between customs authorities is crucial. Article 12 of the ATF provides for detailed forms of customs cooperation: it regulates the form of request, the administrative burden that can be imposed, the limitations to requests, an obligation to respect confidentiality and reciprocity, and the possibility of signing bilateral and regional agreements aiming at promoting cooperation between customs authorities. Border agency cooperation is incited as well. To this effect, the Draft Agreement included a number of provisions in Article 9 aimed at facilitating cooperation (e.g., the alignment of working hours of different national customs authorities). Article 8 of the ATF enlarged the scope for border agency cooperation, adding to the alignment of working hours, alignment of procedures and formalities, sharing of common facilities, joint controls, and establishment of one-stop border post (OSBP) control. Some countries have in practice gone so far as to establish OSBPs, like the “Chirundu crossing” between Zambia and Zimbabwe, and the “Malaba crossing” between Kenya and Uganda.135

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There is no obligation to do all of this, though, since Article 8 of the ATF is drafted in best endeavors terms. Administrative Decisions and Appeals Procedures The term “administrative decision” is defined paradoxically in footnote 4 as follows: An administrative decision in this Article means a decision with a legal effect that affects rights and obligations of a specific person in an individual case. It shall be understood that an administrative decision in this Article covers an administrative action within the meaning of Article X of the GATT 1994 or failure to take an administrative action or decision as provided for in a Member’s domestic law and legal system.

We discuss Article X of GATT in chapter 12 of this volume. Suffice it to state here that WTO members must, by virtue of Article 4 of the ATF, provide appeals procedures against all administrative decisions, as defined previously. 1.5.6

Special and Differential Treatment

A large part of the ATF is dedicated to special and differential treatment. It explicitly includes “conditionality” in the relevant provisions: the idea is that the requirement to undertake a commitment depends on the capacity to implement the relevant commitment. The capacity can be asymmetric across trading nations, and, thus, the agreement breaks away from the past practice of establishing transitional periods for developing countries, and even longer ones for LDCs without “customizing” transition any further.136 To induce the presumed beneficiaries to speed up the implementation process, donors (developed nations) will enter bilateral negotiations. Provided that the financing of implementation has been agreed on, bilateral agreements will reflect the deadline by which implementation will have occurred. 1.5.6.1 Categories of Commitments Section II of the ATF reflects the provisions regarding “special and differential” treatment. Developing countries and LDCs undertake commitments, which will be reflected in three lists: “Category A,” “Category B,” and “Category C.” Both sets of countries enjoy discretion when deciding which commitments go into which list. The difference between the three lists is the entry into force of the commitments entered: commitments under Category A enter into force before those under Category B, which, in turn enter into force before those included in Category C. Specifically, Category A commitments will enter into force simultaneously with the entry into force of the ATF or, in the case of LDCs, within one year of it. Category B reflects commitments that will enter into force after a transitional period. Category C contains commitments that will enter into force after a transitional period, but that entry into force requires implementing capacity through the provision of assistance and support for capacity building (Section II, § 2).

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Footnote 16 of the ATF reads: “... assistance and support for capacity building may take the form of technical, financial, or any other mutually agreed form of assistance provided.” Consequently, and as briefly alluded to previously, negotiations between donors and beneficiaries will determine the extent of the list in Category C. Including the supply of technical assistance as a prerequisite for implementation could affect the incentives of both donors and beneficiaries to extend or reduce the length of the list: items of interest to developing countries and LDCs would be included in Category A; items of interest to developed countries would be included in Category C. Developing countries and LDCs retain discretion to shift items from Category B to C and vice versa through notifications to the Committee on Trade Facilitation. If the shift occurs from Category B to C, the WTO member concerned must also provide information regarding the status of assistance and support required to build capacity (Section II, § 7). All commitments entered under the three categories will be annexed to the ATF and become, thus, an integral part thereof (Final Provisions of Section II, §§ 10–11). Finger (2015) performed a reality check on commitments entered. As of 31 July 2014, only twenty-three developing countries had notified the WTO of their Category A schedules, and many of them simply specified where information should be published, but not what information should be published. Hence, few committed, and, among those few, many entered only shallow commitments. 1.5.6.2 Implementation: Sine Die (Until the Greek Kalends)? Whereas developed countries have to implement the ATF from the date of its entry into force, this is not the case for developing countries or LDCs. Both sets of countries have discretion when it comes to deciding the entry into force of their commitments under Categories B and C. They have to implement immediately only commitments under Category A. Section II, § 4.1, says as much as far as developing countries are concerned. Section II, § 4.2, addresses the same issue with respect to LDCs. The discretion of both sets of countries with respect to commitments under Category B is unlimited; Section II, § 4.5, supports this conclusion: No later than 60 days after the dates for notification of definitive dates for implementation of Category B and Category C in accordance with paragraphs 4.1, 4.2, or 4.3, the Committee shall take note of the annexes containing each Member’s definitive dates for implementation of Category B and Category C provisions, including any dates set under paragraph 4.4, thereby making these annexes an integral part of this Agreement.

It follows that the Committee on Trade Facilitation does not have the authority to question the dates of implementation proposed by developing countries and LDCs. The two sets of countries have unlimited discretion when it comes to scheduling commitments under Category B.

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Section II, § 4.1a, deals with Category B commitments entered into by developing countries: Upon entry into force of this Agreement, each developing country Member shall notify to the Committee the provisions that it has designated in Category B and corresponding indicative dates of implementation.

The next paragraph, 4.1(b), requests developing countries to notify their commitments under this category within one year from the entry into force of the ATF. Section II, § 4.2a, focuses on Category B commitments entered by LDCs: No later than one year after entry into force of this Agreement, a least developed country Member shall notify the Committee its Category B provisions and may notify corresponding indicative dates for implementation of these provisions, taking into account maximum flexibilities for least developed country Members.

The next paragraph, 4.2(b), requests LDCs to notify their commitments under this category within one year from the entry into force of the ATF. Nothing in the letter of these provisions curtails the discretion of the WTO member to choose its dates of implementation. As a result, developing countries and LDCs may choose long transitional periods if they deem it warranted to procrastinate the date of entry into force of their commitments. When it comes to commitments under Category C, both sets of countries will initiate negotiations with donors, since the implementation of provisions under this category is linked to supply of technical assistance, the presumption being that absent technical assistance, the WTO members concerned will be in no position to implement. Section II, § 4.1(c), (d), and (e) explain in a detailed manner the negotiation process between developing countries and donors. Section II, § 4.2(c), (d), (e), and (f), are the corresponding provisions for LDCs. The length of the period of implementation of Category C commitments is, thus, in function of the supply of technical assistance. Technical assistance involves costs for the donors, of course: therefore, it is to be expected that negotiations between donors and beneficiaries will take place in order to define the timeliness of the ATF by developing countries.137 Negotiators had agreed early on that technical assistance would be necessary in order to ensure smooth implementation of the ATF by developing countries, the intended main beneficiaries of the agreement. The 2004 Decision on Trade Facilitation138 reads in pertinent part: “Negotiations shall also aim at enhancing technical assistance and support for capacity building in this area.”139 § 3 dealt specifically with LDCs, and it provided that: “Least-developed country Members will only be required to undertake commitments to the extent consistent with their individual development, financial and trade needs or their administrative and institutional capabilities.”

Annex 1A Agreements Dealing with Customs Procedures

61

LDCs, thus, would not be requested to undertake commitments beyond what they could implement in light of their level of development. That was the basis of the negotiated agreement.140 On the other hand, this point should not be overstretched. Business and investment decisions will inevitably be affected in a negative manner if implementation drags on forever. So beneficiaries will have to balance the potential for cash flow to finance implementation of the ATF against the costs that delayed implementation will signify for their domestic economies. In any event, in an effort to facilitate implementation by developing countries and LDCs, the WTO Agreement established the Trade Facilitation Agreement Facility (TFAF). The purpose of TFAF is to provide trade facilitation—related technical assistance and capacity building, and the facility was meant to be the focal point for the implementation of commitments. TFAF will help developing countries and LDCs with technical support and implementation grants. Various organizations besides the WTO participate in this facility and have agreed to help the implementation of the agreement in this way: the International Trade Centre (ITC), the Organisation of Economic Cooperation and Development (OECD), the UNCTAD, the UN Economic Commission for Europe, the UN Economic Commission for Latin America and the Caribbean (ECLAC), the UN Economic and Social Commission for Asia and the Pacific (ESCAP), the UN Economic and Social Commission for Western Asia (ESCWA), the World Bank (WB), and the WCO. They issued a joint statement on 22 July 2014,141 announcing their commitment to participate in the facility. 1.5.6.3 Early Warning Section II, § 5, includes the so-called early warning provisions. To the extent that they find it impossible to honor their engagements regarding implementation, WTO members can request an extension from the Committee on Trade Facilitation. The latter will establish an “Expert Group,” which will report to the committee, and the committee will ultimately decide. The opinion of the Expert Group must be sought, but it is not binding on the committee (Section II, § 6). No dispute before the WTO can be raised regarding commitments by developing countries under Category A for two years following the entry into force of the ATF; for six years from the entry into force of the ATF for commitments under Category A by LDCs; and for eight years after implementation for commitments under Categories B and C by LDCs (Section II, § 8). 1.5.7

Institutions

Article 13 of the ATF provides for a Committee on Trade Facilitation. This committee will meet at least once a year, will be the depository of national schemes coming under its purview, will establish subsidiary bodies to the extent necessary, and will link with other

62

Chapter 1

institutions with overlapping mandates, such as the WCO. It will have the power to review the agreement and discuss its future shaping in light of the needs observed. Article 13.2 of the ATF contains an important innovation in that it provides for national committees on trade facilitation, which will liaise with the Committee on Trade Facilitation in an effort to better face the problems encountered in this context. 1.5.8

Entry into Force

The ATF went through a number of bumps on its way to conclusion. For some time, fearing negative reactions, the option of signing a plurilateral agreement was briefly contemplated. Similar thoughts were soon abandoned though. A basic purpose of the ATF is, as we saw supra, to contribute to development, and absent participation of all developing countries and all LDCs this very basic purpose of the ATF would have been defeated. According to a decision by the Ministerial Conference adopted in Bali in December 2013, the General Council was supposed to meet before 31 July 2014, and adopt a protocol that would be open for acceptance by WTO members until 31 July 2015. Alas, following India’s decision to link adoption of the protocol to one on food security (also adopted in Bali), and because of its dissatisfaction with the lack of progress in the latter, the protocol was not adopted in July 2014. WTO members agreed to discuss this issue again in September 2014. Finally, WTO members managed to agree on 28 November 2014 that the ATF would enter into force in accordance with Article X of the Agreement Establishing the WTO.142 The definitive entry of the ATF presupposed the adoption of the agreement by 2/3 of the WTO membership. At the time of writing (May 2015) only a handful have managed to do so. 1.5.9

Where Does the Red Tape End?

The measurement of gains from cooperation in the field of trade facilitation depends on the assumptions made. There are many papers estimating similar gains, which will be discussed in what immediately follows. Similar work certainly influenced the WTO negotiation, since there was awareness of what could be achieved through cooperation. It is doubtful, however, that it provided the original impetus for the negotiation, which was initially conceived as a means to provide technical capacity to developing countries only. Studies have focused on the cost side of existing regimes and the benefits in case some of the deadweight losses were dismantled. Speeding up the process of customs clearance has undeniable benefits. CoRe NTM (which stands for Compilation of Recorded Nontariff Measures), the US International Trade Commission (USITC) database, records issues that have been raised officially, have appeared in official documents such as the WTO Trade Policy Reviews, or both.143 The

Annex 1A Agreements Dealing with Customs Procedures

63

most common grounds for complaints are delays in customs clearance, followed by complaints regarding requests for additional documentation, and inspection.144 Sengupta (2007), for example, employed the World Business Economic Survey (WBES), and interviewed managerial staff in 10,000 enterprises spread over eighty countries to conclude that a considerable amount of their time is spent on nonproductive activities such as dealing with bureaucracy.145 Hummels (2001) linked trade facilitation measures to tariffs, finding that each day saved in shipping time (thanks to faster customs clearance) is worth a 0.5-percentage-point reduction of ad valorem tariffs. Wilson, Mann, and Otsuki (2003) construct four measures of trade facilitation (port efficiency, customs environment, regulatory environment, and e-business usage), using country-specific survey and hard data. They estimate independent effects for each of the four measures and find that trade flows are most closely associated with port efficiency. In a companion paper, Wilson and colleagues (2005) keep the four measures of trade facilitation and investigate their relationship to trade for a sample of seventy-five countries. They find that improvement in all forms of trade facilitation would yield an increase in global trade of $377 billion, which they decompose to shed some light on the GATT provisions under discussion in the WTO negotiation on trade facilitation (Articles V, VIII, and XX of GATT).146 Hufbauer and Schott (2013) estimated that the gains from a far-reaching trade facilitation agreement would increase the world gross domestic product (GDP) by $960 billion annually. Dennis and Shepherd (2011) showed that improved trade facilitation (essentially reforms to customs procedures) represents a set of policy options that would appear to have significant scope to promote export diversification. Djankov, Freund, and Pham (2010) have estimated that it takes three times as many days, twice as many documents, and six times as many signatures to trade in some African countries than in developed countries. Freund and Rocha (2011), in a similar vein, calculated that an extra day in Africa to get a consignment to its destination is equivalent to a 1.5 percent additional tax. Zaki (2014) found that gains are more significant for developing than for developed countries (regardless of whether gains are measured in welfare gains or increases in trade), that welfare effects are much higher in the long run than the short run, that both intraregional and interregional trade will be boosted, and that export diversification will be improved. In short, there is by now persuasive empirical evidence regarding the gains from improved trade facilitation. It all, thus, boils down to the coverage intended: the hands of negotiators are free, of course, since this is a new agreement, and it can be amended and expanded in the future. The business community has a rather ambitious agenda.147 In a similar vein, some fora, such as the Asia Pacific Economic Cooperation (APEC), have included under the heading “trade facilitation” a broad set of policies that may have an impact on trade costs, including policy measures that affect the efficiency of transport and logistics services.

64

Chapter 1

WTO trading partners have privileged a narrower focus, as shown previously, which, does not include such elements as infrastructure and related services. But even if we were to quantify the limited WTO agenda, the gains from an agreement on trade facilitation are quite important. A particularly careful and detailed analysis of the potential impact of the WTO trade facilitation by Moïsé and Sorescu (2013), based on a comprehensive data set of trade facilitation indicators, estimated that implementing the various elements of what has been proposed in the Doha round would lower developing-country trade costs by around 14 percent.148 1.6

Concluding Remarks

The rationale behind the WTO attempts to regulate the behavior of customs authorities rests on the premise that the multilateral regime needs to address deadweight losses associated with lengthy, unnecessary, and sometimes abusive customs procedures. The original GATT only sparingly addressed customs procedures, and it is only as of the Tokyo round that trading nations focused on this issue. The big change comes of course with the Uruguay round and the subsequent agreement to conclude the ATF. Some of the procedures employed correspond to actual needs (e.g., statistical information), but some might be the expression of protectionist pressure, and the resolve of the WTO framers is to ensure that there will be no protection in addition to whatever level of protection has been negotiated among trading partners and has been expressed in OCDs and ODCs. Other types of beggar-thy-neighbor policies could not be excluded out of hand; one could well imagine how customs agents might be tempted to delay clearance on purpose in order to extract monetary rewards. Corruption features high on the World Bank agenda in this context, and rationalization of customs procedures is an antidote to similar phenomena. The two original agreements (i.e., ILA and CVA) provided some clarity as to what was expected from customs authorities. For long periods, negotiators had probably lost interest in the ILA due to the scarce practice in this area. The resurgence of import licensing schemes, especially across Latin American countries after 2010, has raised the level of awareness regarding the negative effects of similar measures on international trade. The current disciplines do not adequately deal with some issues mentioned in this chapter, but most important, they also do not seem to address the missing incentives to increase the existing level of transparency. Information about import licensing schemes is often lacking, since notification of schemes is not incentive-compatible for those practicing them. The WTO has tried to introduce some of the missing incentives to be transparent by proposing simplified procedures for notification and publication, but at this stage, much still needs to be done in this context.

Annex 1A Agreements Dealing with Customs Procedures

65

Adjudication at the WTO level has been scarce, probably because similar issues are best handled before national authorities in light of the “urgency” involved. Indeed, WTO members are required to establish domestic courts or tribunals that will hear cases involving customs-administration-related complaints (Article X.3 of GATT). This is where most of the activity is (and we will be discussing this topic in detail in chapter 12 of this volume), and WTO panels have been reduced to only a handful of cases, which we have discussed in this chapter. The focus of the previous-generation agreements was on customs-related procedures: customs valuation and production of import licensing certificates. The PSI Agreement was thought of as an additional facilitating step. Goods would be cleared at the export market by private entities; hence, corruption of government agents, at the very least, would be curbed. Over the years, though, demand for PSI services dropped substantially,149 and various factors have contributed to this occurrence. Customs authorities have responded to the challenge by cleaning up their act. Some customs services have been outsourced to PSI companies (e.g., “Crown Agents” have been involved in a partnership with Angola). Others have switched to “destination inspection” companies, which look like PSI companies but always have an office in the country of importation. PSI companies were quite expensive anyway, and the outcome sometimes was thrown into question. Criticism on the activities of PSI companies has been mounting, the culmination being the introduction of the paragraph in the ATF, to which we referred earlier, which puts a halt to compulsory PSI (but also postshipment inspection). Trade facilitation emerges as the new-generation agreement with a slightly different focus. Some of its provisions address customs-related procedures, albeit in a more comprehensive manner than ever before (e.g., single window and cooperation across customs authorities). Some of its procedures, though, are the first step toward addressing behindthe-border measures, which affect the speed of clearance at customs. Research points to substantial gains from adopting similar mechanisms, which vary as a function of the content of trade facilitation. It is, of course, too early to pronounce on the welfare implications of the ATF. The signs, however, are not very positive. Finger (2015) has emerged as one of the increasingly critical voices. His concern was that the new agreement “does not provide a fertile field for reciprocal bargaining,” and he feared that, as with similar prodevelopment attempts in the past (most notably the Enabling Clause), absence of reciprocity would ensure that the gift for developing countries might prove to be form without substance. The agreement is a step in the right direction, but probably a very small step. The focus on behind-the-border measures is certainly welcome. Frontloading the information regarding commercialization of goods in markets is warranted in order to avoid surprises after clearance of goods. Future experience will show how ambitious the agenda on this front will become.

2

Antidumping

2.1 The Legal Discipline and Its Rationale 2.1.1 The Legal Discipline Antidumping is one of the three contingent protection instruments agreed already during the negotiation of the GATT, the other two being countervailing measures, and safeguards. The contingency is dumping, defined as the differential between two prices: the price of a good in the home market and the price of the same good in the export market (e.g., the “dumping margin”). Antidumping is contingent protection, it is the reaction to dumping, the contingency that it addresses. Article VI of GATT and the subsequently concluded WTO Agreement on Antidumping (AD) do not regulate dumping; rather, they deal with the conditions that must be met for AD duties to be imposed lawfully. A WTO member must show that “dumping”—has caused injury (in the form of decreasing volume of sales or reduced profitability) to the domestic industry in the importing WTO member producing the like product. If these requirements have been cumulatively met, a WTO member can impose AD duties (that is, it can add the dumping margin to its customs duties).1 To do that, it will have to initiate an AD investigation and ensure that specific due process obligations have been respected throughout the process. 2.1.2 The Rationale for the Legal Discipline Dumping is private behavior, and, as per Article VI of GATT, is an “unfair” practice that has been condemned by the WTO members: The contracting parties recognize that dumping, by which products of one country are introduced into the commerce of another country at less than the normal value of the products, is to be condemned if it causes or threatens material injury to an established industry in the territory of a contracting party or materially retards the establishment of a domestic industry. (italics added)2

The rationale for AD duties is, thus, to counteract an unfair practice.3 Case law has recognized as much [§ 87 of the Appellate Body (AB) report on Argentina–Footwear (EC);

Argentina Australia Brazil Bulgaria Canada Chile China Colombia Costa Rica Czech Republic Ecuador Egypt EU Guatemala India Indonesia Israel Jamaica Japan Jordan Korea Latvia Lithuania 5 3 1 4

25 1 21 11 6

13

11 4

4

33

6

4

5

22 17 18

1996

27 5 5

1995

15

13 5 3

7 41

1 1

14

14 44 11

1997

7 65

1 14 22

3

28 8 7

1

2 6

1

41 3 1 1

3 32

21 5 11 3

43 15 11

2000

6

64 8

2 2

18

23 24 16

1999

8 2 3 6 1 2

8 13 18

1998

Table 2.1 Initiations of AD investigations, 1 January 1995–30 June 2010

4 1

79 4 4 1 2

7 28

14 6

25

28 23 17

2001

9 6

1

81 4

3 20

30

14 16 8 1 5

2002

18

1

46 12

1 7

22

15

1 8 4

2003

3

21 5 1

30

27 2

11

12 9 8

2004

4

4

28

12 25

24 2 1

1

12 7 6

2005

1 7

35 5

9 35

7 1 10 9 1

11 10 12

2006

15

4

47 1

2 9

1 1 4 1

8 2 13

2007

5

55 7 1

19

3 1 14 6

19 6 23

2008

31 7 6 1

2 15

6 1 17 5 2

28 9 9

2009

3

17 3 5 1

8

1 1 4 2

7 4 5

2010

1 67 414 1 613 83 43 6 6 1 111 7 7

277 212 184 1 152 19 182 50 10 3

Total

68 Chapter 2

22

2 226

3 157

3

1 1

14

23 1

34

16

15 1 6 246

4

2 2 1

8 1

2 1

8 6 5

1997

2 4 4

1996

3 4 10

1995

Source: http://www.wto.org.

Malaysia Mexico New Zealand Nicaragua Pakistan Panama Paraguay Peru Philippines Poland Slovenia South Africa Taipei, Chinese Thailand Trinidad and Tobago Turkey Ukraine US Uruguay Venezuela Total

Table 2.1 (cont.)

10 266

36

1

4

41 6

3 3

2

1 12 1 2

1998

7 358

47

8

3

1 8 6 7 1 16

2 11 4

1999

47 1 1 298

7

1

21 4

1 2

6 9

2000

15 2 77 4 1 371

3 1

6 3

8

1 6 1

2001

1 315

18 3 35

21

4

234

11 2 37

3 2

8 2

4 1 1

3

1

13 1 3

6 14 5

2003

5 10 2

2002

220

25 6 26

3

6

1 7

3

3 6 5

2004

202

12 2 12

23

4

13

4 6

2005

203

8 1 8

3

3 5

3

4

8 6 1

2006

165

6 5 28

2

5

2

3 6

2007

213

23 7 16

1

3

3

1

2008

209

6 2 20

1

3 1

4 1

26 4

2

2009

69

1 1 2

2

1

1

2010

145 31 442 6 31 3752

43 12

43 98 53 2 53 6 2 69 18 12 1 212 23

Total

Antidumping 69

Argentina Australia Brazil Canada Chile China Colombia Costa Rica Czech Republic Egypt EU Guatemala India Indonesia Israel Jamaica Japan Korea Latvia Lithuania Malaysia Mexico

Reporting member

16

1

2 7

2 4

2

7

23 1 8 4

10

23

15

1

11 1 2 7 2

1997

5

1

1

1

20 1 6

1996

13 1 2 7 2

1995

4 7

8

22 2 6

5 28

12 20 14 10 2 3

1998

Table 2.2 AD measures, 1 January 1995–30 June 2010a

1 7

23 7 4

14 18

5 2

2 6

1 6

5

55

1 1 41

15 5 9 14

2000

9 6 5 10

1999

3

7

38 1 1 1

2 13

16 10 13 19

2001

1 4

2 2 2 1 1

64

7 25

5

22 9 5

2002

7 7

4 1

52 1

4 2

1

33

20 10 2 5

2003

7

10

29 8 1 1

1 10

14 1

1 4 5 8

2004

7 8

3

17 4

21

16 1

8 3 3 4

2005

5

8

16 2 3

12 12

24 1

5 4

2006

1

25

2 12

10 1 9 3 1 12 7 2

2007

4 12

31 5

3 15

4

6 3 11 3

2008

1

4

30 1

9

15 2 16 2 1 12 3

2009

1

2

17

1 2

7

7 1 3 2

2010

190 81 105 94 8 137 24 3 1 52 269 1 436 35 21 4 7 70 2 7 25 83

Total

70 Chapter 2

4 127 181

8 190

92

2 119

12 1

24

20

12

36 1

1 3 3

1

1999

33

13 5 2 2

1 1

1

1998

1

18 1 1

3 1

1997

11

8

2 2

2

2

4

1996

3

1995

9 237

31

170

2 1 33

2

1 8

5

1

2

2001

13 1

4 4 6

2000

1 218

11 2 27

15 2 1

7

1

1

2002

224

1 154

16 2 14

1 1

20 1 28 2 12

4

4 1 8

2

2004

1

2

7

2

2003

138

9 6 18

2

3

1

4

2005

140

21 2 5

7 1

4

6

2

2006

108

6 1 5

1 1 1

1

4

3

2007

139

11 5 23

3

2008

137

9 3 15

3

3

2

6

2009

59

5

9

1

1

2010

142 24 289 1 25 2433

22 1 24 2 48 11 9 2 128 12 31 7

Total

a. There have been many great efforts to provide databases on AD cases initiated and enforced by WTO members. Such databases are not simple matters to create, however, since the AD procedures are so complicated (especially if one takes the reviews into account). The most complete source is provided by Bown (2013), and it is posted on the following website: http://econ.worldbank.org/ttbd/gad. See also Czako et al. (2003), as well as Prusa (2001, 2005) who tries to explain the proliferation of AD duties. Finger and Nogues (2006) have studied the practice of MERCOSUR countries, and they concluded that AD has been used as a carrot to pursue economic liberalization. Source: http://www.wto.org

New Zealand Nicaragua Pakistan Paraguay Peru Philippines Poland Singapore South Africa Taipei, Chinese Thailand Trinidad & Tobago Turkey Ukraine US Uruguay Venezuela Total

Reporting member

Table 2.2 (cont.)

Antidumping 71

72

Chapter 2

§ 81 of the AB report on US–Line Pipe]. The rationale for disciplining the imposition of AD duties has to do with moral hazard. Left totally to their discretion, trading nations might have had the incentive to overreact to dumping and eviscerate the steps taken toward trade liberalization. Over the years, the discipline originally imposed through Article VI of GATT has been strengthened with the passage of successive AD agreements. The current (Uruguay-round) AD Agreement is the successor to the Kennedy-round and the Tokyo-round AD agreements.4 2.1.3

Discussion

2.1.3.1 Negotiating History Dumping is a private practice. Private practices were not a matter of concern for the GATT. They were, to the extent that they were considered to be restrictive business practices (RBPs), a matter of concern for the ITO. The ITO contained a chapter, Chapter V, that aimed at addressing RBPs. The thinking was that through similar anti-competitive practices, gains from trade liberalization would be eviscerated. Still, dumping did not figure in the list of restrictive business practices that ITO members aimed to eliminate.5 The Suggested Charter, the precursor to the GATT as we saw in chapter 1, volume 1, did not contain a reference to this effect either.6 At the London Conference (October–December 1946), there was discussions about dumping, but no statement that dumping is an “unfair practice” and, therefore, should be condemned. Article 17 of the London Draft, the corresponding provision to Article VI of GATT, did provide the possibility to counteract dumping, but dumping came to be recognized as an unfair practice at a later stage. The road to condemning dumping as unfair went through a few twists and turns. The provision on dumping had been proposed by the US delegation. Initially, while recognizing that there were four types of dumping (price, service, exchange, and social), the US delegate (Johnson) acknowledged that the US-backed provision on AD was concerned only with price dumping, without, nevertheless, condemning it as “unfair.”7 There was widespread agreement to this effect. The French delegate (Roux) requested that a paragraph be added that would make it clear that the country imposing AD duties should carry the burden of proof and justify its measures.8 In other words, the focus should not be on disciplining dumping, but on disciplining antidumping, the response to dumping. In New York, negotiators continued their efforts to discipline AD, still without condemning dumping as unfair.9 The question thus, remained what would justify AD? After all, dumping, the practice that AD aimed to counteract, was not even considered to be an RBP. It was in Geneva, in the summer of 1947, at the end of the negotiation of the GATT, that Cuba insisted on the inclusion of a paragraph against dumping. The Cuban request was not initially adopted, but Cuba finally got its wish to insert a paragraph condemning dumping.10 This paragraph

Antidumping

73

now figures prominently in the current Article VI of GATT.11 Characterizing dumping as unfair provided the rationale for allowing AD. The disciplining of AD was left for much later, for the negotiations during the Kennedy round. Before that moment, the discussions on AD during the Havana Conference did not lead to any meaningful change. New Zealand suggested that a discipline on dumping (as opposed to a discipline on AD) be inserted, which was rejected by the other trading partners.12 2.1.3.2 Economic Theory The rationale for AD has little, if any, support in economic theory. Some arguments have been voiced in favor of using AD as a selective safeguard. We will return to this discussion later in this chapter. 2.1.3.3 Contingent Protection We announced above that AD is one of the three so-called contingent protection instruments. The term “contingent protection” refers to a situation where a contingency has occurred (e.g., dumping, a subsidy, or unexpected increased imports), which allows WTO members to introduce protection (in the form of either tariffs, quotas, or a combination thereof) in favor of their domestic producers beyond the existing consolidated tariff protection.13 There are two contingent protection instruments besides AD duties: countervailing duties (CVDs) and safeguards, which can take the form of duties, quotas, or even tariff quotas. AD duties can be imposed when dumping occurs. CVDs can be imposed to counteract subsidization (e.g., government behavior aiming to help national producers). Safeguards, in turn, will be imposed when imports have increased in unforeseen, disproportionate amounts, loosely speaking. Yet in the real world, the three instruments are often used interchangeably.14 2.1.3.4 Injury to Competitors Dumping can be counteracted only when it causes injury. The injury standard in the AD Agreement is “injury to competitors” (as opposed to “injury to competition”). Article 3 of AD describes “injury” as the effect of dumped imports on domestic producers, and it does not request that investigating authorities inquire into economywide effects of dumping. Article 6.12 of AD supports this understanding since it does not place consumer organizations on equal footing with producers: consumers will, of course, benefit from dumping, but there is no obligation to take into account similar beneficial effects when deciding on AD duties.15 2.1.3.5 Combating Dumping Only through Antidumping Article 18.1 of AD makes it clear that dumping can be addressed only through AD duties and through no other measure: “No specific action against dumping of exports from

74

Chapter 2

another Member can be taken except in accordance with the provisions of GATT 1994, as interpreted by this Agreement.”16 In US–Offset Act (Byrd Amendment), the panel found that payments under the Byrd Amendment, a US law reserving monetary compensation resulting from the collection of AD duties to the economic operators that had supported a petition to impose AD duties, was a “specific action” against dumping other than AD duties, and, hence, was illegal (§ 7.18). This law had been enacted to address a collective action problem. Especially in industries where concentration (as measured by the Herfindahl Index) is low, it is to be expected that meeting the rather demanding statutory threshold established in Article 5.4 of AD could prove to be, in practice, a test too far. (We discuss Herfindhai in some detail later in this chapter.) Article 5.4, also covered in more detail further on, requires that at least 25 percent of the domestic industry concerned must support a petition to initiate an AD investigation for it to be considered at all. The US law aimed at easing the process by incentivizing the private sector to support petitions. We discuss this aspect of the US law later. For now, we focus on another aspect—namely, whether the “Byrd payments” could be considered specific action aiming against dumping as per Article 18.1 of AD. On appeal, the AB confirmed the panel’s findings, and, recalling its prior pronouncements on this issue (US–1916 Act), it held that the Byrd Amendment17 was inconsistent with Article 18.1 of AD (§§ 255–256 and 265). In its view, Byrd payments were counteracting dumping without taking the form of AD duties since no investigation leading to their adoption would take place. As a result, the US was forced to eliminate Byrd payments and continue to counteract dumping only through AD duties, not through payments to companies. With this ruling, the AB evidenced its willingness to construe the term “specific action” in a wide sense. It is at best debatable why payments to companies might dissuade dumpers from dumping. First, there is uncertainty when payments are promised that duties will be imposed. Second, the duties imposed might give dumpers more of an incentive to dump. And, finally, recipients might want to use Byrd payments in more profitable ways, if they exist. Still, the AB concluded that Byrd payments constituted specific action against dumping. What mattered, in the eyes of the AB, was not their effectiveness. What mattered was one plausible explanation behind the signing into law of this measure.18 2.1.3.6 No Double Count In US–Antidumping and Countervailing Duties (China), the AB added that a WTO member cannot impose both ADs and CVDs to address the same situation. It prohibited, in other words, “double counting” (§§ 550ff., and especially 583 and 591).19

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If, say, export prices (EPs) decrease by 5 percent because of dumping and an additional 5 percent because of a granted subsidy, the importing nation can impose a 5 percent AD and a 5 percent countervailing duty (CVD), assuming that it has complied with the obligations of the AD and Subsidies and Countervailing Measures (SCM) agreements. If, however, they decrease by 5 percent only as a result of both dumping and subsidization, it cannot impose a 5 percent AD and a 5 percent CVD. This is a sensible finding; otherwise, exporters will be punished twice for the same offense.20 2.2 The Relationship with GATT Panels have consistently held that both Article VI of GATT and the AD Agreement in tandem regulate the legality of imposition of AD duties. Consistent practice suggests that the order of analysis is to first review submitted claims under the prism of the AD Agreement, and then follow up with an evaluation under Article VI of GATT when and if needed. In practice, this has been necessary when discussing claims relating to nonmarket economies (NMEs), since AD on goods originating in NMEs is regulated only in Article VI of GATT, not in the AD Agreement.21 Recall that AD presupposes the existence of dumping that causes injury. The WTO member interested in imposing AD duties must demonstrate the existence of all three elements (dumping, injury, causal relationship between the two). We turn to an analysis of these elements in what follows. 2.3 2.3.1

Calculating the Dumping Margin NV Must Exceed EP

According to Article 2.1 of AD, dumping exists when the price of a good in the exporting market, called “normal value” (NV), exceeds the price of the same good in the destination market, the “export price” (EP). The difference between the two prices constitutes the “dumping margin.” An investigating authority (IA) must demonstrate that the dumping margin exceeds the statutory de minimis level of 2 percent (Article 5.8 of AD), otherwise no AD duties can be lawfully imposed. An IA is not totally free when it comes to choosing methodologies for establishing a dumping margin. It must observe the requirements established in Article 2.4.2 of AD. 2.3.2

NV Can Be a Market Price

The NV is the actual market price of the allegedly dumped good in the exporting market unless one of the statutory exceptions discussed in what follows occurs.

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NV When Market Price Is Discounted

The AD Agreement allows an IA to disregard the market price if one of the following three situations occurs (Article 2.2 of AD): • There are no sales of the like product in the “ordinary course of trade”22 • A proper comparison between the NV and the EP cannot be made because of a “particular market situation” • The volume of sales in the home market is “low” An IA can, when confronting one of these three scenarios, set aside the market price in the exporter’s market and pick one of the following two alternative bases for the calculation of the NV (Article 2.2 of AD): • “Third-country sales”; that is, use data from sales of the like product in an appropriate third country, provided the price is representative • “Constructed price”; that is, calculate de novo the NV based on the cost of production in the country of origin, a reasonable amount for selling, general, and administrative (SG&A) expenses, and a reasonable amount for profits Recourse to nonmarket prices is, thus, reserved to a few specific situations where there are reasons to believe that the market price is not representative. If recourse to nonmarket prices is made, the discretion of IAs is somewhat curtailed since they will either have to use third-country sales or constructed price, but not any method they might deem appropriate. The idea is that, independent of the methodology used, the nonmarket price would be an appropriate proxy for the elusive market price. 2.3.3.1 Ordinary Course of Trade Article 2.2.1 of AD provides that sales made below the per-unit cost of production (fixed and variable) plus SG&A expenses may, under certain circumstances, be considered sales that are not in the ordinary course of trade. This is so only if sales have been made within an extended period of time (normally one year, but never less than six months), in substantial quantities (if the weighted average selling price of the transactions under consideration is below the weighted average per-unit cost, or if the volume of sales at a loss represents at least 20 percent of the volume of transactions),23 and at prices that do not allow the recovery of all costs within a reasonable period of time. Sales made at prices that are below per-unit costs at the time of sale, but above weighted average per-unit costs for the period of investigation (POI), shall be taken into account as means for the recovery of costs within a reasonable period of time. The wording of Article 2.2.1 of AD does not suggest that what is described here is the only case of sales that are not in the ordinary course of trade. Case law has provided additional examples of sales outside the ordinary course of trade.

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In US–Hot-Rolled Steel, sales between parties with common ownership were identified by the AB as a case of sales outside the ordinary course of trade, but the AB was quick to point out that, even where the parties were entirely independent, a transaction might still not be in the ordinary course of trade (§ 143), citing as an example a liquidation sale by an enterprise to an independent buyer, which may not reflect normal commercial principles (§ 148). The AB held in the same case, though, that IAs cannot cherry-pick among sales between related parties. A test applied by the US, which excluded sales transactions between related parties24 that were marginally low priced while including all high-priced sales except those proved to be aberrantly high priced, ran, in the AB’s view, afoul of Article 2.2.1 of AD (§ 154). 2.3.3.2 Low Volume of Sales Footnote 2 to the AD Agreement defines the term “low volume of sales.” Assume that Home is the exporter and Foreign the importing WTO member. Sales shall be considered sufficient in volume (and thus, not “low volume sales”), if their volume in Home’s market represents at least 5 percent of the sales of the product in Foreign’s market. It is clear from the text of this footnote that the “5 percent benchmark” is not an absolute criterion. Evidence can be submitted that sales at a lower ratio are still of sufficient magnitude to provide a proper comparison.25 The agreement is silent as to what kind of proof is warranted to make the case that a lower (than the statutory 5 percent) volume of sales would still allow a proper comparison between NV and EP. One would imagine, though, that the exporter would need to show why prices of similar lower volume are still representative of its pricing policy, rather than being extreme outliers that bear no relation to the pricing policy in other markets. 2.3.3.3 Particular Market Situation The text of the agreement does not define this term, and practice is quite rare. As a result, the term “particular market situation” remains largely uninterpreted. A GATT panel (EEC–Cotton Yarn) found that hyperinflation combined with a fixed exchange rate did not necessarily constitute a particular market situation. This panel held that the complainant had failed to demonstrate that prices used as basis of the NV were themselves so affected by the combination of high domestic inflation and a fixed exchange rate, that they did not permit a proper comparison (§§ 478–479). 2.3.4

Calculating NV when Market Price Is Discounted

Recall that, with one of the three scenarios mentioned previously, an IA can have recourse to either of the two statutory methods to calculate the NV: third-country sales or constructed price.

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2.3.4.1 Third-Country Sales In this case, the IA will use data from sales of the “like product” in a third country. The danger here is that the IA might have the incentive to use data from, say, a high-income country when investigating imports from a low-income country, and thus overshoot the dumping margin. This is where the requirement of similarity kicks in: the third country chosen must exhibit similar traits to that under investigation. Sweden and Norway are quite similar for the purposes of an AD investigation; Sweden and St. Kitts and Nevis are not. There is not much case law in this area, most likely because practice is overwhelmingly in the realm of “constructed price,” an instrument that provides IAs with substantial flexibility, as we will see in the next section. In EU–Footwear (China), the EU used Brazil as a surrogate country for China in order to establish NV.26 This choice was challenged by China under Articles 2.1 and 2.4 (first sentence) of AD, but the Panel found that neither of those legal bases covered the choice of surrogate country in an NME investigation (§§ 7.295ff.). We do not know, nevertheless, what the outcome would have been in the same case had China not been considered an NME.27 2.3.4.2 Constructed Price This method of establishing the NV consists in IAs constructing the NV themselves (e.g., without paying attention to the prevailing market price). Their choice to use data, however, is somewhat constrained, as we detail in what now follows. Moving to constructed price could prove to be a huge burden for the exporter who will be left, in principle, at the discretion of the IA, which is part and parcel of the domestic political economy of the importing state and, thus, could be prone to overstating the dumping margin. Over the years, the negotiating efforts of exporting countries have concentrated on limiting the discretion of IAs. Recall from our brief discussion earlier that an IA will construct a price based on three elements: cost data, SG&A, and a reasonable amount of profit. The efforts of negotiators concentrated in limiting the discretion of IAs in these three areas. Cost Data In principle, the cost data to be used as a basis for constructing the NV are those of the exporter or producer in question. The IA has limited discretion in constructing the NV since it must perform a calculation on the basis of28 actual cost data of the examined producer or exporter, provided that records are kept in accordance with the generally accepted accounting principles (GAAP) of the exporting country,29 and that they reasonably reflect the costs associated with the production and sale of the product under consideration. Only when similar data are not available can the IA go ahead and construct de novo the cost using data from similar companies in similar situations. Limits have been imposed by case law regarding the methodology used when constructing the NV. Reversing the Panel’s findings in this respect, the AB on US–Softwood

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Lumber V held that, occasionally at least, an IA should compare alternative methodologies on cost allocation and prefer the one that better suits the facts of the case (§§ 138–139). An IA can make appropriate adjustments for costs of nonrecurring items, which benefit future or current production, or for circumstances in which costs during the POI have been affected by startup operations. Case law has also dealt with the issue of cost allocation in this context. This term refers to assigning common costs to various cost objects. For example, a company might use the same input for the production of two different goods. Sometimes it is easy to perform this exercise, but other times, it is not. How, for example, should one allocate the cost of a new computer center, which might serve also functions unrelated to the production function of the company? In China–Broiler Products, the panel faced a novel issue. The US was exporting chicken paws to China. Chicken paws are part of a chicken, and not the most lucrative part as far as US consumers are concerned. Paws are considered, nonetheless, a delicacy in China. To export paws, of course, chickens must be split. Pre- and post-split costs are incurred, and the question of allocation arises. The issue here was whether a weight-based or a value-based allocation was WTO-consistent. China adopted a value-based allocation, and used the value of paws in the Chinese, as opposed to the US, market when constructing the dumping margin. Because of the increased value of paws in China, it was, thus, easy for it to construct a dumping margin. The question thus arose whether its approach was WTO-consistent. The Panel did not respond directly to this question; rather, it found against China on procedural grounds: China had not explained the reasons for discarding the market price (§§ 7.160ff.). SG&A There is no statutory definition of the term “SG&A expenses.” The Panel on US–Softwood Lumber V held that all costs affecting all or nearly all products manufactured by a company should be considered “general” costs, while “administrative” costs relate to the management of the company’s affairs (§ 7.263). When constructing SG&A and profits (which we will discuss next), an IA must, in accordance with Article 2.2.2 of AD, base its calculations on the investigated exporter’s actual data pertaining to the production and sales in the ordinary course of trade of the like product in their domestic market. If this cannot be the case, they can use the weighted average (WA) of other producers and exporters selling the like good. If this is also impossible to do, they can use any other “reasonable” method. In this case, however, Article 2.2.2 of AD imposes a limit: the calculated amount of profit (which we also discuss later) cannot exceed that of producers or exporters of the same general category of the product concerned (that is, of producers/exporters similarly situated). Article 2.2.2 of AD provides, thus, three alternative methods for calculating SG&A and profits, which, in the words of the Panel in EC–Bed Linen (§ 6.60):

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are intended to constitute close approximations of the general rule set out in the chapeau of Article 2.2.2. These approximations differ from the chapeau rule in that they relax, respectively, the reference to the like product, the reference to the exporter concerned, or both references, spelled out in that rule.30

The first methodology provides, as briefly mentioned earlier, that calculations can be based on the actual amounts incurred by the investigated exporter for the same general category of products (which may include the like product). How broad the general category of products may be is not defined in the agreement. The Panel in Thailand–H-Beams found that the text of Article 2.2.2 of AD does not provide (§ 7.111) “precise guidance as to the required breadth or narrowness of the product category.”31 According to the second methodology, calculation of SG&A and profits may be based on the WA32 of costs incurred by other investigated exporters (or producers) for the like product. The AB (EC–Bed Linen, § 80) clarified that all sales of other exporters or producers of the like product are to be included for determining SG&A and profit data, whether made in the ordinary course of trade or not. The third alternative methodology provides that SG&A and profits may be based on any other reasonable method, with the proviso that the amounts shall not exceed the amounts incurred and realized by other investigated exporters for the same general category of products. The Panel on EC–Bed Linen concluded that (§ 6.98) “in case a Member bases its calculations on either the chapeau or paragraphs (i) or (ii), there is no need to separately consider the reasonability of the profit rate against some benchmark.” The Panel on US–Softwood Lumber V held that, since SG&A benefit the production and sale of all goods that a company may produce, they must relate or pertain to those goods, including to the product under investigation. It, thus, concluded (§ 7.267) that “unless a producer/exporter can demonstrate that the product under investigation did not benefit from a particular SG&A cost item, an IA is not precluded from attributing at least a portion of that cost to the product under investigation.”33 In EC–Tube or Pipe Fittings,34 the question arose whether data relating to sales that had been discarded by an IA under Article 2.2 of AD (“low volume of sales”) could still be used for the purposes of constructing SG&A and profits in the context of Article 2.2.2 of AD. Specifically, Brazil had complained that the EU IA had used in its calculations under Article 2.2.2 of AD data relating to sales previously discarded under Article 2.2 of AD (“low-volume sales”). The AB, upholding the Panel finding in this respect, made it clear that an IA that had discarded the market price for one of the reasons reflected in Article 2.2 of AD, other than for the reason that such sales were made outside the ordinary course of trade, can still use market data for the calculation of SG&A when constructing the NV (§ 101). The Panel on EC–Salmon (Norway) added that actual domestic profit data and actual SG&A data should not be excluded because of the low volume or the low level of profitability of the sales to which they pertain (§§ 7.309, 7.318).35

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Profit Calculation Article 2.2.2 of AD applies here as well, so our discussion regarding the construction of SG&A applies to constructed profits as well. In EC–Bed Linen, the AB discussed the consistency of the methodology used by the EU in constructing profits with the agreement. The IA had had recourse to profit data from one exporter only. In the AB’s view, this was inconsistent with the statutory requirements (Article 2.2.2 of AD), since this provision requests that IAs use the WA of similarly situated producers/exporters, not that of one producer/exporter. The rationale for this provision is obvious: if WTO members were free to select the profit margin of one producer/exporter, they could select the profit margin of an outlier and thus shoot up the dumping margin (§ 74). Prior to the completion of the Uruguay round, US law used a statutory 8 percent profit in constructed value situations [Section 206(a) of the 1921 US Antidumping Act]. With the passage of the Uruguay Round Agreements Act in 1994, US law was modified to conform to provisions in the AD Agreement, since 8 percent could, on occasion, be a rather unreasonable profit margin. 2.3.5

Export Price (EP)

Determining the NV is only the first part of establishing a dumping margin. The second is the establishment of EP. 2.3.5.1 EP Can Be a Market Price According to Article 2.3 of AD, the IA will use market prices unless the exporter and importer are somehow “related.” 2.3.5.2 EP when Market Price Is Discounted In cases where an exporter and importer are related, a constructed EP can legitimately be used. Article 2.3 of AD does not use the term “related.” It uses the terms “association” and “compensatory adjustment” to denote cases of dependency between exporter and importer. In this case, one could suspect that unrealistic prices might be reflected in transactions in order to artificially reduce the dumping margin. Article 2.3 of AD provides an insurance policy against similar practices. In this vein, the Panel on US—Stainless Steel (Mexico) underscored the rationale for constructed EP (§ 6.99): ... an export price is constructed, and the appropriate allowances made, because it appears to the investigating authorities that the export price is unreliable because of association or a compensatory arrangement between the exporter and the importer or third party. By working backwards from the price at which the imported products are first resold to an independent buyer, it is possible to remove the unreliability. Thus, we agree with the United States that the purpose of these allowances is to construct a reliable export price to use in lieu of the actual export price or, as expressed by the EC as third party, to arrive at the price that would have been paid by the related importer had the sale been made on a commercial basis.

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The quoted passage seems to suggest that IAs should test the reliability of prices between related parties by comparing them with those charged in transactions with nonrelated parties.36 In case of a divergence between the two prices, it is the price of the product when sold for the first time to an independent buyer that may form the basis for the constructed EP.37 If the product is not resold, or not resold in the condition that it is being imported into the market where the AD investigation takes place, the EP may be determined on another “reasonable” basis. In this case, IAs have freedom to develop similar bases, provided they are reasonable. Reasonableness is an open-ended standard. There is some practice in this context that helps shed light on this standard. In US–Hot-Rolled Steel, a methodology was challenged for failing the “reasonableness” standard. According to the US methodology, investigated exporters or foreign producers may own as little as 5 percent of another company, and yet a transaction between the two would still be considered as taking place between affiliated (“related”) parties. The panel found that there was nothing wrong with the US methodology.38 The Panel on US–Stainless Steel (Mexico) held that, as the constructed EP should be reliable, costs incurred between importation and resale could be deducted only if they were foreseen (§ 6.100). Interestingly, the same panel highlighted that there is no obligation to make adjustments (§ 6.93) “because the failure to make allowance for costs and profits could only result in a higher export price—and thus a lower dumping margin.” In other words, because not making similar allowances would not constitute a disadvantage to the exporter (as a higher EP, and consequently resulting in a lower dumping margin), the absence of adjustments does not make the calculation of EP inconsistent with the agreement. Reasonableness has thus, been understood as a standard that should protect exporters from arbitrary practices by IAs. 2.3.6 The Duty to Perform Fair Comparison between NV and EP Once an NV and an EP have been determined (regardless of whether they are market or constructed prices), the IA will proceed to establish whether a dumping margin exists by comparing the former to the latter. It must perform a “fair comparison” to this effect (Article 2.4 of AD). The duty to perform a “fair comparison” is distinguished into three obligations: • To compare prices at the same level of trade • To make due allowances whenever appropriate • To use the appropriate methodology for comparing NV to EP The purpose of this requirement is, in the words of the Panel on US–Stainless Steel (Mexico) (§ 6.77) “to neutralise differences in a transaction that an exporter could be expected to have reflected in his pricing.”

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The Panel on US–Softwood Lumber V explained that this process involves judgment on the part of the IA,39 which must ensure that both actions and omissions have been accounted for, and that, at the end of the day, it is comparing apples to apples, not apples to oranges (§§ 7.357–358): Comparability is a term which, in our view, cannot be defined in the abstract. Rather, an investigating authority must, based on the facts before it, on a case-by-case basis decide whether a certain factor is demonstrated to affect price comparability. We can imagine of situations where, although differences exist, they do not affect price comparability. For instance, this could occur where in the exporting country all cars sold are painted in red, while cars exported are all black. The difference is obvious; in fact, it is one of those differences listed in Article 2.4 itself—a difference in physical characteristics. However, there might be no variable cost difference among the two cars because the cost of the paint—whether red or black—might be the same. If instead of differences in cost, we were looking at market value differences, we might reach the same conclusion if, either the seller or the purchaser, would be willing to sell or purchase at the same price, regardless [of] whether the car is red or black. It is also important to note that there are no differences “affect[ing] price comparability” which are precluded, as such, from being the object of an allowance. In addition, we consider that the obligation on an investigating authority is to examine the merits of each claimed adjustment and to determine whether the difference affects price comparability between the allegedly dumped product and the like product sold on the domestic market of the exporting country. (italics in the original)

It is now well settled in case law that the onus falls on IAs to demonstrate that fair comparison has been performed. In this vein, the Panel on Argentina–Poultry Antidumping Duties held that an IA must indicate to the parties concerned the type of information that is necessary to ensure fair comparison, and it must not impose an unreasonable burden of proof on the interested party (§ 7.239).40 The Panel on Egypt–Steel Rebar, without undermining the obligations of IAs as discussed earlier, held that the process of determining what types of adjustments need to be made for a fair comparison to take place is something of a dialogue between interested parties and the IA. This panel also seemed to accept that an IA may be required to make adjustments even when not explicitly requested or identified by the interested parties, in case it is demonstrated “by the data itself” that a given difference affects price comparability (§ 7.352). This seems to be the correct approach in light of the overall obligation imposed on IAs to conduct their investigation in a fair and unbiased manner. 2.3.6.1 Prices Must Be at the Same Level of Trade The rationale for this requirement is obvious since, in the opposite scenario (that is, if a comparison took place between incomparable prices), the dumping margin could be artificially much higher than what it actually is. This would be the case if, for example, an IA were to compare prices at the wholesale level in the exporter’s market with retail prices in the importing market.

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Usually, fair comparison at the same level of trade entails a comparison of prices at the ex-factory level. This practice is also known as “netting back,” and it amounts to establishing an ex-factory NV, and an ex-factory (e.g., price declared at the customs of importation) EP. This does not mean that an IA cannot compare NV and EP at the wholesale or the retail level. What matters is that both prices are at the same level of trade. 2.3.6.2 Due Allowances Can Be Made Article 2.4 of AD provides an indicative list of due allowances that can legitimately be made once prices have been brought to the same level of trade: Due allowance shall be made in each case, on its merits, for differences which affect price comparability, including differences in conditions and terms of sale, taxation, levels of trade, quantities, physical characteristics, and any other differences which are also demonstrated to affect price comparability. In the cases referred to in paragraph 3, allowances for costs, including duties and taxes, incurred between importation and resale, and for profits accruing, should also be made. If in these cases price comparability has been affected, the authorities shall establish the normal value at a level of trade equivalent to the level of trade of the constructed export price, or shall make due allowance as warranted under this paragraph. The authorities shall indicate to the parties in question what information is necessary to ensure a fair comparison and shall not impose an unreasonable burden of proof on those parties.

It follows that the indicative list included in this provision contains both factors “exogenous” to the allegedly dumping economic operator (e.g., taxation) and factors controlled by it, such as quantity discounts or differences between the quality of the exported product and that of the product sold domestically. It also makes sense that both can affect price comparability and can appropriately form the subject matter of due allowances. An IA cannot limit itself to a review of the factors included in the indicative list. Article 2.4 of AD requires that due allowances be made for any “other” (e.g., other than the statutory factors affecting price comparability) difference that affects price comparability. The Panel on EC–Tube or Pipe Fittings, for example, accepted that due allowance could be made for “packaging expenses,” an item not explicitly mentioned in Article 2.4 of AD (§ 7.184). It is, of course, difficult to draw up an exhaustive list of factors that affect price comparability.41 In line with the overall standard of review applied by WTO panels, it might be reasonable to suggest that IAs, at any rate, must take into account the factors mentioned in Article 2.4 of AD, as well as any other factor affecting price comparability brought to their attention. WTO panels have, in general, avoided extending the scope of review of IAs any further, by requesting from them, for example, to actively search for factors not submitted to them by the interested parties. They must entertain requests for adjustment though. This solution has been privileged by the AB in EC–Fasteners, which confirmed that, whereas IAs might be unduly burdened if they were to assess differences in every case irrespective of a request to this effect, they should anyway review the need for adjustment, whenever a request has

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been submitted by an interested party (§§ 517–519). Accordingly, the Panel on HP-SSST found that China had violated its obligations under Article 2.4 AD by refusing to entertain a request for adjustment that had been tabled by an investigated company (§ 7.86). The method to use when making due allowances is not prejudged in the AD Agreement.42 The Panel on EC–Tube or Pipe Fittings dealt with a claim by Brazil to the effect that the EU had denied a request to make due allowances for differences in indirect taxation because of the methodology it had privileged to address this issue. The panel rejected Brazil’s argument. In its view, the AD Agreement did not specify a particular manner in which differences in indirect taxation should be accounted for. As a result, any methodology used, to the extent “reasonable,” should be considered WTO-consistent (§ 7.178). In EC–Tube or Pipe Fittings, the parties did not agree on the nature of the evidence that should be submitted in support of a claim for adjustment, nor whether it was the IA or the exporter that bore the burden of identifying and substantiating the claimed adjustment. According to the panel, at the end of the day it was for the IA, based on input from exporters and the domestic industry, to decide whether due allowances were in order, and abide by the disciplines of Article 2.4 of AD (§ 7.158).43 This implies that for those differences that have been identified as requiring adjustment, it is incumbent upon the IA to evaluate them and decide whether adjustment is indeed required.44 The Panel on US–Stainless Steel (Mexico) clarified that only differences that the exporter could reasonably have anticipated and could have taken into account in the price determination may be subject to adjustments (§ 6.77). 2.3.6.3 Statutory Methodologies to Decide on the Dumping Margin Assuming that prices have been brought to the same level of trade, and due allowances have been made as well, then the IA will be ready to perform the final task: comparing the prices established in order to define the dumping margin. The AD Agreement includes the methods that IAs must use when calculating dumping margins (Article 2.4.2 of AD): ... the existence of margins of dumping ... shall normally be established on the basis of a comparison of a weighted average normal value with a weighted average of prices of all comparable export transactions or by a comparison of normal value and export prices on a transaction-to-transaction basis. (italics added)

Weighted average to weighted average (WA-WA), and transaction-to-transaction (T-T) are, thus, the two normal methods mentioned in the agreement. There is a third method as well, an exceptional one that we will discuss later. The AB on EC–Tube or Pipe Fittings, made it clear that the two methods (WA-WA, T-T) are offered as alternatives, and WTO members are free to choose one or the other.45 Note that the AD Agreement (Article 2.4.2) states that, when using the WA-WA methodology, the WA NV should be compared to a WA of prices of all “comparable export transactions,” not of “all sales.”46

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The T-T methodology does not necessarily involve an evaluation of all sales occurring during the investigation period, since, for example, there could be a discrepancy in the number of sales in the home market, in the export market, or both. It could also be that a number of transactions occur in the domestic market at a given point in time, while only a few exports occur. In similar instances, IAs will have to exercise judgment. Their discretion is, of course, justiciable. If, for example, a domestic transaction that occurred, say, in January is compared not an export transaction that occurred the same day, but to an export transaction that occurred months later, a panel might legitimately inquire into the reason for this action. We stated previously that the two methods are equivalent in the eyes of the legislator. Still, the choice of method might affect the outcome. Assume four domestic transactions taking place on 1 January for $80, 1 March for $100, 1 June for $120, and 1 November for $100. The volume is similar each time. The WA NV is $100. Assume further that three export transactions take place on 2 January, 2 June, and 2 July. All are of equal volume and are worth $100 each. So on a WA-WA basis, there is no dumping. Using a T-T methodology, an export transaction on 2 January for $100 will be compared to a domestic transaction on 1 January for $80. There is no dumping margin, since the EP is higher than the NV. The export transaction on 2 June will be compared with the 1 June domestic transaction for $120, resulting in a dumping margin of $20. And the export transaction on 2 July will also be compared with a domestic transaction on 1 June since this is the closest in terms of time, again finding a dumping margin of $20. On average, using this methodology, a positive dumping margin of $20 will have been established. The reverse could also be the case, of course. We stated previously that T-T, and WA-WA are the two normal methodologies. A third, exceptional methodology is provided in Article 2.4.2 of AD. In specific circumstances, a comparison between a WA NV and prices of specific export transactions is allowed: A normal value established on a weighted average basis may be compared to prices of individual export transactions if the authorities find a pattern of export prices which will differ significantly among different purchasers, regions or time periods, and if an explanation is provided as to why such differences cannot be taken into account appropriately by the use of a weighted average–to– weighted average or transaction-to-transaction comparison.

This provision aims to counteract “targeted dumping.” If an exporter dumps substantial volumes of exports during, say, only one month in a year, and does not dump the rest of the year, then an IA can, for the calculation of dumping margins, legitimately take into account EPs as reflected in the transactions during this month.47 The AB on EC–Bed Linen recognized as much (§ 62).48 This provision was largely an exception in practice as well, until the US started using it more often as a result of the condemnation of “zeroing,” a methodology for comparing NV to EP that we discuss immediately hereafter.

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2.3.6.4 Zeroing: Dead and Loving It “Zeroing” is not a statutory methodology for comparing NV to EP. Zeroing is not reflected in the AD Agreement. It is a matter of practice. Some WTO members started zeroing positive dumping margins when calculating the amount of dumping.49 Now what exactly does this practice amount to? When an IA practicing zeroing faces a situation where the EP exceeds the NV (negative dumping margin), it will disregard the transaction altogether. It will consider that exports are not dumped, and a fictitious margin of “zero” dumping will be attributed. The justification for this approach is that similar transactions are not dumped, and hence the AD Agreement does not care about them since the subject matter of this agreement is dumping, not nondumping. So the argument that IAs practicing zeroing have advanced to justify it is that, since the purpose of the AD Agreement is to counteract dumping, nondumped imports can conveniently be disregarded. Transactions where no dumping margin exists are not “comparable export transactions,” and, for this reason, they do not have to be taken into account at all, as per the wording of the AD Agreement discussed earlier (i.e., Article 2.4.2 of AD). Defenders of zeroing, in other words, have argued that they see nothing wrong about this practice since the whole idea of antidumping is to counteract dumping. This is what zeroing allows them to do by focusing on dumped imports and disregarding totally nondumped imports. Consequently, not all transactions occurring during the investigation period50 are taken into account when establishing the dumping margin. All transactions occurring during this period are investigated—that much is certain. Nevertheless, only those transactions yielding a dumping margin are retained in order to calculate the dumping margin. As a result, assuming that there are other transactions that yield dumping margins, the overall dumping margin will be inflated, since negative dumping margins are not able to moderate the outcome of the calculation of the overall dumping margin during the investigation period. The practice of zeroing, thus, has flourished. It has been used whenever recourse to calculating the dumping margin is being taken at different stages of the investigation—e.g., “original investigations” (Article 5.3 of AD), “administrative reviews” (Article 9.3.1 of AD), “sunset reviews” (Article 11.3 of AD), “interim” or “changed circumstances reviews” (Article 11.2 of AD), and “new shipper reviews” (Article 9.5 of AD). There have been dozens of disputes on zeroing, and the ensuing case law is made of diverging panel reports, dissenting opinions,51 a panel overturning itself,52 and the AB changing its reasoning to deal with the issue on several occasions. There are even two panel reports that openly disagreed with the AB and refused to follow its reasoning.53 This is a very rare occurrence in WTO practice, where panels almost always follow the AB reasoning. And the AB reports notwithstanding, disputes continue to arise regarding the consistency of zeroing with the AD Agreement, as the recent China–Autos (US) evidences.54

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It is clear that the AD Agreement does not contain an express prohibition of or permission for zeroing. In fact, the term “zeroing” is not even mentioned in the AD Agreement. Panels and the AB have used different legal bases to outlaw zeroing: Article 2.1 of AD, which defines dumping margins; Article 2.4.2 of AD, which deals with the methods for comparing NV and EP in order to establish a margin of dumping; and the general requirement of Article 2.4 of AD to conduct a fair comparison between NV and EP. The AB held time and again that Article 2.1 of AD is where the negotiating partners in the Uruguay round agreed to anchor the prohibition of zeroing. This provision, however, echoes verbatim the corresponding provision in the Tokyo-round AD Agreement, when many IAs were practicing zeroing.55 The Tokyo round AD Agreement did not condemn zeroing. The second ground (Article 2.4.2 of AD) is closely linked to the third (Article 2.4 of AD), and it is probably the most appropriate basis on which to condemn zeroing, for the reasons developed in Prusa and Vermulst (2009). The idea is that the finding of a dumping margin is predicated on an investigation of prices that occur during a certain period. Trends, thus, matter. Trends are particularly important for injury purposes as well, since it is highly unlikely that an industry will go out of business because of momentary troubles. Since trends matter, then both positive and negative dumping margins should be taken into account when properly defining the dumping margin. The term “comparable export transactions” should thus be read as export transactions that occur at a comparable point in time or are of comparable volume to domestic transactions, the comparator for defining the dumping margin. Furthermore, there is an insurance policy against “targeted dumping,” the third exceptional method discussed earlier. Opening the door to zeroing would defeat the requirement for fair comparison between prices during an investigation period by allowing the IA to cherry-pick only those prices that suit the dumping scenario.56 It seemed that the discussion on zeroing (both on the academic and the WTO fronts) is now moot since the AB has hermetically shut the door to similar practices under any circumstances.57 And yet it now seems like a pyrrhic victory for those fighting zeroing, since the US has in practice multiplied the use of the exceptional methodology (aimed at addressing targeted dumping only).58 The consistency of this practice across the board with the AD Agreement has yet to be tested.59 The question here would be whether the conditions for recourse to the exceptional methodology have been respected.60 2.3.7

Calculating the Amount of Dumping Margin

2.3.7.1 Dumping Margin Must Not Exceed the Statutory De Minimis Level We have already mentioned that an IA must demonstrate that the dumping margin exceeds the statutory de minimis level of 2 percent (Article 5.8 of AD). This means that if, as a result of the comparison that should be conducted as discussed previously, the dumping

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margin is below 2 percent (or, of course, if there is no dumping margin at all), no AD duties can be lawfully imposed. 2.3.7.2 Calculating Duties for Individual Exporters Article 6.10 of AD reads: “The authorities shall, as a rule, determine an individual margin of dumping for each known exporter or producer concerned of the product under investigation.” There are exceptions to the obligation to calculate individual dumping margins: (a) “Sampling” of exporters; (b) “New shipments”; (c) “Unknown exporters”; and, finally the case of (d) “Single entity.” We turn to a discussion of these terms in what immediately follows. Before we do, though, we should deal with a point of controversy regarding the number of exceptions to the obligations to calculate individual dumping margins. In EC–Fasteners (China), the panel had held that sampling is the only exception to this obligation, a finding that the AB subsequently overturned. China had complained about the imposition by the EU of AD duties on various classes of fasteners. One of the claims concerned the issue of whether sampling was the only permissible deviation from the obligation to calculate individual dumping margins or not. NME exporters interested in avoiding a constructed price (or application of a third-country price) would have to meet the market economy test (MET) established by the EU Basic AD Regulation. Failure to do so would lead the EU authorities to impose a dumping margin calculated on third-country sales on all of them except for those who had applied for individual treatment (IT) in accordance with the conditions included in the IT test (which was an integral part of the EU Basic AD Regulation). The EU, thus, would not calculate individual dumping margins for all exporters who had not managed to reverse the statutory presumption by raising a MET defense. The panel held that indeed sampling was the only permissible deviation from the obligation to calculate individual dumping margins, and, on this basis, found that the EU law was in violation of the AD Agreement (§ 7.90). The AB disagreed, adding that there are other cases where departures are permitted, noting that they had all been reflected in the covered agreements (§§ 328–329). The AB offered examples of this sort: unknown exporters do not benefit from the calculation of individual dumping margin (§ 324); new shippers can only benefit from calculation of individual dumping if they make a request to this effect, otherwise no individual margin will be calculated for them (§ 326). The AB finally, held that (§ 364) unless the EU had used sampling or any other statutory exception, it could not have legitimately deviated from the rule established in Article 6.10 of AD to

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calculate individual dumping margins for each exporter.61 Violation of this rule would lead to violation of Article 9.2 of AD as well—that is, of the obligation to collect the appropriate amount of duty (§ 339). It follows that the statutory exceptions exhaust the possibilities for deviating from the obligation to calculate individual dumping margins. 2.3.7.3 Sampling Exporters The practice of sampling is explicitly provided for in Article 6.10 of AD. Assuming a large number of exporters, an IA may legitimately restrict its investigation to only a few companies (i.e., a “sample”). It will then determine an individual dumping margin for each of the sampled companies. Nonsampled exporters will be burdened, by virtue of Article 9.4 of AD, by a duty corresponding to the WA of the dumping margins of the sampled exporters. Whenever recourse is made to sampling, the IA can either limit the examination to the largest percentage of exporters that can reasonably be investigated, or investigate a statistically valid sample (Article 6.10 of AD). The two alternatives are, from a purely legal perspective, substitutes. Recourse to econometrics seems warranted in order to define what a “statistically valid sample” is. It must thus be shown that the properties of the sampled investigated operators are the same as those of the whole. If this proves to be the case, then one can safely argue that the dumping margins established will more or less reflect those of the nonsampled exporters. The Panel on EC–Salmon (Norway) held that the term “statistically valid sample” refers only to a sample of known exporters without any further specification (§ 7.162). The term “known exporter” has been interpreted by the AB as referring to all exporters that have been identified in the petition, as well as those that have voluntarily appeared before the IA (Mexico–Antidumping Measures on Rice). There is, of course, no guarantee that those investigated will be representative when recourse to the other possibility is taken, that is, when the number of exporters is reduced to whatever can be reasonably investigated. This is so, because in this case administrative capacity matters, and nothing else. Moreover, an IA might be tempted to pick outliers (i.e., nonrepresentative cases). Consequently, this method leaves more discretion to an IA since it does not exclude the possibility that a statistically nonvalid sample has been chosen.62 In principle, thus, the choice between the two sampling methods could lead to divergent results. In EU–Footwear (China), the consistency of the EU criteria for sampling with Article 6.10 of AD was challenged. The EU had sampled those with the largest volume of sales in both the domestic and the export markets. The panel found that the EU approach was consistent with Article 6.10 of AD, applying, for all practical purposes, a “reasonableness” standard in this case (§§ 7.221ff). WTO members must select the sampled exporters, preferably in consultations with them and with their consent. There is, nevertheless, no obligation for IAs to proceed this way (Article 6.10.1 of AD). Nonsampled exporters could request to be individually investigated

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(Article 6.10.2 of AD). They might have a strong incentive to do so if they fear that the WA of the calculated individual duties will be high. For reasons of administrative capacity, the IA concerned might legitimately refuse to concede to similar requests. 2.3.7.4 New Shipments Duties are imposed against all exports originating in a country where dumping occurs, even to exporters who started producing and shipping like products subsequent to the termination of the investigation (“new shippers”). No individual dumping margins can be calculated for “new shippers,” of course, and they will be burdened with the WA of duties calculated for individual exporters. Article 9.5 of AD allows an expeditious procedure to take place, upon request, in order to calculate individual dumping margins for them. We will discuss this issue later in this chapter. 2.3.7.5 Unknown Exporters This exception comes from practice, as the AD Agreement does not make specific provision for it. “Unknown exporters” are distinguished from “new shippers” in that they managed to escape the original investigation even though they were producing and exporting goods when the investigation took place. “Unknown exporters” have never been sampled, nor do they belong to the producers that qualified as nonsampled. Practice reveals that they pay duties without having their dumping margins individually calculated. We discuss later in this chapter the level of duties imposed in these instances. 2.3.7.6 Single Entity/Collapsing This exception to the obligation to calculate individual dumping margins was added by case law. In Korea–Certain Paper, the panel held that an IA can legitimately calculate the same margin for a group of companies that together constitute one economic entity, a “single entity” being the term explicitly used. In this case, the Korean IA “collapsed” the calculation of dumping margins of various companies, which were somehow interlinked into one, arguing that it was the same entity that controlled all of them. Korea had calculated a single margin of dumping for three legally independent Indonesian companies, which it considered to constitute one entity for the purposes of its AD investigation. It collapsed three margins into one. Collapsing, it was argued, was intended to ensure the efficiency of the AD measure. The fear of the Korean IA was that, if separate companies are closely linked, they may be able to start selling through the company for which the lowest duty had been calculated. The panel held that Article 6.10 of AD does not necessarily preclude treating distinct entities as a single exporter, adding that (§ 7.161) “in order to properly treat multiple companies as a single exporter or producer in the context of its dumping determinations in an investigation, the IA has to determine that these companies are in a relationship close enough to support that treatment.”

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In other words, according to the panel (§ 7.162), collapsing would be permissible only when the “structural and commercial relationship between the companies in question is sufficiently close to be considered as a single exporter or producer.” In the case before it, the panel accepted Korea’s decision in light of the following factors: (i) the commonality of management and shareholding; (ii) the use of the same trading company by all three exporters; and (iii) the existence of cross-sales of the subject product among the three companies, which evidenced (§ 7.168) “the ability and willingness of the three companies to shift products among themselves.”63 In EC–Fasteners (China), the AB endorsed this view, and it further explained in § 376 that the situations envisaged by the Panel on Korea–Certain Paper may include either or both of the following: • The existence of corporate and structural links between the exporters, such as common control, shareholding and management • Control or material influence by the state in respect of pricing and output And later, it noted (§ 381): ... an investigating authority might have to take into account factors and positive evidence other than those establishing a corporate or commercial relationship in assessing whether the State and a number of exporters are a single entity and that, therefore, the State is the source of price discrimination. These, for instance, may include evidence of State control or instruction of, or material influence on, the behaviour of certain exporters in respect of pricing and output. These criteria could show that in the absence of formal structural links between the State and specific exporters, the State in fact determines and materially influences prices and output.

So, an inquiry into control or influence is not necessary when corporate and structural links between exporters exist. The terms “control” and “influence,” on the other hand, are quite open-ended. To the extent that one can show that prices and output have been influenced by the state, these criteria will have been ipso facto satisfied. This test leaves, of course, a lot of discretion to WTO panels. It seems that, in this respect, the AB has opened wide the front door, and not a back window, to deviations from the obligation to calculate individual dumping margins. 2.3.8

Calculating Dumping Margins for NMEs

IAs can, but do not have to, calculate dumping margins when investigating companies originating in an NME, as has already been discussed in this chapter. Because prices in NMEs are considered untrustworthy, IAs can discard them and use “fictitious” prices instead. Their discretion to do so is not unlimited, nevertheless, as described in what follows. Prices practiced by NMEs are considered untrustworthy, because they are not reflective of scarcity.

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2.3.8.1 Defining NMEs NMEs are defined in the Interpretative Note of Article VI of GATT as “a country which has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the state.” This definition leaves a lot to be desired. The term “and” should lead to the conclusion that NMEs must satisfy both conditions; e.g., a “complete or substantially complete monopoly of trade” should be in place, and all domestic prices should be fixed by the state. 2.3.8.2 The Rationale for Including Separate Calculation for NMEs Czechoslovakia explained in the 1954–1955 Review Session why there was a need to introduce alternatives to market prices for establishing NV: ... difficulties caused by the application of certain standards relating to the definition of normal value ... are due to the fact that no comparison of export prices with prices in the domestic market of the exporting country is possible when such domestic prices are not established as a result of fair competition in that market but are fixed by the State.64

2.3.8.3 Third-Country Sales, Constructed Prices The Interpretative Note of Article VI of GATT allows WTO members to deviate from the obligations reflected in Article VI of GATT when addressing dumping by companies originating in NMEs. However, it does not explain the exact methodology that they should follow in similar cases: It is recognized that, in the case of imports from a country which has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State, special difficulties may exist in determining price comparability for the purposes of paragraph 1, and in such cases importing contracting parties may find it necessary to take into account the possibility that a strict comparison with domestic prices in such a country may not always be appropriate.

In practice, an IA will either use data from third-country producers or construct the NV. In EU–Footwear (China), the panel faced a claim by China that, by choosing Brazil as a surrogate country for China, the EU had violated its obligations under the AD Agreement. The panel discarded the claim, underlining the wide, in principle, discretion that IAs have when choosing surrogate countries for NMEs (§§ 7.253ff).65 2.3.8.4 The Case of China Not surprisingly, the NME status of China was an important issue in the process of Chinese accession to the WTO. The Chinese Protocol of Accession discusses this issue in considerable detail. WTO members can use Chinese prices or not. Chinese producers under investigation can, when facing “diffident” IAs, request the use of actual prices if they can “clearly show that market economy conditions prevail in the industry producing the like product with regard to the manufacture, production, and sale of that product.”66

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Upon demonstration of the abovementioned condition, the importing WTO member is obliged to use Chinese prices. This is not an easy test to meet by any reasonable benchmark. It should not come as a surprise, therefore, that China has been routinely treated as an NME in AD practice. In the opposite case—that is, if the exporter manages to demonstrate that market conditions prevail in the industry producing the like product (quite an unrealistic prospect under the circumstances, one is tempted to add)—a different methodology may be used, but the WTO Antidumping Committee must be notified thereof. China’s Accession Protocol does not set forth which methodology is to be used, but the final report of the Working Party on China’s Accession67 provides some clarification in this respect. The IA shall normally utilize (to the extent possible, and assuming cooperation) the prices or costs in one or more market-economy countries that are significant producers of comparable merchandise and that are either at a level of economic development comparable to that of China, or are otherwise an appropriate source for prices or costs to be utilized in light of the nature of the industry under investigation. This leaves IAs with substantial discretion.68 The NME status of China will expire no later than fifteen years after accession (that is, by 2016).69 Recall, nevertheless, that Chinese producers might still not benefit from the calculation of individual dumping margins even after 2016, if an IA shows that the state exercises influence in its pricing policy. This is the logical consequence of the AB findings in EC–Fasteners (China), discussed earlier. This exception from the obligation to calculate individual dumping margins does not expire in 2016. 2.4

Injury Analysis

IAs must demonstrate that dumping has caused injury, otherwise, no AD duties can be lawfully imposed. In this vein, an IA has to demonstrate that the domestic industry producing the like product has been injured (Articles 3.2 and 3.4 of AD) as a result of dumped imports (Article 3.5 of AD). The term “injury” refers to a situation of current “material” injury, “threat of injury,” “material retardation,” or any combination in the establishment of an industry.70 Recall that the standard embedded in the AD Agreement is an injury-to-competitors standard. The AD Agreement does not condition the initiation of injury analysis on a prior finding of dumping. In practice, the two legs of the analysis (that is, the investigation of dumping margins and of injury) often take place in parallel.71 2.4.1

Injury Must Be “Material”

The title of Article 3 of AD is “determination of injury,” and a footnote reads:

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Under this Agreement, the term “injury” shall, unless otherwise specified, be taken to mean material injury to a domestic industry, threat of material injury to a domestic industry or material retardation of the establishment of such an industry and shall be interpreted in accordance with the provisions of this Article.

According to Article 3.1 of AD, an IA, in order to establish that injury has been caused by dumped imports, must examine the volume of dumped imports (Articles 3.2 and 3.3), the price effects of dumped imports (Articles 3.2 and 3.3), and the impact of these phenomena on the health of the domestic industry (Article 3.4). We will be discussing all these requirements in detail in what follows. We should also note that, beyond substantive requirements, there are procedural requirements that an IA must also satisfy on its way to showing injury. It must undertake “objective examination” of the effects of dumped imports on prices and producers of the like product, and must further provide “positive evidence” that injury has indeed occurred as a result of dumping (Article 3.1 of AD).72 The AB on US–Hot-Rolled Steel explained that the term “objective examination” relates to the way in which evidence has been gathered and requires an IA to conduct the process without favoring the interests of any interested party in the investigation (§ 193). Injury is usefully distinguished into “quantity effects” (e.g., what is the volume of dumped imports?) and “price effects” (e.g., by how much has the price of the competing domestic good been reduced as a result of dumped imports?). Quantity effects refer to displacing or impeding exports, increase in market share. By price effects, we mean the undercutting, suppression, and depression of price. We will be discussing the terminological differences between the terms in the next sections. We note for now that quantity effects will be observed regardless of whether it is a large or a small company doing the dumping since, other things equal, dumping might lead to a displacement of sales by the domestic industry. Price effects will be observed only when large companies dump—that is, companies that because of their (combined) size can affect terms of trade.73 2.4.1.1 Quantity Effects Article 3.2 of AD requires an IA to consider whether there has been a “significant” increase in dumped imports, either in absolute terms or relative to production or consumption in the importing member. The Panel on Thailand—H-Beams took the view that Article 3.2 of AD required an IA to consider whether there had been a significant increase, but it did not require it to make an explicit finding that increases of dumped imports were significant (§ 7.161). The AB on EC–Tube or Pipe Fittings clarified this finding even further when stating that injury can exist even if the increase in significant imports has not been significant (footnote 114). IAs must therefore consider whether dumped imports have been significant, but an overall finding of injury is not conditioned on a prior affirmative finding to the effect that the increase of dumped imports has been significant. In the joint reports China-HP-SSST (EU), and China-HP-SSST (Japan), the AB underscored that that the analysis under this provision was relevant for the analysis under Article 3.4 of AD, where, as we will see later, injury factors are examined one by one. It further

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held that this analysis is relevant for establishing causality between dumping and injury as well, §§ 5.205–212. Although demonstrating increased dumped imports is not a necessary condition for demonstrating injury, the volume of dumped imports must anyway be above a statutory de minimis level; otherwise, the injury analysis is flawed. If imports originate in one country, they must represent at least 3 percent of total imports, and if in more than one market, they must cumulatively represent at least 7 percent (Article 5.8 of AD). An IA cannot cherry-pick among imports, as per the AB report on EC–Bed Linen (Article 21.5–India): if a producer or exporter is found to be dumping, all imports from that producer or exporter may be included in the volume of dumped imports, but, if a producer or exporter is found not to be dumping, all imports from that producer or exporter must be excluded from the volume of dumped imports. (§ 115)

In this case, the AB dealt with injury analysis in a sampling scenario. The EU had sampled Indian exporters, and, of the five sampled exporters, three were found to be dumping. The EU did not impose duties on the two exporters found not to be dumping, but it did impose the WA of the duties imposed on the three dumpers on the nonsampled Indian exporters. India protested, noting that during the investigation of Indian exporters of bed linen, 53 percent of imports in the EU market (the volume represented by the two nondumping Indian exporters) had been found not to be dumping. The AB did not explicitly state how to determine the volume of dumped imports in the case of a sample, but it did indicate that it was difficult to perceive of any other way than to do this on the basis of some extrapolation of the evidence relating to the investigated producers/exporters (§ 137).74 Finally, the existence of a lawful quota does not provide arguments to support the idea that no injury through dumped imports can exist on similar occasions, even if dumped imports are in-quota. The GATT panel on EEC–Cotton Yarn dealt with the following argument: the EU could not have suffered injury because the products concerned were in-quota products since the Multifiber Arrangement (MFA) was still in force at the time of the dispute. The MFA, discussed in chapter, established a system of quotas between importing and exporting countries. The panel dismissed this argument, stating that a quota system does not amount to “carte blanche” to dump (§§ 532–544). 2.4.1.2 Price Effects An IA must inquire whether, as a result of increased dumped imports, “price undercutting,” “price suppression,” or “price depression” has occurred. Article 3.2 of AD makes it clear that IAs should inquire whether dumped imports have resulted in one (or more) of the three price effects, which appear in the SCM Agreement as well. “Dumped imports” are of course defined in the first sentence of Article 3.2 of AD, where it is made clear that IAs must consider whether there has been a significant increase either in absolute or in relative terms. Once the significant increase has been established, IAs must examine whether price effects have resulted as well. IAs cannot presume that this is the case always.

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They must establish that this has indeed been the case on the basis of an objective examination that they have conducted to this effect. The Panel on China–GOES (Article 21.5– US) established as much (§ 7.50). The duty to conduct an objective examination had been confirmed by the Panel on China–HP-SSST (EU), and China–HP-SSST (Japan), which had established that Article 3.2 of AD must be read together with Article 3.1 of AD. In its view, the duty to perform “objective examination” obliged an IA to assess whether, the risk that prices are distorted, resulted from the fact that there were significant differences between the volumes of products the prices of which were being compared. Differences in volumes can of course, affect the level of prices, but an IA must establish whether this has been the case and not simply assume that it is so (§ 7.114). In similar vein, the Panel on China–GOES (Article 21.5–US) held that China had violated its obligations under Article 3.2 of AD by not properly examining the effect of nonsubject imports to the prices charged by the domestic industry. The Chinese IA, MOFCOM (Ministry of Commerce), had established that during the investigation period dumped imports (e.g., subject imports) had increased their share of the Chinese market by 5.65 percent. At the same time the domestic industry producing the like product had decreased its market share by 5.56 percent. The remaining market share went to nondumped imports (e.g., nonsubject imports). The data provided by MOFCOM itself regarding the corresponding numbers and the effect of nonsubject imports nonetheless, cast doubt on the overall conclusion by MOFCOM, and plainly contradicted some of the findings reached, and the panel found that China had violated its obligations under Article 3.2 of AD (§§ 7.42ff., and especially 7.54–7.58). The same report established that the AD Agreement (like the SCM Agreement in Article 15.2, the corresponding provision to Article 3.2 of AD) did not establish a particular methodology that should be followed when examining price effects (§ 7.41). As a result, IAs had some discretion to devise their own methodology. No matter what their choice, however, they should always abide by the obligation to perform objective examination, which entails the duty to examine the impact of factors other than dumped imports on prices charged by the domestic industry (§ 7.42). As we will be making clear in this chapter, it is for the parties to the dispute to submit factors that might influence prices. The inquiry into price effects seems, prima facie at least, to inherently carry an inquiry into causality as well: price suppression, for example, should not be understood in a contextual manner, but as a consequence of dumping. This impression is wrong. It is, of course, Article 3.5 of AD that includes the requirement to show a causal relation between dumping and injury. Articles 3.2 and 3.5 of AD are not perfect substitutes. A finding that price undercutting is the outcome of dumped imports under Article 3.2 of AD does not absolve an IA from the obligation to check the injury factors mentioned in Article 3.4 of AD and to perform a causality analysis under Article 3.5 of AD. It is the totality of the evidence under the three provisions (Articles 3.2, 3.4, and 3.5 of AD) that will enable an IA to make an informed judgment about whether the health of the domestic industry has

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suffered as a result of dumped imports. The same approach is pertinent for analysis under the SCM Agreement. Having stated that, we also note that the Panel on HP–SSST saw a difference in the nature of review of the three different price effects. Whereas for the purposes of price undercutting a mere price comparison suffices, an inquiry into the effects of price depression and suppression on imports was warranted (§ 7.124). This inquiry does not amount to an examination of causality as stated above, but it is a more elaborate process than a mere price comparison. With this in mind, we turn to the definition of the three price effects, which are not defined in the AD Agreement but have been interpreted in the WTO jurisprudence. Price Undercutting Price undercutting refers to a situation where imported products are priced below domestic products. Price undercutting must be substantial. A 20 percent differential was judged substantial in EC–Tube or Pipe Fittings (§ 7.268ff).75 In the joint reports China–HP-SSST (EU), and China–HP-SSST (Japan), the AB held that price undercutting might but does not have to lead to price suppression/depression. What mattered was that trends as opposed to isolated cases were examined. The latter provide no basis for finding of undercutting, §§ 5.156–181. Price Suppression/Depression In US–Upland Cotton,76 the AB dealt with the interpretation of these two terms (§§ 423–424): In explaining this term, the Panel stated, in paragraph 7.1277 of the Panel Report: Thus, “price suppression” refers to the situation where “prices’—in terms of the “amount of money set for sale of upland cotton” or the “value or worth” of upland cotton—either are prevented or inhibited from rising (i.e., they do not increase when they otherwise would have) or they do actually increase, but the increase is less than it otherwise would have been. Price depression refers to the situation where “prices” are pressed down, or reduced. Although the Panel first identified “price suppression” and “price depression” as two separate concepts in paragraph 7.1277, footnote 1388 of the Panel Report suggests that, for its analysis, the Panel used the term “price suppression” to refer to both price suppression and price depression. We recognize that “the situation where “prices” ... are prevented or inhibited from rising” and “the situation where “prices” are pressed down, or reduced” may overlap. Nevertheless, it would have been preferable, in our view, for the Panel to avoid using the term “price suppression” as short-hand for both price suppression and price depression, given that Article 6.3(c) of the SCM Agreement refers to “price suppression” and “price depression” as distinct concepts. We agree, however, that the Panel’s description of “price suppression” in paragraph 7.1277 of the Panel Report reflects the ordinary meaning of that term, particularly when read in conjunction with the French and Spanish versions of Article 6.3(c), as required by Article 33(3) of the Vienna Convention on the Law of Treaties (the Vienna Convention). (italics in the original)

It follows that “depression” refers to cases where prices of domestic industry articles are reduced, whereas “suppression” refers to cases where prices are prevented from going up, always as a result of dumped imports.

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In all scenarios (undercutting, suppression, and depression), an IA must first control if two products are comparable. Otherwise (that is, if the products concerned do not compete with each other, or even if they are not in the same level of trade), Article 3.2 of AD has not been violated. The AB ruled as much in China–GOES (§ 200). In China–X Ray Equipment, the panel applied this ruling (§ 7.48) and found that because high- and low-energy scanners had different physical characteristics, the observed price undercutting for the latter category could not be attributed to dumped imports of the former category (§§ 7.50–85). 2.4.2

Injury to Competitors

Dumped imports must be injuring the domestic industry producing the like product. Article 4.1 of AD defines the “industry producing the like product” as follows: For the purposes of this Agreement, the term “domestic industry” shall be interpreted as referring to the domestic producers as a whole of the like products or to those of them whose collective output of the products constitutes a major proportion of the total domestic production of those products.77

The terms “like product” and “major proportion” emerge as the key determinants of the domestic industry. 2.4.2.1 Like Product The term “like product” is defined in Article 2.6 of AD as follows: Throughout this Agreement, the term “like product” (“produit similaire”) shall be interpreted to mean a product which is identical, i.e., alike in all respects to the product under consideration, or in the absence of such a product, another product which, although not alike in all respects, has characteristics closely resembling those of the product under consideration.78

It is, of course, not easy to find a product “alike in all respects.” The phrase “characteristics closely resembling” leaves the entity in charge of the investigation with some discretion in defining the like product. The choice to go for “narrow” or “wide” understanding of the term is not obvious. Defining “like products” in a narrow sense could lead the subject country or countries to perform slight changes in product specifications, and thus avoid the AD order in place. There is, thus, risk for circumvention in this scenario. On the other hand, expanding the product definition in an effort to avoid circumvention might lead to fewer findings of injury, since the effect of dumped imports would be diluted in dozens of economic operators.79 In practice, it is usually narrow definitions that IAs typically privilege. Indeed, the careful reader of titles of AD investigations around the world will be struck by titles such as steel tubes or pipes of a certain length or diameter, as opposed to steel tubes. Sometimes similar narrow constructions are functional, in the sense that say only steel pipes of a certain diameter only can have a particular industrial use. Sometimes this is not the case. What matters, though, is that the criterion employed to define likeness (“characteristics closely resembling”) allows for similar constructions.

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Think of the following. It could be that domestic industry produces two goods (say the Fiat Cinquecento and the Opel, which are comparable in all respects), as does the exporter, and still the petition requests that an AD investigation be initiated in order to eventually impose duties against the former only (even if we assume that the domestic industry is profitable in the other market). Indeed, two panels had to deal with this question, and although the panelists on both occasions showed some sympathy for the claim that the products under investigation had been defined in unduly restrictive manner, none of them questioned the IA’s discretion on this score.80 Consequently, whereas the Panel in China–X Ray Equipment put a stop to overly large constructions of the term “like product” as we saw above, case law has put no stop to overly narrow constructions of the same term. In a case involving claims that certain practices constituted illegal subsidies, the AB followed a different attitude when discussing like products. In EC and Certain Member States–Large Civil Aircraft, the AB went on to state that both demand- and supply-substitutability are relevant when establishing whether two goods are like (§ 1121). This is the notorious litigation between the EU and the US concerning subsidies paid to Airbus and Boeing respectively. In light of this case law, and because of the fact that the “like product” definition is identical in the AD and the SCM contexts, one cannot dismiss the idea that this line of thinking might find application in future practice in the AD context as well. In this case, the AB was facing a claim by the US that EU subsidies had displaced US aircraft from world markets. The panel had defined the market as comprising all aircraft produced by Boeing and Airbus, the duopoly in large aircraft. The EU objected to this market definition and appealed, arguing that finer distinctions across the various aircraft types should be made since not all aircrafts compete in the same relevant product market (§ 1113). The AB first noted the “like product” definition in the SCM Agreement, which is identical to that in the AD Agreement (§ 1118). It then went on to agree with the EU argument finding in §§ 1119–1120: We construe the concept of displacement as relating to, and arising out of, competitive engagement between products in a market. Aggressive pricing of certain products may, for example, lead to displacement of exports or imports in a particular market. This, however, can only be the case if those products compete in the same market. An examination of the competitive relationship between products is therefore required so as to determine whether such products form part of the same market. We conclude therefore that a “market,” within the meaning of Articles 6.3 (a) and 6.3(b) of the SCM Agreement, is a set of products in a particular geographical area that are in actual or potential competition with each other. An assessment of the competitive relationship between products in the market is required in order to determine whether and to what extent one product may displace another. Thus, while a complaining Member may identify a subsidized product and the like product by reference to footnote 46, the products thereby identified must be analyzed under the discipline of the product market so as to be able to determine whether displacement is occurring. Ordinarily, the subsidized product and the like product will form part of a larger product market. But it may be

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the case that a complainant chooses to define the subsidized and like products so broadly that it is necessary to analyze these products in different product markets. This will be necessary so as to analyze further the real competitive interactions that are taking place, and thereby determine whether displacement is occurring ... Indeed, whether two products compete in the same market is not determined simply by assessing whether they share particular physical characteristics or have the same general uses; it may also be relevant to consider whether customers demand a range of products or whether they are interested in only a particular product type. In the former case, when customers procure a range of products to satisfy their needs, this may give an indication that all such products could be competing in the same market. (italics in the original)

2.4.2.2 Major Proportion Recall that it is not necessary that the totality of the domestic industry producing the like product suffers injury. It suffices that this is the case for a major proportion of the domestic industry. The term “major proportion” has been understood in case law in qualitative terms, although the relevance of quantitative terms has not been dismissed altogether. There is, because of the preeminence of qualitative criteria, no clarity as to the threshold that must be satisfied. In EC–Fasteners (China), the AB outlawed an EU decision to examine only 27 percent of the Chinese fasteners industry, finding that this percentage does not constitute a “major proportion” (§ 430). In doing so, it provided its understanding of what “major proportion” is (§ 419): In sum, a proper interpretation of the term “a major proportion” under Article 4.1 requires that the domestic industry defined on this basis encompass producers whose collective output represents a relatively high proportion that substantially reflects the total domestic production. This ensures that the injury determination is based on wide-ranging information regarding domestic producers and is not distorted or skewed. In the special case of a fragmented industry with numerous producers, the practical constraints on an authority’s ability to obtain information may mean that what constitutes “a major proportion” may be lower than what is ordinarily permissible in a less fragmented industry. However, even in such cases, the authority bears the same obligation to ensure that the process of defining the domestic industry does not give rise to a material risk of distortion.

A high proportion is necessary, but which quantitative benchmark satisfies this threshold? In Argentina–Poultry Antidumping Duties, the panel rejected the argument that this term implies that producers must account for at least 50 percent of total domestic production. It sufficed that the domestic producers that constitute the domestic industry for purposes of the AD investigation represent (§ 7.341) “an important, serious, or significant proportion of total domestic production.”81 So 27% is not high enough, whereas 50% is not necessary. One thing is for sure. IAs cannot examine the portion of the industry that better suits its case. In US–Hot Rolled Steel, the AB held as much (§ 204).82 In similar vein, in Mexico–Steel Pipes and Tubes, the Panel found that Mexico had failed to comply with this requirement as it had analyzed a number of injury factors with respect to three firms representing 88 percent of the

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national production, while its analysis of financial injury factors was based on only one firm constituting 53 per cent of national production only (§ 7.322). In other words, once a determination has been made as to which producers constitute the domestic industry for purposes of the investigation, and assuming of course that they represent a major proportion of the industry, it is the data from all of these producers that must be used to assess the impact of the dumped imports on the domestic industry. The AD Agreement allows for the exclusion from the definition of “domestic industry” of those producers who are related to the exporters or importers, or are themselves importers of the allegedly dumped product. The rationale for this provision is that these producers may not be representative, as they may be benefiting from the success of the dumped imports themselves. The term “related” is defined in the agreement (footnote 11) in terms of control. A company shall be deemed to control another when the former is legally or operationally in a position to exercise restraint or direction over the latter. The fact that a producer is controlled by, or itself controls, an exporter or an importer does not suffice, though: there must also be grounds for believing or suspecting that the effect of the relationship is such as to cause the producer to behave differently from nonrelated producers.83 Therefore, one can understand that what matters most in these cases is the proper construction of the counterfactual—that is, whether an economic agent would have behaved differently if it was unrelated to the controlling party. 2.4.3

Statutory Indicators of Injury

Article 3.4 of AD contains an indicative list of factors that an IA must review in order to satisfy the injury requirement of the AD Agreement: ... including actual and potential decline in sales, profits, output, market share, productivity, return on investments, or utilization of capacity; factors affecting domestic prices; the magnitude of the margin of dumping; actual and potential negative effects on cash flow, inventories, employment, wages, growth, ability to raise capital or investments. This list is not exhaustive, nor can one or several of these factors necessarily give decisive guidance.

The list of factors included in Article 3.4 of AD seems to combine both indicators of the state of the domestic industry (such as sales, profits, output, market share, productivity, return on investments, and capacity utilization), and factors, which prima facie would seem relevant in resolving the causation question (such as factors affecting domestic prices or the magnitude of the margin of dumping). A number of panel84 and AB reports85 have held that all factors included in Article 3.4 of AD must be examined, although the provision explicitly states that none of them by itself or in combination with other factors mentioned therein is necessarily decisive for the outcome of the analysis.86 The AB, in its report on EC—Tube or Pipe Fittings, held that even though in its decision to impose duties, the EU had not explicitly referred to one

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of the factors mentioned in Article 3.4 of AD, it sufficed for the purposes of consistency with Article 3.4 of AD that it had implicitly examined it. In the case at hand, the EU had not reflected in its order a separate examination of growth, a factor listed in Article 3.4 of AD. It was clear from the record, however, that the IA had taken into account this factor (§§ 161–162). It is, thus, the overall record of the investigation that matters and not simply the final decision when it comes to deciding whether an IA has examined all factors reflected in Article 3.4 of AD.87 The list of Article 3.4 of AD is of an indicative nature. The term “including,” which precedes the statutory indicators of injury, leaves no doubt to this effect. The question is, what else should an IA examine—e.g., which factors beyond those enlisted in this provision? The AB, in its report on US–Hot-Rolled Steel, held that an IA must examine “all relevant economic factors,” not only those mentioned in Article 3.4 of AD (§ 194): Article 3.4 lists certain factors that are deemed to be relevant in every investigation and must always be evaluated by the investigating authorities. However, the obligation of evaluation imposed on investigating authorities by Article 3.4 is not confined to the listed factors; it extends to “all relevant economic factors.”88 This might sound like an investigation too far. In principle, anything can affect trade, and, thus, a myriad of economic factors might lead to injury. Case law has narrowed down the scope of review to factors raised by the parties to an investigation. We will return to this discussion later in this chapter when we discuss the causality requirement. The nature of the review of injury factors was discussed in the panel report on Egypt– Steel Rebar, where it held that Article 3.4 of AD does not require a full causation analysis, and stated that (§ 7.62) “as a whole, these factors are more in the nature of effects than causes.”89 There is, thus, no requirement to show a causal relationship between dumped imports and the injury indicators mentioned in Article 3.4 of AD on the one hand, but mere reference to each of them does not suffice for a WTO member to absolve its obligations under Article 3.4 of AD, either. The Panel on EC–Tube or Pipe Fittings insisted that an evaluation of the injury indicators was required (§§ 7.310ff., and especially § 7.314). Consequently, when reviewing consistency with Article 3.4 of AD, panels will check whether the factors indicated in the list have been examined (e.g., have profits decreased?), without asking questions regarding causality (e.g., have profits decreased because of dumped imports?). To be more precise, an IA will be required to: • Gather relevant data for each of the 15 factors cited therein and put them in the determination. • Discuss trends in each of such factors separately. • Discuss other factors not mentioned in the body of this provision, but which have been brought to its attention, as we will see later in this chapter.

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• When doing so, with respect to factors that show, in part or in full, positive trends, explain why that trend does not affect the conclusion that there is injury caused by dumped imports. • Once done with the factor-specific assessment, provide an overall analysis of the consequent impact of dumped imports on the domestic industry by drawing an overall picture where the 15 (at least) factors examined are evaluated in conjunction with one another.90 When it comes to the causation analysis that we discuss later in this chapter, an IA must, under Article 3.5 of AD: • Explain why dumping, through the effect of dumped imports, is causing injury to the domestic industry, and ideally identify the main pillars of the causation determination. • Analyze other known factors, either those that were brought to the attention of the IA by interested parties, or those that are so obvious that any reasonable IA would have analyzed them, and see how they add to or detract from the conclusions reached. All in all, there is inevitably some overlap between the two exercises, but one does not make the other redundant. 2.4.4

Cumulating Injury from Various Sources

It could very well be the case that injury is caused by dumped imports originating in various WTO members, and an IA might want to perform cumulative injury analysis, in the sense that it might be inquiring into the effects of dumped imports from various sources. To this effect, it can investigate simultaneously exporters originating in various WTO members and can even cumulate the effect of imports originating in various sources, if it respects the statutory threshold provided in Article 3.3 of AD, to wit: • The margin of dumping established in relation to the imports from each country is more than de minimis (>2 percent). • The volume of imports from each country is not negligible (>3 percent). • A cumulative assessment of the effects of the imports is appropriate in light of the conditions of competition between the imported products from the various countries examined and the conditions of competition between the imported products and the like domestic product. This provision does not go so far as to require from IAs to demonstrate that an export cartel has been dumping goods in a given market. In EC–Tube or Pipe Fittings, the AB upheld the panel’s finding that “cumulation” is only possible after a prior country-specific analysis of volume and price effects of dumped imports (§§ 116–117).91

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Sampling in Injury Analysis

There is no provision in the AD Agreement that allows sampling in the context of injury analysis. Yet, this is what customarily happens in some quarters, such as in the EU. In EU—Footwear (China), China challenged the EU practice, and the panel held that the absence of a specific provision does not per se outlaw sampling. It held that the sampled companies must be representative of the whole, and their volume of production is a relevant, but not the sole, criterion for sampling (§§ 7.368ff., and especially 7.381ff.).92 On appeal against the panel report in EC–Fasteners (China), the AB found nothing wrong with the EU practice to sample exporters in the context of injury analysis. In its view, the absence of specific language allowing sampling in injury analysis is no reason in and of itself to disallow similar practice (§ 436). The percentage chosen by the EU (sampled exporters represented 27 percent of dumped imports) did not run afoul of its obligations under the AD Agreement, since the EU did not have to pick a statistically valid sample (it could also have picked a sample of producers that it could reasonably have investigated). Finally, the EU had every right to exclude producers that had not responded within 15 days to its questionnaire, since otherwise, the whole investigation process would have been jeopardized (§ 460). 2.4.6 Threat of Injury AD duties can also be imposed in order to address the threat of (as opposed to material) injury. It is Article 3.7 of AD that sets forth the requirements that an IA has to comply with in this case—namely, adopt a certain standard of review that will not relegate evidentiary standards to mere speculation simply because it is future (as opposed to present) injury that is being addressed through antidumping. 2.4.6.1 Factors of Threat of Injury IAs must consider a number of factors (Article 3.7 of AD): • Factors concerning whether dumped imports have been increasing at a significant rate • Whether there is sufficiently freely disposable or imminent substantial increase in the capacity of the exporter indicating a likelihood of substantially increased dumped exports • Whether the prices of dumped imports are such that they have a significant pricedepressing or -suppressing effect on domestic prices and therefore would likely increase demand for further imports • The state of the inventories of the subject product93 The totality of these factors must lead to the conclusion that further dumped exports are imminent and that, unless protective action has been taken, material injury would occur. According to the Panel on US–Softwood Lumber VI, an IA is required to consider these

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factors in the same way that it is required to consider the volume and price effects of dumped imports in Article 3.2 of AD, that is when it enquires into actual and not threat of injury (§ 7.67). The Panel on Mexico–Corn Syrup held that the factors listed in Article 3.7 of AD relate specifically to the question of the likelihood of increased imports and do not relate to the consequent impact of the dumped imports on the domestic industry. An examination only of the factors listed in Article 3.7 of AD, consequently, does not suffice to reach a determination of threat of injury (§ 7.126). This panel summarized the relationship between Articles 3.1, 3.4, and 3.7 of AD (§§ 7.131–132): In sum, we consider that Article 3.7 requires a determination whether material injury would occur, Article 3.1 requires that a determination of injury, including threat of injury, involve an examination of the impact of imports, and Article 3.4 sets out the factors that must be considered, among other relevant factors, in the examination of the impact of imports on the domestic industry. Thus, in our view, the text of the AD Agreement requires consideration of the Article 3.4 factors in a threat determination. Article 3.7 sets out additional factors that must be considered in a threat case, but it does not eliminate the obligation to consider the impact of dumped imports on the domestic industry in accordance with the requirements of Article 3.4. ... an investigating authority cannot come to a reasoned conclusion, based on an unbiased and objective evaluation of the facts, without taking into account the Article 3.4 factors relating to the impact of imports on the domestic industry. These factors all relate to an evaluation of the general condition and operations of the domestic industry—sales, profits, output, market share, productivity, return on investments, utilization of capacity, factors affecting domestic prices, cash flow, inventories, employment, wages, growth, ability to raise capital. Consideration of these factors is, in our view, necessary in order to establish a background against which the investigating authority can evaluate whether imminent further dumped imports will affect the industry’s condition in such a manner that material injury would occur in the absence of protective action, as required by Article 3.7.

The Panel on US–Softwood Lumber VI agreed with this view, but it did not consider that an IA, once it had examined and evaluated the factors mentioned in Article 3.4 of AD, was required to make projections as to the likely impact of future dumped imports on each of these factors (§ 7.105). Nor would it be necessary, according to this panel, for an IA to reexamine the factors mentioned in Article 3.2 of AD concerning the volume and price effect of dumped imports in a predictive context in making a threat of material injury determination (§ 7.111). In sum, it suffices for an IA to conduct an injury examination on the basis of Articles 3.2 and 3.4 of AD, and also to consider some of or all the factors mentioned in Article 3.7 of AD in order to be able to conclude that further dumped imports are imminent and that, unless protective action is taken, material injury will occur. What matters therefore is that unless action is taken, threat of injury will emerge as clear and present danger that will inevitably lead to injury of the domestic industry producing the like product.

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2.4.6.2 Reasoned and Adequate Explanation In US–Softwood Lumber VI (Article 21.5–Canada), the AB held that a panel, when reviewing the factual basis for a threat of injury determination, must determine (§ 98): whether the investigating authority has provided “a reasoned and adequate explanation” of: how individual pieces of evidence can be reasonably relied on in support of particular inferences, and how the evidence in the record supports its factual findings; how the facts in the record, rather than allegation, conjecture, or remote possibility, support and provide a basis for the overall threat of injury determination; how its projections and assumptions show a high degree of likelihood that the anticipated injury will materialize in the near future; and how it examined alternative explanations and interpretations of the evidence and why it chose to reject or discount such alternatives in coming to its conclusions.94

It follows that IAs must, having examined the factors mentioned here, provide a “reasoned and adequate explanation” of why, unless action is taken, injury will inevitably occur. 2.4.6.3 The Special Care Obligation Article 3.8 of AD states that, in case of threat of injury, the application of AD measures shall be considered and decided with “special care.” The Panel on US–Softwood Lumber VI held that this implies that “a degree of attention over and above that required of investigating authorities in all anti-dumping and countervailing duty injury cases is required in the context of cases involving threat of material injury” (§ 7.33). The special care obligation applies during the process of investigation, in the establishment of whether the prerequisites for application of a measure exist, and not merely afterward, when final decisions about whether to apply a measure are made (§ 7.34). The reason for the special care-obligation is this: because there is no certainty that injury occurred, IAs should move beyond their usual duty of objective assessment of evidence before them; they should make sure that absent imposition of duties, injury will materialize. It is the special care-obligation that crucially influences the standard of review that the WTO adjudicating bodies will apply when facing disputes regarding the legality of imposition of AD duties in cases where imports threaten to injure the domestic industry. We turn to this question in what immediately follows. 2.4.6.4 The Standard of Review: Clear and Present Danger A determination of threat of injury must be based on facts that are about to have an impact on the domestic industry, not merely on allegations, conjecture, or remote possibility. The expected injury must be imminent and clearly foreseen. The term “threat of injury,” of course, suggests a future, as opposed to an actual, occurrence of an event. As with all future events, some degree of uncertainty is unavoidable. WTO panels and the AB have tried to impose a standard that will not equate “uncertainty” to a speculation that the unlikeliest event will occur. They, thus, aimed to ensure that the imposition of duties will not be based on speculative but rather on serious probabilistic analysis. The time factor

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is, in and of itself, a factor reducing uncertainty. According to the Panel on US–Softwood Lumber VI, the change in circumstances that would give rise to a situation in which injury would occur must be predicted to occur imminently (§ 7.57). In a similar vein, the AB, in its report on Mexico–Corn Syrup (Article 21.5–US), provided its understanding as to the applicable standard of review (§ 136): In our view, the “establishment” of facts by investigating authorities includes both affirmative findings of events that took place during the period of investigation, as well as assumptions relating to such events made by those authorities in the course of their analyses. In determining the existence of a threat of material injury, the investigating authorities will necessarily have to make assumptions relating to “the “occurrence of future events” since such future events “can never be definitively proven by facts.” Notwithstanding this intrinsic uncertainty, a “proper establishment” of facts in a determination of threat of material injury must be based on events that, although they have not yet occurred, must be “clearly foreseen and imminent,” in accordance with Article 3.7 of the Antidumping Agreement. (italics and emphasis in the original)

Consequently, the AB has taken the view that an IA can lawfully have recourse to threat of injury in order to justify the imposition of AD duties only if the injury is imminent in the short run, rather than an event that could, speculatively, occur in the distant future. According to the Panel on US–Softwood Lumber VI, this implies that (§ 7.33) “a degree of attention over and above that required of investigating authorities in all antidumping and countervailing duty injury cases is required in the context of cases involving threat of material injury.” We can conclude that the standard applied by panels is reminiscent of the “clear and present danger” test, which was established by Justice Oliver Wendell Holmes, Jr. in Schenck v. United States (249 US 47, 1919) concerning the ability of the US government to regulate speech against the draft: The question in every case is whether the words used are used in such circumstances and are of such a nature as to create a clear and present danger that they will bring about the substantive evils that the United States Congress has a right to prevent. It is a question of proximity and degree.

Demonstration of threat of injury is a question of proximity and degree: it cannot be pure speculation that might or might not occur in the future. 2.5 The Causality Requirement The obligation for IAs to establish a causal link between dumped imports and injury (and/ or threat of injury) rests on a substantive and a procedural leg. The substantive obligation is to guarantee through this analysis that injury will be attributed to dumped imports and not to other factors. AD duties should not be used in order to address injury factors other than dumping. Injury can, and usually is, caused by various factors simultaneously, and dumping is one of them. The question thus, arises whether IAs should be obliged to inquire

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into any potential factor of injury. This is the function of the nonattribution requirement. The list of plausible factors could vary, and, in principle, could be quite long. In quest for the perfect outcome, one could end up extending the length of investigation, and thus sacrifice an important objective of the whole endeavor: the data used must be recent, and not of historic value. This is where the case low construction of “known factors” comes into play. Inspired by systems of adversarial justice, case law leaves it to the parties to a dispute to draw the list of factors that have caused injury, the IA not being obliged to search for additional factors that might have also contributed to the establishment of injury. When applying this test to the specifics of case, the question arises as to what happens when multiple factors have contributed to the establishment of injury. Some domestic statutes (in the US, for example) do address this issue by requesting that dumping, in similar cases, be a “substantial” cause of injury. WTO case law has distanced itself from similar constructions, holding that all that matters is that dumping be a contributing factor. The procedural leg concerns the duty to investigate. IAs can rely on the evidence supplied by domestic industry and exporters, but they have to satisfy themselves through the investigation conducted to this effect that dumping has indeed caused injury. During the investigation process, IAs must guarantee that all interested parties enjoy adequate opportunities to present their views. Through these obligations, WTO members must ensure that they have demonstrated a genuine and substantial relationship between dumping and injury. We take each issue in turn. 2.5.1

Causal Relationship between Dumping and Injury

The causality obligation95 is embedded in Article 3.5 of AD, which imposes a dual obligation on an IA, namely to show that injury is: • Attributed to dumped imports • Not attributed to factors other than dumped imports The second requirement is often referred to as “nonattribution.” An IA will be required to examine the impact of all known factors, other than dumped imports, on the state of the domestic industry, and ensure that injury caused by such factors is not attributed to dumped imports. Article 3.5 of AD contains an indicative list of factors that may appropriately be taken into account in the context of this exercise: Factors which may be relevant in this respect include, inter alia, the volume and prices of imports not sold at dumping prices, contraction in demand or changes in the patterns of consumption, trade restrictive practices of and competition between the foreign and domestic producers, developments in technology and the export performance and productivity of the domestic industry. (italics in the original)

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Implications for Data Gathering

Case law has limited the ambit of known factors to factors produced by interested parties during the investigation process, thus limiting the duty of an IA to search for information.96 The IA is thus construed as an arbiter presiding over an adversarial system: it has a duty to look for alternative explanations of all evidence submitted, but no duty to look for evidence itself.97 2.5.3

Genuine and Substantial Relationship

Once the list of known factors has been established, IAs must, by virtue of the nonattribution requirement mentioned previously, separate and distinguish the effects of dumped imports from the effects of any other factor on the domestic industry producing the like product. Consequently, the nature and extent of the injurious effects of the other (than dumping) known factors need to be identified and separated from the effects of dumping on the domestic industry (AB, US–Hot-Rolled Steel, § 223, § 227).98 The AB conceded in the same report that the discipline imposed is quite demanding (§ 228); in § 224, it held that an IA can choose any methodology that it deems useful in order to disentangle the effects of the various factors causing injury.99 Should the impact of factors other than dumped imports be examined both individually and collectively? The AB addressed this issue in its report on EC—Tube or Pipe Fittings. An assessment of the collective effects of other causal factors is not necessarily required in every case, but it might be necessary in order to honor the nonattribution obligation depending on the facts of the case.100 The AB did not provide any examples of circumstances that would make such an evaluation a compulsory requirement (§§ 191–192).101 At the end of the day, as dozens of reports have confirmed, what matters is whether there is a genuine and substantial relationship of cause and effect between dumping and injury.102 Injury analysis in the AD context is informed by the ruling of the AB in its report on US–Lamb.103 There, the AB indicated that an evaluation of alternative explanations was in order, in the sense that IAs cannot pick only the one explanation that best suits their conclusion if other, less forthcoming explanations are plausible (§ 106): Panels must, therefore, review whether the competent authorities’ explanation fully addresses the nature, and, especially, the complexities, of the data, and responds to other plausible interpretations of that data. A panel must find, in particular, that an explanation is not reasoned, or is not adequate, if some alternative explanation of the facts is plausible, and if the competent authorities’ explanation does not seem adequate in the light of that alternative explanation. Thus, in making an “objective assessment” of a claim under Article 4.2(a), panels must be open to the possibility that the explanation given by the competent authorities is not reasoned or adequate.

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Once an IA has shown that injury has been caused, at least partially, by dumped imports, the whole injury analysis becomes moot for the remaining part of the process. AD duties will be imposed to counteract the dumping margin, and not the resulting injury for the domestic industry producing the like product. So, although the obligation to disentangle effects of various factors might seem onerous, once dumping has been shown to cause some injury, the AD authority can leave the injury analysis behind and concentrate on counteracting the established dumping margin. 2.6

Imposing Antidumping Duties

2.6.1 The Decision to Impose Duties Assuming that an IA has established that dumping has caused injury, it will decide whether to impose AD duties (Article 9.1 of AD). There is no obligation to impose duties, and no automaticity to this effect results from a finding that injurious dumping has been established. If a WTO member decides to impose AD duties, it must collect them on nondiscriminatory basis—e.g., from all sources where dumped goods originate (Article 9.2 of AD). The decision to impose duties marks the end of the original investigation. The record as established by the IA is what interested parties can challenge. The rationale for imposing duties cannot change after that point. The AB has made it clear in its report on US— Tyres (China), that Members may not offer during WTO dispute settlement proceedings a new rationale for its IAs determinations (§329). AD duties protect domestic producers from competition in their own market. They do not protect them from injury suffered from dumped exports into third markets. This is in large part the reason why it is big domestic markets (e.g., Brazil, EU, India, US) that have most frequently taken recourse in AD duties, and not WTO members like Singapore or Switzerland, countries with stronger interests in export markets than in their own market.104 2.6.2

Public Interest Clause

Article 6.12 of AD reads: The authorities shall provide opportunities for industrial users of the product under investigation, and for representative consumer organizations in cases where the product is commonly sold at the retail level, to provide information which is relevant to the investigation regarding dumping, injury and causality.

Consumers and producers, of course, have antithetical interests when it comes to deciding whether AD duties will be imposed. Industrial users of dumped imports should be on the side of consumers in a dumping scenario.105 An IA will, through Article 6.12 of AD,

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provide enemies of antidumping actions with a forum. This provision does not at all put into question the injury-to-competitors standard. All an IA has to do is invite consumers to present their opinions. It is under no obligation whatsoever to respond to them. Furthermore, the AB held in US–OCTG Reviews that this obligation does not confer unlimited rights, since the investigation must be conducted in an expeditious manner anyway (§§ 241–242). Some WTO members go a bit further than Article 6.12 of AD when it comes to acknowledging the interests of consumers. The EU106 and Canada are illustrations of this approach. They have imposed an additional (to Article 6.12 of AD) requirement on themselves, since their IAs are required by domestic law to examine whether the imposition of duties would be against their public interest. In EU practice, typically, the interests of industrial users, rather than consumers at large, are at stake when recourse to this provision is being made. Hoekman and Mavroidis (1996a) discuss the “Extramet” jurisprudence, where the Court overturned an imposition of AD duties because the EU Commission had overlooked the interests of an industrial user.107 The EU market for the downstream good (pure calcium, mainly used in the metallurgical industry) was a duopoly. One of the two companies involved (Péchiney) was also producing the basic input (calcium metal) for the downstream good. Péchiney refused to sell calcium metal to its competitor (Extramet), which was forced to import it from China. At the request of Péchiney, the EU Commission investigated Chinese exports of calcium metal, and found them to be dumped. To address the injury suffered by Péchiney, AD duties were imposed, which had nefarious effects on Extramet. Extramet initiated proceedings against Péchiney, accusing it of abusing its dominant position, and also against the EU Council for imposing AD duties without properly taking into account that Péchiney, by its refusal to sell calcium metal, had contributed to the injury that it subsequently suffered. The Court held that, in this case, the EU Council had not properly controlled for the reasons behind the injury suffered by Péchiney and annulled the AD duties imposed.108 Overall, consumers’ rights have not proved to be a formidable obstacle to imposition of AD duties, especially in the case of the EU. Few invocations have taken place, and the European Court of Justice has been quite reluctant to interpret the “Union (ex-Community) interest,” leaving thus the executive organ of the EU, the Commission, with substantial discretion in this respect.

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2.6.3 The Various Forms of Impositions 2.6.3.1 Provisional Duties WTO members might want to impose provisional duties before the investigation process has been terminated, if they respect the statutory conditions established in Article 7 of AD, namely: • No provisional duties can be imposed earlier than 60 days from the date of initiation of the investigation (Article 7.3 of AD). • Parties must have had an opportunity to present their views during the course of the investigation up to that stage [Article 7.1(i) of AD]. • An affirmative preliminary determination of dumping and consequent injury to the industry has been made [Article 7.1(ii) of AD]. Note that there is no absolute requirement to make preliminary determinations, but absent preliminary determinations, provisional duties cannot be lawfully applied. • Preliminary duties have been judged necessary to prevent injury caused during the investigation [Article 7.1(iii) of AD]. Duties imposed should preferably be in the form of “security” (“cash deposit” or “bond”), although additional customs duties remain a possibility (Article 7.2 of AD). The level of duties shall not be higher than the provisionally estimated margin of dumping. Provisional duties should be limited in time and, in principle, they can be imposed for up to four months. Assuming a request by exporters representing a significant percentage of the trade involved, their imposition can run for up to six months (Article 7.4 of AD). Absent a request to this effect, IAs cannot automatically extend provisional duties to six months. The Panel on China–HP-SSST (EU) ruled as much (§ 7.334). The Panel on Mexico–Corn Syrup109 found that the application of provisional measures by Mexico for more than six months was inconsistent anyway with Article 7.4 of AD (§ 7.183). 2.6.3.2 Definitive Duties A product will be subjected to an AD duty as soon as the investigation has been terminated, and a final determination has been made to the effect that AD duties should be imposed (Mexico–Antidumping Measures on Rice, AB, § 347). As the AB noted in the same report (§ 346): the [AD and SCM] Agreements use the term “definitive” to distinguish duties imposed after a final determination (following an investigation) from “provisional” duties that may be imposed under certain conditions during the course of an investigation, namely, after a preliminary determination.

2.6.3.3 Variable Antidumping Duties The Panel on Argentina–Poultry Antidumping Duties noted that nothing in the AD Agreement explicitly identifies the form that AD duties must take, and that nothing in the AD

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Agreement explicitly prohibits the use of “variable duties” (§ 7.355). It thus held that variable duties could be an option (§ 7.364): the variable antidumping duties at issue are not inconsistent with Article 9.3 simply because they are collected by reference to a margin of dumping established at the time of collection (i.e., the difference between a “minimum export price,” or reference normal value, and actual export price).

Of course, IAs have the duty to verify in subsequent investigations (sunset administrative reviews, discussed later in this chapter) whether the margin of dumping is still the same as that in the original investigation. In practice, though, ad valorem are the most frequently used AD duties, followed by fixed duties. 2.6.3.4 Price Undertakings WTO members can request or accept price undertakings from willing exporters (Article 8 of AD). Through a price undertaking, an exporter agrees to raise prices to the level of the dumping margin, or to the level established in application of the lesser duty rule if the IA agrees to this latter level.110 The consideration is that no AD duties will be imposed. Price undertakings may not be offered to exporters until a preliminary affirmative determination of dumping, injury, and the causal link has been made. There is no obligation to offer price undertakings, nor is there an obligation to accept undertakings if offered by exporters. The Panel on US–Offset Act (Byrd Amendment) emphasized the freedom of the IA to accept or reject price undertakings, holding that an IA is not required to examine a proposed price undertaking in objective manner (§ 7.81). The acceptance of a price undertaking puts an end to the investigation with respect to the exporter concerned, unless this exporter wants the IA to continue with the investigation. In the case of continuation, if the investigation ultimately leads to a negative finding of dumping or injury, the undertaking shall automatically lapse except in cases where a negative determination is in large part due to the price undertaking itself, in which case the undertaking may be maintained for a reasonable period of time. An IA may request from exporters to provide information periodically relevant to the fulfillment of the undertaking, thus permitting verification (Article 8.6 of AD). In the case of a violation of agreed undertakings, an IA is entitled to take expeditious action, which may include the immediate application of provisional measures using the best information available (BIA). Definitive duties may be levied retroactively up to 90 days before the application of such provisional measures. No duties may be levied on imports predating the violation.

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2.6.4 The Level of Permissible Imposition 2.6.4.1 Duties Cannot Exceed the Dumping Margin Article 9.3 of AD reads: “The amount of the anti-dumping duty shall not exceed the margin of dumping as established under Article 2.” 2.6.4.2 Lesser Duty Rule The level of AD duties does not have to be equal to the established dumping margin. It can be lower if a lower duty can adequately take care of the injury caused by dumping. The possibility of a lesser duty exists in the AD Agreement (Article 9.1). It is a bestendeavors clause, as there is no obligation to observe the lesser duty rule: It is desirable that the imposition be permissive in the territory of all Members, and that the duty be less than the margin if such lesser duty would be adequate to remove the injury to the domestic industry. (italics added)

The decision to impose a lesser duty rests solely with the IA. The lesser duty rule is a consequence of the legal nature of dumping. It is not illegal but simply unfair, and it should not be punished as such so long as its nefarious consequences (i.e., injury) have been eliminated. Although not a matter of legal compulsion under WTO law, some jurisdictions, and most prominently the EU, have adhered to this rule and consistently observe it in their antidumping practices.111 2.6.5

Duties Imposed Prospectively, Retrospectively

The AD Agreement prejudges the time from which duties will be imposed through a provision on retroactive application of duties of duties, which we discuss later in this chapter. It does not prejudge at all the timing when the assessment of duties will take place. Two systems are observed in practice: prospective and retrospective assessment of duties, discussed next. 2.6.5.1 Prospective Assessment In practice, most WTO members apply a prospective assessment of duties. Once the dumping margin has been calculated (and assuming that it has been established that dumping has caused injury), all dumped imports in the market will be burdened with the applicable AD duty that they have to pay from that moment onward. 2.6.5.2 Retrospective Assessment The US applies a system calling for retrospective assessment of duties.112 Once an AD order has been imposed, the importer will have to pay a provisional duty113 based on the rate calculated during the investigation. The products that enter the US market during the first year that the AD order is in place are not liquidated until a final duty has been paid.

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This final duty will be calculated on the basis of the EP of the product during the year following the imposition of the AD order. In the course of a “duty assessment review,” or, in US parlance, “administrative review,”114 the US authority will compare EPs of the goods over that year, and recalculate the dumping margin that it will be applying on a definitive basis for all imports to its market (retrospective assessment). The definitive duty may be higher than the provisional duty, in case the dumping margin during the first year exceeds that found during the initial investigation, or lower in the opposite case. Consequently, this may lead to either an additional bill for the importer or to reimbursement. Only upon payment of the definitive duty, goods will be considered liquidated. It is this newly calculated rate, which will then form the basis for the provisional duties to be paid the following year, and the process described previously will start all over again.115 Exporters, thus, enter a trial-and-error phase with this system. If the dumping margin increases during the first year, they risk paying for it during the second year in the form of definitive duties. It could be said, thus, that the US regime has a taming effect since exporters know that they are under surveillance and might find it in their interests to increase their prices during the trial phase.116 In a nutshell, the differences between the US duty assessment and a prospective assessment of duties are that in the prospective system, the importer pays a duty, whereas in the US system, the provisional duty may take the form of a cash deposit or guarantee; and in the US system, the administration itself will automatically review the duties in light of prices observed the preceding year, whereas in the prospective system, the interested parties have to submit a request for reimbursement (in case the duties imposed no longer correspond to margins).117 2.6.6

Retroactive Application of Duties

Retrospective assessment should not be confused with retroactivity. Duties in retrospective assessment are applied “prospectively” (e.g., from the moment dumping has occurred). It is because the first burden is not definitive that the US methodology for calculating is called “retrospective.” Retroactive application of duties denotes the case where duties are imposed on imports that occurred in the past, and entered the market without having to pay AD duties. In principle, AD duties cannot be imposed retroactively except under the very limited conditions provided for in Article 10 of AD: • Duties can be imposed retroactively up to the moment when provisional measures had been imposed, if, following a finding of injury, provisional duties had been imposed; or, following a finding of threat of injury and a demonstration that in the absence of provisional measures, injury would have materialized, provisional measures had been imposed (Article 10.2 of AD).118

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• Duties can be imposed retroactively until 90 days prior to the imposition of provisional measures (but in no case prior to the initiation of investigation119) if there is a history of dumping and injury, or if the importer was aware of dumping practices, and, in either case, if the injury was caused by “massive dumped imports” in a short period which, because of the timing and volume of the dumped imports, are likely to seriously undermine the remedial effects that AD duties might have (Article 10.6 of AD).120 In order to be able to collect duties retroactively to the period preceding the application of provisional measures, the agreement provides in Article 10.7 of AD that the authorities may, after initiation, take measures such as the withholding of appraisement or assessment as may be necessary for that purpose. Authorities must have sufficient evidence that the conditions for extended retroactive application have been satisfied. The Panel on US–HotRolled Steel tried to square the requirements of Article 10.7 of AD with the role that this provision is called to play when holding that (§ 7.163): Article 10.7 measures serve the same purpose as an order at the beginning of a lawsuit to preserve the status quo—they ensure that at the end of the process, effective measures can be put in place should the circumstances warrant.

A retroactive application of the duty up to the moment of initiation aims to address injury from massive dumped imports that takes place between the initiation of the investigation and application of (provisional) measures. The dumper uses this window to quickly dump its product on the market before leaving it. The Panel on US—Hot Rolled Steel agreed with the approach of the US authority to compare a period prior to the reference data with data for the period following it (§§ 7.166–167). 2.6.7 Who Are Duties Imposed Against? Dumping is, of course, a private business practice, and individual dumping margins must be calculated for each exporter. There is a presumption in the AD Agreement, though, that all producers originating in the same country are dumping, even if they had not been studied at all during the original investigation. Consequently, AD duties are imposed in practice on a countrywide basis. Article 9.2 of AD reads: ... The authorities shall name the supplier or suppliers of the product concerned. If, however, several suppliers from the same country are involved, and it is impracticable to name all these suppliers, the authorities may name the supplying country concerned.

The AD provisions on sampling (Article 6.10 of AD) and new shippers (Article 9.5 of AD) at the very least implicitly support this proposition. How can an IA impose duties on noninvestigated exporters unless countrywide orders were permissible? All this is, however, at least questionable, if not faulty. Mavroidis and Sapir (2008) note that there is no a priori reason to believe that two or more firms behave identically in terms

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of their pricing in different markets simply because they happen to produce the same product in the same country, unless they operate under perfect competition in both the home and the export markets. If perfect competition prevailed, though, it would have been hard to understand how dumping could occur in the first place. Dumping is a form of price discrimination, and it requires that firms are able to set prices in different markets rather than take them as given (as is the case under perfect competition). If markets were perfectly competitive, in other words, the “law of one price” would prevail and all identical products would have been priced in an identical manner, at least within the same geographical or national market. Perfect competition is clearly an extreme case that is unlikely to prevail in many circumstances, and therefore, as Varian (1980, p. 651) states, “the ‘law of one price’ is no law at all.”121 Against this background, it is remarkable that the agreement implies that all firms producing the allegedly dumped product in the country in question engage in injurious dumping unless proven otherwise. The burden of proving innocence is shifted to all exporters, both “known” and “unknown,” originating in the country of the dumper. The AD Agreement mentions four categories of exporters that can be subjected to the imposition of AD duties: • Known exporters • Sampled exporters • Non-sampled exporters • New shippers 2.6.7.1 Known Exporters An IA must calculate a dumping margin for each known exporter concerned (Article 6.10 of AD).122 The term “known exporter” has been interpreted by the AB as referring to all exporters that have been identified in the petition, as well as those that have voluntarily appeared before the IA (Mexico–Antidumping Measures on Rice). 2.6.7.2 Sampled Exporters Individual duties will be imposed on all sampled exporters as well. 2.6.7.3 Nonsampled exporters Article 9.4 of AD reads: When the authorities have limited their examination in accordance with the second sentence of paragraph 10 of Article 6, any antidumping duty applied to imports from exporters or producers not included in the examination shall not exceed: the weighted average margin of dumping established with respect to the selected exporters or producers or, where the liability for payment of antidumping duties is calculated on the basis of a prospective normal value, the difference between the weighted average normal value of the selected exporters or producers and the export prices of exporters or

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producers not individually examined, provided that the authorities shall disregard for the purpose of this paragraph any zero and de minimis margins and margins established under the circumstances referred to in paragraph 8 of Article 6. The authorities shall apply individual duties or normal values to imports from any exporter or producer not included in the examination who has provided the necessary information during the course of the investigation, as provided for in subparagraph 10.2 of Article 6.

Consequently, an IA will apply the WA of individual dumping margins to sampled exporters.123 When calculating the WA that will be imposed on nonsampled exporters, an IA must disregard de minimis as well as zero dumping margins and cannot base its rulings on margins established through recourse to the facts-available provision of Article 6.8 of AD.124 2.6.7.4 New Shipments Article 9.5 of AD allows exporters that did not export any products during the POI (or that simply did not produce at all during the same period) to request from the IA to calculate an individual margin of dumping in order to determine their duty rate. Article 9.5 of AD provides for them as follows: If a product is subject to antidumping duties in an importing Member, the authorities shall promptly carry out a review for the purpose of determining individual margins of dumping for any exporters or producers in the exporting country in question who have not exported the product to the importing Member during the period of investigation, provided that these exporters or producers can show that they are not related to any of the exporters or producers in the exporting country who are subject to the antidumping duties on the product. Such a review shall be initiated and carried out on an accelerated basis, compared to normal duty assessment and review proceedings in the importing Member. No antidumping duties shall be levied on imports from such exporters or producers while the review is being carried out. The authorities may, however, withhold appraisement and/or request guarantees to ensure that, should such a review result in a determination of dumping in respect of such producers or exporters, antidumping duties can be levied retroactively to the date of the initiation of the review.

There is no dispute that it is the exporter who must take the initiative and identify itself, and the exporter who must also show that it has no business relation to producers already subject to AD duties. The reason for this latter requirement is to prevent “new” companies circumventing the duty order in place. The AD Agreement, presumably, suggests that new shippers should be independent exporters that do not have to follow the pricing policies of another exporter already subjected to AD duties.125 A review has to be carried out promptly, but it should be sufficiently lengthy to allow a proper basis to compare NV with EP. The Panel and the AB on Mexico–Antidumping Measures on Rice held that Article 9.5 of AD “clearly does not subject the right to an expedited new shipper review to a showing of a ‘representative’ volume of export sales.”126 While this may well be true, it appears that, inevitably, a new exporter will have to wait before it can ask for an expedited

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review so as to allow a certain period of export sales to provide the basis for a determination of information on NV and EP.127 Now, the question naturally arises: what happens in the meantime? Do new shippers have to pay duties while awaiting the outcome of an individual review? Both the spirit of the law and relevant practice respond in the affirmative to this question. New shipments will be burdened with duties from the moment they export to the country imposing AD duties on goods originating in their country or customs territory. If no request for an expedited review has been submitted, duties will remain in place. Assuming that a request has been submitted, there will be a truce. Duties will not be imposed during the investigation and, pending its outcome, they might be imposed retroactively—that is, as of the date of the initiation of the investigation. What about the level of duties to be imposed on new shipments prior to the calculation of the individual dumping margin? Should it be the WA, as per Article 9.4 of AD? Or should it be some other rate? At the heart of this discussion is the legal relationship between Articles 9.4 and 9.5 of AD. In practice, most IAs impose a “residual duty” at the level of the WA of individually calculated dumping margins. There is, thus, an implicit assimilation of new shippers to nonsampled exporters. Similar practices have not been challenged, and, hence, panels have had no opportunity to rule on this score. 2.6.7.5 Unknown Exporters Practice reveals the existence of yet another category of exporters, not foreseen in the AD Agreement: namely, the unknown exporters that had not been identified by the authorities at the time of the investigation (either as sampled or nonsampled), and are not new shippers either. Exporters could be unknown because they managed to hide (let us call this “uncooperative behavior”), or because the authority did not take any reasonable efforts to identify them (for example, they continued to export and were never requested to appear before the adjudicating body), or for other reasons. Unknown exporters can exist regardless of whether individual margins have been calculated or producers have been sampled. With respect to unknown exporters, the AD Agreement is silent as to whether they should pay a duty at all, and if so, how much. In principle, they should be treated either as nonsampled exporters or as new shipments. Indeed, this seems like the obvious approach, except that it does not square with practice everywhere. Practice suggests that a residual rate is calculated and imposed on their exports, but practice regarding the amount of the residual rate is disparate. The US, for example, applies the duty that it applies to nonsampled exporters, the so-called all others’ duty (or all others’ rate). Is corresponds to the WA of the individually calculated dumping margins for sampled exporters. EU practice128 suggests otherwise. Assume that the EU authority has sampled three exporters who ship equal volumes to the EU market and that their dumping margins are,

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respectively, 20 percent, 40 percent, and 60 percent. The EU authority will impose the duties mentioned here on the three investigated exporters; a 40 percent (WA) duty on all identified nonsampled exporters; and a 60 percent (residual) rate on nonidentified exporters and new shipments (until an individual duty has been calculated for the latter category). In Mexico–Antidumping Measures on Rice, the Mexican IA (Economía) had imposed on unknown exporters duties equaling the amount of the highest individual dumping margin (echoing the EU practice). The question raised by the US claim was whether the AD Agreement imposes any limits on the amount of the residual duty. The US put forward a claim that, consistent with its own practice, Mexico had to impose on new shipments, prior to the expedited review, a maximum AD duty that should not exceed the WA of duties imposed. In other words, the residual rate should equal the all others’ rate of the US. The panel was not convinced by this argument, as it considered that Article 9.4 of AD left WTO members with discretion in this respect (§ 7.158). As § 7.159 states: The US argument that the placement of this provision immediately preceding Article 9.5 of the AD Agreement dealing with new shipper reviews implies that its rules also apply to non-shipping exporters is not convincing, as we do not find that anything can be deduced in and of itself from the sequence of provisions in the Agreement, particularly when the provision in question relates to an exceptional situation, while the subsequent provision does not. The United States also argues that the non-sampled interested parties and the new shippers dealt with by Article 9.5 are in a similar position and that by analogy the same Article 9.4 methodology for the calculation of a residual duty rate should apply. We are not convinced that the text of the Agreement supports this view. In this respect, we find particularly relevant the absence of any cross-referencing in Article 9.5 of the AD Agreement dealing with new shippers to the calculation methodology of Article 9.4 of the AD Agreement. This absence of cross-referencing is particularly conspicuous if one were to accept, arguendo, the analogous situation of non-sampled and non-shipping exporters. Indeed, especially in such a situation, one would expect the drafters to have explicitly referred to Article 9.4 of the AD Agreement. As on other occasions, where the drafters intended to see obligations apply in similar circumstances, they explicitly provided for such cross-referencing. We recall in this respect that the AB also found that the absence of such cross-referencing to obligations contained in other provisions is revealing of the absence of such an obligation. We find that Article 9.4 of the AD Agreement does not refer to non-shipping exporters outside a sampling situation, and that there was therefore no obligation for the Mexican authorities to calculate a residual duty margin for Producers Rice based on the “neutral” methodology set forth in Article 9.4 of the AD Agreement. We therefore reject the US claim in this respect. (italics in the original)

The AB, on appeal, did not uphold this panel finding; instead, it went on to state that an authority is not permitted to impose a residual duty rate based on the available facts alone, without having given unknown foreign exporters notice of the information required and without giving them an opportunity to submit information. An IA that does not respect these requirements would be acting in violation of Article 6.8 of AD and Annex II of AD (§§ 259–60). According to the AB, putting exporters on notice that the available facts will

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be used is a precondition for the use of such facts. It objected, thus, to the process followed in this case, and avoided responding to the substantive request regarding the level of duties imposed. The question arises, of course, of how an IA can satisfy similar requirements especially since it is dealing here with “unknown” exporters. Practice did not take long to provide a WTO panel with an opportunity to address this issue. In China–Autos (US), China initiated an investigation against US producers. Three companies (General Motors, Ford, Chrysler) had been identified already in the notice of initiation of investigation. In addition, the Ministry of Commerce of the People’s Republic of China (MOFCOM), the Chinese IA, sent notices of initiation and the public version of the petition to launch the investigation to the US Embassy in Beijing and requested from the US government to provide copies to all interested parties. Four new firms (Mercedes Benz USA, BMW USA, Honda USA, and Mitsubishi USA) came forward and registered for participation in the proceedings (§ 7.125). The panel held that this was a necessary, but not sufficient, condition for compliance with Article 6.8 of AD and § 1 of Annex II of AD. China also should have provided the information required in sufficient detail (§ 7.133). This is where MOFCOM fell short of meeting the requirements of the AD Agreement. By requesting generic information, such as information regarding the identity, volume, and value of exporters of the product concerned, MOFCOM did not provide exporters with sufficient guidance as to the information that it would use in order to determine the dumping margin. In the words of the panel (§ 7.134): “There is a parallel between the scope of the information requested and not provided by an interested party and the scope of facts available used by an IA in place of the missing information to make necessary determinations.” The panel felt that because the type of information given was not detailed enough, MOFCOM and China had violated their obligations under Article 6.8 and Annex II of AD (§§ 7.135ff., and especially, 7.139). In China–HP-SSST, the panel reached the opposite conclusion. This time, however, China had published on the Internet not simply generic information but the questionnaire, which was addressed to both known and unknown exporters. In the panel’s view, but doing that, China had fully observed its obligations under the AD Agreement (§ 7.218). The maximum amount of duty to be imposed in similar cases remains an open question. In conclusion, on this score, there is undeniably a problem with the lack of precision of the AD Agreement. 2.6.8 Refunding AD Duties In both systems of assessing duties (prospective and retrospective), a refund is mandated where an importer has paid duties in excess of the margin of dumping, and the importer has requested a refund. Article 9.3 of AD provides for time limits within which refund will take place. The rationale for this provision is that the level of AD duties should not

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exceed the dumping margin established through the investigation process. As the AB stated in Mexico–Antidumping Measures on Rice (§ 312): The refund of duties is conditioned solely on (i) the request being made by an importer of the product subject to the antidumping duty; and (ii) the request having been “duly supported by evidence.” Other than these requirements, we see no basis for an investigating authority to decline to affect the mandated refund. Indeed, failure to do so would result in the importer having paid a duty in excess of the dumping margin, contrary to Article 9.3.

2.7 Administrative Review of AD Duties Recall that AD duties represent one of the three contingent protection instruments. Their life cycle, therefore, is inherently linked to the life cycle of the contingency. When dumping ceases to exist, then the payment of AD duties should cease to exist as well. There are of course some nuances. Dumping might cease to exist strategically, in order to provoke withdrawal of the AD order (and the ensuing payment of AD duties). It could, in this scenario, reemerge when the AD order has been withdrawn. The Tokyo round AD Agreement had put into place a regime aiming to guarantee that the continued imposition of AD duties would be linked to the continued practice of dumping. This is the system of administrative reviews that aimed to inquire into whether the continued imposition of AD duties was necessary. The Uruguay round agreement went one step further. It kept administrative reviews in place, and it also outlawed in principle the imposition of AD duties after five years from the date of their imposition. Extension beyond the five-year period could occur only if a review to this effect were undertaken, the outcome of which was in favor of continued imposition. Thus, sunset reviews were introduced into the WTO legal system. Administrative reviews, which, in principle, can take place at any time after the imposition of AD duties, and sunset reviews, which must take place before five years have lapsed from the imposition of AD duties, constitute the legal instruments that aim to ensure that AD duties will be sued as instrument of contingent, and not constant, protection. We start with a discussion of administrative reviews before we move to an analysis of sunset reviews. 2.7.1 The Function and Rationale for Administrative Reviews As per Article 11.1 of AD, “An antidumping duty shall remain in force only as long as and to the extent necessary to counteract dumping which is causing injury.” Article 11.3 of AD completes this provision when stating that duties will lapse five years after their original imposition. During the five-year period that AD duties are in place, an administrative review (sometimes referred to as “changed circumstances review”) might take place. The term “administrative review” or “changed circumstances review” aims to capture the discipline imposed under Article 11.2 of AD.

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Pricing policies of exporters might change over time for various reasons, and their resulting impact on the domestic industry producing the like product might consequently change as well. A review is meant to address similar changes. 2.7.2 The Ambit of Review An IA, when conducting an administrative review, must (as per Article 11.2 of AD), “examine whether the continued imposition of the duty is necessary to offset dumping, whether the injury would be likely to continue or recur if the duty were removed or varied, or both.”129 An IA is thus free to vary the extent of the review. If a narrow review has been privileged (e.g., if the review focuses on either the issue of whether the continued imposition of duties is necessary to offset dumping or whether injury would likely occur if the duty were removed), duties will remain in place for a maximum period of five years from the date of the original imposition. If a comprehensive review takes place (e.g., if an IA examines the impact of removal of duties on both dumping and injury), then duties will remain in place for five years from the end of the administrative review—assuming, of course, that the outcome of the review is that withdrawal would lead to revival of dumping or recurrence of injury (Article 11.3 of AD). If the review leads an IA to conclude that AD duties are no longer warranted, they should be terminated immediately (Article 11.2 of AD). Articles 11.1 and 11.2 of AD reproduce Articles 9.1 and 9.2 of AD of the Tokyo-round AD Code. The unadopted GATT panel report on US—Swedish Steel Plate discussed the relationship between the two provisions. It held that the US was under no obligation to undertake specific actions under Article 9.1 of AD. In the view of this panel, Article 9.2 of AD explained the specific steps to take in order to honor the mandate of Article 9.1 of AD (§ 226): The Panel considered that it would not be consistent with this interpretation of the relationship between Articles 9:1 and 9:2 to interpret Article 9:1 as containing an obligation of Parties to conduct a factual examination of the necessity of the continued application of anti-dumping duties (in the form of “monitoring” or “surveillance”), distinct from their obligation to carry out reviews under Article 9:2 of the Agreement. The silence of Article 9:1 regarding the means by which a Party was to determine when an anti-dumping duty was no longer necessary within the meaning of that provision, together with the mandatory review procedure specifically provided for in Article 9:2, the purpose of which could only be understood in light of the requirement embodied in Article 9:1, contradicted the view that Article 9:1 by itself obliged Parties to take specific procedural steps to satisfy themselves as to the continued need for the imposition of an anti-dumping duty distinct from those required under Article 9:2.

WTO adjudicating bodies, hence, should focus on whether the test in Article 11.2 of AD has been met. If this were the case, then Article 11.1 of AD will have, ipso facto, been complied with as well.

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Ex Officio and Upon Request Reviews

A review can be initiated either on the initiative of the IA (usually referred to as a self-initiated-, or ex officio review) or upon request (Article 11.2 of AD). The former will take place when warranted, but the latter only after a reasonable lapse of time has passed: The authorities shall review the need for the continued imposition of the duty, where warranted, on their own initiative or, provided that a reasonable period of time has elapsed since the imposition of the definitive anti-dumping duty, upon request by any interested party which submits positive information substantiating the need for a review.

In US–Shrimp II (Viet Nam), the panel rejected a claim by the US to the effect that exporters for which no individual dumping margin had been calculated were barred from requesting a review under Article 11.2 of AD. In the panel’s view, the fact that an individual dumping margin or an all others’ rate had been imposed was immaterial, so far as the right of exporters to request a review was concerned (§§ 7.386ff.). 2.7.4

Reasonable Period of Time

Recall that Article 11.2 of AD obliges an IA to review the need for continued imposition of duties if a request to this effect has been made after a “reasonable period of time” has lapsed. In US–Shrimp II (Viet Nam), the panel held that the passage of four years satisfied this requirement (§ 7.380). The law says nothing regarding the point in time when an ex officio review is warranted. The leading case in the GATT years was US–Swedish Steel Plate. This panel decided that it was not warranted for the US to review 20-year-old duties, even though the following was true: • Sweden had reduced its production of steel products. • It was selling more to the EU because it had signed a free trade agreement (FTA) with it (and EU had eliminated duties on imports of Swedish steel). • Avesta (a Swedish company) had bought a mill in Indiana and, consequently, was selling to the US market through its Indiana site. • US had concluded a voluntary export restraint with many exporters, as a result of which the health of US industry had considerably improved (§§ 246ff.). This is a very restrictive interpretation of the “where warranted” standard, by any reasonable benchmark, and it was typical in the manner the US reviewed the necessity for continued imposition of duties. The US was at the time one of the most frequent users of antidumping. Because of the trade impact of US antidumping measures, a lot of litigation was directed against impositions of AD duties by the US. A lot of case law on this score

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thus, concerned the consistency of US law with the AD Agreement. In US, nevertheless, as has been discussed, a retrospective system of imposition of duties has been privileged. The level of duties initially imposed is calculated on a provisional basis, and interested parties may request an annual recalculation. If no dumping has been found for three years in a row, then the exporter can request revocation of duties. So there is an overlap between the reviews under Article 11.2 of AD and those under domestic US law, and the case law described in what follows concerns the overlap only. In US–Antidumping Measures on OCTG, the panel discussed the consistency of a US law, which imposed, in Mexico’s view, stringent conditions for the initiation of an administrative review. As the panel explained, under the US system, a request for a “changed circumstances” review could be based on the general review provisions or on the basis of no dumping for three years. In the latter case, a company seeking revocation on the basis of no dumping for three years must demonstrate that it had made sales in the US market in commercial quantities during that period. Both in this case (§§ 7.173–174), and in US–DRAMS (§§ 6.58–59),130 WTO panels have held that the absence of dumping for a period of three years and six months did not, in and of itself, mandate a self-initiated review. One can question the reasonableness of this approach. If review is not warranted after 70 percent of the lifetime of duties has lapsed and no dumping has occurred, then one might legitimately wonder when this would be the case. Some of the litigation concerned AD measures imposed by other WTO members, and helped illuminate a few aspects of the obligation to conduct administrative reviews when warranted. In Mexico–Antidumping Measures on Rice, the AB agreed with the panel that to require that a “representative volume of export sales” has taken place as a condition for conducting a changed circumstances review was inconsistent with the agreement (§ 316): Article 68 of the Act requires as a rule that each time an interested party is unable to show that volume of exports during the review period was representative, such a review is to be denied. ... The change in circumstances is unrelated to the export side of the equation. An interested party is entitled to a changed circumstances review under Article 11.2 of the AD Agreement and 21.2 of the SCM Agreement, if it submits positive information substantiating the need for a review. What such positive information relates to will depend from case to case, and such positive information does not, in our view, necessarily include that a representative number of exports sales were made. We consider that, by requiring the authority to reject a review each time the volume of export sales was not representative, even in cases where the change in circumstances is unrelated to the export price, Article 68 of the Act requires the authority to reject reviews in a manner which is inconsistent with Article 11.2 of the AD Agreement. (italics in the original)

The Panel on EC–Tube or Pipe Fittings dealt with the argument by Brazil that the devaluation of its national currency (which coincided in time with the last weeks of the

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investigation) was, in and of itself, a reason for the EU to launch on its own initiative a review of the necessity to keep in place the AD duties. The panel responded in the negative (§ 7.116) and concluded, invoking the findings of the Panel on US–DRAMS to this effect, that even cessation of dumping does not in and of itself mandate the initiation of a review (§ 7.118).131 This brings us straight into a discussion of the standard of review that WTO adjudicating bodies will apply when facing challenges regarding the consistency of administrative reviews conducted by WTO members. 2.7.5

Standard of Review

Although there is not much case law regarding the standard of review that WTO adjudicating bodies will apply in cases concerning the administrative review, it seems plausible to conclude that WTO adjudicating bodies have shown deference to decisions by IAs. In this vein, the Panel on US–DRAMS held that since the subject matter of an administrative review was a forward-looking analysis, which necessarily entailed uncertainty, some degree of imprecision would be unavoidable and permissible (§ 6.43). This much makes sense. When it comes to the questions asked in this context, though, WTO adjudicating bodies have been applying a test that overlooks the main purpose of Article 11 of AD—that is, whether something has changed with time that would make a review, but not necessarily a revocation, warranted. Recall the outcome in US–DRAMS and in US–Antidumping Measures on OCTG, where the passage of substantial time was not enough to warrant an administrative review. This is odd. Ex officio reviews slowly become a dead letter, and the discussion concerns the standard of review when a review has been requested. This was probably unavoidable with the advent of sunset reviews. Why, one might ask, should WTO members review ex officio the necessity of imposing AD duties, when we have all agreed that five years is a reasonable period for imposition? Still, the attitude of WTO adjudicating bodies is far from sensible in this respect. The fact that duties can does not mean that duties must stay in place for five years. Moreover, reviewing duties should not be equated to revoking duties. Howse and Staiger (2007) have criticized this attitude, stating that the conditions for reviewing duties should be distinguished from the conditions for revoking them, in the sense that less evidence should be required for the former than for the latter. In deciding whether revocation is warranted, an IA should ask whether a change in competitive conditions did occur, and whether because of this change, a review was required.132 This seems like the appropriate test. It is quite demanding, and panels would have to engage with the facts in order to honor it, but, alas, there is no way around it.

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Sunset Reviews Duties Will Lapse in Five Years, Absent Review

One of the major innovations of the Uruguay-round AD Agreement was the introduction of “sunset clauses.” AD duties, as per this provision, will lapse five years after their introduction unless if the IA has determined, as per Article 11.3 of AD: in a review initiated before that date on their own initiative or upon a duly substantiated request made by or on behalf of the domestic industry within a reasonable period of time prior to that date, that the expiry of the duty would be likely to lead to continuation or recurrence of dumping and injury. The duty may remain in force pending the outcome of such a review.

In the words of the AB in US–Carbon Steel133 (§ 88): An automatic time-bound termination of countervailing duties that have been in place for five years from the original investigation or a subsequent comprehensive review is at the heart of this provision. Termination of a countervailing duty is the rule, and its continuation is the exception.

Because continuation is an exception, it is for IAs to prove that unless duties are maintained injury will recur, by conducting a sunset review to this effect. The five-year period runs from the date of the original imposition, from the date of the most recent administrative review under Article 11.2 of AD if the review covered both dumping and injury, or from the date of the most recent sunset review. Since duties can stay in place after the five year period only following a review, absent review, the antidumping order will have to be withdrawn. The introduction of sunset clauses was perceived as a major victory for the negotiators of southeast Asian countries that were quite frequently the targets of AD activity during the GATT years.134 Before their introduction, AD duties could be imposed for long periods and the only way exporters could limit the imposition of duties in time was through a request for initiation of an administrative review (a possibility in the Tokyo-round AD agreement as well). De facto, the only possibility was a requested administrative review, since case law, as we saw previously, had adopted a very deferential attitude toward IAs who routinely refused ex officio reviews. Recall that, in US—Swedish Steel Plate, a GATT panel ruled that the US was not obliged to ex officio initiate a review to evaluate the need to keep 20-year-old AD duties in place. A request for review entails, of course, substantial costs for the exporter, a new round of request and supply of information, and there is no guarantee of the outcome. It was hoped that the introduction of sunset reviews would put an end to all this by introducing the presumption (in principle, at least) that duties must lapse after five years unless the IA could show that their duration was warranted. The initiative and (to some extent) onus to do so would, thus, shift from exporters to the IA.

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There was a “birth defect” from day one, however, that few noticed. An original investigation would be typically initiated following a request to this effect. Sunset reviews would be initiated either upon request (by the domestic industry) or on the initiative of the IA. In some quarters, nothing in the statutory language prohibited an IA from automatically initiating an investigation, such as at a fixed point in time preceding the five-year period. As a result, duties would not necessarily lapse five years after they had been imposed. They would lapse only if the automatically initiated review would support a similar conclusion. This is in and of itself an important observation, since in some quarters the outcome of similar reviews was (almost) consistently pro-continuation. 2.8.2 The Ambit of Sunset Review Article 11.3 of AD reads: ... any definitive anti-dumping duty shall be terminated ... unless the authorities determine, in a review initiated before that date on their own initiative or upon a duly substantiated request made by or on behalf of the domestic industry within a reasonable period of time prior to that date, that the expiry of the duty would be likely to lead to continuation or recurrence of dumping and injury.

What needs to be shown by the IA, thus, is that the expiration of duty would lead to continuation of recurrence of dumping and injury. The methodology is not prejudged in the WTO statute. One would rationally expect serious discussion of the counterfactual, that is, a review of the market situation without AD duties in place, and the incentives this scenario would provide exporters with. Alas, a very deferential standard of review that has been adopted in case law has removed the possibility for serious analysis along these lines. 2.8.3 The Standard of Sunset Review Article 11.3 of AD does not subscribe to a particular methodology to show that unless duties continue to be in place, continuation or recurrence of injury is “likely.” It is case law that provided some precision. While it has stressed that the whole exercise if forwardlooking, and hence some degree of deference to the IA is unavoidable, case law has stressed that IAs must show an appropriate degree of diligence, and reach a reasoned conclusion based on the information before them why it is likely that injury will continue or recur if duties were to be removed (US–Corrosion-Resistant Steel Sunset Review, §§ 1o5ff.). Without saying so, adjudicating bodies have seen a but-for test here: but for the continued imposition of duties, injury is likely to continue or recur.135 2.8.3.1 Likelihood of Continuation or Recurrence of Injury The terms “continuation” and “recurrence” appearing in the body of this provision refer to two different factual situations. The first term presupposes that dumping, injury, or both

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have not ceased to exist during the period of imposition of AD duties. The latter presupposes that the opposite has happened. The rationale for including recurrence is this: if injury has stopped not because of the behavior of the exporters but because of the duties in place, removing duties would lead to recurrence of injury. This should not happen, as the whole purpose of imposing duties is to remove injury. The rationale for the “continuation” standard is harder to follow, as it seems to imply that duties have not effectively addressed injury. One might wonder why, for example, if the dumping of margin has increased since the original imposition, the level of AD duties has not been adjusted as well, following an ex officio or upon request administrative review to this effect? There is no persuasive response to this question. Continuation or recurrence should be likely. The term “likely” has been understood in case law by the AB to be equivalent to the term “probable,” rather than “possible” (US–Corrosion-Resistant Steel Sunset Review, § 111). Probable implies of course a higher degree of likelihood than possible that something will occur. The methodology used to demonstrate the likelihood of continuation or recurrence is not prejudged by the AD Agreement since Article 11.3 of AD imposes an obligation of result rather than of specific conduct. The panel, in its report on US–Corrosion-Resistant Steel Sunset Review, dealt with the consistency of a US statute that expressed the “likelihood” standard in negative formulation. Duties would be removed only if it was unlikely that their removal would lead to recurrence or continuation of dumping and injury. It did not find the US statute to be inconsistent with Article 11.3 of AD (§§ 7.227–228), and the AB did not disturb this finding either. The AB, in its report on US–OCTG Sunset Reviews, addressed an argument by the complainant (Argentina) to the effect that an IA is obliged, by virtue of Article 11.3 of AD, to establish a precise time frame within which continuation or recurrence of dumping and injury would likely occur. The US statute did not specify the time horizon within which the likelihood of recurrence or continuation should occur, and in Argentina’s view, this was unlawful since Article 11.3 of AD imposes a temporal limitation that must be imminent (§ 358). The AB rejected Argentina’s argument. It underscored the panel’s finding that likelihood should be evaluated within the reasonably foreseeable future (with no further precision being required) (§ 360, 364).136 2.8.3.2 Positive Evidence The likelihood of continuation or recurrence of dumping, injury, or both must be determined by the IA. The term “determine,” appearing in the body of Article 11.3 of AD, has been interpreted in case law as dictating a standard that obliges authorities to reach their conclusions on “positive evidence” and justify them as well (AB on US–OCTG Sunset Reviews, §§ 179–180).

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The AB, in its report on US–Hot-Rolled Steel, determined that the requirement of “positive evidence” implied that the evidence must be objective and verifiable (§ 192). The “positive-evidence” standard was also discussed in US—OCTG Sunset Reviews. Where an interested party waives its right to participate in the review process, the US IA will presume the likelihood of continuation or recurrence of dumping, without having to investigate to what extent this has actually been the case. The US law contained two types of waivers: those applicable in situations where an interested party (exporter) had provided incomplete information to questions asked by the IA during the review process (in US parlance, a “deemed waiver”); and those applicable in situations where the exporter had declared that it will not participate in the proceedings (an “affirmative waiver,” in US parlance). The Panel on US–OCTG Sunset Reviews had found both types of waivers to be WTOinconsistent (§§ 7.91–99). On appeal, the US argued that the panel had erred since it had not sufficiently taken into account the process followed by US authorities. Waivers were used when a company-specific review had been conducted; company-specific reviews, however, were only the first leg of the sunset review, since the US IA would also examine the likelihood of recurrence or continuation of dumping on an orderwide basis.137 The AB rejected the US argument. In its view, even though reviews were orderwide, the input to the final determination was flawed since the determination had been based on waivers—that is, not on positive evidence (§ 234): We agree with the Panel’s analysis of the impact of the waiver provisions on order-wide determinations. Because the waiver provisions require the USDOC [US Department of Commerce] to arrive at affirmative company-specific determinations without regard to any evidence on record, these determinations are merely assumptions made by the agency, rather than findings supported by evidence. The United States contends that respondents waiving the right to participate in a sunset review do so “intentionally,” with full knowledge that, as a result of their failure to submit evidence, the evidence placed on the record by the domestic industry is likely to result in an unfavorable determination on an order-wide basis. In these circumstances, we see no fault in making an unfavorable order-wide determination by taking into account evidence provided by the domestic industry in support thereof. However, the USDOC also takes into account, in such circumstances, statutorilymandated assumptions. Thus, even assuming that the USDOC takes into account the totality of record evidence in making its order-wide determination, it is clear that, as a result of the operation of the waiver provisions, certain order-wide likelihood determinations made by the USDOC will be based, at least in part, on statutorily-mandated assumptions about a company’s likelihood of dumping. In our view, this result is inconsistent with the obligation of an investigating authority under Article 11.3 to “arrive at a reasoned conclusion” on the basis of “positive evidence.”

In US–OCTG Sunset Reviews, the AB, while agreeing with Argentina that the “likelihood” determination should be based on positive evidence, it accepted nonetheless that, since a review is by definition a forward-looking exercise, some speculation about future events cannot be avoided. In other words, the requirement to use positive evidence to show likelihood should not be understood as a requirement to completely eliminate uncertainty

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about the course of future events (§§ 340–341). In a similar vein, the AB pointed out in Mexico–Antidumping Measures on Rice that this requirement does not eliminate the possibility for an IA to resort to assumptions. But, as per § 204, “these assumptions should be derived as reasonable inferences from a credible basis of facts, and should be sufficiently explained so that their objectivity and credibility can be verified.”138 In US–OCTG Sunset Reviews, the complainant (Argentina) had asked whether an IA could base its conclusions solely on information already used during the original investigation, and to what extent reliance on similar information satisfied the positive evidence requirement. The AB, citing US–Carbon Steel,139 held that reliance exclusively on the determination made in the original investigation would not suffice. Nothing precluded an IA from using information in the record, provided that it took a fresh look at it (§ 328). 2.8.3.3 Irrelevance of Standards Applied in the Original Investigation Panels and the AB have held that, since sunset reviews and original investigations are distinct processes with different purposes, the disciplines applicable to original investigations cannot be automatically imported into review processes.140 De Minimis Thresholds The Panel on US–Corrosion-Resistant Steel Sunset Review held that the de minimis thresholds applicable during the original investigation, in the absence of explicit language or cross-referencing to this effect, are not applicable in the context of a review (§§ 7.70–71), and especially, at § 7.85: On the basis of this textual analysis of the relevant provisions of the Antidumping Agreement, we conclude that the 2 per cent de minimis standard of Article 5.8 does not apply in the context of sunset reviews. In this context, we again observe that, in light of the qualitative differences between sunset reviews and investigations, it is unsurprising that the obligations applying to these two distinct processes are not identical. (italics in the original)141

In this vein, the AB on US–OCTG Sunset Reviews, upholding the panel’s view in this respect, held that the small volume of export sales to the US market was not an impediment to a finding that dumping would continue to occur were the duties to be revoked (§ 346).142 It went on to find that, when it comes to establishing injury, an IA does not have to respect the standards included in Article 3 of AD (§ 280).143 The AB did not go the full distance and establish what exactly needs to be observed for an injury determination at the sunset stage to be WTO-consistent.144 The AB did add, on the other hand, that an IA may, without being obliged to do so, borrow from its analysis under Article 3 of AD (the original investigation) when conducting its review analysis (§ 284). If it were to borrow from its analysis under Article 3 of AD, and if its analysis were to be judged inconsistent with Article 3 of AD, it would be ipso facto deemed inconsistent with Article 11.3 of AD as well: a subsequent panel, EU–Footwear (China), held as much (§§ 7.337ff.).

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Cumulation The Panel on US–OCTG Sunset Reviews had to deal with a claim that, in the absence of specific language to this effect, cumulation was not permissible at the sunset review stage. It held that cumulation was permissible throughout the investigation and the review processes, but that the standards regarding cumulation during the original investigation reflected in Article 3.3 of AD were not applicable in the context of reviews (§§ 7.323– 336).145 The AB confirmed this finding (§§ 300–302).146 In US–Antidumping Measures on OCTG, the AB confirmed its view that Article 3.3 of AD did not apply to sunset reviews, but it emphasized that on occasion, a cumulative assessment might be inappropriate depending on the conditions of competition in the marketplace (§ 171). Calculation of Dumping Margin The Panel on US–Corrosion-Resistant Steel Sunset Review held that during the review, an IA need not calculate precisely the dumping margins, which would result if it removed the duties. Rather, because uncertainty is inherent in any forward-looking study, some reasonableness standard was warranted; consequently, an IA should not be requested to make a determination of dumping in the sense of Article 2 of AD and provide a precise amount of dumping margins (§§ 7.162–180). This did not mean, according to the panel, that evidence of dumping was not relevant for a likelihood of recurrence or continuation of dumping determination (§ 7.180). On appeal, the AB confirmed this view (§§ 123–124), but it made one important clarification, thus overturning the panel’s ruling in this respect. If a WTO member went ahead and calculated dumping margins, it should do so only in accordance with Article 2 of AD (§§ 127–128).147 The same panel (US–Corrosion-Resistant Steel Sunset Review) faced the question of whether an IA would be required, by analogy with the obligation included in Article 6.10 of AD, to calculate an individual margin of dumping for each exporter or producer investigated, and to make a determination of likelihood of recurrence or continuation of dumping and injury for each exporter or producer under review. The panel considered that no such company-specific likelihood determination was required, and a determination could thus be made on an orderwide basis (§§ 7.207–208). The AB confirmed this view. It acknowledged that Article 11.4 of AD contained an explicit cross-reference to the provisions of Article 6 of AD (regarding evidence and procedure), making these rules applicable to review situations. Article 6.10, however, requiring from IAs to calculate individual margins of dumping, could not apply in a review because, according to the AB, an IA in a review was not required under Article 11.3 of AD to calculate dumping margins in the first place. Hence, the requirement to make an individual company-specific determination as set forth in Article 6.10 of AD cannot apply in a review situation (§ 155).

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It follows that neither individual dumping margins nor precise margins need to be calculated at the review stage. Causal Link The AB held in US–Antidumping Measures on OCTG that Article 11.3 of AD requires an IA to make a determination concerning the likelihood of dumping and injury, but not to make a causal link between the two (§§ 123–124): Therefore, what is essential for an affirmative determination under Article 11.3 is proof of likelihood of continuation or recurrence of dumping and injury, if the duty expires. The nature and extent of the evidence required for such proof will vary with the facts and circumstances of the case under review. Furthermore, as the Appellate Body has emphasized previously, determinations under Article 11.3 must rest on a “sufficient factual basis” that allows the investigating authority to draw “reasoned and adequate conclusions.” These being the requirements for a sunset review under Article 11.3, we do not see that the requirement of establishing a causal link between likely dumping and likely injury flows into that Article from other provisions of the GATT 1994 and the Antidumping Agreement. Indeed, adding such a requirement would have the effect of converting the sunset review into an original investigation, which cannot be justified. Our conclusion that the establishment of a causal link between likely dumping and likely injury is not required in a sunset review determination does not imply that the causal link between dumping and injury envisaged by Article VI of the GATT 1994 and the Antidumping Agreement is severed in a sunset review. It only means that re-establishing such a link is not required, as a matter of legal obligation, in a sunset review. (italics in the original)148

That last paragraph is probably at odds with the wording of Article 11.3 of AD (“dumping and injury”). It also seems to suggest that the causal link between dumping and injury will persist but does not need to be shown, since it had been established in the original investigation. It is doubtful, though, whether dumping always leads to injury. Why introduce Article 3.5 of AD in the first place, then, if dumping is always injurious? What if there is no domestic production anymore? Of all the AB interventions in this regard, this is the most dramatic. By reducing a demonstration of causality at the review stage to redundancy, it effectively tilted, the balance of probabilities in favor of positive response to the question of whether continuation or recurrence of dumping and injury would persist if duties were to expire. 2.8.3.4 Zeroing in Sunset: Illegal as Well The panel in its report on US–Shrimp II (Viet Nam) held that there is no need to calculate individual dumping margins when performing a sunset review either. It also confirmed that IAs must respect the disciplines imposed if they were to calculate dumping margins. It then concluded that that the US was in violation of its obligations under Article 11 of AD because it had not taken into account “zeroed” negative margins. The US was in violation of its obligations, but not because it had to calculate individual dumping margins. It was in violation because it chose to do so, but then zeroed all negative margins. (§§ 7.305ff., and especially §§7.311 and 7.312).

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135

Ex Officio and Upon Request Reviews

A sunset review may be initiated either ex officio or upon a duly substantiated request. When the latter occurs, the request must be deposited within a reasonable period of time prior to the expiration of the five-year period. The AD Agreement does not impose an obligation to start ex officio sunset reviews on a specific date. As a result, WTO members retain some discretion on this score. US law provides for automatic initiation of sunset reviews. The AB report on US—Carbon Steel describes the process as follows (§ 101):149 Section 751(c)(2) of the Tariff Act directs USDOC to publish a notice of initiation of a sunset review no later than 30 days before, inter alia, the fifth anniversary of the date of publication of a countervailing duty order. Section 351.218(b) of Title 19 of the Regulations confirms that USDOC will conduct a sunset review of each countervailing duty order. Both the Sunset Policy Bulletin and the SAA describe the initiation of sunset reviews by USDOC as “automatic.” (italics in the original)

The AB held that this law was not inconsistent with the requirements of the SCM Agreement (§ 118). Confirmation that this interpretation is good law in the AD context as well came with the panel report on US–Corrosion-Resistant Steel Sunset Review. The panel held that automatic self-initiation procedures in the context of sunset review were not inconsistent with the AD Agreement because they did not necessarily150 result in continuation of the duties in place (§ 7.55). The panel declined to rule on a related argument made by Japan to the effect that an automatic sunset review takes away the discretionary authority to initiate a sunset review that is implied by the terms “on its own initiative,” as this claim was not, according to the panel, properly before it (§§ 7.46–54). Automatic initiation of sunset reviews reduces of course, the probability that duties will lapse at the end of the five year period. This is so because irrespective of the merits of keeping them in place, the discontinuation of duties is function of the outcome of the review. The deferential standard of review applied at the sunset stage by WTO panels that we have discussed above, might incentivize IAs to keep duties in place. The last sentence of Article 11.3 of AD clarifies that duties will remain in place during the review process. Since the imposed duties will remain in place while the review is continuing, there is a risk that WTO members might keep duties in place for a period longer than the statutory five-year period by starting a review as late as possible. This risk is somewhat addressed through the discipline included in Article 11.4 of AD that stipulates that a review should normally be completed within 12 months. One would expect that, if a review extends beyond the five-year deadline and the outcome is that duties should not be imposed beyond “sunset,” IAs would reimburse duties perceived after the completion of the fifth year.

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Due Process

Article 11.4 of AD provides that the provisions of Article 6 of AD (regarding evidence and certain procedural requirements) shall apply to sunset reviews. Reviews shall be carried out expeditiously and shall, normally, be concluded within 12 months of initiation of the review. The due process rights of interested parties must be respected in the context of a sunset review, the expedited character of reviews notwithstanding. In US—Corrosion-Resistant Steel Sunset Reviews, and US–OCTG Sunset Reviews, the AB held that IAs had to allow interested parties to present evidence and defend their case in sunset reviews as well. In the words of the AB on US–Corrosion-Resistant Steel Sunset Reviews (§ 152): Article 6 requires all interested parties to have a full opportunity to defend their interests. In particular, Article 6.1 requires authorities to give all interested parties notice of the information required and ample opportunity to present in writing evidence that those parties consider relevant. Articles 6.2, 6.4, and 6.9 provide other examples of the kind of opportunities that investigating authorities must give each interested party ... They therefore confirm that investigating authorities have certain specific obligations toward each exporter or producer in a sunset review.

As we will see in more detail later in this chapter, “interested parties” (that is, exporters, foreign governments where exporters originate, and the domestic industry, as per Article 6.11 of AD) have the right to participate and defend their interests from the moment an investigation has been launched until it has been concluded. Article 6.2 of AD reads: Throughout the anti-dumping investigation all interested parties shall have a full opportunity for the defence of their interests. To this end, the authorities shall, on request, provide opportunities for all interested parties to meet those parties with adverse interests, so that opposing views may be presented and rebuttal arguments offered.

They enjoy equal rights at the stage of administrative and sunset review as well. The reason why we entertain this issue here is that we want to underscore a point that often sneaks by. The identity of exporters can change from one stage of the investigation to another. It could be, for example, that Home investigates A and B during the original investigation and imposes an all others’ rates duty on C, D, and E. Then, during the sunset review, it might choose to investigate how the behavior of C would be affected by the elimination of duty. It could be, for example, that an IA is led to believe that dumping will recur in case duties were removed, not because A and B will be dumping, but because C will be dumping. C, in our illustration, had not been reviewed during the original investigation, but might be reviewed at the sunset review stage. There is, in other words, no obligation to review the same exporters consistently throughout the investigation.151

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137

Sunset Practice

Cadot et al. (2006) examined data from 1979 to 2005 and concluded that, since the advent of sunset clauses, the majority of AD duties imposed are not renewed beyond the five-year period. Recall nevertheless, that up until the end of the Tokyo round, the EU and US held a quasi-monopoly in the imposition of AD orders. The new players appeared during and after the Uruguay round. In this vein, Cadot et al. (2006) also observed that, originally, the five-year deadline did not change much with respect to EU practice, where duties had been rarely imposed for longer than five years. This was the policy recommendation by a group of experts that had been formed following a recommendation by the then Trade Commissioner for the EU, Peter Mandelson.152 The recommendations of the group were short-lived. Karel De Gucht, the next Trade Commissioner for the EU, started an ambitious project to modernize, among other things, the EU Antidumping Regulation. At the time of writing, the modernization package is going nowhere; it is still a project. It is noteworthy, though, that duties are now imposed for five years, and the EU has started doing sunset reviews as before. US practice, nevertheless, tells a different story, according to the results in Moore (2004) and Cadot et al. (2006). Duties will routinely remain in place in the US beyond the initial five-year period, following sunset reviews to this effect. 2.8.7 Administrative and Sunset Reviews: The Overlap In its report on US–Shrimp II (Viet Nam), the panel provided its understanding of the common function that administrative and sunset reviews share, since they both aim to ensure that duties will stay in place only to the extent necessary (§ 7.364): ... each paragraph provides for a review of the continuing need for the duty, one at a specified point in time, on the investigating authority’s own initiative or on the basis of a substantiated request by the domestic industry, in order to justify continuing the duty at all; the other available at any time, on the investigating authority’s own initiative or on the basis of a substantiated request by an interested party (provided in the latter case that a reasonable period of time has elapsed since the imposition of the definitive duty) to examine the continued need for the duty.

So much for similarities. The panel saw an important difference between the two instruments, though. Whereas in the context of the administrative review it is the level of the individual duty of the exporter requesting a review that will be examined, it is the countrywide duty that will constitute the subject matter of a sunset review. In the panel’s view, this conclusion as warranted because in the case of a request for administrative review, it is only the level of the individual dumping margin that will be entertained. This is not the case in the context of a sunset review (§§ 7.369ff.).

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Duties Can Be Imposed Only Following Investigation Conducting Investigation Is a Legal Requirement

Article 1 of AD reads: “An anti-dumping measure shall be applied only under the circumstances provided for in Article VI of GATT 1994 and pursuant to investigations initiated and conducted in accordance with the provisions of this Agreement.” A footnote to this provision reads: “The term ‘initiated’ as used in this Agreement means the procedural action by which a Member formally commences an investigation as provided in Article 5.” Absent investigation, thus, no duties can be lawfully imposed. A GATT panel report, Brazil–EEC Milk, found that, by not conducting an investigation to this effect, Brazil had unlawfully imposed CVDs against EU exports of milk and milk powder. The same should be true with respect to AD duties as well. 2.9.2 Who Can Request Investigation? 2.9.2.1 Ex Officio An AD investigation can be launched ex officio (Article 5.6 of AD). 2.9.2.2 Upon Request An AD investigation can also be launched upon request (Article 5.1 of AD). Since ex officio initiations are highly exceptional, we concentrate in what follows on investigations launched upon request. Mutatis mutandis, our analysis in what follows applies to ex officio requests as well. 2.9.3

Standing Requirements

2.9.3.1 The Rationale for Standing Requirements Article 5.4 of AD lays down the standing requirements that the domestic industry filing an application must fulfill: An investigation shall not be initiated pursuant to paragraph 1 unless the authorities have determined, on the basis of an examination of the degree of support for, or opposition to, the application expressed by domestic producers of the like product, that the application has been made by or on behalf of the domestic industry. The application shall be considered to have been made “by or on behalf of the domestic industry” if it is supported by those domestic producers whose collective output constitutes more than 50 per cent of the total production of the like product produced by that portion of the domestic industry expressing either support for or opposition to the application. However, no investigation shall be initiated when domestic producers expressly supporting the application account for less than 25 per cent of total production of the like product produced by the domestic industry.

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The inclusion of this provision was intended as a guarantee to the effect that initiations of investigations will not take place in a rushed or unthinking way. Empirical work conducted by Prusa (1992) and Rutkowski (2007) confirms that initiation of investigation in and of itself can have nefarious effects on exporters because of the resulting uncertainty regarding transaction costs for the products under investigation.153 By requiring that a relatively high percentage of domestic industry is behind a request, the AD Agreement wanted to ensure that there was some serious concern that needed to be addressed. The percentage will, of course, be reached more easily if the market is concentrated in a few dominant players. 2.9.3.2 Statutory Thresholds When reading Article 5.4 of AD that we have quoted in full above, we are led to conclude that there are two thresholds that must be met simultaneously: the application needs to be supported by those producers (i) whose collective output is more than 50 percent of the total production of that portion of the domestic producers expressing an opinion in favor or against the initiation, and (ii) more than 25 percent of the total production of the like product in the importing WTO member.154 Assume that A, B, C, and D are the only companies producing a like product to the dumped good, and they are producing 10 tons, 20 tons, 50 tons, and 20 tons, respectively. A and B support the initiation, C is opposed to initiation, and D remains outside the fray. The joint production of A and B is 30 tons, which is less than 50 percent of the total production of the producers expressing an opinion (A, B, and C, which together produce 80 tons). If C had stayed out of it, and it had been D who had voiced opposition to the idea of an initiation, A and B would have met the first threshold, as together they produce 30 tons, which is more than 50 percent of the 50 tons produced by A, B, and D. In either scenario, A and B together produce 30 tons, which is more than 25 percent of the total production of the domestic industry (A, B, C, and D), which amounts to 100 tons. The Panel on US–Offset Act (Byrd Amendment) faced a complaint to the effect that the US had disrespected Article 5.4 of AD. The US administration had promised to afford all US companies that would actively back a petition to impose AD duties a redistribution of the eventually imposed duties. These were the notorious Byrd payments, alluded to earlier in this chapter. We stated previously that this measure was enacted in the hope of addressing a collective action problem that would inhibit petitions from meeting the statutory thresholds established in Article 5.4 of AD. Concentrated industries are likelier to meet the statutory threshold since it might suffice that two or three companies get together and agree on petitioning an investigation. The problem is more acute when markets are not concentrated. To ensure that AD actions will not be inhibited in the latter case, Byrd payments were introduced.155 A caveat is necessary here. Hansen and Prusa (1996) showed that low-concentration industries are not without hope in getting their petitions through, since they would typically

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command broader political support than would high-concentration industries. The authors acknowledged that high-concentration industries would typically find it easier to organize their petitions, and their main findings were simply meant to relax somewhat the anxiety that low-concentration industries were feeling about petitioning AD duties. Various papers support the finding that high-concentration industries find it easier to launch of an investigation. Bown and Crowley (2013), using four-firm concentration (CR4), found that it is likelier that high-concentration industries will enjoy protection. Reynolds (2006) examined the effects of Byrd payments and found that, by awarding payments only to firms that had actively supported the petition, the law mitigated the “free rider” problem traditionally associated with collective actions. Empirical results in this study provide strong evidence that industries have filed more AD petitions under the new law. Crucially, the average proportion of firms in the industry filing these petitions increased under the law. This finding suggests that the law at least partially alleviated free-riding incentives. Similar studies help unveil the rationale behind the enactment of the Byrd Amendment. A host of trading nations complained about its enactment. The major claim advanced was that, by providing operators with an incentive to support an application, the US authority had reduced a statutory requirement to redundancy (Article 5.4 of AD). The panel agreed with the complainants, finding that the US measure (Byrd payments) was inconsistent with the terms of Article 5.4 of AD since, in its view, it violated the principle of good faith (“bona fides”). It held that the US measure undermined the value of the standing requirement (§§ 7.59–65).156 On appeal, the AB reversed the panel’s conclusions in this respect (§ 283): A textual examination of Article 5.4 of the Antidumping Agreement and Article 11.4 of the SCM Agreement reveals that those provisions contain no requirement that an investigating authority examine the motives of domestic producers that elect to support an investigation. Nor do they contain any explicit requirement that support be based on certain motives, rather than on others. The use of the terms “expressing support” and “expressly supporting” clarify that Articles 5.4 and 11.4 require only that authorities “determine” that support has been “expressed” by a sufficient number of domestic producers. Thus, in our view, an “examination” of the “degree” of support, and not the “nature” of support is required. In other words, it is the “quantity,” rather than the “quality,” of support that is the issue.

Consequently, in the AB’s view, Article 5.4 of AD imposed a formal requirement to ensure that a certain percentage of the domestic industry supported an application, and nothing more. In the eyes of the AB, the influence that the measure exerted on companies that might have stayed idle if not for this law was irrelevant altogether. The AB refused to enter into the rationale for enacting the Byrd Amendment. It did not even acknowledge the issue of collective action at all. Consequently, a WTO member that manipulated the standing requirements, and thus reduced the “bite” of a provision that had been negotiated amid fierce opposition against it, managed to “get away with it.”157

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The quintessential purpose of this provision was to ensure that petitions would be genuine, in the sense that domestic industry would be reacting to cheaper imports that threatened its existence. Recall that the idea was that an AD investigation should not be initiated at the drop of a hat, precisely because of the nefarious impact it can have on international trade. US companies might support a filing, not necessarily because they feel they have a strong case of injurious dumping to show before the authorities, but in the hope of receiving windfall profits (Byrd payments). In the meantime, they are shifting costs to their competitors through the petition, as Prusa (1992) and Rutkowski (2007) have shown.158 One of the conclusions of Reynolds (2006) was that, by increasing the total benefits accruing to industries filing successful petitions, the law subsidizes rent-seeking. The AB ruling, unfortunately, condoned all of the above. 2.9.4 The Content of Requests An investigation will be initiated if the IA decides that the evidence submitted through the application of the domestic industry is adequate and justifies the initiation of the process. Article 5.2 of AD reflects the elements that an application must contain: An application under paragraph 1 shall include evidence of (a) dumping, (b) injury within the meaning of Article VI of GATT 1994 as interpreted by this Agreement and (c) a causal link between the dumped imports and the alleged injury. Simple assertion, unsubstantiated by relevant evidence, cannot be considered sufficient to meet the requirements of this paragraph.

Article 5.2 of AD further specifies that “the application shall contain such information as is reasonably available to the applicant” concerning the domestic industry, the allegedly dumped product and the alleged dumpers, the NV and EP, the volume and price effect of the imports, and their consequent impact on the domestic industry. The term “simple assertion,” featured in the body of this provision, denotes that what must be avoided is unsubstantiated information. The term “evidence,” also in this provision, should not be equated to full proof, or proof beyond reasonable doubt. The Panel on Mexico–Corn Syrup clarified that the application need not contain information on all injury-related factors listed in Article 3.4 of AD (§ 7.73). In the same vein, the Panel on Thailand–H-Beams held that (§ 7.77) “raw numerical data would constitute ‘relevant evidence’ and not merely a ‘simple assertion’ within the meaning of this provision.” More generally, according to the Panel on Mexico–Corn Syrup (§ 7.76), “Article 5.2 does not require an application to contain analysis, but rather to contain information, in the sense of evidence, in support of allegations. While we recognize that some analysis linking the information and the allegations would be helpful in assessing the merits of an application, we cannot read the text of Article 5.2 as requiring such an analysis in the application itself.”159

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To recap, it follows that on the one hand, there is no requirement to submit analysis and proof, but, on the other, information submitted must be relevant. Of course, it would be unreasonable to request full information at this stage. Petitioners might be facing cases of genuinely private information (e.g., the pricing policy of the exporter in its own market). Since even requests that have only a slim chance of success can have nefarious effects on trade, the “relevance of information” standard emerges as the first attempt to thwart frivolous requests. Is it truly the case, though, that frivolous requests create problems for exporters? Prusa (1992) looked at a wide sample of cases, including those where a petition was withdrawn. His data showed that withdrawn cases have comparable effects on trade as cases that resulted in duties. What he termed “nuisance suits” (that is, petitions with a low probability of success) can confer large gains on the domestic industry supporting the petition.160 Actually, an effect on the market might exist from the moment that an announcement of a petition is made public. Rutkowski (2007) examined 45 such withdrawals in EU practice (between 1992 and 2004) and tested this hypothesis, with similar results.161 The manner in which IAs will implement their discretion and distinguish wheat from chaff at this stage of the process will largely provide the response to the question of whether frivolous requests will have a short life or a longer one. We turn to this question in what immediately follows. 2.9.5 The Decision to Initiate Investigation The decision to initiate an investigation or not to do so belongs to the IA. The process is internal in the sense that, following the request by domestic industry, the IA concerned will decide whether to launch or not, without having to entertain the opinion of exporters as well beforehand. When presented with an application (“petition”), an IA is not obliged to initiate an investigation, since it retains discretion to this effect. Article 5.3 of AD provides that, even in cases where the application contains evidence on dumping, injury, and the casual link between them, no investigation may be initiated unless the IA has examined the record and verified the accuracy and adequacy of the information contained therein. When the IA is persuaded as to the accuracy of the information provided and the wellfounded nature of the allegations, it may decide to launch a formal investigation. In other words, a petitioner is not guaranteed an investigation even if it has satisfied the requirements embedded in Article 5.2 of AD. This is the natural consequence of the fact that the WTO regulates rights and obligations of WTO members, and not of private entities. Governments are sums of interests, and, in principle at least, (should) act in the name of social welfare. By retaining discretion, WTO members can extract promises and contributions from those interested in the imposition of AD duties. It could also be the case that, presented with enough evidence of injurious dumping, a WTO member might decide to

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use the petition in order say to fend off challenges by other WTO members (where exporters that allegedly dump are located). The key point here is that IAs retain discretion, as a matter of WTO law, to initiate an investigation even if presented with robust evidence of injurious dumping. 2.9.5.1 The Duty to Examine Supplied Information Article 5.3 of AD reads: “The authorities shall examine the accuracy and adequacy of the evidence provided in the application to determine whether there is sufficient evidence to justify the initiation of an investigation.” This provision should be read in conjunction with Article 5.7 of AD, which requires from IAs that: “The evidence of both dumping and injury shall be considered simultaneously (a) in the decision whether or not to initiate an investigation, and (b) thereafter, during the course of the investigation, starting on a date not later than the earliest date on which in accordance with the provisions of this Agreement provisional measures may be applied.”162 An IA has a duty to actively check the accuracy and adequacy of the information submitted under Article 5.2 of AD. The Panel on US–Softwood Lumber V held as much (§§ 7.74ff.). In a similar vein, the GATT Panel on US–Norwegian Salmon AD, held that IAs cannot automatically initiate an investigation. They are under the duty to evaluate the information submitted, and retain discretion with respect to the ultimate decision to initiate or not (§ 358). 2.9.5.2 IAs Retain Discretion to Initiate An IA that has found that submitted information is inadequate can go ahead and complete the record ex officio. It has, however, no obligation to do so. The panel held as much in its report on US–Softwood Lumber V (§ 7.75). If the IA thinks that the submitted information was inadequate, or if, after having tried to complete it itself, it did not manage to do so, it will reject the application, as per Article 5.8 of AD: “An application under paragraph 1 shall be rejected and an investigation shall be terminated promptly as soon as the authorities concerned are satisfied that there is not sufficient evidence of either dumping or of injury to justify proceeding with the case.” In the opposite scenario, it will issue a notice of initiation of investigation. Assuming that the decision is taken to initiate an investigation, an IA will have to issue a public notice to this effect. When issuing this notice, the IA concerned will have to observe the requirements reflected in Article 12.1 of AD. The authorities must during the course of the investigation satisfy themselves as to the accuracy of the supplied information upon which their findings will be based (Article 6.6 of AD). Now what does this duty specifically entail? The Panel on Guatemala–Cement II (§ 8.31), as well as the Panel on Argentina–Poultry Antidumping Duties (§ 7.60) were of the view that, while the accuracy and adequacy of the evidence are relevant to the authorities’ determination whether there is sufficient evidence to justify initiation, “it is, however,

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the sufficiency of the evidence, and not its adequacy and accuracy per se, which represents the legal standard to be applied in the case of a determination whether to initiate an investigation.” Sufficiency, thus, as opposed to adequacy or accuracy, is what matters. This does not mean that information can be inadequate or inaccurate. Sufficiency is a complement and not a substitute to adequacy and accuracy. Information submitted must be judged sufficient to initiate an investigation. The Panel on US–Softwood Lumber V held that the IA concerned was justified to initiate investigation in the presence of the following information: • Cost-related evidence from smaller surrogate domestic producers (as a proxy for cost data from the exporters/producers allegedly dumping) satisfies the requirements of Article 5.3 of AD (§ 7.95). • Cost allocation to specific products can legitimately not take place at this stage, and hence absence of evidence concerning such cost allocation is not at odds with the requirements of Article 5.3 of AD (§ 7.97). • If cost data from various surrogate companies covers the whole year and cost data from one company covers the whole period, Article 5.3 of AD has not been violated (§ 7.99). • The fact that evidence of dumping is found only with respect to some categories of the product among those for which an initiation of investigation has been requested is not at odds with the requirements of Article 5.3 of AD (§ 7.101). • Prices for domestic sales (home market) can legitimately be taken from a specialized magazine, even though it reflects a number of sales and is not related to a specific sale (§ 7.105). • An affidavit that reflects deleted (confidential) information can legitimately be taken into account (§ 7.120). • Price information on only two out of seven categories of lumber products under investigation suffices to meet the requirements of Article 5.3 of AD, so long as the evidence concerns more than an insignificant subset of the imported product (§ 7.123). • Freight cost information related only to truck freight does not violate Article 5.3 of AD, as nothing before the authority indicated that only rail was used to transport lumber, or even that rail was mostly used (§ 7.126). It is important to point out that the exporters alleged to have been dumping are not involved at all in the preinitiation phase. Article 5.5 of AD expressly provides that an IA shall avoid publicizing the application for initiation of an investigation unless a decision has been made to initiate it. The only obligation that exists is to notify the government of the exporting country of the receipt of a properly documented application prior to initiation of the investigation. The reason for this is to avoid a chilling effect on trade, which even

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the submission of an application may have, given the likelihood that it may lead to the initiation of an investigation and subsequent imposition of AD duties. Having sufficient submitted evidence leaves IAs with substantial discretion to decide on the next steps. Case law has provided some clarifications that act as restraining factors to the exercise of discretion. The Kind of Evidence Required Article 5.3 of AD does not expressly provide that the evidence in question should relate to the questions of dumping, injury, and the casual link, but panels, reading Article 5.3 of AD in the context of Article 5.2 of AD, have consistently held that this is the kind of evidence required to justify initiation.163 Unbiased and Objective IA In order to determine whether there is sufficient evidence of dumping and injury, an IA cannot entirely disregard the elements that configure the existence of that practice as outlined in Articles 2 and 3 of AD.164 In other words, even though the various provisions of Article 2 of AD relating to NV and EP do not apply, as such, to the initiation determination, they are certainly relevant to the authorities’ determination regarding the sufficiency of evidence.165 According to the Panel on US–Softwood Lumber V (§ 7.80): this does not, of course, mean that an investigating authority must perform a full-blown determination of dumping in order to initiate an investigation. Rather, it means simply that an investigating authority should take into account the general parameters as to what dumping is when inquiring about the sufficiency of the evidence. The requirement is that the evidence must be such that an unbiased and objective investigating authority could determine that there was sufficient evidence of dumping within the meaning of Article 2 to justify initiation of an investigation.

Evidence of NV and EP at Different Levels of Trade In Guatemala–Cement II, the panel held that the Guatemalan IA was not justified in initiating an investigation based on an application that presented data for NV and EP at different levels of trade, and with important differences in the sales quantities, without examining the possible effects of such differences on price comparability (§§ 8.37ff.). Comparability of Submitted Evidence The Panel on Mexico–Steel Pipes and Tubes held that the information contained in a request for initiation was not sufficient if the information regarding NV consisted of one invoice and one price quote that did not even pertain to the known exporter but to a distributor, was related only to a small subset of the product under investigation, and concerned one single day. By contrast, the EP information reflected the full spectrum of products imported by Mexico from Guatemala over the entire POI, at the level of the Guatemalan producer or exporter. The panel found that differences of this kind typically

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lead to a distortion of the NV vis-à-vis the EP and thus, if not adjusted, they could give rise to apparent margins of dumping where no dumping in fact exists (§ 7.42). In Argentina–Poultry Antidumping Duties, the panel held that the Argentine IA had not justifiably initiated an investigation, even though the application contained evidence about at least a number of transactions that were dumped, since not all comparable export transactions had been included in the preliminary dumping analysis. Incomplete Information An investigation cannot be initiated on incomplete information. In Guatemala–Cement II, the IA was faulted for initiating an investigation involving a claim of threat of injury that contained information on dumping, injury, and the causal link, but did not provide information on the additional threat factors of Article 3.7 of AD. The Panel on Mexico–Steel Pipes and Tubes held that the Mexican IA could not have initiated an investigation on the basis of the volume of import data at the tariff-line level without any breakdown of such data at the specific product level. Interestingly, the Mexican IA had acknowledged this problem, stating, at the time of initiation, that this was one of the issues that it was going to investigate in the course of the investigation in order to determine the exact trend in the volume of imports of the subject product as part of its injury analysis. Actually, the investigation confirmed that the subject product constituted a substantial portion of the imports under this more general tariff line, thus confirming the reliability of the data. The panel did not consider any of this to be relevant in its assessment of whether, at the time of initiation, the Mexican IA was in possession of information sufficient to justify the investigation (§§ 7.58–60).166 2.9.6

Rights and Duties of Investigating Authorities during Investigation

An IA, when initiating an investigation, will possess information regarding dumping and injury, but still will have some way to go to establish that dumping indeed had caused injury. To do that, it might have to request additional information (by sending questionnaires to the parties to this effect), and it might need to verify all submitted information. At the end of the investigation process, it must be demonstrated that dumping has caused injury. The road that an IA must cover from the launch to the end of an investigation travels from sufficient information to launch the process to proof that dumping has caused injury. Throughout the process, an IA must perform an objective examination of the record before it as it develops, and respect due process. Parties to the process are under a duty to cooperate. 2.9.6.1 The Right to Request Information through Questionnaires IAs typically send out questionnaires to the domestic industry (requesting information on the injury), and the exporters (requesting information regarding the dumping margin). According to Article 6.1.1 of AD:

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Exporters or foreign producers receiving questionnaires used in an anti-dumping investigation shall be given at least 30 days for reply. Due consideration should be given to any request for an extension of the 30-day period and, upon cause shown, such an extension should be granted whenever practicable.

The AD Agreement does not provide for a definition or mandatory table of contents for questionnaires. The AB in EC–Fasteners (China) rejected the idea that an EU formulary requesting information regarding the market economy status of individual exporters was a questionnaire because of its limited scope.167 It briefly provided its understanding of the term “questionnaire” (§ 613): We therefore find that the “questionnaires” referred to in Article 6.1.1 are a particular type of document containing substantial requests for information, distributed early in an investigation, and through which the investigating authority solicits a substantial amount of information relating to the key aspects of the investigation that is to be conducted by the authority (that is, dumping, injury, and causation). While in many investigations one “questionnaire” may be employed to solicit such information on these aspects of the investigation, we consider that, depending on how different Members organize the conduct of the investigation process, a party may receive several substantial requests soliciting such comprehensive information that are “questionnaires” within the meaning of Article 6.1.1. (italics in the original)

The gist of the quoted excerpt, although admittedly it is not a monument of clarity, is that a questionnaire should have wide scope. The panel, nonetheless, does not exclude the possibility that various requests can occur within the investigating period. The question that this panel has left unanswered is whether questions of limited scope must still respect the thirty days limit provided for in Article 6.1.1 of AD. 2.9.6.2 The Right to Conduct On-the-Spot Verification IAs might find it useful to conduct on-the-spot verification to ensure the accuracy of submitted information. On-the-spot verification may take place only in cases where the firms to be verified agree to them, and the authorities of the exporting member have been notified and have not objected to their conduct (Article 6.7 of AD).168 Annex I of AD contains further details relating to on-the-spot verification. We should note, however, that verification is not compulsory. The aim of verification is to ensure that supplied information is accurate. IAs can have an opinion about the accuracy of supplied information even without going through the verification process. In the view of the Panel on US–DRAMS, the authorities (§ 6.78) “could ‘satisfy themselves as to the accuracy of the information’ in a number of ways without proceeding to some type of formal verification, including for example reliance on the reputation of the original source of the information.”169 The authorities must explain in clear terms the information required for verification purposes to the exporters/foreign producers (Argentina–Ceramic Tiles, panel report, § 6.57).170 They must also secure the agreement of firms where verification will take place, and WTO members where the firms are located (AB, China–HP-SSST (EU), and China– HP-SSST (Japan) at §§ 5.70ff. Verification does not have to be limited to information

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submitted prior to the visit, but it also may include information that will be provided during the course of verification. The Panel on Guatemala–Cement II ruled as much (§ 8.203).171 In China–HP-SSST, the panel dealt with the following request by the EU: an EU company had provided for the first time during the verification the Chinese IA with rectification of information that had been supplied before. The IA refused to accept it. The panel held that, in light of the fact that verification of the supplied information was quite simple, China had violated its obligations under Art. 6.7 AD and Annex 1§7 of AD by refusing to accept the rectification provided by the investigated company (§§7.98–101). The AB upheld this finding in §5.76. The results of verification must be made available to the verified firms, as well as to the applicants. The Panel on Korea–Certain Paper held that this disclosure does not necessarily have to be made in writing (§ 7.188). This finding is not totally unproblematic in light of evidentiary problems in the case of challenges regarding whether disclosure occurred or not. The obligation to disclose the results of the verification is intended to ensure that exporters can structure their cases for the rest of the investigation in light of those results. The Panel on Korea–Certain Paper also held that disclosure must contain adequate information regarding all aspects of the verification, including a description of the information that was not verified, as well as of the information that was successfully verified, since both could be relevant to the presentation of the interested parties’ case (§ 7.192). 2.9.6.3 The Right to Draw Inferences IAs might face cooperative or uncooperative behavior. There is an undeniable duty to cooperate, which has statutory underpinnings, and has been acknowledged in case law as well (Panel report on EC–Countervailing Measures on DRAM Chips). Briefly, when faced with uncooperative behavior, panels can have recourse to suboptimal available information to decide on the imposition of AD duties (the so-called best information available, BIA, the statutory underpinnings of which are in Article 6.8 of AD, are discussed later in this chapter). The Panel on EC–Countervailing Measures on DRAM Chips went one step further and found that an authority can draw adverse inferences in case interested parties fail to cooperate (§§ 7.60–61).172 We will discuss this point in more detail later in this chapter since it is intimately linked with the right of IAs to have recourse to the BIA when facing uncooperative behavior by investigated exporters. 2.9.6.4 The Duty to Observe Due Process There is nothing like a “World Antidumping Authority” composed of international officials. IAs are national administrative entities, and as such, they are part of the political economy constraints in any given sovereignty. The framers of the AD Agreement, mindful of the potential influence that domestic constituencies might exercise on IAs, opted for institutional guarantees that would reduce the risk for politically motivated decisions. This is where the requirement for evenhandedness imposed on IAs begins. It is a multi-

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faceted requirement, since IAs must observe this requirement at different stages of the investigation process. Since exporters and domestic industry have antithetical interests, they must be afforded equal chances to present their views. In this vein, interested parties are to be given timely opportunities to see all information that is relevant to the presentation of their case, that is not confidential,173 and that has been used by the investigating authorities. Article 6.1 of AD captures the essence of this obligation: “All interested parties in an anti-dumping investigation shall be given notice of the information which the authorities require and ample opportunity to present in writing all evidence which they consider relevant in respect of the investigation in question.” This obligation is explained further in a series of more specific obligations. Interested parties must be allowed to prepare presentations174 on the basis of this information, and authorities must keep a public record of the investigation to serve this duty (Article 6.4 of AD). For example, in the case of a constructed NV, the actual figures for cost of manufacture, SG&A expenses, or profits used in the calculation of the constructed NV are to be disclosed to the interested party requesting such information.175 IAs must thus divulge information submitted by other interested parties, as well as information from other sources or documents prepared by the authorities, to comply with this obligation. This obligation, thus, corresponds in part to the duty to access the file that interested parties have, and which is discussed in detail later in this chapter.176 2.9.6.5 The Duty to Protect Confidential Information During AD investigations, a substantial amount of information requested (and often submitted) is of a confidential nature. To provide interested parties with the incentives to submit information of this nature, which might be crucial during the investigation process, the AD Agreement guarantees that it will be disclosed only with the permission of the party submitting it (Article 6.5 of AD). According to the agreement, there are two types of confidential information: information that is confidential by nature (the agreement contains an illustrative list of information that is confidential by its very nature), and information for which the party supplying it has requested confidential treatment. Regardless of whether the supplied information is by nature confidential or a request to be treated as such has been lodged, it is always the party that provides the information that must show “good cause”177 why the information supplied should be treated as confidential. Several panels (e.g., Guatemala–Cement II; Korea–Certain Paper) have held as much.178 The party aiming to show good cause must point to the prejudicial effect that it wishes to avoid in order to substantiate its request. The IA is obligated to evaluate objectively the request made for confidentiality. The Panel on EC–Fasteners (Article 21.5–China) must balance the prejudicial effect for the party showing good cause, with the prejudicial effect on due process because of nondisclosure (§ 7.30ff.). In the same report, the panel held that the lack of contest by exporters does not absolve an IA from its obligation to

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objectively evaluate request for confidentiality based on good cause. The absence of evidence that the UE IA had done so, led to a finding that the EU had acted inconsistently with its obligations under the AD Agreement (§ 7.42ff.). The Panel on China–HP-SSST saw a ‘procedural requirement’ as well in this context. It held that China had violated its obligations under Article 6.5 of AD by not providing evidence to the effect that it had objectively reviewed the alleged ‘good cause’ for confidential treatment (§ 7.299). The AB upheld this finding adding that, merely summarizing reasons by petitioners to this effect, was inconsistent with Article 6.5 of AD §§ 5.99–100. IAs have no discretion when it comes to information that the AD Agreement characterizes confidential. They must treat it as such. This is the case for all information coming under one of the headings included in the indicative list, as well as with respect to all similar information. IAs retain discretion, and they can refuse to adhere to a request to treat some information as confidential. If they do so, they can disregard the submitted information unless the interested party has proved its correctness. Article 6.5.2 of AD reads: If the authorities find that a request for confidentiality is not warranted and if the supplier of the information is either unwilling to make the information public or to authorize its disclosure in generalized or summary form, the authorities may disregard such information unless it can be demonstrated to their satisfaction from appropriate sources that the information is correct.

When an IA accepts a request for confidentiality, no justification is required under Article 6.5 of AD explaining why it has accepted it. The Panel on Mexico–Steel Pipes and Tubes ruled in this way (§ 7.380). When confidential information has been submitted, a nonconfidential summary will be requested and, in principle, disclosed. The summary should be sufficiently detailed to permit a reasonable understanding of the substance of the information submitted in confidence. The Panel on Argentina–Ceramic Tiles held that the purpose of nonconfidential summaries was to inform interested parties of the information provided and to enable them to defend their interests. In EC–Fasteners (China), the AB upheld this point, stating that the purpose of nonconfidential summaries was to permit interested parties develop a “reasonable understanding” of the substance of the information withheld (§§ 541–542).179 The purpose of nonconfidential summaries is, therefore, not to provide a detailed account of the situation. An IA is, therefore, not allowed to reject an exporters’ response because the summary was not sufficiently informative to allow the calculation of NV, EP, and the margin of dumping (Panel report, EC–Fasteners (China), § 6.39). If, in exceptional circumstances, parties indicate that the information provided cannot be summarized, they will be asked to justify their opinion (Article 6.5.1 of AD).180 Failure by the IA to request an explanation of why it is impossible to supply a nonconfidential summary amounts to a violation of Article 6.5.1 of AD. The AB found this to be the case in EC–Fasteners (China), at §§ 556ff. China had claimed that the EU producers had not pro-

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vided a nonconfidential summary, and that the EU had not insisted that they do so. As a result, so the argument went, the right of defense of the Chinese exporters had been negatively affected since they were deprived of information that probably was crucial to their eventual success before the European IA. For example, Agrati, an EU producer, had provided a nonconfidential summary of information concerning some injury factors, but not others. For the latter, the following statement was included: “the information cannot be summarized without disclosing confidential information, which can cause damage to our company. The information has been provided as limited” (§ 550). Fontana Luigi, another EU producer, did not supply a nonconfidential summary with regard to distribution systems and price setting. The reason for doing so was presented in the following terms: “... the information is by nature confidential because its disclosure would be of significant competitive advantage to a Competitor” (§ 551). In the AB’s view, none of the information provided met the “exceptional circumstance” standard established in Article 6.5 of AD, which must be met in order for the obligation to provide a nonconfidential summary to be waived (§ 553). Consequently, the AB, upholding the panel, found that the EU had violated its obligations under Article 6.5 of AD by accepting the justifications of the two companies as valid reasons to waive their obligation to provide a nonconfidential summary.181 Now what if confidential information submitted to an IA is then submitted to a panel? Art. 17.7 AD deals with this issue. When an IA transmits confidential information in its possession to a panel, the panel may not disclose it absent authorization from the entity that had supplied the information to the IA. The Panel on China–HP-SSST held as much (§§7.21–29), and the AB upheld this finding (§§ 5.315–316). 2.9.6.6 The Duty to Respect Transparency Article 12.2 of AD requests an IA to make public any preliminary or final determination or acceptance of price undertakings. Articles 12.2.1–3 of AD reflect the elements that should figure in the public notice. Before making a final determination, IAs must inform all interested parties of the “essential facts,” which formed the basis for the decision to apply AD measures. In China–HP-SSST, the Panel held that the description must include sufficient detail to ensure that the IA’s reasons for concluding as it did can be discerned and understood by the public, e.g., not only interested parties, but also consumer organizations etc. (§7.270). What should be considered to be essential facts? Let us start with what this duty does not imply. Case law reveals that the duty to inform stated in Article 6.9 of AD does not imply that the IA is required to inform the parties of their legal determinations during the course of an investigation, or of the reasons for accepting or rejecting certain arguments.182 Case law has also established that the disclosure obligation under Article 6.9 of AD relates to factual information only—that is, it does not extend to cover legal evaluations.183 In EC–Salmon (Norway), the panel held that this term refers to the “body of facts essential to the determinations that must be made by the IA before it can decide whether to apply definitive measures. That is, they are the facts necessary to the process of analysis and

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decision-making by the IA, not only those that support the decision ultimately reached” (§ 7.807). This finding leaves discretion to IAs, of course, to pick and choose among the facts that they have reviewed, but discretion is justiciable. The Panel on China—Autos (US) provided the parameters of the test that should guide IAs when choosing what to disclose as essential facts (§ 7.72): What constitute essential facts must therefore be understood in light of the content of the findings needed to satisfy the substantive obligations with respect to the application of definitive measures under the Anti-dumping Agreement, as well as the factual circumstances of each case.184

“Essential,” thus, refers to the facts that help explain the findings reached by an IA with respect to definitive measures, regardless of whether they take the form of duties or price undertakings. This disclosure should take place early enough for the parties to be in a position to defend their interests (Article 6.9 of AD). The modalities of performing disclosure are left to the discretion of IAs (Panel on Argentina–Ceramic Tiles, § 6.125). In China–Broiler Products, the panel found that a narrative description of the data cannot ipso facto be considered insufficient if the essential facts the authority is referring to are in possession of the respondent (§ 7.95). In this, as well as in its report on China–HPSSST the Panel held that the formula used to compare normal value to export price is an essential fact (§ 7.239). In China–HP-SSST, the Panel also held that China should have disclosed (properly summarized) all of the domestic and import price data in its possession as well (§ 7.250). The AB upheld this finding, and went one step further. In its view, facts essential to impose duties but also to reject imposition are essential, elements such as home market sales, export sales, adjustments of prices, calculation methodologies used (§§ 5.130–131). In China–GOES (Article 21.5–US), the panel held that the obligation to disclose essential facts could not be overlooked, even in cases where disclosure of information could prejudice the position of a party to the dispute. In this case, the panel contemplated whether disclosure of essential facts should take place at all, when only two competitors existed in a market. In this case disclosure of average domestic sales prices, that constituted an essential fact on which the decision by the IA had been based, could allow the competitor to proceed to calculations that would provide it with an advantage in terms of information regarding the costs incurred by the other party. The panel decided that in similar cases, IAs must at the very least publish a nonconfidential summary of similar information that constituted an essential fact in reaching their final decision (§§ 7.168–7.173). 2.9.7 The Rights and Duties of Interested Parties The counterpart to the rights and duties of IAs are of course the rights and duties of interested parties. The term “interested parties” is defined in Article 6.11 of AD, and includes all of the following:

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(i) An exporter or foreign producer or the importer of a product subject to investigation, or a trade or business association, a majority of the members of which are producers, exporters, or importers of such product; (ii) The government of the exporting member; (iii) A producer of the like product in the importing member or a trade and business association, a majority of the members of which produce the like product in the territory of the importing member. This list shall not preclude members from allowing domestic or foreign parties other than those mentioned here to be included as interested parties. Categories (i) and (ii) refer, of course, to the entities threatened with the imposition of duties,185 whereas category (iii) should comprise entities interested in imposing AD duties. 2.9.7.1 The Right to Access the File The right to access the file is included in Article 6.2 of AD, quoted previously. Recall that a request must be made to the IA in order for interested parties to exercise this right.186 2.9.7.2 The Right to Be Heard The right to be heard is a direct consequence of the duty of IAs to observe due process. Interested parties have the right under Article 6.2 of AD to defend their views and present them orally. They do not incur the obligation to appear in meetings, even if invited to do so, and their position will not be prejudged because of failure to appear. Appearance before the IA is left within the discretion of interested parties. The right to be heard should be read in conjunction with the duty of IAs to ensure evenhandedness in the conduct of the investigation as far as the rights of the interested parties are concerned. IAs are free to organize hearings, for example, if they deem it appropriate. If they do, they should provide all interested parties with an opportunity to present their views at the hearing. If some accept to do so, and some do not, the latter parties should not be negatively prejudged simply because they decided not to attend the hearing. An interested party might, for example, decide to send its views by email. It is a totally different case if a party decides to behave uncooperatively. We will discuss this issue later in this chapter. The right to be heard includes the manner in which oral presentations will be made. In China–Broiler Products, the US government had requested from MOFCOM (the Ministry of Commerce, the Chinese IA) to meet with the petitioner in order to clarify some issues regarding the request to impose AD duties. China replied that the issues raised by the US did not directly concern the petitioner, and consequently, it decided to hear its opinions by way of presentation. There was no evidence in the record that it had informed interested parties about the US request, though, although China did assert something to this effect before the panel. The panel, in light of the absence of evidence, found that China had violated its obligations under Article 6.2 of AD (§§ 7.20–25).

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2.9.7.3 The Duty to Cooperate The AD Agreement does not explicitly mention a duty to cooperate for interested parties. Case law has interpreted Article 6.8 of AD as implying a similar duty: In cases in which any interested party refuses access to, or otherwise does not provide, necessary information within a reasonable period or significantly impedes the investigation, preliminary and final determinations, affirmative or negative, may be made on the basis of the facts available. The provisions of Annex II shall be observed in the application of this paragraph.

It is the AB, in its report on US–Hot Rolled Steel, that deduced a “duty to cooperate” from this wording. An IA is entitled to expect a very significant degree of effort from investigated exporters. They must cooperate to the “best of their abilities” (§ 102). Based on this finding, the Panel on EC–Countervailing Measures on DRAM Chips187 considered that a duty to cooperate exists in the SCM context as well (§§ 7.60– 61). Failure to observe this duty might lead to recourse to BIA, the subject of the next discussion. 2.9.8

Balancing Rights and Duties: Recourse to BIA

An IA will rarely, if ever, launch an AD investigation on its own initiative. The process belongs to the parties, the IA being reduced to the role of “honest broker.” Even when an investigation has been launched on its own initiative, an IA must still play the role of honest broker, ensuring that the rights and obligations of all interested parties have been respected. When evidence proves insufficient, IAs will decide against the imposition of duties. When evidence is insufficient because of uncooperative behavior of the exporter, though, they have the right to continue and complete the process using “second best” information to this effect. This is what recourse to “best information available” amounts to, for all practical purposes. Recourse to similar procedures is possible only under very strict conditions, as detailed later in this chapter. Article 6.8 and Annex II of AD provide the legal basis for recourse to BIA, the legal institution that enables an IA to continue with the investigation in spite of the lack of cooperation from an interested party. 2.9.8.1 The Rationale for This Provision Recourse to BIA is the stick that threatens exporters with sanctions in case they behave in uncooperative manner, as explained in Annex II, § 7: It is clear, however, that if an interested party does not cooperate and thus relevant information is being withheld from the authorities, this situation could lead to a result which is less favorable to the party than if the party did cooperate.

It is the risk to see “second best” information used against it that will prompt exporters to behave cooperatively, in the eyes of the legislator at least.

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Recourse to BIA, however, is not meant to open the door to abuses by the IA in the name of uncooperative behavior by the interested parties that they might be facing. The AD Agreement provides for a series of measures aimed at reducing this risk. It is probably the Panel on Mexico–Antidumping Measures on Rice that provided the most authoritative understanding of the aims pursued through the enactment of this provision. This panel faced the following situation. According to Mexican laws, the IA would always apply the highest dumping margin (assuming a range of margins) based on the facts available to all those exporters that had refused to cooperate with it during the investigation process. The panel held that this law was based on a misunderstanding of Article 6.8 of AD, which was not aimed at punishing uncooperative parties. In fact, in this panel’s view, case law had made it clear that, even when presented with imperfect responses, an IA must always try to make good use of them (§ 7.238). The AB agreed with the explanation of the panel concerning the term “best information available.” In its view, this term required an assessment in order to determine which facts are best suited to fill in the missing information (§ 297): The use of the term “best information” means that information has to be not simply correct or useful per se, but the most fitting or “most appropriate” information available in the case at hand. Determining that something is “best” inevitably requires, in our view, an evaluative, comparative assessment as the term “best” can only be properly applied where an unambiguously superlative status obtains. It means that, for the conditions of Article 6.8 of the AD Agreement and Annex II to be complied with, there can be no better information available to be used in the particular circumstances. Clearly, an investigating authority can only be in a position to make that judgment correctly if it has made an inherently comparative evaluation of the “evidence available.” (italics in the original)188

What the AB effectively did was underscore the term “best” at least as much as the term “available,” and ensure thus that recourse to the “best information available” does not amount to opening the door wide to abuses. 2.9.8.2 When Is Recourse to BIA Appropriate? Recourse to BIA is legitimized if a requested party (Article 6.8 of AD) does any one of the following: • Refuses access to necessary information • Fails to provide necessary information within a reasonable period of time • Significantly impedes the investigation189 The Panel on China–Autos (US) underscored this point, rejecting an argument by China that recourse to BIA was conditioned on a general failure to cooperate by declining to participate in an investigation. It held that recourse to BIA is legitimized only when one of the three statutory grounds has been met. Failure, thus, of an unknown exporter to register and participate in the proceedings does not absolve an IA from its duty to request information and have recourse to BIA in case its request is not answered (§ 7.138).

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Case law has established that IAs have a triple duty. First, they must clearly describe the information it requests. The Panel on Argentina–Ceramic Tiles noted to this effect (§ 6.55): Thus, the first sentence of paragraph 1 [of Annex II] requires the investigating authority to “specify in detail the information required,” while the second sentence requires it to inform interested parties that, if information is not supplied within a reasonable time, the authorities may make determinations on the basis of the facts available. In our view, the inclusion, in an Annex relating specifically to the use of best information available under Article 6.8, of a requirement to specify in detail the information required, strongly implies that investigating authorities are not entitled to resort to best information available in a situation where a party does not provide certain information if the authorities failed to specify in detail the information which was required.

Second, they must always inform the supplying party of the reasons for rejecting submitted information and provide it with the possibility to provide additional explanations within a reasonable period of time (Annex II, § 6 of AD). This provision, though, should not be understood, according to the Panel on Korea–Certain Paper, as the means to provide the interested party with a second chance to submit information (§ 7.85). The ambit of submissions is, thus, circumscribed. Third, as we will see later in this chapter in detail, when recourse to the best information available is made, it should be done with what has been called “special circumspection.” IAs thus must describe accurately the information requested, explain the reasons for rejecting information supplied, and use best information available with special circumspection irrespective of the reason they have decided to have recourse to it. It is of course, one thing to face total absence of information, and another thing altogether when some information has been provided. In the latter case, a balancing test is required before recourse to BIA is taken. On the one hand, exporters might be procrastinating the process by submitting inappropriate information.190 On the other, an IA driven say by political economy considerations might reject useful, submitted information lightheartedly, and thus jeopardize the chances of exporters to have a fair trial. The AD Agreement strikes a balance between these two concerns, stating that IAs do not have total discretion to reject submitted information. § 3 of Annex II of AD reads: All information which is verifiable, which is appropriately submitted so that it can be used in the investigation without undue difficulties, which is supplied in a timely fashion, and, where applicable, which is supplied in a medium or computer language requested by the authorities, should be taken into account when determinations are made.

This means that recourse to BIA should not be made lightheartedly when some information has been submitted. According to the Panel on US–Steel Plate, an IA is required to take into account information that is verifiable and satisfies all the criteria of § 3 of Annex II of AD (§ 7.57). According to this panel (§ 7.71), information is verifiable if the

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“accuracy and reliability of the information can be assessed by an objective process of examination.” The fact that verifiable information was not actually verified is irrelevant. The duty to take into account similar information is not affected by the absence of verification (Panel on Guatemala–Cement II, § 8.252).191 Submitted information does not necessarily have to be used, though, even if it is verifiable. One should not confuse the obligation to consider verifiable information with a duty to use it. IAs might decide for good reasons not to do so. This could be the case when, for example, submitted information cannot be used without undue difficulty. The Panel on US–Steel Plate held that it is not possible to determine in the abstract whether information can be used without undue difficulty. IAs are under a duty to explain why they could not have used verifiable information, and it is on the basis of similar explanations that WTO Panels will decide whether they were legitimized in refusing it (§ 7.74). Finally, note that information must be submitted in accordance with the IA’s domestic laws, otherwise it can be legitimately set aside. The Panel on Argentina–Poultry Antidumping Duties (§ 7.191) held that information submitted by Brazilian exporters without respecting the Argentine accreditation requirements had not been appropriately submitted, and thus, had lawfully been set aside. With this in mind, we turn now to the three grounds justifying recourse to BIA and discuss them one by one in what follows. 2.9.8.3 Refusing Access to Necessary Information The agreement does not specify what is meant by “necessary information.” Since it is IAs that request information, the question naturally arises of whether the mere fact that information was requested or required by the authorities suffice to label it necessary. Additionally, one might also legitimately ask whether IAs should ex ante define what is necessary, or, conversely, whether they should be allowed to ex post decide whether nonsupplied information was necessary. Recall that IAs will use questionnaires to request information, which they might or might not use. Information that has been requested is thus, not by definition “necessary.” Furthermore, as we saw previously, the Panel on US–Steel Plate allowed for the possibility to discard information that cannot be used without undue difficulty, provided that an explanation to this effect has been supplied (§ 7.74). Yet again, unused information of the sort cannot be deemed to be necessary to reach an outcome. Lack of provision or use of requested information, thus, as a threshold issue, should not be equated to opening the door to the “best information available.” IAs must still decide whether the nonsupplied information was “necessary.” Case law recognizes as much, but has been rather deferential toward similar judgments by IAs, probably even too deferential. We explain. In Korea—Certain Paper, a certain percentage of the domestic sales of two exporters was made through a related company (called CMI), and the IA, for this reason, had considered that it needed the financial

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statements of CMI for the purposes of verifying the completeness of the NV data submitted. In spite of the fact that the two exporting companies and CMI had submitted all their domestic sales data, the IA considered that the failure to provide CMI’s financial statements implied that necessary information had not been provided (§ 7.51). On this basis, the IA decided to reject all the domestic sales data submitted. The panel upheld this approach. The IA had decided to base its NV determination on the prices charged by the related company (CMI) to independent buyers. For this reason, in the panel’s view, the financial statements of CMI were necessary information (§§ 7.43–44). A legitimate question can be raised here as to whether supporting evidence (like that requested from CMI) actually constituted necessary information. Arguably, with reasonable additional effort, the IA could have procured the information it needed to establish the NV from the domestic sales data of the two companies and the CMI. Should panels simply endorse whatever an IA deems as “necessary” information? Should not the IA at least explain what kind of information the financial data of CMI included that could not be traced in the information already supplied? These questions seem reasonable. And yet, the approach taken in Korea–Certain Paper was also largely followed in Egypt–Steel Rebar, where the panel held (§ 7.155): On the question of the “necessary” information, reading Article 6.8 in conjunction with Annex II, paragraph 1, it is apparent that it is left to the discretion of an investigating authority, in the first instance, to determine what information it deems necessary for the conduct of its investigation (for calculations, analysis, etc.), as the authority is charged by paragraph 1 to “specify ... the information required from any interested party.” This paragraph also sets forth rules to be followed by the authority, in particular that it must specify the required information “in detail,” “as soon as possible after the initiation of the investigation,” and that it also must specify “the manner in which that information should be structured by the interested party in its response.” Thus, there is a clear burden on the authority to be both prompt and precise in identifying the information that it needs from a given interested party.

It simply cannot be, though, that the authority has to observe two procedural requirements (i.e., specifying the information required and the manner in which it should be communicated), and then be left alone to decide what is (and what is not) necessary information, without its judgment being subjected to judicial review.192 This is not a satisfactory solution. Intuitively, one would expect panels to link the term “necessary information” to the term “essential facts,” the cornerstone of a final determination. By this, we mean that necessary information must anyway be reflected in the essential facts communicated to interested parties. One could even go one step further, and argue that some information might be necessary to decide on what the essential facts are.193

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2.9.8.4 Failure to Provide Necessary Information within a Reasonable Period of Time The second grounds for legitimate recourse to BIA, concerns the failure by investigated entities to provide necessary information within a reasonable period of time. The difference with the first ground is that, in this case, information might have been provided, albeit belatedly so. The term “necessary information” has not been meaningfully interpreted in this context either. Case law has responded to questions regarding the procedural aspects of failure to provide information within a reasonable time, but it has not addressed head on the understanding of the term “necessary information.” The Panel on US–Hot-Rolled Steel dealt with a challenge by Japan against a US decision to reject submitted information. The US authority (DOC) had rejected information by a Japanese company (Nippon Steel Corporation, NSC) because it had been submitted after the deadline it had unilaterally fixed. NSC did not respect the deadline, but it still sent its responses to DOC before the initiation of the verification process. In the panel’s view, what mattered was not respecting unilateral deadlines, but rather whether the process had suffered as a result of NSC’s behavior. In its view, this was not the case since there was ample time for DOC to verify the submitted information (§ 7.57). On appeal, the AB confirmed the panel’s finding and explained in some detail how the term “reasonable period of time” (within which information must be provided) should be understood (§ 85): In considering whether information is submitted within a reasonable period of time, investigating authorities should consider, in the context of a particular case, factors such as (i) the nature and quantity of the information submitted; (ii) the difficulties encountered by an investigated exporter in obtaining the information; (iii) the verifiability of the information and the ease with which it can be used by the investigating authorities in making their determination; (iv) whether other interested parties are likely to be prejudiced if the information is used; (v) whether acceptance of the information would compromise the ability of the investigating authorities to conduct the investigation expeditiously; and (vi) the numbers of days by which the investigated exporter missed the applicable time-limit.

In this vein, the Panel on Korea–Certain Paper examined whether information had been provided within the deadline set by the IA, and, if not, whether it had nevertheless been submitted within a reasonable period of time by applying the criteria set forth by the AB in the US–Hot-Rolled Steel report (§§ 7.48–55) quoted previously. This approach has become standing case law. 2.9.8.5 Significant Impediment of Investigation The third grounds for having legitimate recourse to BIA comes into play when IAs encounter a significant impediment to the investigation. This provision has not been interpreted in many instances, and the report from the Panel on Guatemala–Cement II emerges as one of the few exceptions. This report stands for the proposition that the IA must have acted

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itself in reasonable, objective, and impartial manner, otherwise it cannot claim that the investigated party is responsible for significantly impeding the investigation process. In the case at hand, Guatemala sent a verification team to review information that had been provided by Cruz Azul, a Mexican cement company. Guatemala had included in its verification team two US nongovernmental experts, who, had participated in prior US antidumping proceedings regarding allegations of dumping against Mexican cement producers. Cruz Azul had not been an interested party in those proceedings, and Guatemala further claimed that it had signed confidentiality agreements with the US experts. The Panel found that Mexico’s reluctance to allow the visit by the verification team was not unreasonable. In its view (§ 8.250): In particular, there is no guarantee that the role of the two non-governmental experts in the US proceedings (i.e., to assist US domestic producers in their claims against Mexican cement exporters) would not undermine their objectivity and impartiality during the verification visit to Cruz Azul. The fact that steps may have been taken to ensure that the non-governmental experts did not violate the confidentiality of Cruz Azul’s data provides no guarantee that their role in the US proceedings would not undermine their objectivity and impartiality during the verification visit to Cruz Azul, since it is possible to be partial and non-objective while preserving confidentiality.

According to the Panel, the agreement “does not require cooperation by interested parties at any cost” (§ 8.251). This report conditions recourse to BIA on the behavior. 2.9.8.6 Special Circumspection Even when the authority is entitled or forced to make determinations on the basis of the available facts, it is not entirely free to make its determinations on whatever basis it chooses. The determination should still be based on facts, not on assumptions or conjecture. The agreement imposes two distinct obligations in this respect. First, in light of the requirements set forth in §§ 3 and 5 of Annex II of AD, an IA must use the information submitted by the interested parties as much as possible.194 Second, Annex II, § 7 of AD, requires from IAs to use “special circumspection” when basing a determination on secondary sources of information. “Secondary sources” could, in principle, cover a variety of sources of information, including “interested parties.” When doing that, there are specific obligations that they must respect. In this vein, if IAs use information from the petitioner without verifying its accuracy, they will be running afoul of their obligations under Annex II of AD (Panel on Mexico–Steel Pipes and Tubes, § 7.193). On the other hand, an IA cannot claim that it does not need to verify information that it receives simply because it verified it at a prior stage of the investigation in order to comply with Article 5.3 of AD. The Panel on Korea– Certain Paper underscored this point in § 7.124 of its report. More generally, the AB, in its report on Mexico–Antidumping Measures on Rice, held that an IA must not use data from secondary sources without ascertaining the reliability and accuracy of such information. It must check this information, where practicable, against information obtained from

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other independent sources at its disposal, including material submitted by interested parties (§ 289).195 2.9.9 The Length of the Period of Investigation The investigation itself normally runs from a period of 12 months to a maximum of 18 (Article 5.10 of AD). During the investigation, IAs will be reviewing data concerning dumping, injury and the causal link between the two. It would have been unreasonable to extend the period for which data is collected and analyzed to eternity. Some reasonable boundaries must be drawn that will allow IAs, by observing past and as close to present as possible behavior, draw reasonable conclusions about the future. After all, no matter whether the prospective or the retrospective system have been privileged, it is future transactions that will be burdened with the imposition of AD duties. 2.9.9.1 The Function of POI This is where the notion of “period of investigation” (POI) kicks in. The term “POI” refers to the period for which dumping and injury-related data are collected and analyzed. This period normally precedes the initiation of the investigation, which runs from 12 to 18 months, as already stated, and should be as close as possible to the date of initiation of investigation. It is of course not the case that all WTO members have symmetric administrative capacity to process data. The POI, therefore, will be influenced by endogenous to national administrations factors as well. 2.9.9.2 Recommendation on Length of POI Strangely enough, the AD Agreement does not expressly discuss the length of the POI. The Panel on EC–Tube or Pipe Fittings acknowledged that (footnote 116): The concept of a set period of investigation to examine the existence of dumping has been present in the GATT system for over 40 years. Indeed, a 1960 Report by a Group of Experts concerning antidumping and countervailing duties considered the use of a “pre-selection system.” See Group of Experts, Second Report on Antidumping and Countervailing Duties, adopted on 27 May 1960 (L/1141) BISD 9S, 194.

This is strange omission, since the importance of the choice of POI cannot be overstated. The Panel on Mexico–Antidumping Measures on Rice summed it up very well at § 7.56: The choice of the period of investigation is obviously crucial in this investigative process as it determines the data that will form the basis for the assessment of dumping, injury and the causal relationship between dumped imports and the injury to the domestic industry.

What the framers of the AD Agreement did not do, the members of the WTO Antidumping Committee addressed a few years later. The WTO Antidumping Committee (ADP Committee) adopted a “Recommendation Concerning the Periods of Data Collection for Antidumping Investigations” (hereinafter

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called the “POI Recommendation”). In the words of the Panel on Guatemala–Cement II (§ 8.266), “this recommendation reflects the common practice of Members.” The POI Recommendation196 distinguishes between periods of data collection for dumping and injury investigations. The period of data collection for dumping investigations normally should be 12 months, and in any case no less than six months. This period should end as close to the date of initiation as is practicable. The period of data collection for injury investigations should normally be at least three years unless a party from whom data is being gathered has existed for a lesser period. The period of data collection for injury investigations should include the entirety of the period of data collection for the dumping investigation. The ADP Committee stated in the POI Recommendation that it was merely issuing guidelines, which should not preclude an IA from choosing a different POI. In this case, an IA should include in public notices, or in separate reports, an explanation of the reason for the selection of a particular period for data collection. There is, thus, no legal compulsion imposed on WTO members to follow the POI Recommendation verbatim. The Panel on US–Hot-Rolled Steel, based on discussions in the ADP Committee concerning the nature of the committee’s recommendations, confirmed that the POI Recommendation was a nonbinding instrument. Accordingly, in the panel’s view, all obligations imposed on an IA with respect to the length of the POI have to be found in the AD Agreement itself (footnote 152 of the report).197 Subsequent panels, nevertheless, have shown considerable deference to the substantive part of the POI Recommendation, its nonbinding nature notwithstanding. In Argentina–Poultry Antidumping Duties, the panel held (§ 7.287): Furthermore, we note that the issue of periods of review has been examined by the Antidumping Committee. It has issued a recommendation to the effect that, as a general rule, “the period of data collection for injury investigations normally should be at least three years, unless a party from whom data is being gathered has existed for a lesser period, and should include the entirety of the period of data collection for the dumping investigation.” It would appear, therefore, that the period of review for injury need only “include” the entirety of the period of review for dumping. There is nothing in the Antidumping Committee’s recommendation to suggest that it should not exceed (in the sense of including more recent data) the period of review for dumping.

The Panel on Mexico–Antidumping Measures on Rice, while recognizing its nonbinding nature, used the POI Recommendation as support for its findings (§ 7.62). On appeal, the AB upheld this approach in its totality (§ 169): It appears to us that the Panel referred to the Recommendation, not as a legal basis for its findings, but simply to show that the Recommendation’s content was not inconsistent with its own reasoning. Doing so does not constitute an error of law.198

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2.9.9.3 POI Ends before Initiation of Investigation The POI ends before the initiation of the investigation, at least most of the time. The Panel on EC–Tube or Pipe Fittings explained the rationale for using a POI that ends before the initiation of the investigation in the following terms (§ 7.101): There are practical reasons for using an investigation period, the termination date of which precedes the date of initiation of the investigation. This ensures that the data that will form the basis for the eventual determination are not affected in any way by the initiation of the investigation and any subsequent actions of exporters/importers. The rationale is thus to acquire a finite data set unaffected by the process of the investigation. This can form the basis for an objective and unbiased determination by the investigating authority. The period of investigation terminates as close as possible to the date of initiation of the investigation in order to ensure that the data pertaining to the investigation period, while historical, nevertheless refers to the recent past. The use of a sufficiently long period of investigation is critical in order to ensure that any dumping identified is sustained rather than sporadic.

2.9.9.4 Recent Data Should Be Used In US–Hot-Rolled Steel, the US IA had gathered data for a three-year period (1996–1998) and acknowledged that this was required for purposes of conducting injury-analysis. It then used data from 1996 and 1997 to decide on injury. The US had argued that the reason that it had not compared data for 1996 and 1997 with that for 1998 was that “changes created a new economic context for the performance of the industry.” The US did not explain why it considered the data no longer relevant in light of the changed economic circumstances. Nevertheless, the panel did not consider it inappropriate for the IA to examine only data from two years, as similar data was germane to the most recent period and included the period of alleged dumped imports (§ 7.234). The panel emphasized that no endpoint-toendpoint comparison was required and that, in certain circumstances, it would be reasonable for an IA to examine only part of the data covering a two-year period. So long as three recent years of data had been gathered, and these three-year data had been used, at least in part, the authority would seem to be able to get away with the fact that it did not analyze part of the data for certain factors mentioned in Article 3.4 of AD. In Mexico–Antidumping Measures on Rice, the US had challenged the decision by the Mexican IA to use a POI for injury that ended more than 15 months prior to the initiation of the investigation. The panel considered that while the AD Agreement does not contain any specific and express rules concerning the period to be used for data collection in an AD investigation, this does not mean that the authorities’ discretion in using a certain period of investigation is boundless (§ 7.57). The panel took the view that there was necessarily an inherent real-time link between the investigation leading to the imposition of measures, and the data on which the investigation was based.

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In spite of the fact that an AD investigation out of necessity relies on historical data gathered during a past POI, such information should be the most recent information reasonably available (§§ 7.58ff.). The panel considered that a 15-month gap between the end of the period of investigation and the initiation of the investigation was long enough to impugn the reliability of the evidence. In the panel’s view, Mexico had thus failed to use data that met the criterion of positive evidence pursuant to Article 3.1 of AD (§ 7.64). The AB fully upheld the reasoning of the panel (§§ 163–72). It emphasized that the determination of whether injury exists should be based on data that provides indications of the situation prevailing when the investigation takes place, because the conditions to impose an AD duty are to be assessed with respect to the current situation (§ 165). The Panel on Mexico–Steel Pipes and Tubes considered that an 8-month gap between the end of the POI and the initiation of the investigation was reasonable. It acknowledged that this 8-month gap implied that the IA did not have “the most pertinent, credible, and reliable information,” but considered that “practical time constraints inherent in the production of data that must then be collected and analyzed by the applicant (in order to be relied upon and submitted in the application), and then analyzed by the investigating authority,” and the fact that “the investigation occurred within the overall time constraints envisaged by the Agreement,” were sufficient reasons to conclude that the temporal gap did not preclude the authority from making a determination of injury that was based on positive evidence and that involved an objective examination (§ 7.239). 2.9.9.5 Shorter Periods Can Be Lawful In Guatemala–Cement II, the panel rejected the idea that the use of a 1-year period of data collection would be a priori inconsistent with the requirement of Article 3.2 of AD (to consider whether there has been a significant increase in the volume of dumped imports). Recall that the examination of whether a significant increase has occurred is part of the injury analysis for which the POI Recommendation considered that a 3-year period of data collection was the norm. The panel considered that no provision in the agreement specified the precise duration of the period of data collection. In this case, Guatemala had argued that the reason for the shorter period of data collection was that exports by the Mexican producer, Cruz Azul, did not become significant until the year of data collection, a conclusion supported by the record of the investigation. Under these circumstances, while the panel took the view that a longer data collection period might have been preferable, it was unable to find that the use by Guatemala of a 1-year data collection period was inconsistent with Guatemala’s obligation under Article 3.2 of AD (§ 8.266). 2.9.9.6 Cherry Picking Is Not Permissible In Mexico–Antidumping Measures on Rice, the US claimed that the AD Agreement had been violated because the Mexican IA had analyzed data pertaining to only six months for each of the three years of data collection. Mexico asserted that it was necessary to

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examine these particular 6 months of every year, instead of the full year, in order to ensure that the period of injury analysis paralleled the 6-month period chosen for the analysis of dumping, so as to avoid any distortions. The panel saw no a priori reason why the POI for the injury analysis should be chosen to fit the POI for the dumping analysis if the latter covers a period of less than 12 months. The panel considered that the choice of the POI was crucial, as it determined the data that would form the basis for the assessment of the impact of dumping, and that an examination or investigation could be objective only if it was based on data that provided an accurate and unbiased picture of what was being examined. The panel thus reached the following conclusion (§ 7.86): In sum, we find that the injury analysis of the Mexican investigating authority in the rice investigation, which was based on data covering only six months of each of the three years examined, is inconsistent with Article 3.1 of the AD Agreement as it is not based on positive evidence and does not allow for an objective examination, as it necessarily, and without any proper justification, provides only a part of the picture of the situation. In addition, we find that the particular choice of the limited period of investigation in this case was not that of an unbiased and objective investigating authority as the authority was aware of, and accepted, the fact that the period chosen reflected the highest import penetration, thus ignoring data from a period in which it can be expected that the domestic industry was faring better.

Similarly, the Panel on EC–Tube or Pipe Fittings took the view that an IA is precluded from limiting its dumping analysis to a selective subset of data from only a temporal segment of the POI. The panel relied on the requirement of Article 2.4.2 of AD, which generally calls for a comparison of a WA NV with a WA of prices of all comparable export transactions, or for a comparison of NV and EPs on a T-T basis. According to the panel, these methodologies would generally seem to require that data throughout the entire investigation period would necessarily be consistently taken into account. In Argentina–Poultry Antidumping Duties, the use of different periods for different injury factors was found to be inconsistent with the requirement to conduct an objective examination (§ 7.283). To examine only a part or a segment of the domestic industry was also considered to be inconsistent with the requirement to conduct an objective examination. The AB stated in US–Hot-Rolled Steel that, where an IA undertakes an examination of one part of a domestic industry, it should, in principle, examine in a like manner all other parts that make up the industry, as well as the industry as a whole. A partial examination of the domestic industry could make it easier to find injury. This led the AB to conclude that this practice was inconsistent with the AD Agreement (§ 204). It follows from the case law above that IAs cannot address the two POIs endogenously, in the sense that one fits, in principle, the result of the other. While IAs enjoy some flexibility in selecting the POI, they should never use their discretion in a biased manner. Flexibility in selecting the POI, in other words, should not result in selection bias. One

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way to avoid this occurring is by shortening the time gap between the two POIs. We discuss this next. 2.9.9.7 Overlap between Dumping and Injury POI The Panel on Argentina–Poultry Antidumping Duties held that an overlap between the two POIs (dumping and injury) was desirable, but it rejected the argument that the POI for dumping and the POI for injury should also end at the same time. The panel added that there may be a time lag between the entry of dumped imports and the injury caused by them, and that therefore, it may not be appropriate to use identical periods of review for the dumping and injury analyses in all cases (§ 7.287). This is sensible. The two POIs, nonetheless, should be close to each other, otherwise the probability that dumping has caused the observed injury becomes remote. 2.10

Special and Differential Treatment

The AD Agreement does not contain elaborate provisions on special and differential treatment for developing countries. In fact, Article 15 of AD is all we have in this respect. The WTO, though, organizes a series of workshops and conferences aiming at improving the administrative capacity of developing countries in handling antidumping investigations. Article 15 of AD requests that WTO members explore the possibility of imposing constructive remedies when facing allegations that exporters originating in developing countries have been causing injurious dumping. 2.10.1 What Are Constructive Remedies? Article 15 of AD does not define the term “constructive remedies.” The Panel on EC–Tube of Pipe Fittings held that both the “lesser duty rule” and “price undertakings” came under the ambit of this term (§§ 7.77ff.).199 In some way, both could be characterized “constructive.” Application of the lesser duty rule would lead to lower level of AD duties. Price undertakings, even when they are equal to the level of AD duties imposed, have one beneficial effect for exporters: it is exporters that will pocket the mark up (dumping margin); it is not importers that will do so, in the form of AD duties. 2.10.2

Constructive Remedies Must Be Explored

The provision makes it clear that constructive remedies must be “explored.” This does not mean, of course, that IAs must always lessen duty rule and/or price undertakings when they review petitions to impose AD duties against exporters originating in developing countries. The obligation to explore constructive remedies requires from WTO members some active behavior. IAs cannot stay idle. Furthermore, in EC–Bed Linen, the panel held

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that an outright rejection of remedies proposed by the investigated developing country (India) amounted to a violation of this provision (§ 6.238). IAs will thus observe this obligation when they can demonstrate that they took active steps during the investigation inquiring into the possibility of imposing similar remedies. Although the agreement falls short of imposing a procedural requirement to this effect, IAs, if challenged, should be in position to show that they had indeed adopted similar active behavior. The best proof is, of course, the adoption of constructive remedies. As stated though, there is no obligation to this effect. This obligation takes effect before definitive, and not provisional, AD duties will be imposed (Panel on EC–Bed Linen, at § 6.231; Panel on EC–Tube or Pipe Fittings, at § 7.82). 2.11 The Standard of Review by WTO Adjudicating Bodies 2.11.1

One or Two Standards of Review?

WTO adjudicating bodies must observe the generic standard of review included in Article 11 DSU anyway. They must perform an “objective assessment” of the matter before them. The AD Agreement is the only agreement coming under the aegis of the WTO (“covered agreement,” in WTO parlance), which includes its own standard of review reflected in Article 17.6 of AD: In examining the matter referred to in paragraph 5: in its assessment of the facts of the matter, the panel shall determine whether the authorities’ establishment of the facts was proper and whether their evaluation of those facts was unbiased and objective. If the establishment of the facts was proper and the evaluation was unbiased and objective, even though the panel might have reached a different conclusion, the evaluation shall not be overturned; the panel shall interpret the relevant provisions of the Agreement in accordance with customary rules of interpretation of public international law. Where the panel finds that a relevant provision of the Agreement admits of more than one permissible interpretation, the panel shall find the authorities’ measure to be in conformity with the Agreement if it rests upon one of those permissible interpretations.

The question thus, arises whether WTO adjudicating bodies must respond to the generic standards of review or to the specific ones—or both. Law is silent on this point. Case law has provided a response by inquiring into the relationship between the two provisions (Article 11 of DSU and Article 17.6 of AD). The AB report on US–Hot-Rolled Steel captures best the basic line adopted. The two standards are complements and not substitutes (§ 62): Finally, although the second sentence of Article 17.6(ii) of the Antidumping Agreement imposes obligations on panels which are not found in the DSU, we see Article 17.6(ii) as supplementing, rather than replacing, the DSU, and Article 11 in particular. Article 11 requires panels to make an “objective assessment of the matter” as a whole. Thus, under the DSU, in examining claims, panels

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must make an “objective assessment” of the legal provisions at issue, their “applicability” to the dispute, and the “conformity” of the measures at issue with the covered agreements. Nothing in Article 17.6(ii) of the Antidumping Agreement suggests that panels examining claims under that Agreement should not conduct an “objective assessment” of the legal provisions of the Agreement, their applicability to the dispute, and the conformity of the measures at issue with the Agreement. Article 17.6(ii) simply adds that a panel shall find that a measure is in conformity with the Antidumping Agreement if it rests upon one permissible interpretation of that Agreement.” (italics in the original)

What does this mean in practical terms? The AB suggests that a panel can make an objective assessment and reach a range of permissible interpretations. There is no antinomy between the two. There is very scarce practice to this effect though, as we will see in what follows. Panels, since the very first dispute adjudicated (US–Gasoline) have always employed the Vienna Convention on the Law of Treaties (VCLT) in order to interpret the terms in the various covered agreements. We saw in chapter 1, volume 1, that they understood the reference to customary rules of interpretation in Article 3.2 of DSU as synonymous to the VCLT. The VCLT offers a rule for interpretation: terms should be interpreted in accordance with their ordinary meaning, in their context, and taking into account other relevant rules of international law, subsequent agreement and/or practice. Recourse to preparatory work is commendable but not compulsory. The question arises thus, whether, following recourse to the VCLT, one can still end up with a range of permissible interpretations. A priori one would be hard-pressed to suggest that this can never be the case. Is this nonetheless what negotiators had in mind when drafting Article 17.6 of AD? Did they aim at the range of permissible interpretation that can equally well serve the treaty? The Panel on US–Softwood Lumber VI held differently. In its view, the AD standard of review might lead to a more “tolerant” approach toward the findings of IAs. In this view, the term “permissible interpretations” should be equated with deference. It could not point to specific examples, though (§ 7.22): ... it seems to us that there might well be cases in which the application of the Vienna Convention principles together with the additional provisions of Article 17.6 of the AD Agreement could result in a different conclusion being reached in a dispute under the AD Agreement than under the SCM Agreement. (italics in the original)

This report is an outlier. Most panels have avoided reference to this or similar statements and have construed the two standards as mutually coherent, without however explaining what to do when more than one interpretation is permissible.200 One might legitimately ask whether this provision was necessary at all. Indeed, one of the interpretative maxims that have been used in WTO case law is that if an obligation can be understood in two different ways, then it should be understood in the manner that prejudges national sovereignty the least (in dubio mitius). Why all the fuss then? Why did negotiators bother to spend time and effort on including this provision in the AD Agreement, and why a similar provision was included only in the AD Agreement? It is quite telling that a similar standard

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of review was not included in either the SCM or the Safeguards (SG) Agreement, the two other agreements regulating contingent protection. There are good reasons to support the argument that the negotiating intent was to provide more deference toward IAs dealing with antidumping, toward making the unwritten interpretative maxim “in dubio mitius” discussed above, explicit.201 The negotiating record lends support to this point, especially the proposals tabled by the US delegation, the “architect” of this provision.202 The above would argue in favor of construing Article 17.6 of AD as a substitute, and not a complement to Article 11 DSU. The degree of deference is of course, difficult to measure. The AB sees the applied (applicable) standard somewhere within the continuum “no total deference, no de novo,” which leaves us with dozens of possibilities to choose from. The overall conclusion must be that the record is mixed. There are instances where case law shows considerable degree of deference toward IAs (e.g., sunset reviews), and areas where case law has been quite strict (e.g., zeroing).203 In other words, WTO adjudicating bodies have not explicitly stated that Article 17.6 of AD includes a more deferential standard than Article 11 DSU, but have de facto deferred to IAs in some specific areas, but not in others. 2.11.2

De Novo Review Is Not Total Deference

WTO adjudicating bodies will evaluate whether the IA has properly established facts, and whether it has evaluated them in an unbiased manner, by using Article 17.6(i) of AD. They will also evaluate whether the overall conclusion reached rests on a permissible interpretation of the AD Agreement under Article 17.6(ii). We return to this latter issue in the next subsection. Article 17.6(i) has been understood in case law as a statutory requirement not to engage in de novo review. However, there is no statutory definition of the term “de novo review.” Roughly, following this standard, GATT and WTO adjudicating bodies will sanction WTO members for not properly establishing the record and for reaching conclusions that are inconsistent with the requirements of the AD Agreement, but they will refrain from substituting their own judgment for that of an IA.204 Panels have cautioned that the absence of de novo review should not be equated to total deference to the IA. But again, what does total deference mean? It seems that total deference and de novo review are the two ends of the spectrum, and the question is at what point in the continuum will WTO adjudicating bodies intervene? Case law has provided some clarifications in this respect. 2.11.2.1 Panels Cannot Use New Evidence Under the “no de novo no total deference” standard now applied, panels will not substitute their judgment for that of an IA. Panels will not reopen the investigation process and redo the whole procedure. However, a panel will review whether an IA has properly established

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the factual record before it. In practice, this amounts to examining whether the IA has diligently assembled facts. The Panel in US–Hot-Rolled Steel summed all this up as follows (§ 7.26): The question of whether the establishment of facts was proper does not, in our view, involve the question whether all relevant facts were considered including those that might detract from an affirmative determination. Whether the facts were properly established involves determining whether the investigating authorities collected relevant and reliable information concerning the issue to be decided—it essentially goes to the investigative process. Then, assuming that the establishment of the facts with regard to a particular claim was proper, we consider whether, based on the evidence before the US investigating authorities at the time of the determination, an unbiased and objective investigating authority evaluating that evidence could have reached the conclusions that the US investigating authorities reached on the matter in question. In this context, we consider whether all the evidence was considered, including facts which might detract from the decision actually reached by the investigating authorities.

This means that panels cannot reach their conclusions based on new evidence (e.g., on evidence that was not before the IA), and the consistency of the decision of which with the multilateral rules is being challenged. To decide whether evidence was before an IA or not, one needs a benchmark, and that cannot be the “essential facts” revealed before a decision has been issued. Recall that an IA will be required to make public only the essential elements of the investigation that led it to its decision (Article 12 of AD). As a result, it could be the case that an IA does not disseminate all the information it had used to reach its conclusions. The question may arise whether nondisclosed information should be considered as part of the record and, if so, under what conditions. Following inconsistent case law on this issue, the Panel on EC–Tube or Pipe Fittings held that facts that have not been disclosed by the IA, but on which the authority relied to reach its decision, can (and should) be reviewed by a WTO panel (§§ 7.35 and 7.45). On appeal, the AB upheld the panel’s approach (§§ 125ff., and especially § 133).205 Panels, on the other hand, cannot take into consideration evidence that was not submitted to the IA or that was not appropriately submitted to the IA, and which, as a result, the IA had refused to take into account (Panel on Egypt–Steel Rebar, § 7.21). In the words of the Panel on US–Hot-Rolled Steel (§ 7.6): Thus, for example, in examining the USITC’s determination of injury under Article 3 of the AD Agreement, we would not consider any evidence concerning the price effects of imports that was not made available to the USITC under the appropriate US procedures. (italics in the original)

Summing up prior case law, the Panel on EC–Bed Linen206 explained what constitutes new facts and evidence in the following manner (§ 6.43): Article 17.5(ii) of the AD Agreement provides that a panel shall consider a dispute under the AD Agreement “based upon ... the facts made available in conformity with appropriate domestic procedures to the authorities of the importing Member.” It does not require, however, that a panel consider

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those facts exclusively in the format in which they were originally available to the investigating authority. Indeed, the very purpose of the submissions of the parties to the Panel is to marshal the relevant facts in an organized and comprehensible fashion in support of their arguments and to elucidate the parties’ positions. Based on our review of the information that was before the European Communities at the time it made its decision, in particular that presented by India in its Exhibits, the parties’ extensive argument regarding this evidence, and our findings with respect to India’s claim under Article 5.4, we conclude that the Exhibit in question does not contain new evidence. Thus, we conclude that the form of the document (that is, a new document) does not preclude us from considering its substance, which comprises facts made available to the investigating authority during the investigation. There is in our view no basis for excluding the document from consideration in this proceeding, and we therefore deny India’s request. (italics in the original)

Note, however, that the Panel on US–Softwood Lumber V excluded a regression analysis based on data that had been submitted to the IA because it considered that regression analysis constituted new evidence that went beyond a mere mechanical reformatting of appropriately submitted facts (§§ 7.40–41). The same panel accepted charts that were not before the IA, nonetheless, since they only (§ 7.168) “display in graphical form data which was before DOC during the course of the investigation.” Still, both the regression analysis and the graph were based on evidence that had already been submitted to the IA, so some additional explanation for the differential treatment would be warranted in this case. It seems there is a thin line between evidence that is merely “marshalling” the already submitted evidence and, hence, can be taken into account by a panel, and evidence that constitutes “a manipulation of already submitted facts and evidence,” on which the panel would not be allowed to base its review if it wants to avoid a de novo review.207 2.11.2.2 Absence of a Reasoned and Adequate Explanation It is clear by now (US–Lamb, AB report, §§ 106–107) that absence of a reasoned and adequate explanation of the decision is fatal for the order. US–Lamb dealt with a dispute under the SG Agreement. Its standard of review, however, soon found application in cases coming under other contingent protection instruments. In its report on US–Softwood Lumber VI (Article 21.5–Canada), the AB explained that a panel must examine the IA’s determination in light of other plausible alternative explanations, rather than in the abstract. This did not imply, according to the AB (§ 117, and footnote 176), that panels must reject the IA’s explanation if, in its view, it did not rebut the alternatives. What is important is that the IA has taken account of and responded to plausible alternative explanations that were raised before it and that, having done so, the explanations provided by it in support of its determination remain “reasoned and adequate.” Ultimately, it must be the totality of factors and evidence that should support the findings reached for panels to be satisfied with the outcome of an investigation (§ 138):

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In sum, the Panel’s analysis, viewed as a whole, reveals a number of serious infirmities in the standard of review that it articulated and applied in assessing the consistency of the Section 129 Determination with Articles 3.5 and 3.7 of the Antidumping Agreement and Articles 15.5 and 15.7 of the SCM Agreement. First, the Panel’s repeated reliance on the test that Canada had not demonstrated that an objective and unbiased authority “could not” have reached the conclusion that the USITC did, is at odds with the standard of review that has been articulated by the Appellate Body in previous reports. As we noted earlier, the standard applied by the Panel imposes an undue burden on the complaining party. Secondly, the “not unreasonable” standard employed by the Panel at various reprises is also inconsistent with the standard of review that has been articulated by the Appellate Body in previous reports, and it is even more so for ultimate findings as opposed to intermediate inferences made from particular pieces of evidence. Thirdly, the Panel did not conduct a critical and searching analysis of the USITC’s findings in order to test whether they were properly supported by evidence on the record and were “reasoned and adequate” in the light of alternative explanations of that evidence. Fourthly, the Panel failed to conduct an analysis of whether the totality of the factors and evidence considered by the USITC supported the ultimate finding of a threat of material injury. (italics in the original)

2.11.3

Permissible Interpretations

Article 17.6(ii) of AD requests from WTO adjudicating bodies not to overturn conclusions by IAs that rest on “permissible interpretations” of the AD Agreement, even if they would have reached a different conclusion. The Panel on US–Hot-Rolled Steel held that it would have to start from the VCLT in order to evaluate whether the interpretation reached was permissible (§ 7.27). It thus, did not a priori exclude the possibility that recourse to VCLT can yield more than one permissible interpretations. On appeal, the AB confirmed the panel’s position (§§ 59–60). In US–Continued Zeroing, the AB explained that the term should refer to a “range” of interpretations, but there should be no contradiction across the terms in the range (§§ 272–273): However, the second sentence allows for the possibility that the application of the rules of the Vienna Convention may give rise to an interpretative range and, if it does, an interpretation falling within that range is permissible and must be given effect by holding the measure to be in conformity with the covered agreement. The function of the second sentence is thus to give effect to the interpretative range rather than to require the interpreter to pursue further the interpretative exercise to the point where only one interpretation within that range may prevail. ... The purpose of such an exercise is therefore to narrow the range of interpretations, not to generate conflicting, competing interpretations. Interpretative tools cannot be applied selectively or in isolation from one another. It would be a subversion of the interpretative disciplines of the Vienna Convention if application of those disciplines yielded contradiction instead of coherence and harmony among, and effect to, all relevant treaty provisions. (italics in the original)

Similar statements are hard to prove or disprove. What matters at the end of the day is practice in this area. So far, there is little evidence of permissible interpretations, with the

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exception of the case law on zeroing of course. Recall that in zeroing case law, panels did not conform to the AB interpretations. Panels defended their views invoking Article 17.6 AD, arguing that both interpretations were permissible. Except for this case law, the Panel on Argentina–Poultry Antidumping Duties was requested to judge whether 46 percent of all domestic producers should be considered a “major proportion” of the total domestic production, in accordance with Article 4.1 of AD. Without delving into a thorough discussion of this issue, the panel accepted that this was indeed a permissible interpretation of the term (§ 7.341). This is probably the only case where a panel insinuated that this was one of a range of permissible interpretations and, since it was in the range, it was acceptable. For the rest, panels have (implicitly, at the very least) construed Article 17.6(ii) of AD to be perfectly consistent with the VCLT. There has been no case thus far, nevertheless, where panels have pointed to two permissible interpretations and accepted one of them on the grounds that it was permissible. 2.11.4

Investigating Authorities: Honest Brokers or Active Investigators?

Earlier in this chapter, we alluded briefly to the fact that there is nothing like a World Antidumping Authority. Investigations are handled by entities that are part and parcel of political economy within WTO members. The political economy of protectionism has been discussed in numerous publications. Of interest here are two studies. Finger et al. (1982) discussed the US bureaucracy and concluded that it is politicians that are decisive (with the “high policy track,” in their terminology), rather than US bureaucrats, who have a narrow mandate and are restricted to the “low policy track.” Messerlin (1981) argued that this does not apply to the EU bureaucracy, as it is EU bureaucrats that retain substantial discretion regarding the eventual imposition of contingent protection measures. Both studies concluded that AD authorities, their differences in design notwithstanding, are heavily influenced by political economy considerations and routinely take a pro– domestic producers stance. These two authorities were among the first to be established and deal with the administration of contingent protection. They have provided the blueprint for others to follow. It is, thus, only safe to assume that similar institutional design has been followed elsewhere as well. The legislator, mindful of this background, imposed the requirement for due process in order to ensure paritas armis between exporters and domestic producers. It should not come as any surprise that Article 6.12 of AD was drafted the way it is. Trade agreements, as stated in volume 1, chapter 1, are meant to solve international cost-shifting. They are not meant to solve domestic problems. The other element of the involvement of IAs has to do with the intensity of their involvement in the process. Should they be honest brokers that will decide on facts as presented

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by the disputing parties, or should they go ahead and conduct, ex officio, their own investigation? Law here leaves the issue largely open. Case law has made some steps toward suggesting that it favors active IAs. The requirement to examine “all relevant economic factors” and the requirement to evaluate submitted evidence in light of alternative explanations are illustrations to this effect. Case law has also taken steps in the opposite direction, however. By limiting the realm of “known factors” to whatever has been placed before the authority, it effectively understood IAs to be honest brokers. In short, in light of law and case law as it currently stands, it seems fair to conclude that IAs do not have to spend resources establishing the factual record ex officio, but they do have to take the lead when analyzing the established record. 2.12

Remedies against Illegally Imposed AD Duties

The question of remedies against illegal imposition of AD duties is distinct from the obligation to refund provisional duties (or wrongly calculated duties before liquidation in the prospective assessment system). Here, we deal with situations where duties have been definitively imposed and the consistency of their imposition is being challenged before a WTO panel. In the GATT era, a handful of panels, inspired by the standard of compensation in case of the commission of an illegal act in customary international law, had recommended that, in the case of illegally imposed (AD and countervailing) duties, the GATT contracting party imposing duties was under the obligation to reimburse the injured exporter.208 This is how it works. In this line of thinking, a court’s judgment that an illegality has been committed has declaratory and not constitutive effect, and a judicial decision acknowledges that an illegal act was committed when the act occurred. An illegal act cannot produce legal effects (ex injuria non oritur jus); hence, all consequences of an illegal act must be wiped out. Reimbursement of duties in many cases will not take care of all the damage done, but it will contribute to full compensation. Moreover, the knowledge that duties might have to be reimbursed might disincentivize trigger-happy IAs. The GATT panels that opted for similar solutions did not have statutory language to rely upon, since the GATT did not explicitly address the issue of reimbursement of illegally perceived AD duties. They constructed GATT (implicitly at the very least) as an international contract that must respect customary international law. The situation in this respect did not change with the advent of the WTO. The contract remains silent on the issue whether retroactive (ex tunc) remedies are permitted or excluded in WTO law. The Panel on Guatemala–Cement II, facing a specific request by Mexico to suggest reimbursement of illegally imposed AD duties, acknowledged that in the specific circumstances of the case, a request for reimbursement might be justifiable. Ultimately, however, the panel refused to pronounce on this score (§§ 9.6–7). On more or less the same wavelength, the

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Panel on Australia–Automotive Leather II held that the DSU did not exclude the possibility for retroactive remedies. These two panel reports, nonetheless, are outliers. Typically, a finding that duties have been illegally imposed will be accompanied by a statement that the WTO member concerned should bring its measure into compliance. Although WTO members can still go ahead and reimburse illegally perceived duties as a matter of domestic law, there is no compulsion to this effect as a matter of WTO law; hence, typically WTO members that have illegally imposed duties will simply stop doing so in the future (that is, after the end of the reasonable period of time defined in Article 21 of DSU within which they must bring their measures into compliance with their obligations). 2.13

Institutional Issues

The ADP Committee is established by virtue of Article 16 of AD. WTO members must, by virtue of Article 18.5 of AD, notify the committee of any changes in their laws. In US–Customs Bond Directive, the panel found that the US, by not notifying the committee of its new legislation, had acted inconsistently with its obligations under this provision (§ 7.285). The ADP Committee is not simply a depository of national AD-related initiatives. It administers the day-to-day operation of the agreement and can intervene to further the achievement of the objectives by the WTO members in this respect. To this effect, it can set up subsidiary bodies (Article 16.2 of AD). The Working Group on Implementation is an appropriate illustration to this effect. It was established back in 1996, following a recommendation by the Committee on Antidumping Practices of the Tokyo-round code, and was originally named an “ad hoc Group on Implementation.”209 The group was supposed to make recommendations on issues that arise under the agreements and where agreement was possible. It was clear that the group would have the power to recommend, and, following its recommendation, it fell to the committee to adopt, reject, or modify the recommended action. This group, it was decided, should concentrate on technical and procedural questions, and participation of experts from capitals was deemed necessary. In 2001, it was renamed the “Working Group on Implementation.”210 Based on input by this body, the ADP Committee has produced decisions and recommendations, like the one on the duration of the POI,211 that WTO adjudicating bodies have used in case law. 2.14

Is Dumping Unfair?

Dumping is a price discrimination scheme. Characterizing it as unfair seems odd, since as we will see soon, similar schemes are not only everyday business practice, but crucially

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legal under domestic laws. The question thus arises: Why is most domestic price differentiation lawful, while international price differentiation is not? Indeed, one way to look at Article VI of GATT is as an exception to Article III of GATT.212 WTO members apply one statute (domestic antitrust) to domestic price differentiation, while applying a different statute (i.e., the AD Agreement) when the operator practicing the scheme is of foreign origin.213 Does the fact that the subject of price discrimination is foreign suffice to characterize as unfair a practice that is considered normal business when practiced by domestic economic agents? To respond to this question, we need to inquire first into the history of antidumping before moving into today’s regulation of price discrimination. 2.14.1 The Origins of Modern Antidumping Antidumping precedes Article VI of GATT timewise. It seems that originally it was conceived as instrument aiming to punish, in targeted manner, international punish discrimination. Indeed, William S. Fielding, Canada’s finance minister who is considered the father of the first Canadian AD legislation, has been quoted saying in 1904: “It was unscientific to meet special and temporary cases of dumping by a general and permanent raising of the tariff wall and that the proper method was to impose special duties upon dumped goods.”214 So, AD was originally (in Canada, at least) thought to be the means to avoid punishing innocent bystanders. The Australian AD statute, the 1906 Industries Preservation Act, seems to have had a narrower focus, since it protected the Australian market from international predation. § 19 of the statute left no doubt in this respect.215 In a similar vein, protecting against international predation, and not simply price discrimination, seems to have been the thrust of the US laws as well. Stewart et al. (1993, p. 1401) reflected the following opinion by US Congressman Joseph Fordney, expressed in 1921, as follows: We have no law and we have no means of preventing concerns in a foreign country combining to sell their goods at a sacrifice in this country until competition here has been destroyed and thus control our markets at such prices as they wish to charge.

Indeed, in American Banana Co v United Fruits Co,216 Justice Oliver Wendell Holmes, writing for the US Supreme Court, held that one could not use domestic laws to attack foreign price discrimination. Citing prior case law to the effect that all legislation is prima facie territorial,217 he went on to write (p. 357): Words having universal scope, such as “every contract in restraint of trade,” “every person who shall monopolize,” etc., will be taken as a matter of course to mean only everyone subject to such legislation, not all that the legislator subsequently may be able to catch. In the case of the present statute, the improbability of the United States’ attempting to make acts done in Panama or Costa Rica criminal is obvious, yet the law begins by making criminal the acts for which it gives a right to sue. We think it entirely plain that what the defendant did in Panama or Costa Rica is not within the

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scope of the statute so far as the present suit is concerned. Other objections of a serious nature are urged, but need not be discussed.

Antidumping was thus conceived as the instrument to punish restraints of trade committed by foreigners, and predation emerges as the key concern that antidumping statutes in Australia, Canada and the US aimed to address. Recall that, through predatory pricing, an economic operator wants to eliminate competition from the market and eventually raise its prices in order to recoup the investment made. Similar practices were (and continue to be) prohibited in various domestic antitrust statutes irrespective whether the predator was (is) national or foreigner. Consequently, the statutes cited so far applied the predation standard in nondiscriminatory manner to domestic and foreign agents. Over the years, antidumping evolved, first in the US and subsequently elsewhere as well, into an instrument that punishes any price discrimination instead of focusing exclusively on predation.218 Indeed, the US proposal to introduce antidumping in the GATT did not contain any references to the rationale for antidumping other than a reference to redress price discrimination (irrespective of predatory intent or effect). And when Cuba, as we have seen above, added that antidumping was the instrument to address “unfair” (e.g., discriminatory) pricing, again it did not narrow price discrimination down to a predation scenario.219 AD statutes took time to proliferate. A 1956 GATT study reveals that only 24 countries had AD laws in place, and only 8 of them had used them by that time.220 Institutions were gradually established at the national level to deal with the procedural aspects of AD investigation.221 Eventually, they multiplied. The two Antidumping agreements signed first at the Kennedy round, and later at the Tokyo round, contributed to this outcome. The explosion of domestic antidumping statutes is a post—Uruguay round phenomenon, when the Tokyo round code became a multilateral agreement. The negotiation of the Uruguay-round AD Agreement has been discussed in several publications.222 A division between the then-main users, the EU and the US, and the exporters emerged right from the start of the negotiations. The former were fighting a rearguard battle in an attempt to keep as much discretion as possible in the hands of IAs and introduce stringent anticircumvention mechanisms, such as third-country circumvention and country-hopping.223 The latter aimed to do the exact opposite—e.g., “tighten the screws” so that recourse to AD measures would become an onerous exercise. A series of drafts prepared by the New Zealand delegate Hugh McPhail (“McPhail drafts” I, II, and III) were rejected, and only a compromise draft at the end of the round (the “Cartland draft,” named after the Hong Kong ambassador, Michael Cartland) managed to gather the necessary support. The main users failed in introducing anticircumvention but, at the insistence of the US, they did manage to introduce a standard of review that, prima facie, looks quite deferential toward IAs, as explained previously. Exporters can claim victory for introducing new disciplines regarding recourse to constructed prices, best

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information available, etc. Then, there are some issues like zeroing where no agreement proved possible and the matter was left for discussion at a later date, and eventually to adjudication with the results discussed previously. The trend has been toward “tightening the screws,”224 at least at the legislative level, and various factors have contributed to this outcome, including the following: • Abuses of the past were definitely key. • The identity of AD users, which has changed over the years (as table 2.1 showed earlier in this chapter), and yesterday’s users have become today’s victims. • Supply chains have emerged, which suggests that industrial users interested in cheap inputs have multiplied around the world • There has been an increasing awareness that, whereas a safeguard clause is necessary, in practice, AD duties often harm more than they protect. Nonetheless, no amendment of the antidumping agreements so far has led to a link between antidumping and antitrust. Antidumping continues to address price discrimination. It continues to include an injury to competitors (as opposed to injury to competition) standard. The only concession to antitrust, if it can be characterized as such, was the inclusion of Article 6.12 of AD, which allows but does not oblige IAs to invite the opinions of parties negatively affected by the imposition of AD duties. 2.14.2

Price Discrimination in Domestic Antitrust Statutes

In antitrust practice,225 a price differential226 is not necessarily viewed with skepticism. In the EU system, for example, price differentiation will be treated as an abuse of single or collective dominance. As a result, for price differentiation to enter the picture of antitrust enforcement, a prior finding of dominance is required. The European Court of Justice (ECJ) had the opportunity to pronounce on this issue in its AKZO and Tetrapak case law.227 We quote from the Tetrapak decision (§ 41), which can be considered the authentic expression of the test for predatory pricing established by the ECJ: In AKZO, this Court did indeed sanction the existence of two different methods of analysis for determining whether an undertaking has practised predatory pricing. First, prices below average variable costs must always be considered abusive. In such a case, there is no conceivable economic purpose other than the elimination of a competitor, since each item produced and sold entails a loss for the undertaking. Secondly, prices below average total costs but above average variable costs are only to be considered abusive if an intention to eliminate can be shown.

With respect to some of the sales, the ECJ found that the prices charged were between average variable cost and average total cost. This sufficed for the ECJ to find that prices were predatory (§ 44):

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... it would not be appropriate, in the circumstances of the present case, to require in addition proof that Tetra Pak had a realistic chance of recouping its losses. It must be possible to penalize predatory pricing whenever there is a risk that competitors will be eliminated. ... The aim pursued, which is to maintain undistorted competition, rules out waiting until such a strategy leads to the actual elimination of competitors.

A dominant company that prices below a certain threshold is thus found to be practicing predatory prices, in EU practice, and there is no need to further show a realistic possibility to recoup the investment. In the eyes of the court, a company behaving in this manner can only intend to monopolize the market.228 In the US statute, monopolization plays a comparable role to abuse of dominance in the EU regime, and it is under its aegis that the Supreme Court discussed this issue. The leading case is Brooke Group:229 A plaintiff must prove (1) that the prices complained of are below an appropriate measure of its rival’s costs and (2) that the competitor had a reasonable prospect of recouping its investment in below cost prices. ... The plaintiff must demonstrate that there is a likelihood that the scheme alleged would cause a rise in prices above the competitive level sufficient to compensate for the amounts expended on the predation, including the time value of the money invested in it. Evidence of below cost pricing is not alone sufficient to permit an inference of probable recoupment and injury to competition. The determination requires an estimate of the alleged predation’s cost and a close analysis of both the scheme alleged and the relevant market’s structure and conditions. Although not easy to establish, these prerequisites are essential components of real market injury. ... Predatory pricing schemes, in general, are implausible ... and even more improbable when they require coordinated action among several firms. ... They are least likely to occur where ... the cooperation among firms is tacit, since effective tacit coordination is difficult to achieve; since there is a high likelihood that any attempt by one oligopolist to discipline a rival by cutting prices will produce an outbreak of competition; and since a predator’s present losses fall on it alone, while the latter supracompetitive profits must be shared with every other oligopolist in proportion to its market share, including the intended victim.

This ruling requires some explanation. A predator’s pricing is a strategy that has two phases. Eliminating competitors necessarily generates costs for the predator during the first phase, and recouping these costs during the second phase almost necessarily creates incentives for old competitors to come back or new competitors to enter a market that they ignored before the price war. A predator should follow a predatory pricing strategy only if the second phase brings higher profits than the losses generated by the first phase. If phase 1 is long, the likelihood of recouping in phase 2 thereby becomes slimmer. At the end of the day, only an evaluation of the barriers to entry in the market where the predator operates can provide responses as to the likelihood of recouping the original investment. The unlikelihood of this occurrence is supported by an additional argument. If the goal of predation is monopolization of a market, there is a better, less costly manner to do it: merger. A predator can buy the other companies in the relevant market where it operates,

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at a price that would reflect their stock value in the expected monopolistic (not competitive) market.230 The evidentiary standard in US law is, thus, higher, and makes the possibility of successful challenges against predatory schemes quite unlikely. Both antitrust statutes, though, punish behavior, which causes injury to competition as opposed to injury to competitors.231 Antitrust statutes, thus, when dealing with price discrimination, look into the welfare implications of price differentiation for the whole of the society, whereas the AD statute looks simply into the implications for a subset of the society, the injured producers. What is unfair or plain illegal in antitrust (price predation), and what is unfair in trade law (price discrimination) partially only overlap. In practice, this is very seldom the case as Messerlin’s (2001) study, that we quote in what follows, shows. 2.14.3

In Defense of AD

Policy makers, nevertheless, advance four categories of arguments to justify continuing recourse to AD:232 • Discriminatory pricing is wrong. • AD addresses predatory prices. • “Strategic dumping” can reduce the incentives for participating in the WTO. • AD is necessary to “level the playing field.” • AD is a necessary safeguard. 2.14.3.1 Price Discrimination AD demonizes price discrimination when it causes injury. It does not address the reasons that give rise to it. Price discrimination will occur when price arbitrage is impossible. This could be the case for various reasons. The absence of arbitrage may be the consequence of factors outside the control of the exporting firm, such as different technologies in the two markets; the home-country consumers could be much more sensitive to the latest technologies than the foreign-country consumers; other technical barriers to trade; it might be generated from the firm itself in its effort to protect the home market. Whatever the reason, the fact remains that dumping occurs because there is no price arbitrage. If discriminatory pricing is the true concern of the proponents of AD duties, why address the proximate and not the ultimate cause? Why have recourse to a secondbest instrument such as AD (which leads to increasing prices to the level of the higher price) and not try to move prices to the level of the lower price? Do we really need to burn the village to save it? More practically, the first question to ask would be why importers do not simply reexport the dumped products to the exporting country charging the higher price?

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Arguably, this would have been quite profitable. Is it because of state trade barriers, product differentiation, or any other reason? The former could be decomposed into tariffs, quantitative restrictions (QRs), export subsidies, and domestic instruments. But QRs and export subsidies are illegal per se, and domestic instruments have to be applied in a nondiscriminatory manner. Hence, the only remaining issue would be whether the reason for price arbitrage relates to import tariffs. Assuming that this is indeed the case, it would be more sensible to try to reduce the level of tariffs in the context of multilateral rounds rather than increase prices by adding the dumping margin to the bound tariff. As we have seen in volume 1, chapter 3, though, tariffs are at an all-time low, while AD activity is blossoming, the low tariffs notwithstanding. Cases of product differentiation can also be discarded, since, assuming this is indeed the concern, AD duties can hardly provide the antidote since the IA will not be in a position to overcome the like product requirement.233 Price arbitrage can also occur because of legitimate prohibition of parallel imports, since the Trade-Related Aspects of Intellectual Property Rights (TRIPs) Agreement does not include an outright prohibition of similar instruments.234 One, thus, may legitimately suspect that there must be some truth in that AD duties are used more and more as customs duties fall, as some sort of safeguard or antidote to the “procedures-heavy” requirements included in Article XXVIII of GATT. At any rate, inquiring into the reasons for lack of arbitrage will allow trading partners to use the first-best instrument to address distortions.235 It will, in all likelihood, also lead to fewer AD investigations.236 2.14.3.2 Predatory Dumping Complaining firms in AD cases often suggest that dumping is driven by the will of foreign firms to eliminate domestic competitors in their own market in order to increase prices when they will ultimately be in a monopoly position in the import-competing market. If this was indeed true, one could simply reduce AD actions to cases of predatory pricing and address them as discussed previously.237 2.14.3.3 Strategic Dumping In this case, an exporting firm will benefit from a closed home market (a safe harbor), where it can charge the home consumers the full (fixed and variable) costs of production, allowing the sale of the product in the export market at a price only inclusive of the variable cost (its competitors in the export market are assumed not to operate in a safe harbor). The competitors of the strategic dumper cannot emulate its behavior. They thus must be disadvantaged enough, in terms of the relative size of accessible markets and scale economies, with respect to the strategic dumper. Strategic dumping could, thus, originate in companies operating in vast domestic markets (the EU, US, China, and India are good examples). If at all, it could be a concern for

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companies originating in China, and India, since the EU and US markets are quite open. But then, it could hardly be offered as excuse to impose AD duties, when the safe harbor is small relative to the export market, since in this case, it is highly unlikely that strategic dumping will occur. In this vein, a high percentage of AD investigations (of goods originating in, say, Singapore, or Hong Kong, China) cannot be justified on strategic dumping grounds. And, of course, the question whether it is more profitable to impose AD duties instead of negotiating away the barriers, making the Chinese or Indian market difficult to access, remains unaddressed by proponents of AD duties to respond to strategic dumping. 2.14.3.4 Leveling the Playing Field We referred previously to the statutory acknowledgment that dumping is unfair. Proponents of AD duties have advanced a series of arguments in this respect. The heart of similar arguments is this: the playing field is not level since some enjoy relax competition laws, whereas others do not; some face low labor costs, and others do not; and some can profit from tax havens, and others cannot. In short, because of differences across trading nations, some will always be better off than others. AD, in this logic, is the necessary instrument to level the playing field. Absent some corrective action, cheaters will always profit. Who are the cheaters? The WTO is based on regulatory diversity. Indeed, one might go so far and ask: How much trade would we have if all nations were identical? There is definitely no will, and no good arguments at all to harmonize conditions of production and competition on a global basis, and an effort to do so will prove counterproductive, as it will create its own negative external effects. Cass and Boltuck (1996) have provided the most persuasive response to this argument, to which we totally adhere (p. 404): The “level-playing-field” analogy that producers have so freely invoked is inapposite. And equitable international competition is a mirage. We cannot begin to make the conditions of production equivalent across nations, and we should not have that as a goal. The effort to do so is bound to produce mischief and to use up resources unproductively in the process.

2.14.3.5 AD as Safeguard In defense of AD, the argument has also been made that AD introduces a flexibility element into the WTO contract. Trading partners will be induced to make more commitments than otherwise because they know that they can always increase their protection by the dumping margin (if need be). AD thus functions like a safeguard.238 Finger and Nogues (2006) provided some empirical support for the argument that AD can be put to good use as a safeguard mechanism by researching the Mercosur experience. In their account, national administrations in the Mercosur countries used the potential for AD as a carrot to persuade domestic lobbies to support trade-liberalizing commitments. This argument rests on the premise that the current safeguard clause does not operate to the satisfaction of the trading partners. This is probably true, as we will see in chapter

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4 of this volume. But the natural question to ask is this: Why do negotiating efforts not concentrate on fixing the current safeguard clause instead of adding a new one that comports numerous negative external effects? If what is truly needed, a question that still needs to be put squarely before negotiators, is a “targeted safeguard,” then why not simply renegotiate Article 5.2(b) of SG?239 This discussion points to the inability to mount a serious intellectual defense of AD. Its advent in the WTO world is better explained on political economy grounds.240 2.14.4 AD and ... More Problems In what follows, we turn to costs caused by AD that are less obvious than those described so far. 2.14.4.1 A Procartel Instrument There is evidence that AD measures have a procartel effect at the stages of both the complaint and the decision. Messerlin (2001) persuasively argued that exchanging information for lodging a complaint requires a minimum exchange of information from the complainant. Even if handled through lawyers, plaintiffs could draw common conclusions from the complaint. On the other hand, nascent collusion between plaintiffs can be made sustainable by AD measures. It is not by accident that, on Messerlin’s count, at least one-quarter of EU AD cases of the 1980s were “twin” AD and competition cases dealing with similar products and EU firms. A more systematic indication of this procartel dimension flows from the fact that the combined market shares of the plaintiffs and defendants are often extremely high—on average, around 80–85 percent in the US and the EU. Defendants and complainants have a combined market share of less than 90 percent in only 55 percent of the US and EU AD cases examined in the 1980s and mid-1990s. In addition, foreign cartels (that is, those outside the country enforcing AD measures) have been created by AD cases, as best illustrated by the quasi-official Canadian potash cartel triggered by US AD. Another interesting observation that Messerlin (2001) reported is echoing in AD investigations. It has been shown that EU and US AD actions against China targeted the same Chinese exports in 75 percent of AD cases initiated against Chinese exports by the US and in 68 percent of the cases initiated by the EU. Most of these cases echoed each other within a year or less, and all but three of these cases (cycles, hammers, and pocket lighters) resulted in AD measures of some kind. Such a large proportion of “echoing cases” and the similarity of their outcomes are signs that AD is a protectionist instrument that petitioners are using in a strategic way to segment the two largest world markets. World cartels are likely to be fostered by a series of AD cases echoing each other all over the world. Large firms almost simultaneously lodge AD complaints in Brussels, Washington, D.C., and elsewhere in order to segment the world market as they wish (AD duties and measures increase the transaction costs,

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and hence the firms’ ability to charge different prices—that is, discriminate—in different locations). 2.14.4.2 AD Wars China–X Ray Equipment was nothing like a memorable dispute. It dealt with mundane issues and provided unsurprising responses. It can rank among the leading cases and can hardly serve as a teaching tool. And yet, underneath the surface, lie some interesting facts. This case concerned the imposition by China of AD duties on scanners. In fact, both the EU and China imposed AD duties on each other’s scanners. Scanners are an oligopolistic market, with a few companies dominating it. Smith, an EU company, detained 80 percent of the EU market and 29 percent of the world market. Nuctech, its Chinese competitor, enjoyed for its part 90 percent of the Chinese market, and was rapidly raising its stakes in the world market as well.241 The EU initiated an investigation in February 2009, imposing a preliminary duty of 36.6 percent in December 2009 and a final duty of 34 percent a few weeks later. China initiated an investigation in August 2009 (i.e., a few months later) imposed a preliminary duty of 43.2 percent in January 2010, and a final duty of 33.5 percent a few weeks later. The strikingly similar level of AD duties meant that both companies suffered a loss in each other’s market. Confirming the predictions of Martin and Vergote (2008), discussed in volume 1, the imposition of duties by the EU led to the imposition of duties by China in the same product market. 2.15

Concluding Remarks

It is probably not an overstatement that AD is the one WTO instrument that has provoked most of the wrath in economic literature. The valiant effort to justify it as a necessary safeguard begs the question: Why not address the existing safeguard clause head on instead? Judges are not legislators, of course, so WTO panels cannot put into question the rationale for AD: the distortion lies in the law itself. This is the elephant in the room. There is nothing quintessentially “unfair” about price discrimination. In the meantime, there is an increasing use of AD duties as the users of the system multiply. Brazil, for example, recruited over 100 AD investigators in 2012. There has also been an increase in tit-for-tat cases, mainly because of US–China feuding. AD is definitively popular. Against this background, case law has been quite strict on occasion vis-à-vis the IAs involved, and deferential as well. There are good arguments in favor of contract flexibility and we will be discussing them in chapter 4 of this volume.

3

Subsidies

3.1 The Legal Discipline and Its Rationale 3.1.1 The Legal Discipline The Subsidies and Countervailing Measures (SCM) Agreement aims to discipline two instruments: subsidies granted by WTO members and countervailing duties (CVDs) imposed on injurious subsidized imports. To this effect, it requests that WTO members avoid using two types of prohibited subsidies (local content and export subsidies); avoid causing adverse effects to other WTO members through the use of subsidies other than the two prohibited types; and to impose CVDs when addressing nefarious effects of subsidies only in accordance with the agreement’s provisions. 3.1.2 The Rationale for the Legal Discipline The SCM Agreement does not contain a preamble, where the negotiating rationale and the objectives of the agreement are usually included. It was not for lack of trying. Negotiators simply could not agree on what the objectives should be.1 To understand the rationale, we have to look into the specific provisions of the SCM Agreement, as well as their negotiating history. Recall that the rationale for the nondiscrimination discipline imposed on domestic policies was to provide an insurance policy against tariff concession erosion through unilateral actions. Concession erosion was perceived as a risk, since it would affect the incentive of trading nations to continue reducing their level of tariffs at a time when tariffs in and of themselves constituted the main instrument for market segmentation. Subsidies, like any other discriminatory domestic instrument, could erode the value of tariff concessions. Indeed, the first disputes regarding subsidies (discussed later in this chapter) reflected precisely this point: trading nations, by subsidizing, eroded the value of tariff concessions for which consideration had been paid. Something needed to be done about this. The necessity to act against subsidies became all the more pressing since they were exempted from the coverage of Article III of GATT, by virtue of Article III.8 of GATT.

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Trading nations could, thus, through subsidization, favor domestic producers only. What to do, then? GATT contained a mild discipline on subsidies in Article XVI, and also allowed the imposition of CVDs, an instrument akin to antidumping (AD) duties, in order to counteract the effects of subsidization. Case law allowed for subsidies to be challenged through nonviolation complaints. Law and case law point in the same direction. WTO members should not, through payment of subsidies, eviscerate the value of trade concessions, and risk the beneficial effects of tariff liberalization. Indeed, the very existence of nonviolation complaints (NVCs), the legal instrument meant to compensate trading nations even from legal actions that however negatively affected the value of tariff concessions, provides ample testimony to this effect: the majority of NVCs have been raised against subsidies granted by WTO members.2 3.1.3

Discussion

3.1.3.1 Negotiating Subsidies in GATT/WTO The original GATT had adopted a rather benign attitude toward subsidies. It explicitly acknowledged the harmful effects of export subsidies without outlawing them, and imposed only a notification requirement with respect to all subsidies aiming to increase exports or reduce imports (Article XVI.1). From early on during the negotiation (London Conference, 1946) subsidies were divided into export and domestic subsidies. The former would be paid only upon demonstration of export sales. The latter would be paid irrespective of the destination of sales. The historical underpinnings of the bifurcation between domestic and export subsidies merit some additional discussion at this point. Article 30 of the London Draft reflects the first multilateral regulation of subsidies. A bifurcated approach was favored.3 Export subsidies, on the one hand, would be, in principle, prohibited. Some exceptions were provided in this provision, such as price stabilization schemes.4 All other subsidies would be notified and, assuming they caused serious prejudice to the interests of another country, the subsidizing state would be requested to enter into consultations with affected countries. The bifurcation was deemed necessary “in view of the fact that export subsidies were recognized as being more likely to distort trade than so-called ‘domestic’ subsidies.”5 No elaborate justification for the distinction was offered. We will return to this point later in this chapter. In subsequent negotiations, the US circulated a text6 during the New York Conference that retained the distinction between domestic and export subsidies and found support among some, but not all, delegations. Then, during the discussion within the 7 Subcommittee on Tariff Negotiations, a document was circulated that did not include any disciplines on export subsidies. It merely reproduced the discipline on domestic subsidies. By that time, a majority of countries felt that the discipline on export subsidies should be part of the ITO Charter, not GATT.8 Recall

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that the Havana Charter was supposed to also continue disciplines on restrictive business practices. This approach was followed in all subsequent negotiations leading to the adoption of the original GATT. The Geneva Draft also contained no mention of a discipline on export subsidies.9 No change of substance is recorded in the Havana Conference.10 It is, of course, difficult to sustain that, as a matter of principle, export subsidies are always more likely to distort trade than their domestic counterparts. What constitutes plausible grounds justifying the bifurcation is the fact that, when subsidizing their domestic markets, trading nations might also be promoting social preferences (besides helping domestic producers). When providing export subsidies, though, trading nations can safely be presumed to aim exclusively at helping domestic producers. Indeed, except for extraordinary circumstances, what is the interest for Home to promote public health in Foreign? After the entry into force of GATT, the attitude of the trading nations toward subsidies changed once again. During the preparatory work of the Review Session (1954), discussions centered on the link between negotiating tariff concessions and the erosion of their value through subsidies. Negotiators had by now gained some experience with subsidies that were eviscerating the value of tariff concessions. A series of generous subsidization programs were put in place following World War II in order to reignite national economies. The existence of the New Deal policies, the Marshall Plan for the reconstruction of Europe are appropriate illuminations of the generous subsidization programmes that saw the light of day during that time. They were not uncontroversial. Some GATT contracting parties went so far as to question the value of negotiating additional tariff concessions without the discipline of subsidies.11 Furthermore, a consensus emerged to the effect that strengthening the disciplines on subsidies was warranted indeed. The fiercest opponents of subsidies proposed an outright ban on export subsidies,12 whereas delegates of some developing countries adopted a two-tiered approach and backed India’s proposal for a series of exceptions for developing countries.13 The final compromise was to reintroduce a legal discipline on export subsidies. The emerging consensus was not in favor of banning them altogether but rather for taming export subsidies. The US delegate should be credited with the formulation that export subsidies should not lead to the subsidizing state acquiring more than an “equitable share of world trade.”14 The US then secured a waiver and heavily subsidized its farm sector as of the mid-1950s. Eventually, it became one of the world’s leading farm producers and exporters.15 A few years later, the signing of the Treaty Establishing the European Economic Community (EEC), which entered into force on 1 January 1958, signaled the advent of the common agricultural policy (CAP), one of the cornerstones of the EU integration process. The CAP effectively amounted to a “license to subsidize.” The EU, in the name of self-sufficiency with respect to farm goods (probably inspired by the terrible experience that European countries lived through World War II), provided subsidies aimed to incite domestic production. The incitement, nonetheless, was too generous, and the EU also became an important producer of farm goods.16

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The US had in the meantime become a very efficient producer of farm goods, and did not need to rely on subsidies as much as before. It could not fully exploit its newly found prowess as a major farm producer because of the subsidies practiced elsewhere. The US adopted a series of initiatives aiming to curb subsidization both with respect to farm goods and in general. The next time the treatment of subsidies was negotiated was during the Tokyo round, since the Kennedy round came probably a bit too early, and produced only one code anyway, the Antidumping (AD) Agreement. During the Tokyo round, the US delegation backed the adoption of a code on subsidies that would reflect the following approach: Such a code should deal with three basic problems. First, subsidization can lead to increased exports by one country artificially distorting normal market forces. Second, a country may experience loss of sales in third-country markets if another country’s subsidies result in increased exports to those markets. The United States considers this situation to be a problem of increasing frequency and importance affecting the exports of both developed and developing countries. Finally, a country may experience loss of sales in a subsidizing country’s market when the subsidy results in import replacement in that market. Moreover, subsidies that result in import replacement in one country may deflect other countries’ exports previously entering that country to third-country markets, often to the detriment of producers in those third countries.17

The US was an active negotiator during the Tokyo round, 17 and a number of US proposals found their way into the Tokyo-round Agreement (“Code”) on Subsidies, which bound the discretion of only a subset of GATT contracting parties with respect to subsidies. When arriving at the negotiating table, the EU position was influenced by discussions on farm trade where subsidies played a prominent role, whereas the US position was heavily influenced by talks on aircraft subsidies. The Tokyo round agreement distinguishes between export and other subsidies, imposing stronger disciplines on the former. It requests its signatories to avoid using export subsidies on goods other than primary goods (Article 9), and to avoid earning more than an “equitable share of world trade” of primary goods through subsidies (Article 10). The regulation of other domestic subsidies was reflected in a carefully worded provision. On the one hand, signatories recognized that domestic subsidies (Article 11.1) are widely used as important instruments for the promotion of social and economic policy objectives and do not intend to restrict the right of signatories to use such subsidies to achieve these and other important policy objectives which they consider desirable. On the other hand, however, they also recognized that subsidies could harm the interests of other traders. Acknowledging their harmful effects, the agreement went on to impose the following discipline (Article 11.2): [S]ignatories shall therefore seek to avoid causing such effects through the use of subsidies. In particular, signatories, when drawing up their policies and practices in this field, in addition to evaluating the essential internal objectives to be achieved, shall also weigh, as far as practicable, taking account of the nature of the particular case, possible adverse effects on trade. They shall also

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consider the conditions of world trade, production (e.g. price, capacity utilization, etc.) and supply in the product concerned.

The obligation thus imposed was very mild. The Tokyo-round agreement provided for consultations in case effects were caused anyway. Two features of the Tokyo-round agreement influenced subsequent negotiations. First, the differential treatment of export subsidies based on whether they are granted to primary products, is the criterion for distinguishing between export subsidies under the Uruguay-round SCM Agreement and the Agreement on Agriculture (AG). Second, Article 11.1 of the Tokyo-round agreement included an indicative list of “legitimate” objectives that trading nations might be pursuing through subsidies. We find reflected therein subsidies aiming to address regional disparities and promote employment policies, environmental protection, research and development, as well as interests of developing countries. Some of these policies found their way into the now-defunct Article 8 of the Uruguay-round SCM Agreement, as we will see later in this chapter. The Tokyo round agreement on subsidies was made possible because of the statesmanship that key delegates showed at crucial times. The EU and US delegations locked their horns in a sometimes bitter battle. The EU, fearful that farm subsidies might be questioned and eventually disciplined, adopted a very negative attitude throughout the negotiation. It took all the skill of Canadian Ambassador Rodney De C. Grey, who acted as the middleman between EU and US during Tokyo round, and managed to lead the negotiation to successful conclusion. It was not easy. The US was forced to give up a very cherished advantage that it had obtained already in the negotiation of the GATT. Rivers and Greenwald (1980) explain that the US had been exempted from the obligation to perform an injury analysis when imposing countervailing duties. The US had requested (and obtained) this permission, since the US law did not provide for injury analysis, and the US was unwilling to amend its domestic laws as a result of the advent of the GATT. The signing of the Tokyo round agreements signaled the end of this practice. The Tokyo round did provide some additional disciplines to subsidization. It did not match the expectations of some players though, and crucially, the US. No disciplines on farm subsidies were included, and the threshold to counteract subsidies was increased, since now the US would have to demonstrate that subsidies by its trading partners were causing injury to its domestic production. The next stop was Punta del Este, in 1986. The US entered the Uruguay round in a bullish mood, aiming to discipline subsidies in a drastic manner and go beyond what had been decided in the Tokyo round. This line of thinking was very much in line with the prevailing economic “philosophy” of the Ronald Reagan administration, which was well in place throughout the preparatory work and the early years of the Uruguay round. For all practical purposes, the economic plan that became known as “Reaganomics” marked a sharp curb in government spending. The New Deal days were long gone, as President

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Reagan and his advisers decisively turned the page on government spending. The Reagan administration expected others to emulate its example. The EU, on the other hand, wanted to defend its farm subsidies, of course, and the relationship between the two agreements was far from clear, at least early in the negotiations. It, thus, naturally moved to the opposite camp (i.e., opposite to the US position). Some developing countries that wanted to keep the possibility to subsidize intact practiced a difficult balancing act. They liked the ideas advanced by the EU, but in an effort to differentiate themselves from the EU (since, among other things, their interests with respect to farm trade were at the antipodes of the EU interests), privileged a two-tiered approach, where developing countries only would have substantial possibilities to subsidize.18 Developing countries (or at least some of them) emerged as important players in the negotiation because of the decision to adopt “single undertaking” during the Uruguay round. The Tokyo-round agreement bound only its few signatories, the Organisation of Economic Cooperation and Development (OECD) world. This would not be the case anymore. For some time, it seemed like a deal would be impossible, since the EU was unwilling to back down. Laura D’Andrea Tyson (1992), and Hoekman and Mavroidis (1996b) have argued that the shift in the US position in November/December 1993, when George H. W. Bush’s administration was about to leave office, and Bill Clinton’s administration was about to enter the White House, was the catalyst. A rapprochement was possible because of the affinity that the Clinton administration and the EU bureaucracy shared regarding subsidies.19 This was a defining moment in the evolution of the Uruguay round, and, for this reason, it deserves a few more words here. In the 1980s, the US was quite hostile to the idea of government intervention in the life of business. It was emerging from the biggest deregulatory experience in its history. Many still remember how, in dramatic fashion, President Reagan ordered the dismantlement of the national telecoms carrier AT&T in 1982, which henceforth was limited to international services. This action left the US market to other firms (which became known as the “Baby Bells”). Deregulation, a process that had started earlier under the presidency of Jimmy Carter, was not limited to telecoms, of course.20 This is how the US delegate to GATT described what lay behind deregulation: The motive behind deregulation in a number of sectors in the United States had been the feeling that there was not enough competition, nor enough companies. As could be seen from the situation in coastal shipping, the degree of free competition needed was also an issue in his country. On the other hand, the dynamism that may have resulted from deregulation, say in telecommunications, could be attributed to management styles rather than to global trade trends, and of course some dominant firms remained in the market.21

During the first six years of the Uruguay round, the US maintained its hostile attitude toward subsidies, which made a deal on the SCM and the AG agreements an impossibility.

Subsidies

191

In 1992, President Clinton came to power, and his group of advisors included a few proponents of a different philosophy regarding subsidies as a means of industrial policy. Many of them saw the merits of subsidization under certain conditions, especially in globalized markets where other participants routinely were subsidized.22 The US, previously proponents of the “zero option” to farm subsidies, accepted transitional periods for their elimination. The “zero option” meant that the US was prepared to commit to zero percent tariffs on farm goods, if the EU was prepared to do the same. The EU was not prepared to do the same though, and the Agreement on Agriculture was signed, which aimed to bring farm goods within the disciplines of the multilateral trading system, and made room for provisional periods during which subsidies would be progressively reduced. In a similar vein, the US toned-down hostility to subsidies, and paved the way toward the emergence of the “traffic light” approach (in which red meant prohibited subsidies, green permitted, and, amber challengeable) and the deal in the SCM Agreement. As a result, the Tokyo-round compromise was further developed. Export subsidies became outright illegal, whereas some domestic subsidies became legal and immune to challenges. There was an in-between category—namely, domestic subsidies that were considered nonactionable. They would be left to micromanagement by those interested in granting them, and eventually to adjudication. The traffic light approach had entered the world trading system.23 3.1.3.2 Subsidies in the Realm of Economic Theory Economists have taken a nuanced position toward subsidies. There are so-called good and bad subsidies, subsidies that address distortions, and subsidies that are mandated by political economy–conscious governments that should not exist in the first place. It is clear that subsidies distort the allocation of resources, and if it is optimal allocation of resources that is being sought, then subsidies have no place. Markets, however, supply some goods and not others; “they work well for ice cream and not so well for clean air,” as one saying goes (see Mankiw 2011). In a trade agreement context, which is the focus of this volume, there are some good arguments in favor of limiting the potential for subsidization. The value of tariff commitments might be eviscerated through the use of subsidies, regardless of the rationale for subsidization.24 Early GATT panel reports, like Australia–Ammonium Sulfate, made trading nations aware of their impact. Domestic subsidies shift demand from imported to domestic goods, thus eroding the value of tariff concessions for which consideration had been paid. Without naming subsidies “unfair,” as they did with dumping, negotiators wanted to buy insurance against this risk. Addressing negative effects that subsidies might have on the value of tariff concessions emerges, hence, as a sensible regulatory strategy. The question, however, arises of how much more one should regulate subsidies in a context like the WTO.25

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Several arguments have been advanced in favor of adopting a benign attitude toward subsidies. For starters, subsidies expand trade, as producers will have an extra incentive to produce and increase the volume of traded goods. Foreign consumers would be the first to be grateful to subsidizers, whereas foreign producers of competing goods (and not producers in the downstream industry using the subsidized good as input for the production of their final product) would be hurt, at least in principle. Should not, then, the SCM Agreement reflect on both effects and recommend antisubsidy action accordingly? Furthermore, subsidies are not as distorting as tariffs since they affect one margin (i.e., producers), whereas tariffs have an impact on two margins (i.e., producers and consumers). Additionally, overdisciplining subsidies in the WTO context might make WTO members reluctant to make tariff commitments in the first place, as Bagwell and Staiger (2002) and (2006) noted.26 Losing some flexibility through disciplining of subsidies might make them unwilling to lose any more flexibility through disciplining of tariffs. Finally, the rationale for subsidies should be accounted for since, as many have noticed, subsidies are adopted for a variety of reasons, and some of them will primarily aim to address distortions (say, environmental pollution). Should, then, a trade agreement punish similar subsidies that might affect international trade, if only in an ancillary manner? It could be that firms are unable to take into account the social benefits associated with their production, and, thus, produce less than they should. Assuming market failure, a subsidy might on occasion be a first-best instrument to respond to it. In such a case, a production subsidy could be a solution. Strategic trade theory has also made a strong case for subsidization. The basic idea of this literature is that subsidies (and other trade policy instruments) can raise domestic welfare by shifting profits from foreign to domestic firms. It is simple to see, for example, that a subsidy will reduce welfare in a country that exports products that compete with the subsidized good. Brander and Spencer (1985) should be credited probably more than anyone else with this insight. They constructed a two-stage game where Home and Foreign produce substitutes (homogeneous products) and export to the world market. During stage 1, Home pays an export subsidy to its firm. In stage 2, Home and Foreign take each other’s volume of production as given. The subsidy paid by Home lowers the price for its firm and makes it want to export more for any level of volume of exports from Foreign. The foreign firm must then reduce its output. As the subsidy increases, the quantity of exported goods rises, economies of scale work, Home’s prices fall, and rents for Home rise, while rents for Foreign fall. Rents are, thus, shifted from Foreign to Home.27 Strategic trade theory has been criticized for various reasons28 and has been understood by some in practice as a recommendation for active subsidization in order to induce enhanced productivity. There is, of course, the other side as well. There are those who argue for a tough attitude toward subsidies. Recall the point about misallocation of productive resources: subsidies often constitute the preferred instrument of industrial policy and might shift profits from

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193

nonsubsidizing to subsidizing trading nations.29 And then some subsidies are “predatory.” The intent behind similar policies is to drive competitors out of the market. Predatory subsidies can reduce aggregate welfare in an importing country, both because the local producers that leave the industry forfeit their prospective profits, and because the consumer price may rise once the local competitors exit.30 Depending on the circumstances, thus, there might be good arguments to regulate subsidies in the context of a trade agreement. Most economists, however, would agree that the rationale for subsidization should be relevant in designing the legal discipline.31 3.1.3.3 From Economic Theory to WTO Practice The original Uruguay-round SCM Agreement did try to distinguish the treatment of subsidies depending on their rationale. To this effect, for example, “green” subsidies aimed at addressing environmental hazards would remain unanswered.32 This is not the case anymore, though, and, as we will see in detail later in this chapter, the current SCM Agreement does not condition the treatment of subsidies on their rationale. Subsidies can nowadays be counteracted regardless of their rationale. Grossman and Mavroidis (2007a) argued that the quintessential purpose of the SCM Agreement is to address the shifting of costs to domestic producers. This is what they say: Policies that are set with no regard to their potentially adverse effects abroad are bound to be globally inefficient, in the sense that an alternative set of policies could be found that all governments would agree is preferable to the chosen ones. To further global efficiency, a trade agreement should make it costly for a government to choose policies that inflict harm on its trading partners.33 So, in what ways might a subsidy inflict harm on another country? One possibility would be to associate harm with a loss of aggregate economic welfare. An interpretation of the SCM Agreement that associates harm with a loss in aggregate economic welfare cannot, however, be sustained in light of the manner in which the agreement was structured. If product and factor markets are competitive and well functioning, then a foreign subsidy of production of a good cannot reduce aggregate welfare in an importing country. A subsidy typically encourages production in the subsidizing country. Thus, at each price, local firms are willing to produce more output when subsidized than otherwise. The effect of the subsidy is to reduce the world price of the subsidized good. If markets were competitive and well functioning in the importing countries, and governments were concerned only about aggregate economic welfare, then importing countries would be grateful when a trading partner introduced a subsidy and would have no reason to discourage such subsidies with the threat of countervailing actions.34 Therefore, if the members had intended the SCM Agreement to discourage actions that would inflict welfare losses on others, they would have directed the test for actionable subsidies toward identifying conditions where aggregate loss is most likely to occur: i.e., an external welfare loss is more likely to occur when a government subsidizes firms that sell in an imperfectly competitive market.

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Similarly, a welfare loss is more likely when wages are rigid (e.g., unresponsive to changes) in the importing country than when they are flexible, so the agreement might have made reference to the labor-market conditions there. The agreement might also have allowed for countervailing measures in member countries that export goods in competition with the subsidized good, inasmuch as these countries are quite likely to suffer welfare losses as a result of a foreign subsidy. In fact, the SCM Agreement does not confine the use of CVDs to situations in which an importing country has established the presumption of a welfare loss. The agreement makes no reference to labor-market conditions, to market structure, or even to consumer welfare. And the agreement makes no allowance for countervailing measures in countries that export the subsidized good, where the presumption of welfare losses surely exists.35 Rather, countervailing measures are permitted only when there has been injury or injury is threatened to a domestic industry in an importing country.36 Evidently, thus, the signatories meant to discourage certain policy actions that would harm competing producer interests. This objective is understandable in the light of recent studies on the political economy of trade policy, which have emphasized that governments often set their trade policies with objectives in mind other than the maximization of aggregate economic welfare.37 The policies that are chosen typically reflect a compromise among competing constituent interests. Moreover, some interests, especially those that are relatively concentrated, are given more weight in the political process than others. Less concentrated groups are not so successful in the political arena, in part because they have difficulty overcoming the free-rider problems that plague collective political action (Olson 1965). Thus, governments often are induced by political pressure to place more weight on producer interests than consumer welfare when making decisions about trade policy. The interpretation that the main objective of the SCM Agreement is to discourage subsidies that might harm producers in importing countries finds support in many provisions of the agreement. Article 15.1 of the SCM requires that a determination of injury ... shall be based on positive evidence and involve an objective examination of both (a) the volume of the subsidized imports and the effect of the subsidized imports on prices in the domestic market for like products and (b) the consequent impact of these imports on the domestic producers of such products.

Articles 14 and 19 of the SCM require the size of CVDs to be set so as to just offset the adverse effects of the subsidy on conditions in the domestic industry: the latter provision can only be understood as an attempt to restore competitive conditions in the industry to what they would have been absent the subsidy. The various provisions of the agreement should hence be interpreted in light of this overarching objective, which is very similar, if not altogether identical, to that permeating the AD Agreement.38 Having said that, it is worth noting that economists would prefer to look at economywide effects. Subsidies are viewed by economists as an instrument whereby governments, at

Subsidies

195

least in a perfect competition model,39 subsidize foreign consumers. A reduction in the marginal cost of foreign firms (which may be the consequence of a subsidy) generally reduces prices for the domestic firms. Hence, as briefly alluded to previously, many economists have made the point that instead of imposing countervailing measures to offset subsidization, governments affected by foreign subsidies should be thanking the subsidizing government.40 3.1.3.4 Action against Subsidies WTO members who do not believe in showing such gratitude can impose CVDs against subsidized imports, request a panel to judge that the subsidizing WTO member should stop subsidizing, or both. Both legal actions are available, and whereas CVDs aim to address injury that WTO members suffer in their own market, they can also introduce a legal challenge aimed at stopping subsidization in general when they experience injury in third markets. This last provision was deemed necessary for good reason. Suppose that Home and Foreign produce a good that Foreign subsidizes but Home does not. If Third consumes the good, and it has no interest in stopping Foreign from subsidizing, it belongs in the company of these grateful countries. Home will be shortchanged as a result, even when it imposes CVDs, and unless the SCM Agreement acknowledges its right to intervene and stop Foreign from subsidizing, it will lose out in Third’s market. CVDs are a form of unilateral relief, much like AD measures. While the unilateral nature of the remedy has obvious advantages, it also presents some shortcomings in dealing with subsidies. CVDs may protect the domestic industry of Home from injury suffered in its domestic market due to subsidized imports from Foreign, but it does not provide any relief in cases where the subsidies are distorting a third-country market in which the domestic industry has an export interest.41 However, if Home imposes CVDs on imported goods originating in Foreign, it cannot recover twice the damage it has suffered through CVDs and through countermeasures against Foreign (in case Foreign refuses to adhere to an adverse panel ruling asking it to stop subsidization, thus opening the way for Home to adopt countermeasures). It cannot do double-dipping, as we will see later in this chapter. CVDs are a powerful weapon in the hands of members with a substantial internal market. They will not have to await a multilateral ruling (which can take up to four years) to provide their domestic industry with adequate relief since it is highly likely that most of the injury will be felt in their domestic market, and they will be addressing it through unilateral action within short time limits (around 18 months). The de facto absence of retroactive remedies in the WTO legal system makes this option quite attractive. Conversely, members with small internal markets with exporting interests cannot get much from the threat of CVDs. The size of their domestic market takes a lot of wind out of their sails, and multilateral action emerges as the only option for them to address injury.42

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Article 32.1 of the SCM makes it clear that subsidies can be addressed only through the provisions of the SCM Agreement: No specific action against a subsidy of another Member can be taken except in accordance with the provisions of GATT 1994, as interpreted by this Agreement.

Recall the discussion in chapter 2 of this volume about the Byrd Amendment. The Appellate Body (AB) held that the same applies with respect to CVDs (§ 256). CVDs and legal challenges aimed at causing the subsidizing WTO member to withdraw or adjust its subsidies constitute the only specific action against subsidies. In a subsequent case, though, called EC–Commercial Vessels, the panel faced an argument by Korea to the effect that the EU Temporary Defense Mechanism (TDM) Regulation violated Article 32.1 of the SCM. Korea and the EU had reached an agreement to stop subsidizing their respective shipyards. Through the TDM, the EU had deviated and granted subsidies to its shipbuilding sector, arguing that its action was in response to Korea’s disrespect of its own commitments.43 The panel held that the TDM was a specific action relating to subsidization but distanced itself from the view that it came under the ambit of Article 32.1 of the SCM (§§ 7.154–74). For a scheme to counteract a subsidy, the panel held that it must contain some element in addition to the potential impact on competition (§§ 7.160ff.).44 It, thus, did not outlaw this scheme simply because of its potential to counteract a subsidy, thus relaxing the ruling that the AB had adopted when discussing the legality of the Byrd Amendment. 3.2 The Relationship with GATT The SCM Agreement is an Annex 1A Agreement, and the General Interpretative Note governs its relationship with GATT, as we saw in chapter 1, volume 1. To the extent of conflict, the SCM Agreement will prevail. Very few GATT provisions are relevant in the operation of the SCM Agreement. Subsidies are, by virtue of Article III.8 of GATT, an exception to national treatment. We explained, in chapter 9, volume 1, why Article XX of GATT should not be construed as an exception to the SCM Agreement. There is an overlap (albeit partial, of course) between the subject matter of the SCM Agreement on the one hand, and that of the Civil Aviation, the Trade-Related Investment Measures (TRIMs), and the AG agreements on the other. We discuss the relationship between the SCM and the TRIMs Agreement in chapter 7, volume 2, with the AG Agreement (which deals with a subset of subsidies—namely, farm subsidies) in chapter 8, and its relationship with the Agreement on Civil Aviation (which deals with another subset of subsidies—namely, subsidies to civil aviation) in chapter 11.

5 3 1 4

25 1 21 11 6

13

2

11 4 4

33

4

3

5

6

22 17 18

27 5 5

Argentina Australia Brazil Bulgaria Canada Chile China Colombia Costa Rica Czech Republic Ecuador Egypt European Union Guatemala India Indonesia Israel Jamaica Japan Jordan Korea Latvia Lithuania Malaysia

1996

1995

Reporting Member

8

15

13 5 3

7 41

1 1

14

14 44 11

1997

1

3

28 8 7

8 2 3 6 1 2 1 14 22

8 13 18

1998

2 6

1 2

41 3 1 1

3 32

21 5 11 3

43 15 11

2000

6

64 8

7 65

1

2 2

18

23 24 16

1999

1

4 1

79 4 4 1 2

7 28

14 6

25

28 23 17

2001

Table 3.1 Countervailing initiations: by reporting member, 1 January 1995–30 June 2010

5

9 6

1

81 4

3 20

30

14 16 8 1 5

2002

6

18

1

46 12

1 7

22

15

1 8 4

2003

3

3

21 5 1

30

27 2

11

12 9 8

2004

4

4

4

28

12 25

24 2 1

1

12 7 6

2005

8

1 7

35 5

9 35

7 1 10 9 1

11 10 12

2006

15

4

47 1

2 9

1 1 4 1

8 2 13

2007

5

55 7 1

19

3 1 14 6

19 6 23

2008

31 7 6 1

2 15

6 1 17 5 2

28 9 9

2009

3

17 3 5 1

8

1 1 4 2

7 4 5

2010

277 212 184 1 152 19 182 50 10 3 1 67 414 1 613 83 43 6 6 1 111 7 7 43

Total

Subsidies 197

8 1

34

2 1

16

2 226

3 157

Source: http://www.wto.org.

22

14

1 1

4 4

4 10

Mexico New Zealand Nicaragua Pakistan Panama Paraguay Peru Philippines Poland Slovenia South Africa Taipei, Chinese Thailand Trinidad and Tobago Turkey Ukraine United States Uruguay Venezuela Total

1996

1995

Reporting Member

Table 3.1 (cont.)

15 1 6 246

4

23 1 3

2 2 1

6 5

1997

10 266

36

4 1

41 6

3 3

2

12 1 2

1998

7 358

47

3 8

1 8 6 7 1 16

11 4

1999

47 1 1 298

1 7

21 4

1 2

6 9

2000

6 3 3 1 15 2 77 4 1 371

8

6 1

2001

1 315

18 3 35

21

4

234

8 2 3 2 11 2 37

4 1 1

3

1

13 1 3

14 5

2003

10 2

2002

220

25 6 26

3

6

1 7

3

6 5

2004

202

12 2 12

23

4

13

6

2005

203

8 1 8

3 5 3

3

4

6 1

2006

165

6 5 28

2

5

2

3 6

2007

213

23 7 16

1

3

3

1

2008

209

6 2 20

3 1 1

4 1

26 4

2

2009

69

1 1 2

1 2

1

2010

98 53 2 53 6 2 69 18 12 1 212 23 43 12 145 31 442 6 31 3752

Total

198 Chapter 3

2 5

19

1

2

1996

5

1

7

5 1

1995

Source: http://www.wto.org.

Argentina Australia Brazil Canada Chile China Costa Rica European Union Japan Mexico New Zealand Peru South Africa Turkey United States Venezuela Total

Reporting Member

3

2

1

1997

6

1

1

2

2

1998

14

11

3

1999

21

2

1

10

5 2

1

2000

14

10

1 2

1

2001

Table 3.2 Countervailing measures: by reporting member, 01 January 1995–30 June 2010

14

10

2

2

2002

6

2

1

3

2003

2 1 8

1

1 2

4

1

2

2005

1 1

2004

3

2

1

2006

2

1

1

2007

11

7

1 3

2008

9

1 6

1

1

2009

4

2

1

1

2010

4 2 7 16 2 1 1 25 1 8 4 3 5 1 62 1 143

Total

Subsidies 199

200

3.3

Chapter 3

Defining a Subsidy

The definition of the term “subsidy” depends on the objectives of the agreement where it will be embedded, and it is not at all anomalous that different regimes regulating subsidies include divergent definitions.45 Defining the objectives, though, does not eliminate interpretative difficulties regarding the ambit of the subsidy. The basic problem facing the interpreter will be the construction of the appropriate counterfactual. One can construe numerous examples where the difficulties surrounding the definition of “subsidy” become obvious. Take, for example, a case where, in the context of litigation before the WTO, the question arises whether a company that wants to raise capital and hence offers its stock for sale has been subsidized or not. Assume that the company offers its stock for sale at the stock exchange for $1,000/share. What if no private party buys a share at this price and the state steps in and buys at this price after 5, 35, or 135 days? Has a subsidy has been granted in all three cases? What if the state pays $800/share after 5, 35, or 135 days? What if the state pays $1,000/share after individuals have (massively or moderately) purchased stocks for $900/share? The response to whether a subsidy has been granted in many of these scenarios comes close to being a quixotic test. As we will see later in this chapter, a number of WTO panels simply failed to construct the appropriate counterfactual. It should not come as surprise then that the Palgrave Dictionary for Political Economy has no entry for the term “subsidy.” Additional difficulties result from the different attitude that the GATT and the GATS (General Agreement on Trade in Services) have adopted towards subsidies. The GATS (Article 15) has established a working group aiming to negotiate disciplines on subsidies. At this stage though, there are no disciplines on subsidies for services. And yet, sometimes the distinction between a goods- and a servicessubsidy is hard to draw. Some of the subsidies to national banks in the post-2008 era (e.g., following the financial crisis) are paid on the condition that the money received will be paid to domestic (national) economic agents. De facto, maybe producers of goods profit, the subsidy nonetheless is paid to a service supplier. Are we, in similar instances, in presence of a GATT subsidy (subject to the SCM Agreement), or a GATS subsidy (where no disciplines exist)? Maybe the jurisprudence on pass through of subsidies that we will discuss later in this chapter can help us respond to this question. Arguments nonetheless, can be made for either point of view. What do then, in light of definitional difficulties? Sykes (2005), (2010) went so far as to ask whether, because of the indeterminacy of the term, inaction against subsidies is probably the better option. Snape (1991, p. 140), in a similar vein, took the view that “Virtually every government action can be regarded as subsidy for someone, and virtually all such actions can affect international trade.” It should, thus, come as no surprise that not only the Palgrave Dictionary of Political Economy, but until 1995 (that is, the advent of the WTO), no agreed-on definition of the

Subsidies

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term “subsidy” existed in the multilateral trading system. Various GATT provisions (e.g., Articles III.8, VI, and XVI) dealt with subsidies but failed to provide a definition of the term. In fact, negotiators did not even consider it necessary to do so. The 1961 Working Party report on “Operation of the Provisional Article XVI,” where the trading nations considered it, stated that it was ... neither necessary nor feasible to seek an agreed interpretation of what constitutes a subsidy. It would probably be impossible to arrive at a definition which would at the same time include all measures that fall within the intended meaning of the term in Article XVI without including others not so intended.46

Similarly, the 1979 Agreement on Interpretation and Application of Articles VI, XVI, and XXIII of the General Agreement on Tariffs and Trade (the Tokyo-round subsidies “code”) elaborated rules on the use of subsidies as well as on protective responses to them, but it, too, failed to include a definition of the term. One thing has always been clear: the term “subsidy” was supposed to cover government action, not private endeavors. For example, the Working Party on the “Review Pursuant to Article XVI.5” states “... there was no obligation to notify schemes in which a group of producers voluntarily taxed themselves in order to subsidize exports of a product.”47 Against this background, one might legitimately ask how panels dealt with disputes where a subsidy scheme was being challenged for being inconsistent with GATT, or even the Tokyo-round agreement. Panels had, in fact, adopted a working definition of “subsidy.” The 1950 GATT Panel on Australia–Ammonium Sulfate should be credited with the first definition. Australia had been granting subsidies on ammonium sulfate and sodium nitrate, two competitive products. Subsidies were in place for both goods, which were deemed necessary by Australia for various reasons during World War II. Chile requested and obtained a 0 percent tariff duty on ammonium sulfate from Australia. Subsequently, Australia removed the subsidy from sodium nitrate, but not from ammonium sulfate. As a result, Chile found that its exports of ammonium sulfate to Australia suffered, and so it brought a case against Australia. One of the first questions was how should the term “subsidy” be understood in the absence of a statutory definition. The panel provided the following definition (§ 10): ... the type of subsidy which it was intended to cover was the financial aid given by a government to support its domestic production and to improve its competitive position either on the domestic or on the foreign markets.

The definition of “subsidy” provided in the WTO SCM Agreement borrows heavily from this panel finding: “subsidy” is a financial contribution by a government that confers a benefit to a specific recipient. The first two elements have been included in Article 1 of the SCM,48 whereas the latter is included in Article 2 of SCM. The SCM Agreement

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distinguishes between two types of subsidies: actionable and prohibited. The definition of “subsidy” is valid for both categories.49 3.3.1

Financial Contribution by Government

A government or public body provides financial contribution in the following cases (Article 1.1 of the SCM): (a) In case of “direct transfer of funds” (such as grants, loans, and equity infusions), or potential direct transfer of funds or liabilities (e.g., loan guarantee); or (b) When government revenue that is otherwise due is foregone or not collected (such as fiscal incentives in the form of tax credits); or (c) Where the government provides goods or services other than general infrastructure, or when it purchases goods; or (d) The government entrusts a private body to do the activities mentioned above; or (e) There is any other form of income support as spelled out in Article XVI of GATT. The forms of financial contribution are exhaustively mentioned in the body of Article 1 of the SCM.50 Article 1.1 (e) of the SCM is wide enough to function as anticircumvention device. Furthermore, there is no firewall, between the forms of financial contribution. In Canada–Renewable Energy,51 the AB held that the same transaction could conceivably come under more than one of the subparagraphs of Article 1.1 of the SCM. A panel, however, once satisfied that the challenged measure comes under one of the subparagraphs, does not have to also examine whether it comes under another subparagraph to decide that a financial contribution has been granted, as the AB held in § 5.120: When determining the proper legal characterization of a measure under Article 1.1(a)(1) of the SCM Agreement, a panel must assess whether the measure may fall within any of the types of financial contributions set out in that provision. In doing so, a panel should scrutinize the measure both as to its design and operation and identify its principal characteristics. Having done so, the transaction may naturally fit into one of the types of financial contributions listed in Article 1.1(a)(1). However, transactions may be complex and multifaceted. This may mean that different aspects of the same transaction may fall under different types of financial contribution. It may also be the case that the characterization exercise does not permit the identification of a single category of financial contribution and, in that situation, as described in the US —Large Civil Aircraft (2nd complaint) Appellate Body report, a transaction may fall under more than one type of financial contribution. We note, however, that the fact that a transaction may fall under more than one type of financial contribution does not mean that the types of financial contributions set out in Article 1.1(a)(1) are the same or that the distinct legal concepts set out in this provision would become redundant, as the Panel suggests. We further observe that, in US–Large Civil Aircraft (2nd complaint), the Appellate Body did not address the question of whether, in the situation described above, a panel is under an obligation to make findings that a transaction falls under more than one subparagraph of Article 1.1(a)(1). (italics in the original)52

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The various examples of financial contribution reflected in the SCM Agreement underscore the impression that what matters, is that economic value is being transferred. The AB, in its report on US–Softwood Lumber IV, held that (§ 51) the concept of subsidy defined in Article 1 of the SCM Agreement captures situations in which something of economic value is transferred by a government to the advantage of a recipient.53

There are many schemes, on the other hand, that do not qualify as financial contributions, their economic value notwithstanding. Imposition of an export restraint or an export tax on an input has economic value, since local downstream producers may benefit from it. As the government, nevertheless, is not providing funds, foregoing revenue that is due, or providing a good or service, an export ban or tax does not amount to a financial contribution in the sense of the SCM Agreement, and therefore, there will be no subsidy to the downstream producers: a good or service needs to be provided.54 The Panel on US–Export Restraints noted to this effect that (§ 7.83) the introduction of the two-part definition of subsidy, consisting of “financial contribution” and “benefit,” was intended specifically to prevent the countervailing of benefits from any sort of (formal, enforceable) government measures, by restricting to a finite list the kinds of government measures that would, if they conferred benefits, constitute subsidies.

This panel went on to conclude that, even if a government measure has an effect that is equivalent to that of a financial contribution as defined in Article 1 of the SCM, it will not be considered a “subsidy” unless the measure takes the form of a financial contribution as defined in Article 1.1(a) of the SCM (§§ 8.73–74). Form, thus, matters. 3.3.1.1 Contribution by Government (or Public Body) Paragraphs (a)–(c) of Article 1 of SCM deal with practices by government entities, whereas there is a change of focus in paragraph (d), where a government acts through another nonstate entity. Government The term “government” is not defined in the SCM Agreement. Contextual arguments55 would support the view that it covers federal, state, or provincial authorities. Recall, however, that under Article XXIV.12 of GATT: Each contracting party shall take such reasonable measures as may be available to it to ensure observance of the provisions of this Agreement by the regional and local governments and authorities within its territories.

Public Body The term “public body” is not defined in the SCM Agreement either. A definition of a related concept, “public entity,” was included in paragraph 5(c)(i) of the GATS Annex on Financial Services:

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a government, a central bank, or a monetary authority of a Member, or an entity owned or controlled by a Member, that is principally engaged in carrying out governmental functions or activities for governmental purposes, not including an entity principally engaged in supplying financial services on commercial terms.

The Panel on Korea–Commercial Vessels questioned the relevance of the General Agreement on Trade in Services (GATS) Annex on Financial Services to the interpretation of Article 1.1(a)(1) of the SCM. It went on to construe “public body” as an entity controlled, and not necessarily owned by, government (§ 7.47). In this understanding, a “public body” does not have to also engage principally in carrying out governmental functions. What matters is that it is governments that control it. Before we discuss the evidentiary standard associated with the control-criterion, it is warranted to explain the context of this dispute. The EU, the complainant in Korea–Commercial Vessels, had suggested two criteria that should be decisive in determining what a public body is: (a) An entity would be considered a “public body” only if it pursued a public policy objective, and (b) had access to state resources (§ 7.32). The panel dismissed the relevance of the public policy objective (§ 7.55), and did not express an opinion on whether access to state resources should be a relevant criterion. This panel argued against a “lock, stock, and barrel” transposition of this definition in the SCM context but found it plausible to endorse only the “control-criterion” embedded in the GATS definition. The panel had to also entertain an argument by Korea to the effect that only “inherently” governmental practices were captured by Article 1.1 of SCM. In other words, when public bodies behave as private investors, their policies do not come under the purview of this provision at all. Korea had argued that KEXIM, the Korean public body in question, was set up for the specific purpose of meeting the needs of an industrial or commercial nature; i.e., activities involving the extension of financing facilities in markets. In doing so, it competed with other public or private operators based on market-oriented principles. Korea was thus arguing that, when the “nature” of activity is essentially “private,” then the “private investor’ test becomes inapplicable and all similar activities escape the purview of the SCM Agreement. According to the panel in this case, the term “government practice” is used to denote the “author” of the action, rather than the “nature” of the action, and thus covers all acts of governments or public bodies, regardless of whether or not they involve the exercise of regulatory powers or taxation authority (§§ 7.26ff., and especially § 7.29). This panel accepted that a public body might operate in accordance with commercial considerations. Hence, actions by public bodies should not be equated with subsidies simply because they

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have been carried out by public bodies (§ 7.44). On the other hand, though, activities will not escape the purview of the SCM Agreement only because they are perceived to be inherently private. The panel thus dissociated the test for defining whether an entity is a public body from the test of whether a benefit had been bestowed, an issue to which we return later in this chapter. The panel focused on the fact that the Korean government controlled some of the main appointments and enjoyed extensive “control” over the shaping of the mandate of KEXIM—that is, the entity whose public body status was in dispute (§ 7.53). In its view, the combination of these two factors sufficed for the entity to be considered a public body. In two subsequent “twin” cases, both the US and the EU in their respective countervailing duty examinations into imports of dynamic random access memory (DRAM)56 from Korea had not considered that a number of Korean banks, which were either 100 percent or 80 percent (or even less, but in large proportion anyway, e.g., where government was majority shareholder) owned by the government, were public bodies. Instead, their national investigating authorities (IAs) had examined whether these entities had been “entrusted” or “directed” by the government to provide various financial contributions; that is, to what extent their activities were “controlled” by the government. For the US IA especially, ownership of the investigated company was one of the five factors examined in order for it to conclude whether the Korean government had made a financial contribution or whether the investigated activity was of a private nature.57 The Panel on US– Countervailing Duty Investigation on DRAMs held that 100 percent ownership will be a factor that will weigh heavily when deciding if the body is public. This factor per se will not, nevertheless, decide the issue (footnote 29): Depending on the circumstances, 100 per cent government ownership might well have justified the treatment of such creditors as public bodies but that on the basis of the criteria provided for in US law, however, the DOC treated these 100 per cent owned Group B creditors as private bodies.58

Similarly, the Panel on EC–Countervailing Measures on DRAM Chips stated that it did not (footnote 129) “wish to imply that it would not be possible or justified to treat a 100 per cent government-owned entity as a public body, depending on the circumstances.” These two panels thus unambiguously took the position that ownership is not a perfect substitute for control. In other words, they left room for state companies to behave like private agents, in which case their activities would escape the disciplines of the SCM Agreement (if, of course, they have not been entrusted to pursue a government objective). In subsequent investigations, the US changed its attitude. In investigations involving China, ownership emerged as the decisive criterion to characterize an entity as a “public body,” and not one among several criteria deployed to this effect. This approach was challenged by China before a WTO panel. China claimed that the previous US approach was the correct one, and that the new approach amounted to a

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mere presumption that government had been involved and provided financial contributions. The panel endorsed the US view, and China appealed. The AB held in its report on US–Antidumping and Countervailing Duties (China) that the panel had mistakenly characterized Chinese state-owned enterprises (SOEs) as public bodies by essentially equating government “ownership” to government “control” (§ 320).59 In its view, the panel should have examined other factors as well, such as those that the US Department of Commerce (USDOC) had examined in the past but did not in this case (§ 343): The five factors that the USDOC had examined in the past are: (i) government ownership; (ii) government presence on the board of directors; (iii) government control over activities; (iv) pursuit of governmental policies or interests; and (v) whether the entity was created by statute.60

What mattered for the AB, therefore, was whether the entity possessed, exercised, or was vested with government authority. Mere ownership should not be equated with possession or exercise of government authority. In this report, the AB did not explicitly distance itself from its ruling in Korea–Commercial Vessels, where it had adopted the control criterion as the decisive criterion to characterize an entity as “public body.” There are nonetheless nuances between the two tests. Applying its test to the specifics of the dispute before it, the AB found that there was nothing wrong with the treatment of Chinese state-owned commercial banks (SOCBs) as public bodies by the USDOC. In this case, the US authority had examined extensive evidence (other than ownership) pointing to meaningful control of those entities by the Chinese government that was effectively exercising government authority through them, and, consequently, in the AB’s view, the examined entities qualified as public bodies (§ 355).61 In US–Carbon Steel (India), the same question was asked yet again. In this case, the Indian public body under investigation (NMDC, National Mineral Development Corporation) by the US authority was 98 percent owned by the Indian government (§ 4.1). Moreover, the government of India had the power to appoint two and the power to approve a further seven out of a total of 13 executive directors of the NMDC. India had argued before the panel and the AB that, as per prior case law, ownership should not be equated with control. It also argued that ownership and the power to appoint directors did not suffice for the entity to be characterized as a “public body” (§ 4.54). In India’s view what mattered was whether NMDC was effectively exercising government authority. The panel rejected the Indian claim holding that NMDC was effectively controlled by the government of India and this is all that mattered. India appealed this finding. The AB endorsed the Indian argument. It dedicated a lengthy passage to the discussion of this issue, and it first gave the impression that it was opting for a rather loose test. Indeed, it conceded that there was no need to possess the power to regulate (§ 4.17) 62 It then went so far as to state that (§ 4.29):

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The absence of an express statutory delegation of governmental authority does not necessarily preclude a determination that a particular entity is a public body. Instead, there are different ways in which a government could be understood to vest an entity with “governmental authority,” and therefore different types of evidence may be relevant in this regard. In order properly to characterize an entity as a public body in a particular case, it may be relevant to consider “whether the functions or conduct [of the entity] are of a kind that are ordinarily classified as governmental in the legal order of the relevant Member,” and the classification and functions of entities within WTO Members generally.

But then in the following paragraphs it made a U-turn. In §§ 4.36 of the report, the AB distanced itself from the panel’s findings. It held that what mattered was whether a public body possessed, exercised, or was vested with government authority. In its view, the panel had confused the substantive—with the evidentiary standard that the AB had already established in its prior case law. The AB clarified that panels have to inquire into whether a government has effectively exercised control in order to decide whether we are in presence of a public body. The possibility that it may do so does not suffice. To do that, panels will have to delve into the intricacies of domestic legal regimes. Since the panel had not inquired into this issue, the AB found that it could not have legitimately reached the conclusion that NMDC was a public body (§ 4.55). It follows that with this case law, the AB set the record in favor of the approach that it had followed in its report on US–Antidumping and Countervailing Duties (China). What matters for an entity to be acknowledged as public body is that it possesses, exercises, and is vested with government authority. To show that this has indeed been the case, panels must review not the mere possibility, but the actual exercise of control. 3.3.1.2 Government Acts Through a Private Agent Financial contribution by the government exists also in cases where the government “entrusts” or “directs” a private body to provide a financial contribution, in the sense of subparagraphs (i)–(iii) of Article 1 of the SCM [Article 1.1(a)(1)(iv) of the SCM]. The AB noted in its report on US–Countervailing Duty Investigation on DRAMs that the purpose of this provision was to act as an anticircumvention device (§ 113): Paragraph (iv), in particular, is intended to ensure that governments do not evade their obligations under the SCM Agreement by using private bodies to take actions that would otherwise fall within Article 1.1(a)(1), were they to be taken by the government itself. In other words, Article 1.1(a)(1) (iv) is, in essence, an anticircumvention provision.

The two key terms (“entrust,” “direct”) were interpreted in two disputes between the EU and the US, on the one hand, and Korea, on the other. The disputes (EC– Countervailing Measures on DRAM Chips and US–Countervailing Duty Investigation on DRAMs)63 involved a claim against the subsidization of Hynix, a Korean company. Hynix produced DRAMs (that is, data-storing devices routinely used in personal computers, desktops, and laptops alike). Hynix was the successor to Hyundai Electronics, its original

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name, and had left the Korean chaebol (conglomerate) when it changed its name in 2001. Following the Asian financial crisis in 1997, an industrial program of the Korean government called “Big Deal” was put in place with the goal of curbing overcapacity in the production of DRAMs (among other things). It was the consistency of the government involvement in the Big Deal program with the SCM rules that was questioned through the two disputes. The EU and US had initiated investigations and imposed CVDs against exports of DRAMs from Korea—that is, from Hynix and Samsung, another Korean producer. In their view, they possessed enough evidence that Korean producers had benefited from generous financial contributions by the Korean government that had instructed, inter alia, private operators such as the Korean First Bank (KFB) to behave in this way. Korea claimed before the panel that the CVDs had been imposed unlawfully since Hynix had not profited from financial contribution by the Korean government at all. The Panel on EC– Countervailing Measures on DRAM Chips held first that a distinction must be drawn between private and public behavior. For the “entrust” or “direct” test to be met, an entity must be acting “on behalf of” a government since purely private actions escape the purview of the WTO Agreement (§§ 7.52–53). The panel stated that it did not (§ 7.109): want to be seen as requiring an investigating authority to come up with the smoking gun in the sense of a written order by the government to a private body to provide a financial contribution. We understand that, in most cases, the authority will have to base its decision on a number of arguments and pieces of evidence which perhaps when considered in combination may all point in the direction of government entrustment or direction, especially in cases where the level of cooperation by the interested parties is low.64

The AB expressed this test in even clearer terms in its report on US–Countervailing Duty Investigation on DRAMs, where it held that an IA must (§ 108) “identify the instances where seemingly private conduct may be attributable to a government for purposes of determining whether there has been a financial contribution within the meaning of the SCM Agreement.” Echoing the case law on Japan–Semiconductors,65 the AB held that it was not necessary that the government threaten sanctions (§ 116). The panel had held that “entrust” should be understood as a form of “delegation,” whereas “direct” as implying a “command,” but the AB disagreed. It held that “delegation” was too narrow a test since that implied that “entrusting” needed to be carried out in a particular form. This was not consonant with the wording of the SCM Agreement, however, which, in the AB’s view, implied that even informal delegation of authority satisfied the “entrust” test. In a similar vein, the AB refused to endorse the panel’s understanding of the term “direct” as being synonymous with “command.” In its view, a lesser degree of compulsion appropriately met the “direct” test (§§ 109ff.). The AB made one additional noteworthy finding in this context. KFB had been requested to make a financial contribution (under the so-called Fast Track Debenture

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Programme), which it did not do. The question was whether, in light of its inaction, the “entrust” or “direct” test had still been met. The AB held that this could not have been the case since failure to carry out the directives of the government meant that no financial contribution had been paid at all (§§ 121ff., and especially § 125). In EC–Countervailing Measures on DRAM Chips, the EU IA had relied on circumstantial evidence to reach the conclusion that the government of Korea was entrusting or directing private bodies to participate in the restructuring of a failing Korean DRAMs producer. The IA had relied heavily on two factors: first, that the Korean producer had not adopted “commercial” behavior, in the sense that its actions were not consistent with those of a “typical” profit maximizer; and second, that government ownership of the investigated operator was duly taken into account as well. The panel found this approach reasonable and also held that even if an IA decided not to treat an entity with important government control as a “public body,” this did not imply that government control or shareholding had become irrelevant. Quite the contrary, in fact: government shareholding in a private body may lower the evidentiary threshold for establishing that the government “entrusted” or “directed” a private agent to act in a particular way. Ownership, thus, is relevant when it comes to deciding whether an entity is a public body, as it is when it comes to deciding whether a government has entrusted a “private” operator (i.e., a nonpublic body) to act in a particular way. In both cases, it does not in and of itself suffice to prove that the corresponding legal test has been met. It is, nevertheless, an appropriate criterion to be taken into account when deciding whether the legal test has been met. More to the point, the panel held that there must be “probative and compelling” evidence that government had “entrusted” or “directed” private agents to act in a particular way.66 The US appealed the “compelling” part of the test, arguing that it meant that only one conclusion was possible (§ 137). The AB agreed with the US that indeed this would have been the wrong standard to apply. In the AB’s view, a reasonableness standard was appropriate since panels could not reject conclusions reached by IAs simply because they disagreed with them (§ 139, 187). The AB added, however, that de facto, the panel had applied a reasonableness standard. It went on to state that panels were required to make an “objective assessment” of the matter before them, and it clarified what this test implied for panels—namely, that they should explain how submitted evidence supported their findings and how the findings reached supported the final determination (§ 186).67 The AB also held that panels could not do de novo review since, unlike IAs, they were not “initial triers of facts” (§§ 187–188). The AB underlined that panels cannot base their findings on evidence that was not reasonably before the IA. In its words, panels would be violating the standard of review embedded in Article 11 of the Dispute Settlement Understanding (DSU), if they operated with the “benefit of hindsight” (§ 175). The AB also emphasized the importance of reviewing evidence in its totality, not in bits and pieces (§ 150). The AB noted that this approach was particularly relevant in cases of entrustment

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or direction under Article 1.1(a)(1)(iv) of the SCM, where much of the publicly available evidence would likely be circumstantial (footnote 277). 3.3.1.3 Direct Transfer of Funds by Government Any time a government or public body disburses funds to a recipient directly (as opposed to entrusting or directing a private agent to do so), a financial contribution has taken place. An appropriate illustration of this form of financial contribution is offered in the AB report on EC and Certain Member States–Large Civil Aircraft (§§ 830ff.).68 In US– Carbon Steel (India), the AB held that a transfer of funds is “direct” even when it occurs through an “intermediary,” if the latter has no discretion regarding the disbursement of funds (§ 4.94). It bears repetition that direct transfer of funds, like any form of financial contribution, should not be equated to subsidy. The fact that government directly transfers funds does not mean that it has paid a subsidy. Governments can transfer funds and still evade the disciplines of SCM if they have behaved like private agents. For a subsidy to exist, the direct transfer of funds must represent a transfer that private agents cannot obtain under market conditions. We will return to this discussion later in this chapter, when we discuss the term “benefit.” 3.3.1.4 Revenue Otherwise Due to Government Is Foregone A financial contribution also exists when a government forgoes or does not collect revenue otherwise due. The key term is “otherwise due.” Footnote 1 to the SCM Agreement, as well as Annexes I—III, identify certain situations when revenue foregone will not confer a benefit. Footnote 1 to the SCM Agreement explains that exempting exported goods from consumption taxes is not a financial contribution by a government in the sense of foregone income otherwise due.69 Instruments aimed at avoiding double taxation, an issue that we will discuss in more detail later in this chapter, constitute another instance of income foregone that is not considered to be a financial contribution by a WTO member (Annex I). So are some “drawback schemes” (remission of import charges levied on inputs consumed in the production of exported goods, featured in Annexes II and III). In US–FSC, the AB held that the basis for deciding whether tax income otherwise due had been foregone must be the national tax rules applied by WTO members. In this case, the EU had challenged the consistency of US tax practices with the SCM Agreement. In fact, US–FSC is not the first time that the transatlantic partners disagreed on the consistency of their domestic tax systems with the WTO regime. This is a long-standing dispute between them. The WTO Agreement, like GATT before it, allows its members to freely choose the level and form of taxation. It does not impose on WTO members a particular taxation system. WTO members are free to design their own national tax schemes.70 The EU member states and the US have followed different systems of taxation (the EU favors indirect taxation and adheres strictly to the territoriality principle, while the US system is at the

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antipodes of the EU regime on both counts). Before long, they would dispute the consistency of each other’s regime with GATT. The origin of their dispute lies back in the 1970s, as we saw already in chapter 7 of volume 1.71 European countries and the US were interlocked in litigation arguing that each other’s fiscal system violated the rules, and more specifically, Article XVI.4 of GATT. In Belgium–Income Tax, the US complained that the Belgian tax system that exempted from taxation Belgian companies’ income made abroad was inconsistent with this provision. A GATT panel found that Belgium had indeed foregone income (§ 34), and was, thus, in violation of its obligations under GATT (§ 40). The “twin” GATT panels on France– Income Tax and Netherlands–Income Tax reached similar findings. The US was the complaining party in all three cases. In a mirror case, another GATT panel sanctioned the US practices. In US–DISC, the GATT panel dealt with US tax practices. The US originally deferred payment of taxes for income earned abroad. In 1962, following a tax reform, similar income was taxed in the US. In 1972, the Domestic International Sales Corporation (DISC) legislation allowed tax exemptions of similar income by companies that qualified as domestic international sales corporations (DISCs). A company would be considered a “DISC company” if it was domestic and 95 percent of its assets and income were “qualified exports receipts” and “qualified exports income,” respectively. The panel found that the US measure was in violation of Article XIV.4 of GATT (§ 74). When entertaining the argument by the US that the measure was designed to address the impact that similar taxation by European countries had had on US companies competing worldwide, the panel held that similar behavior was not permissible and the US should act within its rights under GATT and not mimic an illegality (§ 79). The panel was effectively requesting that, now that it had secured a favorable outcome in Belgium–Income Tax, the US should request authorization to impose countermeasures if Belgium continued to disregard the panel’s decision, rather than adopting equally unlawful legislation in retaliation. The DISC legislation underwent some changes, but its substance was not altered. The US and the EU had reached an agreement to abstain from litigating this type of disputes, pending action to avoid future trade friction.72 Its reincarnation was the Foreign Sales Corporation (FSC) Act. The EU complained again.73 In US–FSC, the EU had argued that the US system, under which companies earning income outside the US were exempted from the obligation to pay US taxes, constituted an export subsidy. This was so since, absent enactment of the FSC, those companies would have been obliged to pay taxes for income made both in the US and outside the US market. The panel and the AB agreed with the complainant, arguing that national law should serve as the benchmark to decide whether income was otherwise due (§§ 90ff., and especially 98). In US–FSC (Article 21.5–EC), the AB confirmed (§§ 86, 91–92) that the benchmark to establish whether income was otherwise due was national law.74

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The rationale behind the US law was to reestablish competitive conditions among companies of different national origins, as EU companies did not have to pay taxes on income made outside the EU and could thus profit from tax havens.75 The AB held that the rationale for foregoing income was irrelevant (§§ 93ff.). Should the rationale be immaterial? Think of it this way. The WTO does not impose a particular fiscal (taxation) policy that its members should follow. Why, then, is it impermissible for WTO members to subject some companies to the obligation to pay taxes in the US while exempting others? If this is an issue at all, it should be a constitutional issue that should give rise to litigation under US, not WTO, law. In this vein, the US argued before the panel and the AB that, when it comes to income foregone, WTO adjudicating bodies should limit their review to issues of enforcement (or lack of it). The US would thus be at fault only if it was supposed to collect income and did not do so. The US approach has an undeniable advantage. Panels (assuming factual information) cannot go wrong when it comes to adjudicating disputes regarding income foregone. Is it enough to limit their discretion in this way? Does this limitation faithfully reproduce the negotiating intent? Probably not. To go beyond what the US claimed, though, requires a legal benchmark. The AB offered one in the case regarding implementation of this report. In US–FSC (Article 21.5–EC), the AB held in § 91: In identifying the normative benchmark, there may be situations where the measure at issue might be described as an “exception” to a “general” rule of taxation. In such situations, it may be possible to apply a “but for” test to examine the fiscal treatment of income absent the contested measure. We do not, however, consider that Article 1.1(a)(1)(ii) always requires panels to identify, with respect to any particular income, the “general” rule of taxation prevailing in a Member. Given the variety and complexity of domestic tax systems, it will usually be very difficult to isolate a “general” rule of taxation and “exceptions” to that “general” rule. Instead, we believe that panels should seek to compare the fiscal treatment of legitimately comparable income to determine whether the contested measure involves the foregoing of revenue which is “otherwise due,” in relation to the income in question. (italics in the original)

A footnote to this paragraph reads: We recognize that Member may have several rules for taxing comparable income in different ways. For instance, one portion of a domestic corporation’s foreign-source income may not be subject to tax in any circumstances; another portion of such income may always be subject to tax; while a third portion may be subject to tax in some circumstances. In such a situation, the outcome of the dispute would depend on which aspect of the rules of taxation was challenged and on a detailed examination of the relationship between the different rules of taxation. The examination under Article 1.1(a)(1) (ii) of the SCM Agreement must be sufficiently flexible to adjust to the complexities of a Member’s domestic rules of taxation. (italics in the original)

The Pythia oracle in Delphi pronounced simpler decisions. The AB seems to suggest that it is not illegal per se to provide tax exemptions in a law. Why, then, was the FSC law not judged accordingly? At the end, the outcome of the dispute will be heavily predi-

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cated on the understanding of the term “comparable income.” We have no guidance on this score. It is suggested that were one to go beyond what the US claimed before the panel and punish tax exemptions, one would need to establish a benchmark akin to an intent test. The question should be whether, by designing rules and exceptions, a WTO member intended to forego income otherwise due from a taxable source, or whether there was no intention to tax income in the first place. There is not much case law on this score. In Canada–Autos, an import duty exemption granted to certain cars was considered to be revenue otherwise due. This exemption implied that the normal most favored nation (MFN) import duty of 6.1 percent would not have to be paid and, consequently, the Canadian government had, in the eyes of the AB, foregone revenue that it otherwise would have raised (§ 91). 3.3.1.5 The Special Case of Double Taxation Instruments aimed at avoiding a transaction being taxed twice by two different jurisdictions will not be assimilated to financial contributions by governments, even though in similar instances, income is foregone. It is the Illustrative List of Export Subsidies (Annex 1 to the SCM) that discusses the treatment of double taxation. Paragraph (e) of that list reads: The full or partial exemption, remission, or deferral specifically related to exports, of direct taxes or social welfare charges paid or payable by industrial or commercial enterprises.

Footnote 59 explicitly excludes measures taken to avoid double taxation from the scope of this paragraph:76 Paragraph (e) is not intended to limit a Member from taking measures to avoid the double taxation of foreign-source income earned by its enterprises or the enterprises of another Member.

Of course, the same transaction can, in principle, be taxed twice. Assume, for example, that Home imposes taxes by virtue of the nationality of the economic operator, and Foreign by virtue of the territoriality principle, and the national of the former resides in the latter. Double taxation could be a disincentive for beneficial foreign investment. Consequently, a number of WTO members have signed treaties aimed at avoiding double taxation.77 The AB on US–FSC (Article 21.5–EC)78 held that a measure falls under footnote 59 if it exempts from taxation only foreign-source income. If it further exempts other income, then it cannot benefit from this provision (§§ 184–186). 3.3.1.6 Provision of Goods or Services by Government A government provision of goods or services other than general infrastructure or purchase of goods can constitute a financial contribution [Article 1.1(a)(1)(iii) of SCM]. In both US–Softwood Lumber III79 and US–Softwood Lumber IV, the question before the WTO adjudicating bodies was whether the Canadian so-called stumpage arrangements amounted to provision of goods in the sense of the SCM Agreement. Through these arrangements,

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Canadian harvesters of timber would rent land at less than market value. As a result, their exported products would benefit from a substantial cost advantage vis-à-vis the corresponding US products since US harvesters had to pay a market price for renting land where they would harvest timber. The AB concluded that since the Canadian stumpage arrangements gave tenure holders the right to enter government lands, cut standing timber, and enjoy exclusive rights over the timber that was harvested, they represented financial contributions. The AB disagreed with Canada’s argument that the granting of an intangible right to harvest standing timber could not be equated with the act of providing a good (e.g., standing timber itself). By granting a right to harvest, the provincial government put particular stands of timber at the disposal of timber harvesters and allowed enterprises to use government resources. Stumpage programs, thus, amounted to the provision of goods or services other than general infrastructure (§ 75). There is, of course, a direct link between the right to harvest and cutting timber, since there is no uncertainty that timber is physically located on land rent for discounted prices. Private agents can easily be informed about the commercial value of their purchase by simply visiting the location. As such, by providing the right to use land at discounted prices, the government is effectively providing goods at discounted prices. In other words, the commercial value of the legal entitlement to use the land is easily ascertained. What if, however, uncertainty exists in similar situations regarding the existence and quantities involved? This situation arose in US–Carbon Steel (India). India had granted “mining rights” to private agents. US had countervailed the end product, and India claimed that the US actions were inconsistent with the WTO. The rationale offered by India was that there was no certainty that minerals would be discovered at all, since all mining rights guaranteed was an entitlement to explore. It could be that exploration led to nothing (§§ 4.61ff.). The AB disagreed with this line of reasoning. In its view, the granting of mining rights and the production of final goods were “reasonably proximate.” Because of their “reasonable proximity,” mining rights should be considered as provision of goods (§ 4.73). This is not unreasonable, although the AB would have made a much stronger case for its finding had it based it on the “commercial value” of mining rights. In Canada–Renewable Energy80, the same issue arose again. Canada had introduced FIT (feed in tariffs) payments for producers of renewable energy to the extent that they had used Canadian machinery to produce it.81. The question then arose as to whether the payments made were payments for a service or a good. The panel had found that the Canadian measure was a provision of goods for the following reasons (§§ 5.110–113 of the AB report): First, it noted that the OPA transfers funds to FIT suppliers for “delivered electricity” into Ontario’s electricity grid. ... The Panel highlighted that, while FIT and microFIT Contracts facilitate suppliers’ search for project financing, it would be wrong to characterize the Contract Payments themselves as finance payments for the construction of a generation facility.

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Second, the Panel found that the Government of Ontario takes possession over electricity and thus “purchases electricity.” The Panel found that government “purchases [of] goods” will arise under the terms of Article 1.1(a)(1)(iii) of the SCM Agreement when a “government” or “public body” obtains possession (including in the form of an entitlement) over a good by making a payment of some kind (monetary or otherwise). In particular, given the specific characteristics of electricity, the Panel preferred to characterize a purchase of electricity as involving the transfer of an entitlement to electricity, rather than the taking of physical possession of the electricity. ... Third, the Panel found that the legislative and regulatory framework of the FIT Programme and Contracts supports the conclusion that the challenged measures are perceived by the Government of Ontario and by others in Ontario as governmental activity that involves the procurement or purchase of electricity. (italics in the original)

The AB upheld these findings (§ 5.128). 3.3.1.7 Any Form of Income or Price Support Article 1.1(a)(2) of SCM provides that any form of “income or price support” should be considered a “financial contribution.” This term was copied directly from the first paragraph of Article XVI of GATT and was meant to be some sort of catch-all provision, an anticircumvention device, as we see in the following discussion. Income or price support mechanisms play an important role in farm goods and commodities in general. It is, thus, not accidental that the first cases dealing with this issue concerned income support for farmers. In the GATT report on “Review Pursuant to Article XVI.5,” for example, various schemes were considered to run afoul of this provision: “A government fixes by law a minimum price to producers which is maintained by quantitative restrictions or a flexible tariff or similar charges.”82 In recent years, panels have used this provision to deal with measures that could not fit under the more specific provisions of Article 1 of SCM. There are some limits, though—it is not that anything goes. In China–GOES, the panel held (§ 7.93) that a voluntary export restraint (VER) cannot be considered a form of price support. In the panel’s view, it cannot be that all measures that result in a benefit can in principle come under the aegis of this term. The form of financial contribution matters (§§ 7.85–86). In footnote 104, it referred to a GATT panel that had dealt with this issue in a similar vein:83 ... GATT panel, which speculated on the circumstances under which “a system which fixes domestic prices to producers at above the world price level might be considered a subsidy in the meaning of Article XVI.” The panel agreed that “a system under which a government, by direct or indirect methods, maintains such a price by purchases and resale at a loss is a subsidy.” However, the Panel speculated that “where a government fixes by law a minimum price to producers which is maintained by quantitative restrictions ... there would be no loss to government” and consequently, no subsidy. We note that the conclusion regarding the latter example is less relevant in the context of the SCM Agreement, under which the benefit of a subsidy is defined by reference to market benchmarks, rather than by the cost to government. However, both examples used by the GATT panel at least illustrate that it envisaged “price support” to involve the government setting and maintaining a fixed

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price, rather than a random change in price merely being a side-effect of any form of government measure.

This panel equated VERs to “side-effects,” and thus refused to classify them under “any form of price or income support.” In a similar vein, in US–Export Restraints, the issue was whether the US legislation, which required that export restraints be treated as a countervailable subsidy, was consistent with the WTO. The panel ruled that an “export restraint” could not be understood as a “financial contribution” in the sense of Article 1 of SCM, since it was (§ 8.17) a border measure that takes the form of a government law or regulation which expressly limits the quantity of exports or places explicit conditions on the circumstances under which exports are permitted, or that takes the form of a government-imposed fee or tax on exports of the product calculated to limit the quantity of exports.

The Panel on US–Countervailing Measures (China) cited this report to support its finding that a series of similar Chinese export restraints could not be considered a “financial contribution” in the sense of the SCM Agreement (§ 7.393). 3.3.2

Benefit to the Recipient

A finding that financial contribution has occurred is only the first step toward a finding that a subsidy has been granted. The term “and” appearing in Article 1.1 of SCM leaves us with no doubt that the terms “financial contribution” and “benefit” are two separate constitutive elements of the term “subsidy.” A financial contribution should not be equated to a “benefit.” The AB has consistently understood the two terms (“financial contribution,” “benefit”) as distinct requirements that must both be fulfilled for a subsidy to exist. Canada–Aircraft (§ 157) has underscored this point when understanding “the issues—and the respective definitions—of a “financial contribution” and a “benefit” as two separate legal elements in Article 1.1 of the SCM Agreement, which together determine whether a subsidy exists.” In this vein, the Panel on EC–Countervailing Measures on DRAM Chips held that, whereas the requirement to show that a financial contribution has been paid is a question that needs to be addressed from the perspective of the donor, the response to the question whether a benefit has indeed been conferred needs to be assessed from the perspective of the recipient (§§ 7.212ff., and especially § 7.175). There is, thus, a sequence in the analysis of the terms “financial contribution” and “benefit.”84 The AB explained the sequence in the most pertinent terms in its report on US–Countervailing Duty Investigation on DRAMs, when it held that if no contribution took place, no benefit can result either (§ 205).85 The reason why the framers dissociated financial contribution from benefit is that they did not want to bar WTO members from investing in the market if they acted as private investors. Deciding that states have indeed acted as private investors is not easy, since

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involvement by a state in a market sends signals to the market and to the private investors. Say that a private company wants to raise capital and offers its shares for sale at $1,000/ share. A total of 5,000 shares are sold to private parties right away, and a public body buys 20 more shares at the same price. After the public involvement, private investors continue to purchase shares at the same or higher price. In this case, a financial contribution has been made, but no benefit to the private company has been bestowed since the private company here would have ended up with this contribution anyway under market conditions.86 Sometimes financial contribution and benefit coincide. Home does not enforce tax laws and effectively liberates a private company from payment of taxes up to $100,000,000. The contribution here equals benefit. Or, when market rates for commercial loans are at, say, 7 percent, and Home provides through its state banks loans to beneficiaries at 2 percent, it is providing beneficiaries with a net benefit equaling the difference between the two rates.87 The discussion so far leads to one unavoidable conclusion that is, at the same time a methodological challenge: understanding “benefit” requires a counterfactual. We will need to compare the situation where financial contribution has been bestowed with another fictitious situation in order to assess whether the contribution amounted to benefit. In a nutshell, this is what is termed as the “private investor” test—that is, the test routinely employed by WTO panels to decide whether a benefit has indeed been conferred. It is not always easy to construct the appropriate counterfactual. It is one thing to state that a comparison with the “prevailing market conditions” will be made. It is a totally different issue, on occasion, to describe the “prevailing market conditions” with the accuracy necessary to measure the size of the benefit bestowed. The counterfactual in the two examples we cited earlier is quite straightforward: the private company benefiting would have to pay $1 billion in taxes, or 7 percent instead of 2 percent, when asking for a loan. This is not always the case, though. Case law, to which we will turn in what immediately follows, offers many an example of “inappropriate” counterfactuals that panels have used when attempting to measure the size of benefit bestowed. 3.3.2.1 The Identity of the Recipient Intuitively, recipients should be producers of a commodity (an enterprise or an industry, or a group thereof). Note though, that Article 1 of SCM does not request from the recipient to be a producer; rather, Article 2 of SCM does that. This provision deals with “specificity,” and we analyze this term later in this chapter. Specificity is the third and final constitutive element of the term “subsidy.” This provision requests that payments be made to an enterprise or group of enterprises. The recipient of a payment though is not necessarily the recipient of a benefit. What if, for example, Home pays domestic car producers a premium for using plastic components

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(an area where Home has comparative advantage) instead of steel (a good that Home does not produce)? Recall also the example we cited above where post-crisis money is paid to banks in order to divert it to domestic economic operators. Practice offers dozens of examples where the recipient of a financial contribution and the recipient of a benefit do not coincide. In one of the earlier disputes, the Panel on EEC–Oilseeds I refused to characterize an EU scheme whereby industrial users of oilseeds were paid the difference between the price charged by EU producers of oilseeds and the world price of this commodity (i.e., a subsidy).88 The argument that the panel used to reach this conclusion was that the subsidy was not being paid exclusively to producers. Similar arguments should not be of any significance nowadays since the SCM Agreement does not require “exclusive” payments. As a result, industrial users should qualify as “enterprise or industry or group of enterprises or industries” (Article 2 of SCM). The “pass through” jurisprudence, which we discuss in detail later in this chapter, has established that plaintiffs can successfully challenge schemes paid to entities other than the “direct” beneficiary. Benefits “indirectly” bestowed can also come under the purview of Article 1 of SCM. 3.3.2.2 “Private Investor” Test: Benefit That Market Does Not Yield The AB has espoused the so-called private investor test to decide whether a benefit has been conferred. In brief, the question it will ask in this context is the extent to which the recipient could have obtained under market conditions the benefit that it obtained from a public body. This test was elaborated by the European Court of Justice (ECJ) first in its landmark decision Belgium v. Commission,89 where the Court stated that, by virtue of this test, it would inquire (§ 14) “... whether in similar circumstances a private shareholder, having regard to the foreseeability of obtaining a return and leaving aside all social, regional policy and sectorial considerations, would have subscribed the capital in question.” The test, hence, requests that courts evaluate state behavior by using as counterfactual a private actor that does not have a motive other than profit maximization. Article 14 of SCM, which deals with the calculation of the amount of subsidy bestowed, uses market prices as the benchmark for determining the amount of benefit gained.90 Inspired by this provision, the AB on Canada–Aircraft91 explained its understanding of the term “benefit” as follows (§§ 157–158): We also believe that the word “benefit,” as used in Article 1.1(b), implies some kind of comparison. This must be so, for there can be no “benefit” to the recipient unless the “financial contribution” makes the recipient “better off” than it would otherwise have been, absent that contribution. In our view, the marketplace provides an appropriate basis for comparison in determining whether a “benefit” has been “conferred,” because the trade-distorting potential of a “financial contribution” can be identified by determining whether the recipient has received a “financial contribution” on terms more favorable than those available to the recipient in the market.

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Article 14, which we have said is relevant context in interpreting Article 1.1(b), supports our view that the marketplace is an appropriate basis for comparison. The guidelines set forth in Article 14 relate to equity investments, loans, loan guarantees, the provision of goods or services by a government, and the purchase of goods by a government. A “benefit” arises under each of the guidelines if the recipient has received a “financial contribution” on terms more favorable than those available to the recipient in the market.

This is the notorious private investor test, and it is by now standard case law.92 Case law has used it consistently in all but two cases so far (Canada–Dairy,93 and EC–Export Subsidies on Sugar94). These cases (discussed in more detail in chapter 8) concerned farm subsidies and were adjudicated under the WTO Agreement on Agriculture. We underlined earlier the difficulties associated with the private investor-test, because of the difficulty in designing the appropriate counterfactual. This is not always the case. A financial contribution consisting of revenue foregone or not collected is an example of a rather easy case to show that benefit has been conferred. The Panel on US–FSC put it this way (§ 7.103): Having found that the various tax exemptions under the FSC scheme give rise to a financial contribution, our next task is to consider whether a benefit is thereby conferred. In our view, the financial contribution clearly confers a benefit, in as much as both FSCs and their parents need not pay certain taxes that would otherwise be due.95

The quoted passage implies that comparison to the marketplace conditions, the benchmark in the private investor test, should not be understood as comparison to an unregulated, ideal world. The comparison is rather with the regulated market before the challenged action has taken place. In the quoted example above, a tax level has been set, which all economic agents but FSC companies have to pay. Benefit, except for cases like a tax break, often involves a difficult demonstration. Alas, as if this was not enough, WTO adjudicating bodies, and especially the AB, have made it even more difficult. In Canada–Renewable Energy, the AB made a distinction between subsidies that help create markets that otherwise would not exist and other subsidies, stating that the former should not be considered subsidies. The AB did not refer to public goods, or, more generally, to rationales for subsidization. It simply distinguished between cases where, through a subsidy, a new market has been established, and cases where subsidies are bestowed to recipients operating in a given market.96 Recall that Ontario, a Canadian province, was providing a financial contribution to producers of wind-power and solar photovoltaic energy. Through feed in tariffs (FIT), it offered a guaranteed rate for electricity over a specified period (20 to 40 years in the case of Ontario), the consideration being delivery of energy from renewables into the grid both from commercial producers of energy and from individual homeowners.97 Electricity markets are quite idiosyncratic. They are highly regulated (probably because they are imperfectly competitive), and electricity goods are rarely traded internationally.

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FIT-type regulations became quite fashionable because there was widespread unrest due to the awareness that consumption of fossil fuels could have negative (if not catastrophic) effects on the environment. Canada’s, however, was no ordinary FIT program. It was accompanied by an industrial policy component since producers of renewable energy would profit from support only if they had used Canadian machinery for the production of energy (local content). Canada was not alone in that. A number of other WTO members had similar green measures in place, accompanied by naked industrial policy elements. The panel (§§ 7.243ff.) had held that the measure could not be considered a subsidy because, on the evidence shown, it could not establish whether a benefit had indeed been bestowed. The first step in this endeavor should have been the delineation of the relevant product market.98 However, the panel possessed no information on the rate of return in the electricity market. To decide whether a benefit had been bestowed, a comparison between the average rate of return for electricity producers and the average rate of return for business of comparable risk profile was necessary. As the panel did not possess information on this score, it could not decide this issue. One member of the panel issued a dissenting opinion, holding that a benefit had indeed been conferred since by Canada’s own admission, producers of solar energy would not be in the market in the first place if not for the Canadian measure. The price differential between renewable and nonrenewable energy made it clear that producers of renewable energy would never enter the market absent the subsidy conferred (§§ 9.11ff.).99 The AB followed a different line of thinking to reach essentially the same result. The AB first held that two markets were involved: the market for energy and the market for renewable energy (§§ 5.176ff.). It then argued that the panel should have defined the market from the supply side—that is, it was not demand substitutability that mattered (§§ 5.170–172).100 Having made this distinction, the next logical question was whether a benefit had been bestowed on producers of renewable energy, distinct from the conventional electricity market. Two paragraphs of the AB report are important in this context. First, § 5.185: Nevertheless, while introducing legitimate policy considerations into the determination of benefit cannot be reconciled with Article 1.1(b) of the SCM Agreement, we do not think that a market-based approach to benefit benchmarks excludes taking into account situations where governments intervene to create markets that would otherwise not exist. For example, governments create electricity markets with constant and reliable supply. By regulating the quantity and the type of electricity that is supplied through the network (base-load, intermediate-load, or peak-load) and the timing of such supply, governments ensure that there is a continuous supply-demand balance between generators and consumers, thus avoiding imbalances that would destabilize the network and cause interruptions of power supply. Although this type of intervention has an effect on market prices, as opposed to a situation where prices are determined by unconstrained forces of supply and demand, it does not exclude per se treating the resulting prices as market prices for the purposes of a benefit analysis under Article 1.1(b) of the SCM Agreement. In fact, in the absence of such government intervention, there could not be a market with a constant and reliable supply of electricity.

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Then, § 5.188: Nevertheless, a distinction should be drawn between, on the one hand, government interventions that create markets that would otherwise not exist and, on the other hand, other types of government interventions in support of certain players in markets that already exist, or to correct market distortions therein. Where a government creates a market, it cannot be said that the government intervention distorts the market, as there would not be a market if the government had not created it. While the creation of markets by a government does not in and of itself give rise to subsidies within the meaning of the SCM Agreement, government intervention in existing markets may amount to subsidies when they take the form of a financial contribution, or income or price support, and confer a benefit to specific enterprises or industries. (italics in the original)

The AB states that governments can establish new markets without having to fear the disciplines included in the SCM Agreement when doing so. In similar thus, cases no benefit is bestowed, according to the AB. Is the AB saying that, regardless of the reason behind it, subsidies leading to the establishment of new markets do not run afoul of the disciplines included in the SCM Agreement? For example, could Home spend money to establish its own car industry? If yes, then the finding of the AB could lead to moral hazard and to abuses, but also to legitimate disagreements regarding the scope and the novelty of the market established. If not, what is a “new market’? The multimedia market, for example, nowadays comprises goods that previously belonged to separate markets (e.g., telecommunications and personal computers). The possibilities are endless. Would intervention in similar markets be considered an intervention to a “new market”?101 The AB finding is, of course, also based on an incorrect market definition (§§ 5.158ff.). In doing that, the AB misquoted prior case law. It borrowed from injury analysis, where supply substitutability indeed matters; otherwise, no injury to competitors (the standard adopted in the SCM Agreement) can be shown. Market definition, however, has a different function from injury analysis, as what is at stake in the former is whether consumers treat two goods as substitutable. Solar PV (photo-voltaic) and wind power technologies were so much more inefficient than conventional technologies that they could not possibly compete in the same market with an energy source like fossil fuels. The AB, by distinguishing between two electricity markets, explicitly opened the door for governments to intervene and establish “inefficient” markets that otherwise would not exist. The possibilities for extensive industrial policy (that is, the very policy that the SCM Agreement aims to discipline) seem immense.102 Since the AB had held that the two markets were distinct, it needed information regarding the prevailing market conditions in renewable energy in order to decide whether a benefit had indeed been conferred (since there was no doubt that a financial contribution had been paid). This was a new market, though, and information was lacking. In §§ 5.190

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and 5.245, the AB indicated the type of information it was looking for in order to decide whether a benefit had indeed been conferred: In the light of the above, and in particular in view of the fact that the government’s definition of the energy supply-mix for electricity generation does not in and of itself constitute a subsidy, we believe that benefit benchmarks for wind- and solar PV-generated electricity should be found in the markets for wind- and solar PV-generated electricity that result from the supply-mix definition. Thus, where the government has defined an energy supply-mix that includes windpower and solar PV electricity generation technologies, as in the present disputes, a benchmark comparison for purposes of a benefit analysis for windpower and solar PV electricity generation should be with the terms and conditions that would be available under market-based conditions for each of these technologies, taking the supply-mix as a given. ... In sum, we have found evidence on the Panel record that is relevant to a benefit analysis based on a benchmark that takes into account the Government of Ontario’s definition of the energy supplymix. Based on this evidence, we have considered that RES prices for windpower generation contracts awarded through competitive bidding may qualify as benchmarks for a benefit comparison and seem to suggest that benefit may exist in the case of FIT windpower generation contracts. We conclude, however, that such evidence was neither sufficiently debated before the Panel, nor before us. Moreover, the Panel did not make factual findings on this evidence that would assist us in completing the analysis. (italics in the original)

The AB held that Canada should have organized competitive bidding, and set prices inspired by the level of the prices submitted by the relatively more efficient producer. Consequently, plaintiffs, in order to prevail, should have provided the price that would have emerged had competitive bidding occurred (or some price along these lines). This finding is strikingly similar to the Altmark decision by the ECJ,103 where the Court held that a compensation that is necessary for providing public service is not a subsidy if the level of compensation corresponds to the price that would have resulted had competitive bidding occurred. The insistence of the AB on this feature probably underscores its desire to use this benchmark to define “benefit” in similar cases in the future. One can, of course, only wonder whether this convoluted approach is warranted since it rests on the erroneous basis that renewable and nonrenewable energy are two distinct markets. Demand side considerations, as we have stated above, would seem to support the opposite position. In this vein, the benefit is easy to show since it will be reflected in the difference between the two prices, that for renewable and for nonrenewable energy. Recall that at the panel level, a dissenting opinion followed this simple route to show that a subsidy had indeed been conferred (§§ 9.1ff.). The basis for the minority opinion was that we were in the presence of one market; hence, the counterfactual was the price for nonrenewable energy. The majority opinion in the panel, as well as the unanimous verdict of the AB, disagreed, arguing that we were in the presence of two markets. The discussion above supports one conclusion. While the private investor test to demonstrate the existence of benefit sounds reasonable, it is hard to practice. Alas, the AB

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error in Canada–Renewable Energy is testimony to this point. Hopefully, this decision is an outlier imposed on grounds of political expediency only. Even so, panels and the AB will have to distance themselves from this approach in the future. 3.3.2.3 Cost of Production: An Appropriate Benchmark to Discern Benefit? In Canada–Dairy, the AB had to decide whether Canadian milk producers had been receiving a benefit by the government. Canadian producers had been receiving payments by the government, and the question was whether a benefit had been conferred through similar payments. The term “payments,” used in the AG Agreement, refers to a transfer of economic resources. According to the AB, a payment has occurred if the product is supplied at less than its proper (i.e., market) value. The AB rejected both the domestic and the world market price as appropriate benchmarks for determining the proper value of the good provided, the latter because it was not a market but an administered price (§ 81). With regard to the world price, the AB took the view that it provided one possible measure of the value of the milk to the producer, but it gave no clear indication regarding the response to the key question—namely, whether a benefit had been bestowed on Canadian production (§ 84). The AB decided instead that the total cost of production offered a more appropriate benchmark for comparison. The average total cost of production (fixed and variable costs of producing milk), whether destined for domestic or export markets, would be divided by the total number of units of milk produced in order to define the amount of subsidization per unit of production (§§ 87–96).104 The same test was applied in a subsequent case: EC–Export Subsidies on Sugar.105 The facts of the case are reflected in § 2 of the AB report: EC Regulation 1260/2001 is valid for the marketing years 2001/2002 to 2005/2006 and establishes, inter alia: quotas for sugar production; an intervention price for raw and white sugar, respectively; a basic price and a minimum price for beet for quota sugar production; quota (that is, “A” and “B”) sugar as well as non-quota (that is, “C”) sugar; import and export licensing requirements; producer levies; and preferential import arrangements. Furthermore, the EC sugar regime provides “export refunds” to its sugar exporters for certain quantities of sugar, other than C sugar. These “refunds,” which are direct export subsidies, cover the difference between the European Communities” internal market price and the prevailing world market price for sugar. Non-quota sugar (that is, C sugar) must be exported, unless it is carried forward, but no “export refunds” are provided for such exports. (italics in the original)

The panel took the view that (§ 7.264): in the present dispute, the total cost of production of C beet is an appropriate benchmark for determining whether the sales of C beet to C sugar producers provide a “payment” to the producers of C sugar within the meaning of Article 9.1(c) of the Agreement on Agriculture. (italics in the original)

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The AB endorsed this opinion. This test is potentially at odds with the private investor test, where cost of production of subsidized entities is simply immaterial, since all that matters is whether the same benefit could have been procured under market conditions. Before one rushes to unwarranted conclusions, note that this test has been applied only in cases involving farm subsidies, and never in cases involving subsidies of nonfarm goods. Why has this been the case? It is simply because the relevant provision in the AG Agreement refers to “payments,” not to “subsidies.” “Payments” are a concept akin to “financial contribution,” only one of the three constitutive elements of a “subsidy,” as we detail in chapter 8 of this volume. There is, thus, no inconsistency in case law at all. The private investor test has been consistently applied in subsidies-related disputes where a benefit must be calculated. It has not been applied in the context of the AG Agreement when panels were called to interpret the term “payments,” a term that is not a substitute for the term “subsidy” and hence does not require a benefit analysis. One final point is warranted here, since there is dissonance between economic theory and the WTO law. Horn and Mavroidis (2005a) raised the point that, in theory, absence of benefit does not necessarily amount to a no-subsidy benchmark. The latter is not necessarily a situation where the subsidy has been removed and nothing else has changed, for it could very well be the case that removal of the subsidy equals its replacement by another lawful measure. Here is the relevant passage: ... consider the following highly stylized illustration. A government has two instruments, an actionable specific subsidy of s and a non-actionable lawful instrument with effects equivalent to a smaller specific subsidy r. The government’s preferred rate of subsidization is equal to s. Its first choice would therefore be to use the actionable subsidy, but when unable to do so, it uses the other instrument, and provides a subsidy equal to r. Now let the CVD equal the difference in price with and without the subsidy. How large will it be? If the no-subsidy benchmark were taken to be the situation where neither of the instruments is used, then the CVD would equal s, this being the difference in price between the two situations. But if instead the no-subsidy benchmark is meant to capture the situation as it would be absent the actionable subsidy, the difference in price would be s – r, which is potentially a much smaller number than s. Differently put, the effect of the actionable subsidy is not to change the subsidy with the amount s but with s – r.

The authors conceded, however, that these problems may or may not be important in practice. On the other hand, although probably theoretically sound, the evidentiary standards associated with this approach are very demanding. There are good reasons to avoid going down this road, especially if the likelihood of a counterfactual where a legal avenue is privileged over a subsidy (as opposed to no action at all) is quite small. 3.3.3

Pass Through of Benefits to New Owners

3.3.3.1 The Issue We have alluded in various places of our discussion so far that there could be a discrepancy between the party that receives government payments and the actual beneficiary. And it

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is clear that the framers did not want to close the door to benefits only to let them through the window. This brings us directly to the following question: Under what conditions can benefits that have passed through to entities be counteracted, even if those benefiting from them are not the original recipients? The SCM Agreement does not explicitly discuss “pass through.” The stylized facts reproduced here capture the essence of disputes that have arisen between trading nations that gave rise to the discussion whether a subsidy had “passed through’: • A government had provided an economic operator with a capital infusion. • Subsequently, the company that benefited from the infusion would be privatized at arm’s length (usually through auction), or its corporate identity would change. • WTO members affected by the original subsidization take action against it. For example, if the company faced CVDs, the new owners would initiate a dispute before a WTO panel arguing that the subsidy had been bestowed to a different owner/entity and had not “passed through” to them. Trading nations reacted to similar cases and countervailed products from privatized companies that had benefitted from payments before the change in corporate identity. Exporters reacted arguing that they had never benefited from payment subsidies and disputes were unavoidable, which led to litigation. Panels have examined pass through when questioning whether a benefit has been bestowed. This is so because the beneficiary of the financial contribution is not the party that received the original financial contribution, but a party that simply has benefited from it. There is, in these cases, no doubt that a financial contribution has been paid. The remaining questions are: Has the benefit passed through to a different entity? Can one take legitimately action against a beneficiary of a payment that it has never received? It must be the case, of course, that a subsidy had been paid previously to a different owner/legal entity, and the only question remaining in pass-through analysis is whether the benefit that had already been conferred has passed through to the new owner/entity.106 3.3.3.2 A Typology of Pass Through We referred previously to the “typical” pass through case. It is typical because many of the cases that have been disputed before panels echoed the facts described earlier. The key is that there is an intervening factor, an event that occurs that eliminates the possibility for a benefit resulting from an undisputed payment. In EC and Certain Member States– Large Civil Aircraft, the panel and the AB was requested whether a series of different intervening events could extinguish benefits. The issue concerned the subsidization of Airbus, an EU carrier. The company had received subsidies—this much was undisputed. The question was whether because of a series of intervening events (extinction, extraction of subsidies, and change of legal structure of the company), subsidies continue to exist within the “new” company. In § 716, the AB distinguished between these scenarios:

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• Shares in an enterprise that has previously received subsidies are subsequently bought by new private owners in sales transactions conducted at arm’s length and for fair market value, resulting in the “extinction” of subsidies. • A parent company removes cash or cash equivalents from a wholly owned subsidiary that has previously received subsidies, resulting in the “extraction” of subsidies. • A company that has previously received subsidies is restructured and legally reorganized to form a new company, resulting in a situation in which the subsidies do not “pass through” to the new company. “Extinction,” “extraction of subsidies,” and “change of corporate identity” of a company are three distinct scenarios where the question of “pass through” will be entertained. This is not an exhaustive list. Pass through can occur in other cases as well. A subsidy has been paid, for example, to inputs, and the claim is raised that downstream production has also benefited. The question arises of why the affected parties have not taken action against the subsidized input. In practice, this has been the case simply because the input is not traded. Examples abound: subsidized cherries and traded glacé cherries offer an appropriate illustration. The softwood lumber saga, a series of disputes between the US and Canada that date from the 1970s and were only settled in the twenty-first century, is a good example where subsidy has been paid to the input, but action has been taken against the final product. In US–Softwood Lumber III and US–Softwood Lumber IV, the US had imposed CVDs on imports of softwood lumber from Canada based on a determination of subsidization of the lumber producers through so-called stumpage programs, through which a good (standing timber, in this case) was provided to the tenured timber harvesters at less than market price. The timber harvesters sold the trees to log producers, who sold logs to lumber producers, who turned them into lumber products. It was neither the trees nor the logs that were exported or countervailed, but only the lumber products. The question before the panel and the AB was, thus, whether the exported lumber products nevertheless benefited from the cheap trees that were provided by the government to the harvester/log producers. In other words, had the benefit to harvesters passed through to the lumber producers? The AB started with a plea for a facts-intensive investigation in order to respond to the question whether a subsidy had indeed passed through. The AB cautioned against making presumptions, especially in cases where harvesters and lumber products producers operated at arm’s length, asking from panels to investigate whether the subsidy had actually passed through (§ 144, US–Softwood Lumber IV): Thus, for a potentially countervailable subsidy to exist, there must be a financial contribution by the government that confers a benefit on a recipient. Where a subsidy is conferred on input products, and the countervailing duty is imposed on processed products, the initial recipient of the subsidy and the producer of the eventually countervailed product, may not be the same. In such a case, there is a direct recipient of the benefit—the producer of the input product. When the input is subsequently

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processed, the producer of the processed product is an indirect recipient of the benefit—provided it can be established that the benefit flowing from the input subsidy is passed through, at least in part, to the processed product. Where the input producers and producers of the processed products operate at arm’s length, the pass-through of input subsidy benefits from the direct recipients to the indirect recipients downstream cannot simply be presumed; it must be established by the investigating authority. In the absence of such analysis, it cannot be shown that the essential elements of the subsidy definition in Article 1 are present in respect of the processed product.

In this case, the panel and the AB agreed that a subsidy had indeed passed through, since the producers of the final good had benefited from the cheaper input—that is, they had received a benefit that they could not have obtained under market conditions. The two reports differed on the calculation of the subsidy, an issue to which we will turn later in this chapter. There is a difference between a case where a payment is made to an input, and a case of arm’s length sale of a company that has received payments. In the former case, it could be, for example, that the same company produces the input and the final good, or the two companies are vertically integrated. In this case, one cannot properly speak of pass through of subsidies. Pass through is properly understood when two distinct economic agents (companies) interact. We turn to this question in what follows.107 3.3.3.3 The Test (in Full Mutation) Assume that a state builds a cement factory, which it then auctions off. The highest bidder purchases it and then sees its exports countervailed. Is countervailing under these circumstances consistent with the WTO? Should the purchasing price matter? In similar cases, case law has been quite inconsistent. It started from the premise that the price paid for acquisition of subsidized entities is all we should care about when deciding pass through cases. It then nuanced its position, eventually moving to establish a test, an inventory of circumstances explaining when pass through has not occurred. We explain. The question whether a subsidy has passed through first arose in US–Lead and Bismuth I, a dispute in the GATT years and it concerned the subsidization of the German (Saarstahl), the French (Usinor Sacilor), and the British (British Steel) steel industries. Following years of running into trouble, all three companies had been privatized through arm’s length sales. Arguably, the new owners had paid a market price for their acquisition. The US continued to impose CVDs against exports of the three companies even postprivatization. The EU challenged the legality of imposition arguing that, since a market price for the assets had been paid, no subsidy had passed through. The EU had argued before the panel that it had hired a private consulting company (McKinsey), which had elaborated a report regarding the restructuring of the ailing EU steel industry, which it had followed. The whole process was meant to ensure that the EU steel industry would be operating under market conditions. It further argued that the new owners of the steel plants had paid market prices for their acquisition, as recommended in the McKinsey report. The EU managed to prevail almost with respect to the entirety of the claims that it had

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submitted before the panel. This panel report was never adopted, and the US continued to impose CVDs. In the GATT years, recall from our discussion in volume 1, chapter 1, unadopted panel reports had limited legal value. The EU could not argue that its rights had been impaired because of the US decision to ignore the panel decisions. Following US–Lead and Bismuth I, the issue of CVDs against the EU steel industry arose again in the WTO era, in two cases: US–Lead and Bismuth II and US– Countervailing Measures on Certain EC Products.108 This time, we were squarely within the WTO era, and panel reports would be adopted if the successful complainant so wished. Panel reports would thus, automatically acquire legal significance. The EU complained again about the continuing imposition of CVDs against its steel exports to the US. The US considered that, even following privatization at arm’s length, it was still entitled to impose CVDs on the products of these companies since the subsidies bestowed on them preprivatization had not been exhausted through the sale at arm’s length. The US had determined, in a “changed circumstances review” under Article 21.2 of SCM, that the benefit to the productive operations of the company continued to exist, although it was reduced. The EU considered that the CVDs were no longer justified as the new owner of the firm had paid a fair market value in order to acquire the firm and could, therefore, not be considered to have received a benefit. In other words, in the EU’s view, payment of market price in and of itself exhausted any benefit received (since the market price paid, so goes the argument, would reflect the subsidy paid as well). The panel and the AB sided with the EU. Having established that the recipient must be a natural or legal person (AB, US–Lead and Bismuth II, § 58), they concluded that by paying a market price for the company, the new owner was not better off than it would have been otherwise, that is, if the assets it was buying had not been subsidized (AB, US–Lead and Bismuth II, § 68). Vital to the AB’s consideration was the fact that the marketplace served as a benchmark for determining the existence of a benefit, and it is, therefore, not the “utility value” of the assets of the firm that was important, but their “market value.” In the AB’s view, when a market price has been paid for the firm and its assets, there can be no benefit. In a subsequent case (dealing with almost identical facts), the AB nuanced its position, holding that payment of fair market value does not in and of itself exhaust previously bestowed benefits. The AB report on US–Countervailing Measures on Certain EC Products (§ 103) stated: We agree with the United States that, irrespective of the price paid by the new private owner, privatization does not remove the equipment that a state-owned enterprise may have acquired (or received) with a financial contribution and that, consequently, the same firm may “continue” to make the same products on the same equipment. However, this observation serves only to illustrate that, following privatization, the utility value of equipment acquired as a result of a financial contribution is not extinguished, because it is transferred to the newly-privatized firm. But, the utility value of such equipment to the newly-privatized firm is legally irrelevant for purposes of determining the continued existence of a “benefit” under the SCM Agreement. As we found in Canada–Aircraft, the value

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of the “benefit” under the SCM Agreement is to be assessed using the marketplace as the basis for comparison. It follows, therefore, that once a fair market price is paid for the equipment, its market value is redeemed, regardless of the utility the firm may derive from the equipment. Accordingly, it is the market value of the equipment that is the focal point of analysis, and not the equipment’s utility value to the privatized firm. (italics in the original)

The AB disagreed with the panel that had argued that there is an irrebuttable presumption to the effect that every time a fair market value has been paid, the benefit disappears.109The AB held that the presumption is rebuttable even in case of payment of the market value, and that the facts of the case will reveal whether a benefit continues to exist postprivatization (§§ 121–124). The AB gave no indication at all regarding the nature of circumstances that can successfully rebut a similar presumption. We will explain below why the AB got it wrong not once, but twice. For now, we turn to the three scenarios envisaged in EC and Certain Member States–Large Civil Aircraft,110 We want to show the extent of confusion on the test for pass through, following the back and forth of the AB regarding the relevance of arm’s length transactions to the extinction of benefit. 3.3.3.4 Extinction of Subsidies Bestowed The US had argued in EC and Certain Member States–Large Civil Aircraft that extinction of subsidies could exist only when full privatization occurs, and then again, there is nothing axiomatic about it. In other words, even full privatization does not necessarily lead to the extinction of subsidies. The EU, conversely, had argued that extinction also exists when partial privatization or sales between private parties have occurred. The latter refers to cases of trading of shares in publicly listed companies (§ 720), to cite one example. The AB held that the inquiry that panels must make in order to decide whether subsidies have been extinguished is facts-intensive and due attention must be paid to all factors that might influence the inquiry (§ 725). It understood that the panel had examined whether (§ 729): the transactions at issue involved changes in ownership where (i) benefits resulting from a prior non-recurring financial contribution (ii) are bestowed on a state-owned enterprise (iii) following a privatization at arm’s length and for fair market value, and (iv) the government transfers all or substantially all the property and retains no controlling interest in the privatized producer.

The AB did not disapprove of the test (§ 733), but of its application in the present case since (§ 733) “the Panel should have assessed whether each of the sales was on arm’slength terms and for fair market value, and to what extent they involved a transfer in ownership and control to new owners.” The AB, however, could not have completed the analysis in this respect (§ 735) since it did not possess enough facts. One might wonder how it could have done so, since it is the same AB that in the same report explicitly stated that the three members of the division

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had three different opinions regarding extinction of subsidies as a result of privatization at arm’s length when a “fair market value” had been paid (§ 726): (a) Noting that the Appellate Body has previously ruled in privatization cases that a full privatization, conducted at arm’s length and for fair market value involving a complete or substantial transfer of ownership and control, “extinguishes” prior subsidies, one Member is of the view that this rule does not apply to partial privatizations or to private-to-private sales. (b) One Member noted that, as discussed above, the Appellate Body ruled in US–Countervailing Measures on Certain EC Products that, in the context of Part V of the SCM Agreement, full privatization at arm’s length and for fair market value may result in extinguishing the benefit received from the non-recurring financial contribution bestowed upon a state-owned firm. In response to an argument made by the United States in that case, the Appellate Body observed that privatization at arm’s length and for fair market value does not remove the equipment that a state-owned enterprise may have acquired with the financial contribution and that, consequently, the same firm may continue to make the same products with the same equipment. The Appellate Body agreed with the United States that the utility value of equipment acquired as a result of the financial contribution is not extinguished as a result of a privatization at arm’s length and for fair market value. However, as the Appellate Body explained, the utility value of such equipment to the newly privatized firm is legally irrelevant for purposes of determining the continued existence of a “benefit” under the SCM Agreement. The Appellate Body recalled that it had found in Canada–Aircraft that the value of the benefit under the SCM Agreement is to be assessed using the marketplace as the basis for comparison. It follows, therefore, that once a fair market price is paid for the equipment, or more broadly the assets of a company, their market value is redeemed, regardless of the utility value a firm may derive therefrom. In response to the argument by the United States that nothing about the company changes as a result of the privatization, the Appellate Body agreed with the panel in US–Countervailing Measures on Certain EC Products that the new private owners are “profitmaximizers” who will seek to “recoup{} through the privatized company ... a market return on the full amount of their investment.” Therefore, the new private owners may no longer benefit from any subsidies received by the company before its privatization. This Member considers the rationale underlying the Appellate Body’s case law on full privatization in the context of Part V of the SCM Agreement equally to apply in situations of partial privatization and private-to-private transactions and in the context of Part III of the SCM Agreement. However, this Member also notes that, as the Appellate Body emphasized in US–Countervailing Measures on Certain EC Products, there is “no inflexible rule” that a “benefit” derived from pre-privatization financial contributions expires following privatization at arm’s length and for fair-market value. Rather, as the Appellate Body stated, “{i}t depends on the facts of each case.” An important question in this context is to what extent the partial privatization or private-to-private transactions resulted in a transfer of control to new owners who paid fair market value for shares in the company. (c) One Member of the Division, though affirming the general test that an extinction of benefit is to be determined upon a consideration of all relevant facts, entertains no small measure of doubt that an acquisition of shares, concluded at arm’s length and for fair market value, constitutes relevant circumstances warranting the conclusion that an extinction of benefit has taken place. A subsidy granted to a recipient company contributes to the net asset value of that company. The value of that asset permits the recipient to enjoy an enhanced stream of future earnings over the life of the asset. The asset is the property of the recipient. The recipient’s shareholders enjoy the right to the dividends that may be declared by the recipient and to any capital gains that arise from the enhanced earnings

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attributable to the recipient. When shares change hands on an arm’s-length basis and for fair market value, the buyer pays a price that, in the estimation of the buyer, places a proper value on the future earnings of the recipient. Those earnings derive from all the assets of the recipient, including the benefit of any subsidy paid to the recipient. One shareholder may not accurately value or properly manage the assets of the recipient. Precisely for this reason, sales of shares take place: the buyer believes that the assets, properly managed, will be worth more over time than the price paid, and the seller believes the opposite. Time will tell who is correct. The central point is that a sale of shares, whether or not it conveys control, transfers rights in the shares to a new owner. The assets of the company, to which the shares attach, do not change at all. Nor could it be otherwise, because the buyer would then not acquire the full benefit of the bargain: the buyer would pay for an asset (the subsidy) that had in the very sales transaction been “extinguished.” Shares in listed companies are traded on stock exchanges with great frequency and without any fear that sales on the market diminish the underlying value of the assets owned by these companies. The changing price of listed securities reflects the different valuations that buyers and sellers place upon companies and their underlying assets. However, nothing about these trades extracts the value of any asset, including the benefit of any subsidy granted. That subsidy continues to benefit the recipient, even if the ownership of the recipient’s shares changes from one day to another. Given that the Appellate Body in this case does not need to come to any final view on the issue of extinction in the context of a partial privatization or private to private sales, these matters do not require more definitive determination. (italics in the original)

So, the three members of the AB that adjudicated this dispute could not see eye to eye in the manner they understood the case law regarding the test to apply in pass-through cases. It could not have been otherwise. As we have stated previously, the AB has decided in drastically different manner the first two disputes on this score brought before it in the WTO-era. This is where we stand right now. While we know that arm’s-length transactions coupled with transfer of control can lead to the extinction of subsidies, we are still in the dark as to how exactly this will be done. 3.3.3.5 Extraction of Subsidies Bestowed In EC and Certain Member States–Large Civil Aircraft, the EU had argued before the panel that cash extractions took place in two of Airbus’s partners before their contribution to the joint effort and, in the EU’s view, the panel had not sufficiently considered this issue (§ 740, AB report): the Panel understood the European Communities to argue that, in order for a cash disbursement to be capable of removing or reducing the benefit of prior financial contributions to a company, two requirements would have to be met: “(i) there must be a causal relationship of some sort between the cash “extraction” and the subsidy and (ii) the “extraction” must effectively move the money beyond the reach of the “company shareholder unit.”111

The AB endorsed the panel’s approach on this issue (§ 745). It explained what the EU should have demonstrated in order to prevail in its “extraction” claim in the following terms (§ 746):

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Although we do not mean to suggest that a “euro-for-euro” link between the subsidies and the cash extracted is necessary to prevail on an argument on “extraction,” we do consider that, at a minimum, the European Communities was required to explain how the specific subsidies received by Dasa and CASA were reflected in the balance sheets of those companies, and how the cash removed or “extracted” represented the remaining or unused value of these subsidies. The mere assertion by the European Communities, without more, that subsidies to Dasa and CASA increased the value of those companies and that therefore any cash taken out represents the subsidy or its “incremental value,” does not in our view satisfy the requirement of establishing a “causal relationship” between the “cash extraction” and the subsidy, as argued by the European Communities before the Panel. (italics in the original)

The AB on these grounds found against the EU, but without excluding the possibility that subsidies can be extracted in different scenarios, leading to the absence of pass through. The absence of detail regarding the required extracted sums that will lead to a no-pass through scenario is deplored here, of course. The AB went on, though, and provided some useful guidance as to how the term “extraction” should be understood and what it entails. It held that “extraction” should not be confused with withdrawals (Article 4.7 of SCM), since in the latter case, it had been proven that a subsidy has been bestowed, whereas in the former, the whole matter is still under investigation (§§ 754ff.). It further underscored that financial contribution and benefit do not need to coincide timewise (§ 712), opening the door to the possibility that subsidies bestowed in order to develop previous Airbus models (that are not being produced at the time of investigation) could have had an impact on the development of models produced when the investigation took place (§ 772). 3.3.3.6 Change of Corporate Identity In EC and Certain Member States–Large Civil Aircraft, the AB examined the issue of change of corporate identity.112 Airbus GIE (“groupement d’intérêt économique”) had been transformed to Airbus SAS (“société par action simplifiée”). GIE and SAS are two distinct forms of companies under French law. The panel had found that the legal transformation had not altered the “economic reality.” Airbus continued to be the same company, as its ownership had not changed. The AB endorsed this view, also holding that, in light of these facts, the US (the complainant) was not required to show pass through from Airbus GIE to Airbus SAS (§§ 767–768). Only if the two companies had been unrelated would the US have been obliged to demonstrate pass through. This was hardly the case, though, because of the absence of change in ownership (§ 776).113 3.3.3.7 Critique Grossman and Mavroidis (2007a) and (2007d) have taken issue with the decisions of the AB in the privatization cases. In their view, the price paid is irrelevant when it comes to deciding whether a benefit continues to exist. At the heart of their disagreement with the AB’s decision is their understanding of the term “benefit.” They argued that the only

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interpretation consistent with the aims and objectives of those who drafted the agreement is one that attributes benefit whenever a firm’s competitive position is advantaged relative to what it would have been “but for” the government’s financial contribution. To achieve this objective, it makes no sense to interpret “benefit” in terms of the financial wealth of the owners of a firm. Rather, the potentially adverse effects of a subsidy on producers in an importing country can be avoided only if a subsidy is deemed to exist whenever a government’s financial contribution affects the competitive situation in an industry. The price at which a change in ownership takes place has no bearing on the subsequent competitive conditions. Consequently, no presumption that the benefit has passed through is legitimate either. It is through an investigation that national authorities will determine whether pass through of subsidies has indeed been the case. Events that occur subsequent to the payment of a subsidy may render inframarginal an investment that was formerly unprofitable. If an investment becomes inframarginal, it is impossible to argue that the subsidy is the cause of ongoing injury. In this case, the injury would be present even if the subsidy had never been paid.114 3.3.4

Calculating the Amount of Benefit

3.3.4.1 Why Calculate Subsidies in Terms of Benefit Granted? The SCM Agreement provides for the calculation of the amount of the subsidy in terms of benefit to the recipient. Article 14 of SCM contains a list of guidelines to this effect. A benchmark other than those mentioned in Article 14 of SCM can be contracted in a Protocol of Accession.115 The rationale for Article 14 of SCM is simply that a financial contribution should not be equated to a subsidy. Think of it this way. Home lends money to private investors at 4 percent interest rate. The market rate is 6 percent. The benefit to recipient (assuming creditworthiness of the beneficiary) is not 4, but only 2 percent, and this is the amount that Foreign should be allowed to countervail.116 In practice, the question of the calculation of a benefit is sequential to the question of whether a benefit exists.117 The Panel on EC–Countervailing Measures on DRAM Chips underscored this point (§§ 7.187–9). The same panel emphasized the importance of approaching the question from the perspective of the recipient, rather than from that of the provider of the financial contribution, since it is the benefit that is being calculated, and benefits are bestowed on recipients (§§ 7.211–212). The calculation of the amount of benefit bestowed serves two purposes. It provides the maximum amount of CVDs and the maximum amount of countermeasures (in case a subsidy is not withdrawn and recourse to countermeasures is requested and authorized). 3.3.4.2 The Guidance Provided in Article 14 of SCM This provision condones regulatory diversity and encapsulates, for all practical purposes, the private investor test. It explicitly accepts that WTO members can use any

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methodology they deem appropriate, provided that three conditions have been cumulatively satisfied: • The methodology is transparent. • It has been properly justified. • It respects the guidelines established in the four subparagraphs included in this provision. What are these guidelines? Article 14(a) of SCM states that a capital infusion in conformity with prevailing investment practice in the territory of the WTO member providing the infusion does not confer benefit. Article 14(b) of SCM explains that government loans are not conferring a benefit unless if there is a difference between their rate and that of commercial loans, the practice in the territory of the WTO member supplying the loan providing the benchmark to determine this. Article 14(c) applies the same logic to loan guarantees. Finally, Article 14(d) of SCM stipulates that the provision of goods or services or purchase of goods by a government shall not be considered as conferring a benefit unless the provision is made for less than adequate remuneration or the purchase is made for more than adequate remuneration (the latter defined in light of prevailing market conditions in the territory of the WTO member buying or selling the products in question).118 It follows that it is the practice in the WTO member supplying the subsidy that matters when calculating the benefit. It is not practice in the territory of the affected member or any other WTO member that matters. Although the introductory paragraph of Article 14 of SCM makes it clear that the agreement does not prescribe a particular methodology that must be used, the same paragraph makes it also clear that any methodology used must calculate benefit by using values in the market of the subsidizing WTO member. It is the “prevailing market conditions” in that market, in other words, that is significant when calculating the benefit. 3.3.4.3 Does Article 14 of SCM Reflect an Exhaustive List? It was not long before the test established in Article 14 of SCM was put to a test. The Panels on US–Softwood Lumber III, and US–Softwood Lumber IV examined the USDOC calculation of the benefit conferred on the lumber producers by the Canadian government. The US had used US prices, since, in its view, none of the benchmarks mentioned in the body of Article 14 of SCM was reasonable. The US claimed that it would be meaningless to use Article 14(d) of SCM (which refers to the “prevailing market conditions” in the subsidizing country), since there were no market conditions at all in Canada with respect to the lumber market: the price of land was heavily subsidized almost throughout the Canadian territory, leaving no room for market forces to establish a price. The price in the few private lands would necessarily follow the government price.

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The panel disagreed, holding that the US should have used the price for trees on the few private lands that still existed in Canada as the benchmark for the calculation of benefit. The panel’s analysis was based on the language of Article 14 of SCM (§ 7.45). It concluded that (§ 7.60): as long as there are prices determined by independent operators following the principle of supply and demand, even if supply or demand are affected by the government’s presence in the market, there is a “market” in the sense of Article 14(d) [of the] SCM Agreement. (italics in the original)

The panel explicitly acknowledged that, as a matter of economic logic, the US argument stood on strong grounds. However, in the panel’s view, its role was not to amend the clear content of a provision; that role was reserved to the WTO membership, even if it was not itself persuaded by the logic of it (§§ 7.58–60). The AB overturned the panel’s decision, stating that it could well be the case that the subsidizer’s market is so distorted by the government’s financial contribution that using it as a benchmark might be inappropriate. It could be the case, in other words, that no market conditions existed (§ 90): investigating authorities may use a benchmark other than private prices in the country of provision under Article 14(d), if it is first established that private prices in that country are distorted because of the government’s predominant role in providing those goods.

In the AB’s view, Article 14 of SCM reflected “guidelines”; that is, not rigid rules that foresaw each and every foreseeable situation; the introductory paragraph of Article 14 of SCM used this term, as stated earlier (§ 92). As a result, deviations, to the extent “reasonable,” were warranted when a “new” situation (e.g., a factual situation that had not been included in the body of Article 14 of SCM) arose, to honor the spirit of this provision. Only this interpretation was, in the eyes of the AB, consistent with the objective of Article 14(d) of SCM, which is to establish whether the recipient is better off than it would have been without the government’s financial contribution (§ 93): Under the approach advocated by the Panel (that is, private prices in the country of provision must be used whenever they exist), however, there may be situations in which there is no way of telling whether the recipient is “better off” absent the financial contribution. This is because the government’s role in providing the financial contribution is so predominant that it effectively determines the price at which private suppliers sell the same or similar goods, so that the comparison contemplated by Article 14 would become circular.

The AB concluded that the Canadian market was so distorted that it could not serve as a benchmark. More generally, it would not be possible to use Canadian market prices to calculate the benefit when the government’s participation in the market as provider of the same or similar goods was so predominant that private suppliers would align their prices to those of the government-provided goods (§§ 95ff., and especially 101). The AB added, nevertheless, a caveat to the effect that determination of whether private prices were

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distorted because of the government’s predominant role in the market as a provider of certain goods must be made on a case-by-case basis, according to the particular facts underlying each CVD investigation (§ 102). The AB behaved here more as a lawmaker than as an adjudicating body. It saw a legislative shortcoming and corrected it through judicial activism. The premise of the SCM Agreement is that market conditions exist in a given market, and a specific government intervention alters the conditions of competition for some producers. It is not that markets are so heavily distorted anyway that no reliable market price can be used as a benchmark to derive the amount of benefit bestowed. True, Article 14 of SCM uses the term “guidelines,” but it requests that WTO members observe “the following” guidelines, not just any guidelines. The guidelines enlisted all use prevailing market conditions in the subsidizing WTO member as a benchmark to calculate the benefit. There is a problem, of course, when there are no prevailing market conditions in the subsidizing WTO member (as in many instances where GATT/WTO law is incomplete). The question is whether WTO adjudicating bodies should take the initiative and complete the contract, or whether they should satisfy themselves by merely signaling the problem, pronouncing either a “non liquet” (there is no law to address the particular transaction), or pronouncing an unsatisfactory decision to the effect that a violation has been committed when the facts half-support similar conclusions. The panel’s approach (spotting the problem and signaling it to lawmakers) offers undeniable benefits from an institutional perspective. The panel respected the equilibrium established in the DSU, whereby panels cannot alter the balance of rights and obligations decided by the WTO membership. The AB did not pay too much attention to institutional details in this case. Be that as it may, it is by now moot. The Panel on EC–Countervailing Measures on DRAM Chips held in this vein that when facing problems with the prescribed methodology, an IA is entitled to considerable leeway in adopting a reasonable methodology (§ 7.213). In US–Antidumping and Countervailing Duties (China), the AB approved the IA’s decision to refuse to use Chinese interest rates as a benchmark to examine whether loans by SOCBs had been subsidized (§ 470): ... because of pervasive government intervention in the banking sector, which created significant distortions, restricting and influencing even foreign banks within China. Having rejected interest rates in China as benchmarks, the USDOC resorted to an external benchmark. Specifically, the USDOC constructed, using a regression-based methodology, an interest rate benchmark based on inflation-adjusted interest rates of a group of countries with a gross national income (“GNI”) similar to that of China.

The AB added a word of caution, though. It held that the fact that government was a significant supplier of a commodity did not necessarily lead to the conclusion that prices in the exporting market were unreliable, and, hence recourse to another benchmark was warranted (§ 441):

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We read that Appellate Body report as indicating that, if the government is a significant supplier, this fact alone cannot justify a finding that prices are distorted. Instead, where the government is the predominant supplier, it is likely that private prices will be distorted, but a case-by-case analysis is still required. (emphasis in the original)

In this case, however, the Chinese state company possessed a 96.1 percent market share and 3 percent of total imports. In the AB’s view, this information was enough for it to find that the IA had the right to move away from the four corners of Article 14 of SCM and use another standard to calculate the benefit granted to the Chinese companies (§§ 455ff.).119 The AB went on to examine whether the US had exercised its discretion in a reasonable manner. To do that, the AB held that it had to evaluate whether the external loan chosen was comparable to that under investigation (§ 476): Thus, a benchmark loan under Article 14(b) should have as many elements as possible in common with the investigated loan to be comparable. The Panel noted that, ideally, an investigating authority should use as a benchmark a loan to the same borrower that has been established around the same time, has the same structure as, and similar maturity to, the government loan, is about the same size, and is denominated in the same currency. The Panel, however, also considered that, in practice, the existence of such an ideal benchmark loan would be extremely rare, and that a comparison should also be possible with other loans that present a lesser degree of similarity. We agree with both of these observations by the Panel.

It went on to state that commercial loans can be provided by governments as well. An IA that wants to prove the opposite must show how government involvement was at odds with prevailing market conditions (§§ 479–480). “Predominance,” in other words, by a government body in a product market does not mean that an IA can refuse to consider evidence relating to factors other than government market share (§§ 496ff.). In this vein, for example, we could hypothesize that an IA might want to perform a barrier-to-entry analysis to see to what extent competitive pressure might lead “predominant” government entities to behave like price takers. In US–Carbon Steel (India) as well, the panel and the AB were dealing with a US methodology that was not in absolute conformity with those reflected in Article 14 of SCM. The difference between this case and US–Softwood Lumber IV is this: in the latter, the state (Canada) was a predominant supplier of the commodity. Here, that was not the case since the US methodology (“Tier II”) would allow deviation from using the prices in the subsidizing state even when the state was not the predominant supplier. India had argued that deviations from the standard set by Article 14(d) of SCM should be allowed only if the government were the predominant supplier. The AB dismissed the argument, stating that this reading of the findings in US–Softwood Lumber IV was unwarranted (§§ 4.172ff.). The AB did not have to do much more than simply dismiss the Indian claim. It was not called to establish a test when the government is not the predominant supplier. This finding is not much help in understanding what the test should be in case the government entity

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is not predominant in the territory of the subsidizing state. The unanswered question is when and how does government influence market conditions when it is not the predominant supplier? The nuts and bolts of the test are far from straightforward.120 In US–Countervailing Measures (China), the AB confirmed that “predominance” by a government entity simply creates a presumption that prices are distorted. It is no proof of distorted prices. The AB went so far as to state that there was no hierarchy between using “in country-” and “out of country prices.” The key question is whether prices are distorted? It is not to ask whether they originate in a particular source, that is in a government entity which might (or might not) be predominant. (§§ 4.37ff., and especially 4.48, 4.52, and 4.105). The case law on this score, thus, can be summarized as follows: • An IA can use prices from a market other than the market of the subsidizing WTO member. • When doing that, it does not have to first evaluate whether in-country prices are appropriate to use. • When the government entity is predominant in the market of the subsidizing WTO member, a presumption that prices are distorted is created. An IA must not, if this is the case, refuse to consider evidence relating to factors other than government market share, since the key question is whether prices are distorted, not whether they originate in a government entity. 3.3.4.4 Allocation of Benefits over Time The issue here is how long productive assets will benefit from a subsidy paid today. This is a different issue from pass through. In pass through, either an auctioning of previously state property or a subsidy to an input when only the final product is being traded must be the working assumption. Here, the issue is how long assets will profit from a subsidy even if no change of ownership is observed. The “Guidelines on Amortization and Depreciation,” adopted by the Committee on Subsidies and Countervailing Measures in April 1985,121 provided guidance regarding the issue of allocating subsidies over time. In US–Lead and Bismuth I, an unadopted GATT panel report, this issue figured prominently. This case was about the imposition of CVDs by the US against imports from the steel industries of Germany (Saarstahl), France (Usinor Sacilor), and the United Kingdom (British Steel). All the companies involved had been privatized but had received state grants beforehand, and the question was whether the allocation of subsidies to productive period by the US was consistent with GATT. In § 611 of the report, it states: The Panel noted that in these investigations, the DOC explained the use of a period of 15 years for the allocation of certain subsidies by stating that this period was “reflective of the average useful life of assets in the steel industry.”

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In § 618, the panel acknowledged the legal relevance of the guidelines, while in § 622, it expressed its understanding of the disagreement between the EU and the US on this sector in the following terms: These conflicting views resulted in particular from different interpretations of the statement in paragraph 3.2 of the Guidelines on amortization and depreciation that investigating authorities should select “a reasonable period for the firms being investigated.” While the EC argued that this expression implied the need for an analysis of the life of assets of the individual firms under investigation, the United States argued that this expression permitted the use of an industry-wide standard for the average useful life of assets of firms in a given industry.

In §§ 624–625, the panel held that the USDOC (the IA responsible for investigating the subsidization of the EU steel industry) did not have to determine the allocation over time on the basis of company-specific analysis. The average useful life of assets was a reasonable benchmark as well, in its view. In §§ 628ff., however, the panel noted that the USDOC had not responded at all to arguments made by France to the effect that the 15-year period was unreasonably long. It is the absence of justification for using this benchmark that the panel sanctioned and found that the US had acted inconsistently with its obligations since it had imposed a CVD in excess of the amount of the subsidy granted. It did not find against the US decision to employ the same period on imports from the other two European countries, UK and Germany. Neither the UK (§ 641), nor Germany questioned the US methodology in this respect (§ 645). 3.3.4.5 Allocation of Benefit over Productive Assets The question of allocation of benefit over productive assets concerns the issue whether, when imposing CVDs, an IA should allocate the subsidy (in the form of equity infusion) to all productive assets of a multinational company or, conversely, whether it could legitimately allocate them only to the assets of the parent company, and if so, under what circumstances. This issue arose for the first time as well in US–Lead and Bismuth I.122 Allocating them to a narrower subgroup increases the amount of subsidy per asset; this is what the US had done and what the EU was complaining about (§ 590): From this explanation, it appeared to the Panel that the DOC’s decision to include only sales attributable to domestic production in the sales denominator resulted from an analysis which involved two steps. Firstly, the DOC examined whether the subsidies were tied to domestic production. Secondly, having found that the subsidies were tied to domestic production, the DOC decided to allocate those subsidies exclusively to domestic production because (1) the DOC believed that it was reasonable to allocate benefits of subsidies tied to domestic production only to domestic production, and (2) there was no adequate evidence giving a clear reason to believe that the benefits of the subsidies encouraged foreign production

The legal challenge mounted by the EU against the US practice is reflected in § 592:

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Firstly, by ignoring the nature of the subsidies the DOC had improperly allocated the subsidies only to domestic production in France, which had resulted in the imposition of a countervailing duty in excess of the amount of the subsidy found to exist. The DOC had failed to take into account that a subsidy provided in the form of an equity infusion into a holding company of a multinational firm by its very nature could only benefit the recipient company as a whole. This had been acknowledged by the DOC in its Proposed Countervailing Duty Regulations in which it treated subsidies arising from equity infusions as untied subsidies. The DOC’s conclusion in the present case that the subsidies in question were tied to domestic production was without a rational basis and unsupported by evidence. Secondly, by taking the position that the subsidies should be allocated exclusively to French domestic production, unless there was adequate evidence providing a clear reason to believe that the benefits at issue benefitted foreign production, the DOC had relied on an impermissible presumption, contrary to the requirement to make a finding based on an examination of all relevant facts. The factors mentioned by the DOC (the nature of the programmes from which the alleged subsidies arose, the contemporaneous controlling ownership position of the French Government and the intention of the Government of France to promote domestic social policy and domestic economic activities and therefore to encourage domestic production) did not support the presumption that the subsidies were tied to domestic production in France. The presumption established by the DOC was in practice irrebuttable in a substantive sense, because of the nature of the subsidies in question

In § 597, the panel explained the test for consistency of the US practice: The Panel concluded from the arguments summarized in the preceding paragraphs that the key issues on which the parties differed with respect to the DOC’s decision to allocate subsidies only to domestic production in France were: (i) whether the DOC had failed to take into account that the subsidies in question arose from equity infusions and therefore benefitted the firm as a whole; (ii) whether the DOC’s analysis rested on a presumption, rather than on a factual analysis; (iii) whether the factors mentioned by the DOC in its determination adequately supported the DOC’s decision to allocate subsidies only to domestic production in France; and (iv) whether interested parties had been afforded an adequate opportunity to submit evidence.

The panel did not explain what it meant by “factual analysis” in its point (ii) quoted above. It did not provide for a test that would help IAs to allocate subsidies over assets. In § 609, the panel found that the US had acted inconsistently with its obligations by not providing exporters with an adequate opportunity to present their views on this test. 3.3.5

Specificity

A financial contribution must confer a benefit to a specific recipient; otherwise, no subsidy has been conferred. The specificity-requirement is the third and final condition that must be met for a demonstration that a subsidy has been bestowed. Demonstration of financial contribution and benefit alone do not suffice to show that a subsidy has been granted.

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A subsidy is specific if it is granted to (or if it benefits) an enterprise or a group of enterprises, or to an industry or a group of industries, within the jurisdiction of the granting authority (Article 2.1 of SCM).123 The problems that we have encountered previously when discussing the indeterminacy of the term “subsidy” are present here, and are expounded as well. What exactly is specific? Assume that a WTO member is a monoculture, e.g., it produces only copper. Is an education program offered to industry executives a specific subsidy? Is the same program, when offered by a WTO member that has only labor-intensive industries, a specific subsidy? These questions are hard to answer. It seems that the rationale for the specificity requirement reflects the desire of the framers not to question the role of government in general. Governments subsidize various aspects of life, and do so in asymmetric manner. In many countries, primary education is free of charge, and in some even secondary education. Nonmarket prices are paid in state hospitals. In other countries, education and health services have been privatized. The examples of the sort abound. And yet, although similar schemes help domestic producers, no WTO member wanted to put them into question. The problem was how to exclude them from the reach of the SCM Agreement. Specificity emerged as the compromise to do that. Although not an intellectually satisfying concept, specificity was thought of as the opposite to general available schemes that do not target specific recipients. In the words of the Panel on US–Upland Cotton, subsidies will not be specific if they are (§ 7.1142) “sufficiently broadly available throughout an economy as not to benefit a particular limited group of producers of certain products.”124 Unavoidably, disputes will arise and have already arisen regarding the proper understanding of the term “specificity.” The SCM Agreement attempted to reduce the size of the problem. Prohibited subsidies (export and local content subsidies) are considered specific per se (Article 2.3 of SCM). The Panel on US–Upland Cotton underscored this point (§ 7.1153). In a similar vein, subsidies limited to certain enterprises located within a designated geographical region are specific by virtue of Article 2.2 of SCM. In contrast, two government activities are considered nonspecific: the setting or change of generally applicable tax rates by all levels of government (Article 2.2 of SCM), and the granting of subsidies according to objective criteria or conditions [Article 2.1(b) of SCM]. The former is the natural consequence of the fact that the WTO Agreement does not prescribe common tax policies. The latter is defined in footnote 2 to the SCM Agreement as follows: Objective criteria or conditions, as used herein, mean criteria or conditions which are neutral, which do not favour certain enterprises over others, and which are economic in nature and horizontal in application, such as number of employees or size of enterprise.

For the rest, the SCM Agreement addresses both de jure and de facto specificity. Whereas the former concept refers to cases where the statute explicitly names the addressees of a subsidy, the latter captures the instances where an attempt is made to circumvent the

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prohibition of de jure specificity. Subsidies, therefore, can be specific either de jure (because they are by law limited to a group of industries, enterprises, or both) or de facto (because, although by law generally available, their use is in fact confined to a group of industries, enterprises, or both). 3.3.5.1 De Jure Specificity Article 2.1(a) of SCM explains what de jure specificity amounts to: Where the granting authority, or the legislation pursuant to which the granting authority operates, explicitly limits access to a subsidy to certain enterprises, such subsidy shall be specific.

In US–Antidumping and Countervailing Duties (China), the AB held that a subsidy will be specific if access to either the financial contribution or the benefit is explicitly limited to specific beneficiaries (§ 378). The Panel on EC and Certain Member States–Large Civil Aircraft understood the term “explicitly limits” appearing in Article 2.1(a) of SCM as equivalent to the establishment of a limitation that expressly and unambiguously restricts the availability of a subsidy to certain enterprises and thereby does not make the subsidy broadly available throughout an economy. The AB confirmed (§ 949).125 The SCM Agreement does not define “industry” in a particular way. The Panel on US–Softwood Lumber IV rejected the argument that the term “industry” should be defined with reference to a particular, and specifically defined product. The subsidy may be specific to an industry such as the steel industry or, in the case in question, the lumber industry, even when this industry produces a wide variety of slightly different products. In this case, Canada had argued, that over 200 separate products were manufactured by companies holding harvesting rights, forming thus a total of about 23 separate industries. In Canada’s view, the wooden door and window industry should, for example, be distinguished from the wooden kitchen cabinet and bathroom vanity industry. In Canada’s view, a subsidy granted to all those different industries was hardly being granted to a limited number of industries. Rejecting Canada’s approach, the panel expressed the view that specificity under Article 2 of SCM must be determined at the enterprise or industry level, not at the product level. The text of Article 2 of SCM did not require a detailed analysis of the end products produced by the enterprises involved, nor did Article 2.1(c) of SCM provide that only a limited number of products should benefit from the subsidy (§§ 7.120–121). The Panel on US–Upland Cotton126 held that the breadth of industry may depend on several factors. In its view, the breadth or narrowness of specificity is not susceptible to rigid quantitative definition (§ 7.1142). It, thus, came to the following conclusion (§ 7.1151): In our view, the industry represented by a portion of United States agricultural production that is growing and producing certain agricultural crops (and certain livestock in certain regions under restricted conditions) is a sufficiently discrete segment of the United States economy in order to qualify as “specific” within the meaning of Article 2 of the SCM Agreement. (italics in the original)

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3.3.5.2 De Facto Specificity Article 2.1(c)SCM reads: If, notwithstanding any appearance of non-specificity resulting from the application of the principles laid down in subparagraphs (a) and (b), there are reasons to believe that the subsidy may in fact be specific, other factors may be considered. Such factors are: use of a subsidy programme by a limited number of certain enterprises, predominant use by certain enterprises, the granting of disproportionately large amounts of subsidy to certain enterprises, and the manner in which discretion has been exercised by the granting authority in the decision to grant a subsidy. In applying this subparagraph, account shall be taken of the extent of diversification of economic activities within the jurisdiction of the granting authority, as well as of the length of time during which the subsidy programme has been in operation.

A footnote to this provision reads: In this regard, in particular, information on the frequency with which applications for a subsidy are refused or approved and the reasons for such decisions shall be considered.

In US–Measures Affecting Trade in Large Civil Aircraft (Second Complaint), the AB explained the sequence between the paragraphs (a) and (b) in Article 2.1 of SCM (§ 876): ... the application of Article 2.1(c) proceeds on the basis of the conclusions reached as a result of the application of the preceding subparagraphs of Article 2.1. We therefore consider that it was correct for the Panel to assess whether the legislation pursuant to which the IRBs were granted explicitly limited access to certain enterprises within the meaning of Article 2.1(a), even though it was not claimed by the European Communities. Having found that the IRB subsidies are not specific within the meaning of Article 2.1(a), analysis by the Panel under Article 2.1(b) was not necessary.

It follows that subsidies that have not been limited to few enterprises, or that have been provided in accordance with objective criteria, can still be specific.127 To decide if this has indeed been the case, an IA must review whether the scheme is (Article 2.1(c) of SCM): • Used by a limited number of enterprises • Predominantly used by certain enterprises • Paying disproportionately large amounts to certain enterprises • Administered in a manner that legitimately raises questions regarding the exercise of discretion to grant a subsidy128 There is no obligation to examine all four factors, as the Panel on US–Softwood Lumber IV made clear (§ 7.123). In this case, Canada had argued that the Canadian government had never intentionally limited access to the stumpage programs. In its view, the predominant use of the stumpage programs by lumber producers could be explained by the fact that the alleged financial contribution consisted of the provision of trees, which, thanks to

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inherent characteristics, are of interest mainly to a limited number of log and lumber producers. The same panel took the view that there was no need to show intent in order to satisfy the de facto specificity requirement, although deliberate action by the government might be revealing; what matters is that at least one of the four criteria mentioned in Article 2.1(c) of SCM had been met. In this case, stumpage programs could only benefit lumber producers (§ 7.116).129 The presence of a “generally available support program” does not eliminate the potential for “specificity.” The Panel on Japan–DRAMs (Korea) provided the generic test that should be applied by panels when dealing with similar cases (§ 7.374): As a general matter, ... if an investigating authority were to focus on an individual transaction, and that transaction flowed from a generally available support programme whose normal operation would generally result in financial contributions on pre-determined terms (that are therefore not tailored to the recipient company), that individual transaction would not, in our view, become “specific” in the meaning of Article 2.1 simply because it was provided to a specific company. An individual transaction would be “specific,” though, if it resulted from a framework programme whose normal operation (1) does not generally result in financial contributions, and (2) does not pre-determine the terms on which any resultant financial contributions might be provided, but rather requires (a) conscious decisions as to whether or not to provide the financial contribution (to one applicant or another), and (b) conscious decisions as to how the terms of the financial contribution should be tailored to the needs of the recipient company.

Use by a Limited Number of Enterprises In EC and Certain Member States–Large Civil Aircraft, the panel explained the conditions under which a subsidy should be considered for use to a limited number of enterprises (§ 7.931): As we have already noted, it follows from the ordinary meaning of the word “explicit” that it is not any limitation on access to a subsidy that will make it specific within the meaning of Article 2.1(a), but a limitation that “{d}istinctly express{es} all that is meant; leaving nothing merely implied or suggested”; a limitation that is “unambiguous” and “clear.” Above we have found that the normal operation of the EIB’s lending programme involves the granting of loans, with a degree of discretion, to entities of all nationalities, on terms and conditions that, to varying degrees, reflect the particular characteristics and features of the funded project and finance transaction, for activities contributing to the development of a wide array of economic sectors across the EU. While it could be argued that the EIB lending objectives, although very broad, do establish an explicit limitation on its lending activities, we do not consider these to result in a limitation on the availability of its loans to “certain enterprises.” In our view, the wide array of economic sectors covered by the EIB’s explicit lending objectives means that its operations are expressly intended to benefit recipients well beyond a particular enterprise or industry or group of enterprises or industries. Moreover, the fact the EIB loans to Airbus (and other borrowing entities) may contain one or more terms and conditions that are not exactly the same, does not render access to those loans explicitly limited to the particular recipients. This is because the normal operation of the EIB’s lending programme places no explicit limitation on access to the same financing opportunity for any other recipient having the same funding needs

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for a comparable project. Thus, contrary to what the United States has argued, the fact that the subsidy loans to Airbus were negotiated individually between the EIB and Airbus, and granted on terms and conditions that were not always identical to other loans granted by the EIB, does not mean that they are specific within the meaning of Article 2.1(a) of the SCM Agreement. Bearing in mind that the concept of specificity under Article 2.1 of the SCM Agreement has to do with whether a subsidy is sufficiently broadly available throughout an economy so as not to benefit “certain enterprises,” we believe there is, in principle, no express, “unambiguous” and “clear” limitation on access to EIB lending to “certain enterprises.” Accordingly, we dismiss the United States claim that the EIB loans to Airbus are specific, within the meaning of Article 2.1(a).

The limitation should, thus, be “clear” and “unambiguous”; otherwise, the requirements of Article 2.1(a) of SCM would not have been met. The US, in the same dispute, had also argued that the EU subsidies met the statutory requirements since the contracts signed between donor and beneficiary were identical, but it failed to provide evidence to this effect and, thus, its claim was dismissed (§§ 7.392ff.). Predominant Use by Certain Enterprises In EC and Certain Member States–Large Civil Aircraft,130 the panel explained the statutory requirement for a finding of predominant use as follows (§ 7.975): In considering whether there is “predominant use {of a subsidy programme} by certain enterprises’ for the purpose of making a finding of specificity, the last sentence of Article 2.1(c) requires that account be taken of: (i) “the extent of diversification of economic activities within the jurisdiction of the granting authority”; and (ii) “the length of time during which the subsidy programme has been in operation.”

Assuming economic activities are diversified, one would expect that the risk for predominant use would be reduced. Lengthy programs when economic activities are not diversified would, conversely, increase the probability for predominant use by few economic agents. Disproportionately Large Amounts to Certain Enterprises In US–Measures Affecting Trade in Large Civil Aircraft (Second Complaint), it was claimed that disproportionately large amounts of subsidy (a concept very similar to “predominant use”) had been granted to Boeing and Spirit (two US aircraft companies), and the AB clarified the proper standard of review (§ 879): Article 2.1(c) indicates that the first task is to identify the “amounts of subsidy” granted. Second, an assessment must be made as to whether the amounts of subsidy are “disproportionately large.” This term suggests that disproportionality is a relational concept that requires an assessment as to whether the amounts of subsidy are out of proportion, or relatively too large. When viewed against the analytical framework set out above regarding Article 2.1(c), this factor requires a panel to determine whether the actual allocation of the “amounts of subsidy” to certain enterprises is too large relative to what the allocation would have been if the subsidy were administered in accordance with the conditions for eligibility for that subsidy as assessed under Article 2.1(a) and (b). In our view, where the granting of the subsidy indicates a disparity between the expected distribution of that subsidy, as determined by the conditions of eligibility, and its actual distribution, a panel will be

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required to examine the reasons for that disparity so as ultimately to determine whether there has been a granting of disproportionately large amounts of subsidy to certain enterprises.

The AB found that the fact that over two-thirds of subsidies had been absorbed by Boeing was in and of itself an indication of disproportionality (§ 884). It held that the share of employment of Boeing and Spirit was not a particularly relevant factor in deciding if it had received disproportionately large sums (§ 886). The panel should have examined the sum of “qualifying” investments in order to form a view on whether Boeing and Spirit had been receiving disproportionately large amounts (§ 887); that is, it should have examined whether use was predominant among those who could qualify for subsidy, and not in general. Since the US had adduced no arguments to this effect, the AB fatally agreed with the panel’s findings holding that the US had not managed to convince why Boeing and Spirit receiving 69 percent of all subsidies was not disproportionately large (§ 888): We would nonetheless expect that the allocation of such benefits over the 25-year period between 1979 and 2005 would have produced a wider distribution of those benefits across different sectors of the Wichita economy. The fact that Boeing and its successor received over two thirds of all IRB property tax abatements from the City of Wichita over a 25-year period, in our view, provides a reason to believe that the IRB subsidies were granted in disproportionately large amounts to certain enterprises. ... We do not consider that the focus by the parties and the Panel on determining what share of employment Boeing and Spirit had within the Wichita economy is particularly relevant to the inquiry of whether the IRB subsidies granted to Boeing and Spirit were disproportionately large. ... On appeal, the United States ... argues that IRBs are not available to the entire economy of Wichita, and that, as a result, calculating Boeing’s and Spirit’s share of economic participation as a ratio of employment levels of the entire Wichita manufacturing sector is not informative. As the United States argues, “only those companies that fund, construct or improve industrial and/or commercial property during the relevant time period actually had access to the IRB program,” and there is therefore no reason to assume “that there is necessarily a logical and “proportionate” relationship between the number of employees of a particular company or group of companies as compared to all employment in the Wichita manufacturing sector, and the amount of IRB tax benefits received.” It would have made much more sense, the United States argues, to take a look at “qualifying investments” during the relevant period of time—that is, “those companies that actually made investments in industrial or commercial property.” We agree that examining qualifying investments would have been a reasonable basis on which to show why the 69% figure does not indicate that IRB subsidies were granted in disproportionately large amounts. In particular, such a showing may have explained why, for IRB benefits seemingly broadly available over a 25-year period to enterprises seeking to develop commercial or industrial property, one company and its successor received over two thirds of those benefits. However, we do not see on the Panel record that the United States provided evidence in support of such an explanation. In sum, we do not see that the United States provided sufficient reasons supported by evidence to undermine the assessment that the granting to Boeing and Spirit of 69% of the amounts of IRB

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subsidy represents an allocation at variance from what would have been expected from the allocation of IRBs in accordance with their conditions for eligibility.

In a similar vein, in EC and Certain Member States–Large Civil Aircraft, the panel held that (§ 7.969): Where the amount of a subsidy granted to one or more recipients under a broadly available subsidy programme represents a proportion of total subsidies granted under the same programme that significantly exceeds the economic activity attributable to the same recipient(s) in the broader economy, the amount of the subsidy at issue would be “disproportionately large.”

The same report underscored the importance of the time factor, holding that it would be wrong to draw definitive conclusions from the short-term use of particular programs (§ 7.976). Manner in Which Discretion Has Been Exercised to Grant a Subsidy There is no practice so far in this area. Is There Room for an Intent Test? The statutory examples denote the legislative will to avoid punishing governments for actions benefiting the society at large. The specificity test, in other words, is there to ensure that governments are not reduced to redundancy. And yet, one could very well imagine cases where only a few companies use a subsidy, and still the government was aiming at promoting the social welfare. Home wants, for example, to build a bridge, and there is only one constructing company in its sovereignty. Shouldn’t we be looking for the intent in this and similar cases? Shouldn’t we ask what whether the intent was to subsidize the construction company or to promote social welfare by linking two parts of the country that were divided before? In US–Softwood Lumber IV, Canada had argued before the panel that, a subsidy is specific only if the government had intentionally (“deliberately,” in its terminology), limited access to a few enterprises. The panel rejected the argument that intent was necessary for a finding of specificity. What mattered was whether de facto, only a few could enjoy the gift (§ 7.116). This is a problematic statement, as we might end up making specificity an easy-to-meet test, contrary probably to the intentions of the drafters, and thus commit false positives. This is especially dangerous in light of the fact that there is no room for “nonactionable” subsidies anymore, as we will see later in this chapter in more detail.131 WTO adjudicating bodies should rethink this issue. The term “specificity” is hard to define. The rationale is easier to grasp. Under the circumstances, unless an intent test is introduced, that will allow panels to inquire into the reasons for bestowing subsidies, the risk for errors increases.

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3.3.5.3 Regional Subsidies Article 2.2 of SCM reads: “A subsidy which is limited to certain enterprises located within a designated geographical region within the jurisdiction of the granting authority shall be specific.”132 The Panel on EC and Certain Member States–Large Civil Aircraft faced the following question: should a subsidy be deemed specific if it is restricted to a certain region, or, as the EU had argued, should it be specific only if it is also specific to certain enterprises within that region? The panel refuted the EU argument (§§ 7.974ff., and especially 7.1223).133 3.3.5.4 Positive Evidence Article 2.4 of SCM requires that “[a]ny determination of specificity under the provisions of this Article shall be clearly substantiated on the basis of positive evidence.” We have already discussed the positive evidence standard in chapter 2 of this volume. Our analysis there finds application here as well. 3.4 Three Categories of Subsidies 3.4.1

Classifying Subsidies: Actionable, Nonactionable, Prohibited

The SCM Agreement distinguishes among three categories of subsidies: “actionable,” “non-actionable,” and “prohibited” subsidies.134 3.4.2

Legal Consequences of Classification

Two important legal consequences stem from this classification. First, WTO members must immediately withdraw a subsidy that is declared prohibited, whereas WTO members are simply required to remove the “adverse effects” of actionable subsidies, incurring no obligation to withdraw them, and no action can be raised against nonactionable subsidies. The latter category is by now defunct, as detailed later in this chapter. Second, the agreement differentiates the “intensity” of reaction to each of the three categories of subsidies, in case the subsidizing member refuses to comply with its obligations, and withdraw a prohibited subsidy or remove the adverse effects of an actionable subsidy. Injured WTO members can impose “appropriate” countermeasures to counteract the effects of prohibited subsidies, whereas they can only impose “commensurate” countermeasures to address the effects of actionable subsidies. Earlier case law differentiated the level of countermeasures that injured WTO members could impose when facing nonimplementation: the amount would be linked to the amount of subsidy paid if a prohibited subsidy had not been withdrawn, but only to its effects if the effects of an actionable subsidy had not been addressed. Subsequent case law has since then eliminated this distinction.

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3.5 Actionable Subsidies Title III of the SCM Agreement is entitled “Actionable Subsidies.” The term “actionable” implies that action can be taken against similar schemes. Action can take two forms. Affected WTO members can have recourse to CVDs, assuming that the conditions of the SCM Agreement concerning lawful imposition of CVDs have been complied with. Through imposition of CVDs, a WTO member can counteract injury in its domestic market only, and cannot address injury in third-country markets. To do that, an affected WTO member must challenge the consistency of an actionable subsidy with the WTO rules before the WTO adjudicating bodies.135 Both actions can be taken in parallel. If the WTO member concerned imposes countermeasures (because the subsidizing member has refused to comply with the rulings of the panel or AB), it can address injury in its market through either CVDs or countermeasures, but not through both. Double-dipping is disallowed, as we will see later in this chapter. 3.5.1 Three Forms of Adverse Effect: Injury, Nullification or Impairment, and Serious Prejudice Article 5 of SCM reads: No Member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of Article 1, adverse effects to the interests of other Members, i.e.: (a) injury to the domestic industry of another Member; (b) nullification or impairment of benefits accruing directly or indirectly to other Members under GATT 1994 in particular the benefits of concessions bound under Article II of GATT 1994; (c) serious prejudice to the interests of another Member.

To prove adverse effects, IAs and ultimately the WTO adjudicating bodies (panels or ABs) need to construct a counterfactual; for example, compare the actual situation that the claimant is complaining about with another hypothetical situation where no subsidy would have been paid and, consequently, no injury because of a subsidy would have been caused. As stated before, constructing the appropriate counterfactual is far from simple. The problems in constructing the test that we underlined earlier when discussing the private investor test are also present here in the context of injury analysis. Panels and ABs have often been criticized for comparing apples to oranges. Take, for example, the AB report on US–Large Civil Aircraft (Second Complaint). Neven and Sykes (2014) found fault with the AB’s (and the panel’s) decision because it did not consider what the situation would have been had Boeing not received subsidies and thus delayed the production of the Boeing 787. In their view, Airbus would, in all likelihood, have also delayed the production of its Airbus 350 model since the decision to launch it was contingent on the decision of Boeing to launch the corresponding model. Consequently, the authors

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legitimately raised the point that the AB should have considered what would have happened to Airbus’s profits had both companies developed their new models later (as opposed to simply inquiring into injury because of the subsidies paid toward the Boeing 787). In-depth knowledge of the particular market will be necessary, as will be knowledge that transcends the frontier of “trade law.” Indeed, the Boeing-Airbus dispute will be a riddle to panelists who are not conversant in industrial organization. 3.5.2

Injury

Footnote 11 to Article 5 of SCM states that the term “injury” is used here in the same way as it is used in the CVD context, which we discuss later in this chapter. In what follows, we focus on the other two forms of adverse effects. 3.5.3

Nullification and Impairment

Article 5(b) of SCM states that adverse effects can take the form of nullification or impairment of benefits accruing either directly or indirectly to other WTO members—in particular, the benefits of concessions bound under Article II of GATT. A footnote to this provision explains that the term “nullification or impairment” should be understood as synonymous with the term included in Article XXIII.1(b) of GATT. There is, nonetheless, an important difference regarding the evidence of nullification and impairment in the GATT and SCM contexts. The Panel on US–Offset Act (Byrd Amendment) held that whereas nullification or impairment of benefits may be presumed under GATT (since any violation of a provision presumably leads to nullification of benefits according to standing case law), no similar presumption exists in the SCM Agreement, where nullification must be proven (§ 7.119). The same panel held that three elements must be established in order to uphold a claim to this effect (§ 7.120): • The existence of a benefit (typically in the form of tariff concession) • The subsequent introduction of a measure by a WTO member (typically a subsidy) • The nullification or impairment of a benefit must be the result of the application of a measure136 The Panel on EEC–Oilseeds I considered that nullification or impairment would arise when the effect of a tariff concession is “systematically” offset or counteracted by a subsidy program. The Panel on US–Offset Act (Byrd Amendment) confirmed this approach (§ 7.127). This finding’s value closes the door to claims of nullification resulting from measures the negative impact of which on the value of concession has been incidental, or even accidental. The measure must somehow consistently undermine the value of concessions, even if it was not intended to do so.

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Serious Prejudice

The term “serious prejudice” is defined in Article 6.1 of SCM as follows: Serious prejudice in the sense of paragraph (c) of Article 5 shall be deemed to exist in the case of: (a) the total ad valorem subsidization of a product exceeding 5 per cent; (b) subsidies to cover operating losses sustained by an industry; (c) subsidies to cover operating losses sustained by an enterprise, other than onetime measures which are non-recurrent and cannot be repeated for that enterprise and which are given merely to provide time for the development of long-term solutions and to avoid acute social problems; (d) direct forgiveness of debt, i.e. forgiveness of government-held debt, and grants to cover debt repayment. A footnote to the text (footnote 16) reads: Members recognize that where royalty-based financing for a civil aircraft programme is not being fully repaid due to the level of actual sales falling below the level of forecast sales, this does not in itself constitute serious prejudice for the purposes of this subparagraph.

Article 6.1 of SCM provides the complainant with an important evidentiary advantage, since it is relieved of the burden to demonstrate the prejudicial effects of a subsidy.137 Since this provision was enacted to serve on a provisional basis and WTO members could not agree on its extension, it has been repealed by Article 31 of SCM. This does not mean that it is totally irrelevant nowadays. The Panel on US–Upland Cotton took the view that it could still provide useful guidance in interpreting serious prejudice (footnote 1487 of the report), even if the evidentiary advantage has ceased. The Panel on Korea–Commercial Vessels adopted a similar attitude (§ 7.583). Its legal relevance, however, should not be overstated since panels can but do not have to draw inspiration from Article 6.1 of SCM.138 Article 6.3 of SCM identifies the following situations of serious prejudice that may arise:139 (a) The effect of the subsidy is to displace from or impede in the market of the subsidizing member the exports of a like product originating in another member; (b) The effect of the subsidy is to displace from or impede in a third-country market the exports of a like product originating in another member; (c) The effect of the subsidy is a significant price undercutting or significant price suppression, price depression, or lost sales in the same market; (d) The effect of the subsidy is an increase in the world market share of the subsidizing member in a particular subsidized primary product or commodity as compared to the average share it had during the previous period of three years and this increase follows a consistent trend over a period when subsidies have been granted.140

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Adverse effects are, thus, distinguished into quantity (displacing or impeding exports, increase in market share) and price effects (undercutting, suppression, depression). This distinction sits on a solid foundation, as we saw in the previous chapter: recall that quantity effects will be observed regardless of whether it is a large or a small country that is providing the subsidy since, other things being equal, subsidies might lead to displacement of imports. Price effects, however, will be observed only when large countries (that is, countries that can affect terms of trade) subsidize. Hence, in cases of serious prejudice, panels dealing with price effects should at the outset establish whether the world price has been affected. The standard of review for serious prejudice cases has occupied the minds of the trading community for a long time now. We will be discussing it in detail in what follows when we revert to the specific forms of serious prejudice. At the outset, nevertheless, we should note the relevant discussion in the 1960 Working Party report on “Review Pursuant to Article XVI.5,” where the following generic standard was elaborated: The criterion is therefore what would happen in the absence of a subsidy. While the panel agreed that in most cases such a judgment cannot be reached only by reference to statistics, nevertheless, a statistical analysis helps to ascertain the trends of imports and exports and may assist in determining the effects of a subsidy. The panel considers it fair to assume that a subsidy which provides an incentive to increase production will, in the absence of offsetting measures, e.g., a consumption subsidy, increase exports or reduce imports.141

The assumption is, thus, that subsidies will affect competitive conditions in a given market, and it is through the construction of an appropriate counterfactual that their effects will be measured. 3.5.4.1 Quantity Effects Displacing or Impeding Exports Articles 6.3(a) and 6.3(b) of SCM provide that a subsidy has an adverse effect if it has the effect of “displacing” or “impeding” exports into the market of the subsidizing WTO member or a third-country market. The Panel on Indonesia–Autos examined claims relating to displacement and impediment of car exports to the Indonesian market (particularly cars originating in Japan, the EU, and the US) due to subsidization of the Indonesian carmaker (producing the Timor model). To decide whether displacement had occurred, the panel reviewed data concerning market share and sales. It appeared that, while market share of the European cars had fallen, sales volume in absolute figures had not gone down (§ 14.210). The explanation was that the size of the Indonesian market had expanded after the introduction of the subsidized Indonesian Timor, since consumers who could not afford to purchase a car at all could now do so because of the low price at which “Timor” was selling (§§ 14.216–17). The data regarding the question whether sales of EU models in absolute terms would have been higher than the actual had the Indonesian model not been introduced were inconclusive. As a result, the panel rejected the claim of displacement

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(§ 14.220), since, in its view, serious prejudice must be demonstrated on positive evidence (§ 14.222). The same panel understood the term “impediment” as follows (§ 14. 218): the question before us is therefore whether the market share and sales data above would support a view that, but for the introduction of the subsidized Timor, sales of EC C Segment passenger cars would have been greater than they were while impedance relates to a situation where sales which otherwise would have occurred were impeded. (italics added)

The panel also considered to what extent the nonintroduction of new EU models was due to the Indonesian subsidization of its motor industry (§ 14.227). Once again, the panel took the view that the complainants failed to adduce sufficient positive evidence (§ 14.236). The core evidence submitted by the complainants consisted in journalists’ articles in newspapers regarding the effects of Indonesian subsidies. The panel did not consider similar evidence to be sufficient to substantiate the claim advanced by the EU. It did give an indication of the kind of evidence it was expecting (§ 14.234): We do not mean to suggest that in WTO dispute settlement there are any rigid evidentiary rules regarding the admissibility of newspaper reports or the need to demonstrate factual assertions through contemporaneous source information. However, we are concerned that the complainants are asking us to resolve core issues relating to adverse trade effects on the basis of little more than general assertions. This situation is particularly disturbing, given that the affected companies certainly had at their disposal copious evidence in support of the claims of the complainants, such as the actual business plans relating to the new models, government documentation indicating approval for such plans (assuming the “approval” referred to by the complainants with respect to the Optima means approval by the Indonesian government), and corporate minutes or internal decision memoranda relating both to the initial approval, and the subsequent abandonment, of the plans in question.142

In US–Large Civil Aircraft (Second Complaint), the AB held that because of subsidies paid, there had been “technology effects” (e.g., new products had been produced faster than otherwise and they resulted in increasing the share of subsidized goods). As a result, sales of competing planes had been displaced since the market valued so-called new products more than even the most reliable old ones (§§ 16ff.). Increase in the World Market Share Article 6.3(d) of SCM states that with respect to primary products or commodities, a subsidy has an adverse effect if it leads to an increase in the world market share of this commodity as compared to the average share it had had during a previous period of three years. It adds that this increase has to follow a consistent trend over a period when subsidies had been granted. The Panel on US–Upland Cotton held that the term “world market share” (§ 7.1464) “refers to share of the world market supplied by the subsidizing Member of the product concerned.” The panel defined “world market” as the global geographical area of economic activity in which buyers and sellers come together and the forces of supply and demand affect

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prices. It gave no credence to the argument that this term would necessarily not include the domestic market of the subsidizing WTO member (§§ 7.1431–1432). It consequently rejected Brazil’s argument that the term “world market share” refers to the world market share of exports only (§§ 7.1434–1435). 3.5.4.2 Price Effects Price Undercutting, Suppression, or Depression Article 6.3(c) of SCM lists price suppression, price depression, and price undercutting as three forms of adverse effects.143 Information regarding these issues typically involves a fact-finding process in the subsidizing country, the complaining WTO member, and thirdparty countries. To this effect, Annex V of the SCM Agreement organizes the fact-finding process and even makes room for the participation of a Dispute Settlement Body (DSB) representative to serve as a “facilitator” during the information-gathering process. Article 6.8 of SCM indicates that the existence of serious prejudice, pursuant to Articles 5(c) and 6.3(c) of SCM, is to be determined on the basis of information submitted to or obtained by the panel, including information submitted in accordance with Annex V. All three terms (price undercutting, price suppression, and price depression) refer to effects on the pricing policy of the nonsubsidized traders, and one might question the wisdom of using three terms for essentially the same purpose.144 “Price undercutting” is equated with selling below a certain price, and the term “price suppression” refers to a situation where prices are either prevented or inhibited from rising (that is, they do not increase when they otherwise would have done, or they do increase but the increase is less than it otherwise would have been). “Price depression” refers to the situation where prices are pressed down or reduced (AB, US–Upland Cotton, § 423). Article 6.3(c) of SCM states that price undercutting, price suppression, or price depression must occur in the same market, but it does not specify any further which market that is. In US–Upland Cotton, the AB agreed with the panel that, in the absence of specification in Article 6.3(c) of SCM, the market in question could be national, regional, or even the world market, if it can be demonstrated that the subsidized product and the other product compete in it (AB, US–Upland Cotton, §§ 406–409). The AB, in its report on US–Upland Cotton, understood the term “geographic product market” to mean the following (§ 408): the scope of the “market,” for determining the area of competition between two products, may depend on several factors such as the nature of the product, the homogeneity of the conditions of competition, and transport costs.145

For two products to be considered to be in the same market, they must engage in actual or potential competition in that market even if they are not necessarily sold at the same time and in the same place or country (AB, US–Upland Cotton, § 408). This finding comes close to the “orthodoxy” in antitrust law, whereby the geographic extent of a

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market is a function of homogeneity of conditions of competition. It follows that the geographic scope of the market can be subnational, national, regional, or even the world market if conditions of competition are homogeneous in each of the aforementioned constellations. The subsidized and the competing product necessarily have to be substitutes in order to be able to be in the same market. Whether they have to be “like products” as well was a question that the AB did not believe it needed to resolve. The Panel on Korea–Commercial Vessels held that it was not required that the products concerned were “like products” (§ 7.553): that “like product” as defined in footnote 46 to Article 15 of the SCM Agreement is not a legal requirement for claims of price suppression/price depression pursuant to Article 6.3(c). (italics in the original)146

Price undercutting, price suppression, and price depression must be “significant.” The Panel on Indonesia–Autos upheld a claim to the effect that the subsidized Indonesian car, the Timor, significantly undercut the prices of EU products in the Indonesian market because the level of undercutting was 42–54 percent (§§ 14.251–4). It thus provided a “quantitative” benchmark of “significance.” Quantification is certainly helpful, although, it appears that it is not strictly necessary. In US–Upland Cotton, the panel understood the term “significant price depression or suppression” to mean “important, notable, or consequential” (§ 7.1326).147 The same panel added that (§ 7.1330): a relatively small decrease or suppression of prices could be significant because, for example, profit margins may ordinarily be narrow, product homogeneity means that sales are price sensitive or because of the sheer size of the market in terms of the amount of revenue involved in large volumes traded on the markets experiencing the price suppression.

The same panel had found that price suppression indeed existed based on three factors (§ 7.1280): the relative magnitude of the US production and exports in the world upland cotton market; general price trends (in the world market); and the nature of the subsidies at issue, and in particular, the fact that they had discernible price suppressive effects. This panel did not consider it necessary to quantify the suppression to conclude that it was significant. Rather, these three factors, as well as the readily available evidence of the order of magnitude of the subsidies, led the panel to the conclusion that the price suppression in question was indeed significant (§ 7.1333). The AB upheld all of the panel’s conclusions and pointed to the relevance of such factors as the general price trends, the nature of the subsidies, and the relative magnitude of the subsidized product share of the market (§ 434): In the absence of explicit guidance on assessing significant price suppression in the text of Article 6.3(c), we have no reason to reject the relevance of these factors for the Panel’s assessment in the present case. An assessment of “general price trends” is clearly relevant to significant price suppres-

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sion (although, as the Panel itself recognized, price trends alone are not conclusive). The two other factors—the nature of the subsidies and the relative magnitude of the United States’ production and exports of upland cotton—are also relevant for this assessment.

The requirement to show “significant” price depression/suppression is not trivial, regardless of whether a “quantitative” or a “qualitative” benchmark has been privileged. Korea–Commercial Vessels presents an instance where the panel found that “significance” had not been demonstrated. In this case, the panel was dealing with subsidies paid by the Korean government (§ 7.676), and the question before it was to what extent they had contributed to price depression in the EU (§ 7.677). For reasons that have to do with the manner in which the complainant (EU) pleaded the case, only a handful of schemes were properly before the panel, and, as a result, the panel’s review of the claim regarding price depression was limited to an examination of the impact of these schemes (§ 7.670). In §§ 7.682–683, the panel noted that it had before it data concerning only three out of dozens of transactions, and that small sample could not, in its view, sustain a claim that “significant” price depression had indeed been caused to the EU industry by the Korean subsidies. When examining price suppression, the effects of recurring subsidies may be allocated over time and are not limited to the year in which the subsidy was granted. The AB held as much in its report on US–Upland Cotton (§ 482): we are not persuaded by the United States’ contention that the effect of annually paid subsidies must be “allocated” or “expensed” solely to the year in which they are paid and that, therefore, the effect of such subsidies cannot be significant price suppression in any subsequent year. We do not agree with the proposition that, if subsidies are paid annually, their effects are also necessarily extinguished annually.

Embedded Causality During the GATT era, panels equated price depression to serious prejudice resulting from a subsidy. They did not feel compelled to ask the additional question whether serious prejudice in the form of price effects was the result of subsidization.148 WTO panels have followed a similar path. First, the Panel on Indonesia–Autos rejected the approach followed by Panels in the GATT-era (§ 14.238). In this vein, the panel report on US–Upland Cotton includes the clearest expression of the test followed in the WTO-era (§ 7.1390): the Article 6.3(c) examination is determinative ... for a finding of serious prejudice under Article 5(c). That is, an affirmative conclusion that the effects-based situation in Article 6.3(c) exists is sufficient basis for an affirmative conclusion that “serious prejudice” exists for the purposes of Article 5(c) of the SCM Agreement.149

The AB on US–Upland Cotton summed it up as follows (§ 433):

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However, the ordinary meaning of the transitive verb “suppress” implies the existence of a subject (the challenged subsidies) and an object (in this case, prices in the world market for upland cotton). This suggests that it would be difficult to make a judgment on significant price suppression without taking into account the effect of the subsidies.

The Panel on Korea–Commercial Vessels found that the text of Article 6.3 of SCM implies a “but for” test and would require that a panel examine the counterfactual (§ 7.612). The complainant should demonstrate that, but for the subsidy, it could have expected to participate in a growing market (in the case of displacement of its shipments from a particular market). In the case of impeding exports, it should demonstrate that, but for the subsidies, its sales, market share, or both would have increased or would have increased more than they actually did. The counterfactual in this case was, thus, ceteris paribus, how would the world look like without the subsidy? This framework of analysis still requires, in the eyes of the panel, an evaluation of the various factors contributing to the particular market situation forming the subject of the complaint—that is, supply and demand factors, production costs, relative efficiency of the market actors, etc. (§ 7.615). The Panel on US–Upland Cotton found that there was a causal link between price-contingent subsidies and significant price suppression for four reasons (§§ 7.1347–1355): • The US had exerted substantial influence on the world upland cotton market. • The price-contingent subsidies were directly linked to world prices for upland cotton, thereby insulating US producers from low prices. • There was a discernible temporal coincidence of suppressed world market prices, on the one hand, and the price-contingent US subsidies, on the other. • Credible evidence concerning the divergence between US producers’ total costs of production and revenue from sales of upland cotton since 1997 supported the proposition that US upland cotton producers would not have been economically capable of remaining in the production of upland cotton, had it not been for the US subsidies, and that the effect of the subsidies was to allow US producers to sell upland cotton at a price lower than would otherwise have been necessary to cover their total costs. The AB upheld the panel’s reliance on these factors (§§ 449–53). It emphasized that the nature of the subsidies, as well as the magnitude of the subsidy, played an important role in establishing price suppression, but that, ultimately, all relevant factors had to be taken into consideration (§ 461): However, in assessing whether “the effect of the subsidy is ... significant price suppression,” and ultimately serious prejudice, a panel will need to consider the effects of the subsidy on prices. The magnitude of the subsidy is an important factor in this analysis. A large subsidy that is closely linked to prices of the relevant product is likely to have a greater impact on prices than a small subsidy

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that is less closely linked to prices. All other things being equal, the smaller the subsidy for a given product, the smaller the degree to which it will affect the costs or revenue of the recipient, and the smaller its likely impact on the prices charged by the recipient for the product. However, the size of a subsidy is only one of the factors that may be relevant to the determination of the effects of a challenged subsidy. A panel needs to assess the effect of the subsidy taking into account all relevant factors.

The AB in US–Upland Cotton endorsed the nonattribution requirement when performing causality analysis (§§ 436–437). The AB juxtaposed the panel’s findings on subsidized sales with other than subsidized sales factors (§ 7.1363) and held that they also indeed contributed to price suppression, but, in its view, the challenged subsidy schemes, even in the presence of these factors, still had had a significant price-suppressing effect. The AB found no legal error in the panel’s causation analysis, although it expressed its disappointment about the fact that, in its reasoning, the panel did not offer a detailed enough analysis (§ 458). The key here is that, so long as subsidies have caused significant price suppression, it is irrelevant if other factors have added to this effect. Recall, nevertheless, that as already discussed in the previous chapter, performing causality analysis with respect to price suppression, price depression, or price undercutting does not absolve WTO members from examining whether subsidies have negatively affected the health of the domestic industry (Article 15.5 of SCM) by reviewing the factors mentioned in Article 15.4 of SCM. A finding of price depression, price suppression, or price undercutting is not a finding concerning the health of the industry. An industry can be in “good health” even when its prices have been suppressed (depressed or undercut). The AB put it very well in its report on China–GOES when it held that (§ 154) Article 15.2 of SCM is not equal to causality analysis, but it is the necessary first step. Annex V Procedures Any time that serious prejudice has been caused as a result of subsidization and WTO members cannot find a mutually agreed solution, the matter can be referred to a panel (Article 7.4 of SCM). When information is hard to obtain, following a request to the DSB, recourse can be made to the procedures established in Annex V to the SCM: § 2 of Annex V reads: In cases where matters are referred to the DSB under paragraph 4 of Article 7, the DSB shall, upon request, initiate the procedure to obtain such information from the government of the subsidizing Member as necessary to establish the existence and amount of subsidization, the value of total sales of the subsidized firms, as well as information necessary to analyze the adverse effects caused by the subsidized product.

The DSB shall appoint a “Facilitator,” as per § 4 of Annex V, to help with the gathering of information. The facilitator can ask questions of the parties and has discretion to accept any submitted requests. If a party disagrees with the exercise of discretion, it can always challenge it. In this case, the legal benchmark to decide of discretion has been lawfully

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exercised would be whether the facilitator made an objective assessment of the facts (Article 11 of DSU). Failure to cooperate with the facilitator will be noted and transmitted to the panel and could lead to recourse to best information available (§ 6), which can even draw inferences from noncooperative behavior (§ 7). However, § 3 explains that the facilitator should not be placing an unreasonable burden on parties, while § 9 acknowledges that the panel can complete the record anyway through subsequent investigation. In addition, § 2 lays out the procedure for the appointment of the facilitator: The DSB shall designate a representative to serve the function of facilitating the informationgathering process. The sole purpose of the representative shall be to ensure the timely development of the information necessary to facilitate expeditious subsequent multilateral review of the dispute. In particular, the representative may suggest ways to most efficiently solicit necessary information as well as encourage the cooperation of the parties.

The Panel on US–Large Civil Aircraft (Second Complaint) held that the DSB can decide by negative consensus whether to initiate this procedure. Consequently, the request by the WTO member interested in initiating this procedure suffices. Nevertheless, total inaction before the DSB (e.g., absence of request) is the sole consequence indicating that the procedure has not been initiated (§§ 721ff.). The AB disagreed and held that the DSB should have initiated the procedure at the time of the panel’s establishment since the request suffices for initiation of this procedure to occur (§§ 511, 524). The process should last 60 days, and eventually the panel should receive from the facilitator information regarding (§ 5) [the] amount of the subsidy in question (and, where appropriate, the value of total sales of the subsidized firms), prices of the subsidized product, prices of the non-subsidized product, prices of other suppliers to the market, changes in the supply of the subsidized product to the market in question and changes in market shares. It should also include rebuttal evidence.150

3.5.4.3 The Causality Requirement The complainant will need to show that adverse effects are the causal effect of subsidization. Demonstration of subsidization and adverse effects will not suffice since the former might not “cause” adverse effects, and the latter might be the effect of a cause other than subsidization. Causality is, of course, a tough test as covered in the previous chapter, which discussed several related concepts such as “correlation” and “substantial cause.” The difficulty lies here: the trade outcome (adverse effects) might in practice be due to more than one factor, and subsidization is just one factor. The question, thus, arises how one can isolate the influence of factors other than subsidization to show the effect of the latter on the domestic industry. The additional question is how much subsidization should “contribute” to injury (e.g., what part of the adverse effects should be due to subsidization) for the causality requirement to be satisfied? Moreover, the number of players might in and of itself present both IAs as well as WTO adjudicating bodies with difficult issues to handle.

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It is one thing to discuss injury and causality when a duopoly (à la Boeing/Airbus or Embraer/Bombardier) is present, and a different thing when dozens of producers participate in the market. In US–Upland Cotton, the AB held that Article 6.3 of SCM did not impose a particular methodology that IAs had to employ in order to satisfy the causality requirement. As we will see in more detail in the next chapter where we discuss the same issue in the context of the Agreement on Safeguards, econometric analysis suggests particular methodologies that could be employed in order to “approximate” causality. In line with its case law in the other two contingent protection instruments, the AB did not even require econometric analysis. Anything, in principle, will do, so long as it shows causality. So what has to be shown? The AB requested in this report from IAs to review all factors that caused serious prejudice (one of the forms of adverse effects) and, at the same time, to see how other factors affected the “influence” that causal factors exercised on the outcome. This is another way of stating that the nonattribution requirement (e.g., serious prejudice caused by factors other than subsidies should not be attributed to subsidies) is alive and kicking in this context (§§ 436–437): As the Panel pointed out, “Articles 5 and 6.3 ... do not contain the more elaborate and precise “causation” and non-attribution language” found in the trade remedy provisions of the SCM Agreement. Part V of the SCM Agreement, which relates to the imposition of countervailing duties, requires, inter alia, an examination of “any known factors other than the subsidized imports which at the same time are injuring the domestic industry.” However, such causation requirements have not been expressly prescribed for an examination of serious prejudice under Articles 5(c) and Article 6.3(c) in Part III of the SCM Agreement. This suggests that a panel has a certain degree of discretion in selecting an appropriate methodology for determining whether the “effect” of a subsidy is significant price suppression under Article 6.3(c). Nevertheless, we agree with the Panel that it is necessary to ensure that the effects of other factors on prices are not improperly attributed to the challenged subsidies. Pursuant to Article 6.3(c) of the SCM Agreement, “[s]erious prejudice in the sense of paragraph (c) of Article 5 may arise” when “the effect of the subsidy is ... significant price suppression.” If the significant price suppression found in the world market for upland cotton were caused by factors other than the challenged subsidies, then that price suppression would not be “the effect of “ the challenged subsidies in the sense of Article 6.3(c). Therefore, we do not find fault with the Panel’s approach of “examin[ing] whether or not “the effect of the subsidy” is the significant price suppression which [it had] found to exist in the same world market” and separately “consider[ing] the role of other alleged causal factors in the record before [it] which may affect [the] analysis of the causal link between the United States subsidies and the significant price suppression.” (italics in the original)

It remains to be seen, of course, how such an elaborate requirement can be satisfied without sophisticated econometric analysis, but this issue can be discussed on a case-bycase basis by focusing especially on cases where no econometric tools had been deployed, and yet the AB took the view that causality had been demonstrated. EC–Bed Linen (Article 21.5–India) fits this profile.151 There, the EU found that imports from three countries (India included) were cumulatively contributing to injury. Injury

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consisted in reduced profit rate from 3.6 to 1.6 percent over a five-year representative period. India complained that the EU had proved nothing, especially because its share of the EU import market had only marginally increased, to 1.9 percent. The panel disagreed with India’s assertion to the effect that a small percentage of dumped imports could not lead to injury. It repeated the often expressed finding that dumping (subsidy) should not be the sole cause of injury, it sufficed that it was one of them. It found nothing wrong with the EU’s qualitative evaluation of the situation before it, whereby, to the extent that India’s dumped imports had increased and at the same time profit share of the EU industry had fallen, the causality requirement embedded in Article 3.5 of AD had been satisfied (§§ 6.226–233, and especially, 6.229, 6.230, and 6.231). This statement is, of course, much closer to correlation than to causality. However, the panel called it a “causal link.” 3.5.5

Remedies

A WTO member wishing to remove adverse effects from subsidization must initiate a complaint before a WTO panel. Assuming that it has secured a favorable outcome, a panel will, by virtue of Article 7.8 of SCM, require from the WTO member causing adverse effects through its subsidies “to remove the adverse effects or ... withdraw the subsidy.” In case of noncompliance, the affected WTO member can take countermeasures “commensurate” with the degree and nature of the adverse effects determined to exist. Article 7.9 of SCM reads in this respect: In the event the Member has not taken appropriate steps to remove the adverse effects of the subsidy or withdraw the subsidy within six months from the date when the DSB adopts the panel report or the Appellate Body Report, and in the absence of agreement on compensation, the DSB shall grant authorization to the complaining Member to take countermeasures, commensurate with the degree and nature of the adverse effects determined to exist, unless the DSB decides by consensus to reject the request.

In case of disagreement between the parties as to whether the proposed countermeasures are indeed commensurate, recourse will be made to an “Arbitrator” who will define their level (Article 7.10 of SCM). There has been no practice so far in the context of Article 7.9 of SCM. There are good arguments to construe the term “commensurate countermeasures” in parallel with the term “equivalent countermeasures,” which appears in Article 22.4 of DSU. As stated earlier, the purpose of the SCM Agreement is to reestablish the balance across producers that would have existed absent subsidization. In this vein, the benchmark for calculation should be the injury suffered by the affected party, and countermeasures will be commensurate if they are “substantially equivalent” to the level of injury suffered.

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Nonactionable Subsidies

The so-called nonactionable subsidies were negotiated first without success during the Tokyo round, only to find their way in the WTO regime following the Uruguay round talks (Article 8 of SCM). The idea was to carve out from prosecution a category of subsidies primarily aimed to achieve multilaterally agreed social objectives. This category is by now defunct, as we explain in what follows. The interest in the study of nonactionable subsidies remains all the same though, since the ongoing awareness of the necessity to reverse climate change has put the relationship between trade and environment squarely before trade negotiators once more. The haphazard effort of the AB to address this issue in its report on Canada-Renewable Energy has intensified the need to reopen this discussion.152 Next to border tax adjustments, the tradable carbon permits, and the ongoing WTO negotiation on environmental goods, environmental subsidies could offer those interested in averting the course towards environmental degradation one more instrument to usefully employ. 3.6.1

The Statutory Criteria

Three types of subsidies were considered nonactionable: • Regional aid • Environmental subsidies • Subsidies for research and development (R&D) purposes Nonactionable subsidies coming under these three categories must also respect quantitative statutory criteria regarding the amount of subsidization that have been included in Article 8 of SCM. They were initially contracted for a five-year provisional period. The idea was to reassess at the end of the transitional period the necessity to keep this carve out in place and, if so, under what conditions. 3.6.2

The Limits of Nonactionability

There should be no doubt that the intent of negotiators was to insulate nonactionable subsidies from legal challenges.153 Does this mean that affected nations could not even raise NVCs (nonviolation complaints) against them? This is unclear if not doubtful altogether, since the wording of Article XXIII of GATT leaves little room to doubt that similar complaints can be raised against any legal measure. This question is, of course, a moot point since nonactionable subsidies are now defunct, as we explain later in this chapter.

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The Origins of Nonactionable Subsidies

The distinction154 between “prohibited,” “actionable,” and “nonactionable” subsidies was first proposed by the US during the Tokyo round, as we briefly mentioned earlier. The US proposal distinguished between “prohibited,” “conditional,” and “permitted” subsidies in the following terms: New international rules, on subsidies and offsetting measures “should deal with all three of these problems. The objective of these rules would be to categorize all types of subsidy practices and set forth the conditions by which offsetting measures could be taken against such practices. In particular, rules are needed to: Effectively delineate that category of subsidies that should be prohibited; Place limits and constraints on the use of domestic subsidies” that benefit exports to the detriment of other nations; Delineate which subsidy measures should be permitted; ... Permitted. The permitted category would consist of practices that are considered to have minimal impact on international trade. Permitted practices would be limited to those specifically agreed as falling within that category. Such practices and any practices judged to result in a de minimis subsidy, would not be subject to offsetting measures.155

The US proposal made waves, and was reflected in various official GATT publications: in 1975 a proposal was tabled that there should be an international code to deal with export subsidies, third country subsidization, import-replacing measures, and offsetting measures. The code should categorize all types of subsidy practices and set out the conditions on which offsetting measures could be taken against such practices. Subsidies should be divided into the following three categories: • prohibited (practices designed to increase the competitiveness of national producers, thereby distorting international trade); • conditional (practices directed toward domestic economic, political or social objectives, but which may distort international trade); • permitted (practices with little or no impact on international trade against which offsetting measures could not be taken). Although this proposal was not maintained as a basis for the negotiations, elements of it were eventually carried over into the final Agreement.156 The GATT Activities of 1975 even reflect a passage where the term “traffic light” had been privileged, although environmental subsidies were not explicitly mentioned: One suggestion would have a new single international code which would classify export subsidies into three major categories: prohibited, intermediate, and permitted practices. The intermediate category in this “tricolour” or “traffic light” scheme, as it has been dubbed, could include incentives such as research and development grants, regional development grants and the like.157

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Eventually, the US dropped the proposal. In an effort to facilitate the conclusion of the round, they shifted the focus of the negotiation toward the issues that would form the bedrock of the Tokyo-round agreement. Winham (1986, p. 173) recounted the events in this way: In a major initiative, the United States agreed in principle to work from existing GATT rules on subsidy/countervail, which carried the implication of moving toward an international definition of material injury. The United States also dropped the traffic-light approach that rested on the notion of defining prohibited categories of subsidies. Negotiation on this basis quickly isolated the irreducible minimum for both partners. On the American side, this was the need to demonstrate that the Europeans were willing to accept increased international surveillance and discipline on the use of subsidies, while on the European side it was simply a matter of having the Americans accept a material injury clause in their countervail legislation. These two demands eventually formed the basic quid pro quo of the subsidy/countervail negotiation.158

3.6.4

Back to the Future

It was first the EU that brought back the issue of nonactionable (i.e., permitted) subsidies during the negotiations of the Uruguay round. The original EU proposal, though, did not see room for green subsidies: generally available (e.g., tax concessions), regional, structural adjustment, and indirect subsidies (e.g., subsidies to input products) exhausted the realm of permitted subsidies in the EU proposal.159 Colombia followed suit and proposed illustrative lists for each category of subsidies (and for permitted subsidies as well).160 Switzerland followed soon afterward along the same lines.161 The various proposals found their way in the so-called “Cartland drafts”, named after Michael Cartland, the ambassador of Hong Kong, China, to the GATT, who was chairing the negotiating group on subsidies. Eventually, environmental subsidies found their way there, and the original idea was that nonrecurring subsidies could be paid in order to adapt existing facilities to new environmental requirements, without fear that they might be counteracted through CVDs. The idea was that through similar subsidies, WTO members could alleviate the financial burden that economic operators would have otherwise incurred in order to meet environmental targets. If economic operators were to incur similar costs themselves, their competitiveness would have suffered of course. So, similar schemes were not supposed to be totally innocent. The primary objective though, was to address environmental concerns, and trading nations were prepared to take a step in this direction and exonerate environmental subsidies from liability under the multilateral trading rules.162 The US was now hostile to the idea of introducing a category of permitted subsidies: the Carter administration of the Tokyo round had given way to the Reagan administration, which was in place when the Uruguay round was launched (and the George H. W. Bush administration that followed almost in the same wavelength). In 1992, though, the Clinton administration came to office, which marked a sudden and complete shift in the US position. In November/December 1993, there was an oscillation from the Bush

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administration’s attempt to remove green-light categories from the list of negotiated items, to the Clinton administration’s attempt to expand them.163 The ground was now anyway more fertile for an agreement on nonactionable subsidies. Differences among negotiators persisted as to the list of items that should be included in the list, and the criteria for nonactionability. The concept though, was now well embedded in the negotiations. Article 8 of SCM represents the final compromise. Three categories of subsidies (environmental subsidies figuring prominently therein) would be “tolerated,” assuming that a certain “cap” (in the form of total financial contribution) would not be violated. This provision thus, did not only limit the types of nonactionable subsidies, but also the amounts of money that could be spent within each category. Article 31 of SCM clarified that this provision was of a temporary nature: The provisions of paragraph 1 of Article 6 and the provisions of Article 8 and Article 9 shall apply for a period of five years, beginning with the date of entry into force of the WTO Agreement. Not later than 180 days before the end of this period, the Committee shall review the operation of those provisions, with a view to determining whether to extend their application, either as presently drafted or in a modified form, for a further period.

The negotiating record as reflected in the various documents circulated does not illuminate us as to the identity of the author of this provision. There is nothing shocking about it. The GATT/WTO regime is full of similar transitional clauses, and agreements to renegotiate in order to ensure that trial has not led to error. Alas, in the case of Article 8 of SCM, there was no interest in keeping the provision in place even though no one claimed error. 3.6.5 They Did Not Overstay Their Welcome Article 8 of SCM expired at the end of 2000. It is clear that there was no consensus to renew it. It is unclear why this has been the case. The discussions before the SCM Committee reveal a divide between developed and developing countries: the former were in favor of keeping it in place, while the latter saw no use for it.164 Developing countries might have feared that subsidizing nations were encouraging industrial policy under the guise of environmental measures. And yet, no complaint to this effect was lodged before 2000, and the discussions in the SCM Committee do not reveal substantial worries to this effect either. The minutes of the SCM Committee reveal a second attempt to save this provision, alas to no avail: Switzerland underscored that it would be bad publicity for the WTO to do away with green subsidies. US gave a halfhearted backing to the Swiss proposal, whereas, Brazil, speaking for most developing countries, argued that the list would be maintained only if its content would be modified so as to suit the interests of developing countries.165 No one was prepared to start negotiating the content of Article 8 of SCM anew, and no discussions on this item are reflected in the subsequent meetings of the SCM Committee.166

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Another plausible explanation as to why this provision was not renewed has to do with the fact that developing countries wanted to reintroduce at the same time a clause whereby all development-related subsidies should become nonactionable. This is a quid pro quo that OECD countries did not want to accept. A different explanation is equally (if not even more) plausible. Stewart (1993) took the view that there was, ab initio, a trade-off between Article 6.1 and 8 of SCM, in the sense that extending the life of nonactionable subsidies was always conditioned on agreeing on stronger disciplines through presumptions of adverse effects for subsidies. Since WTO members could not agree on the latter, they would not agree on the former either.167 In the absence of agreement to keep this category in place, nonactionable subsidies ceased to exist as of 1 January 2000 (Article 31 of SCM). Consequently, a scheme that qualifies as a subsidy under the SCM Agreement is, nowadays, either a prohibited or an actionable subsidy, even if the purpose for subsidizing is environmental protection. 3.6.6

Lo and Behold: Stimulus Packages

In the years since 2000, only one scheme that could, in principle, qualify as nonactionable was challenged for being inconsistent with WTO: in Canada–Renewable Energy, the claim was that a partially environmental subsidy scheme was in violation of the multilateral rules. WTO members have shown some restraint in challenging the consistency of similar schemes with the SCM rules. Canada is not the only WTO member that provided subsidies (also) in order to promote environmental protection. The fact that there are no disputes does not mean that green subsidies have ceased to exist altogether. The financial crisis added a new dimension to this discussion. Stimulus packages came to light on both sides of the Atlantic and even beyond. Either because some economic operators were “too big to fail,” or because the economic philosophy of some governments supported it, similar schemes proliferated as a means to address the crisis. To the extent that they concern trade in services (e.g., aid to banks), they escape the bite of the SCM disciplines, in principle. As we explained previously, though, good arguments could be made to support claims against payments made to banks on the condition that they benefit goods- producing industries. The US168 and the EU bailouts of their automotive industries could of course, anyway be challenged (and eventually successfully so) before the WTO. In fact, Argentina led the chorus of countries that voiced their dissatisfaction with these and similar schemes, stopping short, however, from lodging a formal complaint before the WTO.169 It is remarkable that some antitrust laws do know of “crisis cartels”; that is, they allow cartels to address similar imbalances, whereas trade law does not. As things stand, no challenge has been mounted against a stimulus package, although one could, in principle, make good arguments why similar challenges would be successful. The question, of

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course, remains whether it is wise policy to void reintroducing a new provision à la Article 8 of SCM, hoping that trading nations will continue to behave like gentlemen in a gentlemen’s club. 3.6.7 Are Nonactionable Subsidies Legally Irrelevant? Should deletion be equated to legal irrelevance? Article 6.1 of SCM might be of interest to this discussion. This provision has been rescinded by virtue of Article 31 of SCM, and yet panels continuously use it as a legal context. Article 6.1 of SCM provides the complainant with an important evidentiary advantage since it is relieved of the burden to demonstrate the prejudicial effects of a subsidy. The Panel on US–Upland Cotton took the view that Article 6.1 of SCM could still provide useful guidance in interpreting serious prejudice (footnote 1487 of the report), even if it has been rescinded. The Panel on Korea– Commercial Vessels adopted a similar attitude (§ 7.583). The legal relevance of this provision, though, is largely that while Article 6.1 of SCM has been rescinded, the concept of “serious prejudice” has not. It is very much alive. Conversely, the concept of nonactionable subsidies has been taken out from the WTO arsenal of rights and obligations. It follows that Article 8 of SCM has lost its legal relevance altogether, and parallels with Article 6.1 of SCM are not persuasive. Both Howse (2010) and Rubini (2010) have voiced their concerns over the deletion of nonactionable subsidies from the SCM Agreement: as the argument goes, in the current fight against climate change, their usefulness should not be underestimated. Rubini (2010) has argued that if there is no agreement to reinstate nonactionable subsidies in the SCM Agreement, Article XX of GATT could be an acceptable second-best option since it would allow subsidies ostensibly justified on environmental grounds to become de facto nonactionable.170 At the heart of similar claims lies the frustration of trade experts with the absence of recognition in the SCM context of the rationale for subsidization. Subsidies might be a very appropriate instrument to deal with market distortions and, as the saying goes, “markets work well when it comes to ice cream, but not necessarily so when it comes to clean air.” Alas, as things stand, similar voices have not had the effect that they should have had on those around the table negotiating the WTO agreements. Still, it is not all doom and gloom in this department, since many of the schemes (e.g., environmental subsidies) will typically be nonspecific and will escape the purview of the SCM Agreement. 3.7

Prohibited Subsidies

Prohibited subsidies constitute the third and last category of subsidies in the system of the Uruguay round SCM Agreement. Local content and export subsidies are the two forms of

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prohibited subsidies. WTO members found to be providing a prohibited subsidy do not have the option to address their address effects. They must remove them immediately.171 3.7.1

Export Subsidies

A scheme qualifies as an export subsidy if a recipient receives a benefit from government only upon exportation of goods. The contingency that must be filled for payment to occur is thus, sales to an export market. 3.7.1.1 The Changing Attitude toward Export Subsidies The attitude of the world trading system toward export subsidies has evolved remarkably since the inception of GATT. Initially, as we saw earlier in this chapter, GATT took a lenient approach toward export subsidies—more lenient, anyway, than the current SCM Agreement.172 A bifurcation between domestic and export subsidies had already been agreed upon during the London Conference (1946), but it was not accompanied by a prohibition on export subsidies. It was in the context of the 1955 Review Session of GATT that trading nations agreed to amend Article XVI of GATT. They introduced § 4 (Section B), which banned export subsidies on manufactured goods, whereas export subsidies on farm goods were not banned. There was not much opposition to this amendment. From the moment of the GATT Review Session onward, the US gradually toughened its stance toward export subsidies. The emergence of the EU common agricultural policy, and the notorious EU export subsidies on farm goods were the main reason for the change in the US attitude towards export subsidies. Already the Working Party on Subsidies (1960) aimed, inter alia, at ensuring the faithful implementation of Article XVI.4 of GATT.173 § 5 of this Working Party report reflected an agreed list of illegal subsidies—namely, illegal currency restriction, direct subsidies, remission of direct taxes, exemption of charges in connection with imports or exports other than indirect taxes, charging of prices below world prices for delivery by governments of raw materials, export credit guarantees at manifestly inadequate rates, export credits at nonmarket rates, and government-borne costs for obtaining credit. The list was comprehensive and nonexhaustive, and yet the US was not happy with the fact that some export refunds were not outlawed as well.174 Subsequently, GATT contracting parties accepted a Declaration Giving Effect to Provisions of Article XVI.4, promising action on the front of export subsidies within set deadlines.175 The US attempted in the GATT years to tighten the screws on export subsidies even further came with the establishment of the Working Party report on Border Tax Adjustments (BTAs) which, as we saw in chapter 7 of volume 1, ended with a result that was not what the US had expected. In the meantime, its efforts to curb subsidization of EU farm goods were consistently thwarted by the EU. USTR (United States Trade Representative) Robert Strauss had to drop his demands to this effect in order to save the fate of the Tokyo round (1973–1979).

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What the US did not manage to obtain in the first seven negotiating rounds, it did in the Uruguay round. Export subsidies were banned, in principle, for both manufactured and farm goods. The latter would be “tolerated,” in the short to medium run, if they respected statutory thresholds.176 We should note though, that the US has not been consistent in formulating its policy towards export subsidies. Back in 1971, the US declared that even measures to counteract currency devaluations should be considered a prohibited export subsidy:177 special government measures to offset, in whole or in part, the price disadvantages on exports that result from its own or other countries’ exchange rate adjustment.

As it happens, 1971 is when the US unilaterally decided to throw the Bretton Woods system of fixed parities into the trash bin of history by simply using the “delete” function. The US has defended the exact opposite position, of course, in recent years following the willful (in its view) undervaluation of the renminbi, the Chinese currency. We discussed the attitude of the WTO regime towards currency devaluations and exchange rates in volume 1, chapter 2. We have stated previously that two types of subsidies are prohibited, export subsidies, and local content. Annex I of the SCM Agreement contains 12 types of export subsidies that have all been included in an Illustrative List. These 12 types are more detailed descriptions of export subsidies, and help clarify the negotiating intent, e.g., what should be understood as export subsidy. The AB report on Brazil–Aircraft (Article 21.5–Canada) held that a scheme that falls under the purview of the Illustrative List is ipso facto prohibited. There is, thus, no additional requirement to demonstrate that it is contingent upon export performance under Article 3.1(c) of SCM. Assuming, conversely, that a scheme has not been reflected in the Illustrative List, the complainant must demonstrate that it is either a de jure or de facto export subsidy. The letter of Article 3.1 of SCM (“either in law or in fact”) leaves no doubt that this is the correct conclusion. In a nutshell, we have moved from the GATT world of relative tolerance to the WTO world of strict intolerance of export subsidies (Article 3 of SCM). One plausible explanation why export subsidies have been declared illegal outright, without looking into economywide effects, is that de facto, it is sellers (i.e., producers) who influence government positions in this respect and not consumers. Implicit in this argument is the collective action problem that we have discussed earlier in volume 1. Few would argue with a prohibition on predatory subsidization, but this is not what the agreement outlaws. Green and Trebilcock (2010), and Coppens (2014) have argued that it is sensible to treat export subsidies differently from domestic subsidies since they often upset world markets.177 This can, of course, be true. If nonetheless, the criterion for disciplining export subsidies in drastic manner is that they upset markets, then some domestic subsidies should be disciplined in similar manner. If trade effects become the key criterion for

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disciplining subsidies, both the regulation as well as litigation (and the ensuing evidentiary issues) will become cumbersome. The most cogent argument in favor of distinguishing between export and domestic subsidies has to do with the rationale for subsidizing the domestic and the export market. In the former case, it could be that a subsidy is being bestowed in order to address, say, an environmental hazard. In the latter case, the reasonable presumption should be that a subsidy is bestowed to increase market share. Why would Home care about the standard of environmental protection in Foreign? Does it makes sense, though, to introduce a blanket prohibition (per se) against export subsidies when it is fairly easy to construct scenarios where domestic subsidies can be more distorting? Is it not more sensible to inquire into the rationale of similar schemes? As we will see in chapter 8 on the Agreement on Agriculture, some export subsidies are quite welcome—when, for example, they address needs by poor net food-importing countries that cannot pay the world price for foodstuffs. As things stand, and following the elimination of nonactionable subsidies, the rationale for subsidization is irrelevant for the purposes of applying the SCM Agreement. 3.7.1.2 De Jure Export Subsidies A case where the law itself conditions the payment of a subsidy upon exportation would amount to a de jure export subsidy. Proof of a de jure export subsidy is relatively easy. The AB explained its understanding of the evidentiary standard associated with proof of de jure export subsidy in § 112 of its report on US–FSC (Article 21.5—EC): ... a subsidy is contingent “in law” upon export performance when the existence of that condition can be demonstrated on the basis of the very words of the relevant legislation, regulation or other legal instrument constituting the measure ... [F]or a subsidy to be de jure export contingent, the underlying legal instrument does not always have to provide expressis verbis that the subsidy is available only upon fulfilment of the condition of export performance. Such conditionality can also be derived by necessary implication from the words actually used in the measure. (italics in the original)

3.7.1.3 De Facto Export Subsidies A scheme is a de facto export subsidy when—although the statutory language does not lead to this conclusion—payments will be made only upon exportation. De facto export subsidies address the need for some kind of insurance policy against circumvention. WTO members might have avoided the discipline of Article 3 of SCM and still granted export subsidies, if this provision was limited to a ban of de jure export subsidies only. Yet, as much as opening up to de facto export subsidies seems to be the correct move, the opening itself presents serious evidentiary issues.179

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3.7.1.4 The Evidentiary Standard The evidentiary standard associated with de jure subsidies is straightforward, as we have states previously. An analysis of many (usually complicated) facts, though, is necessary in order to decide whether a scheme operates as a de facto subsidy. The AB in its report on Canada–Aircraft discussed the different evidentiary standards required to demonstrate the existence of a de jure or a de facto subsidy. It explained why, in its view, the latter was a more demanding standard in the following terms (§ 167): In our view, the legal standard expressed by the word “contingent” is the same for both de jure and de facto contingency. There is a difference, however, in what evidence may be employed to prove that a subsidy is export contingent. De jure export contingency is demonstrated on the basis of the words of the relevant legislation, regulation or legal instrument. Proving de facto export contingency is a much more difficult task. There is no single legal document which will demonstrate, on its face, that a subsidy is “contingent ... in fact ... upon export performance.” Instead, the existence of this relationship of contingency, between the subsidy and the export performance, must be inferred from the total configuration of the facts constituting and surrounding the granting of the subsidy, none of which on its own is likely to be decisive in any given case . ... We note that satisfaction of the standard for determining de facto export contingency set out in footnote 4 requires proof of three different substantive elements: first, “the granting of a subsidy”; second, “is ... tied to ... “; and third, “actual or anticipated exportation or export earnings.” (italics in the original)

The evidentiary standard associated with a demonstration of de facto export subsidy was discussed in the panel report on Australia–Automotive Leather II as well (§§ 9.36–66). In this case, the panel found that a subsidy was de facto an export subsidy based on the following factors. First, Australia had agreed to pay Howe (a private economic operator) 30 million Australian dollars in three installments, if Howe met certain sales and investment targets. Second, the terms of the contract between Australia and Howe did not require Howe to export, though it provided the latter with incentives to do so. Third, the government’s awareness, at the time the contract was concluded, that Howe earned the majority of its income from exports was crucial to the panel’s evaluation. Fourth, for Howe to meet the set targets, exporting was required since the Australian market was too small to absorb its production. This panel’s conclusion, that an export subsidy had indeed been paid, was thus based, inter alia, on the quasi-impossibility for the recipient to benefit from financial contribution absent exporting its produce.180 The scheme, thus, incentivized Howe to continue its prior sales strategy—namely, to continue to earn most of its income through exports. In EC and Certain Member States–Large Civil Aircraft,181 a subsequent case, the AB confirmed that for a scheme to be judged a de facto export subsidy, it must incentivize producers toward exporting rather than selling in the domestic market. In this case, the additional factor was that similar behavior (e.g., favoring exports in lieu of domestic sales), did not correspond to the market conditions of supply and demand (§ 1102):

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We find that the factual equivalent of de jure conditionality between the granting of a subsidy and anticipated exportation can be established where the granting of the subsidy is geared to induce the promotion of future export performance of the recipient. The standard for de facto export contingency under Article 3.1(a) and footnote 4 of the SCM Agreement would be met when the subsidy is granted so as to provide an incentive to the recipient to export in a way that is not simply reflective of the conditions of supply and demand in the domestic and export markets undistorted by the granting of the subsidy. (italics in the original)

It is difficult to assess what was the key criterion that led the Panel on Australia–Automotive Leather II to conclude that it was in presence of a de facto export subsidy. Was it the fact that the measure incentivized private operators to export, or that private operators could not have reached the target unless if they exported? Do incentives suffice, or must exports be inevitable? The AB in its report on EC and Certain Member States–Large Civil Aircraft quashed any doubts when holding that all that matters is that the WTO member provides private agents with incentives to export. The counterfactual is that private agents, absent the government measure, would not have engaged in exporting their produce. 3.7.1.5 Permanent Group of Experts (PGE) When entertaining a dispute under Article 3 of SCM, Panels can request the help of the Permanent Group of Experts (PGE) in order to decide whether a challenged scheme constitutes a prohibited subsidy or not. The PGE is composed of trade experts of renown expertise. Panels retain discretion to call on the expertise of the PGE. If requested to pronounce on a case, the opinion of the PGE binds the panel (Article 4.5 of SCM). So far, panels have refused to use this institutional facility. One can only speculate on the reasons for this. Maybe panels do not want to limit their discretion, and this is why they have not taken recourse to the PGE so far, since, if they did, they would have to accept its decision as final. On the other hand, there is no a priori guarantee that PGE will respect its own case law. Panels may be ad hoc institutions, but are expected to abide by the case law created by the AB, as the AB itself in its report on Mexico–Stainless Steel has stated. There is no similar guarantee for the PGE, the members of which are appointed for a fixed term. Under the circumstances, it is not illegitimate for panels to take the view that deferral to the PGE is risky. There are, thus, good arguments in favor of rethinking the legal significance of decisions by the PGE. It would probably be more beneficial to reduce the PGE to a consultative role. Panels could thus, benefit from their input without having to put into question the coherence of the WTO legal order. 3.7.2

Local Content

Government schemes that condition the payment of a benefit upon the use of local content are also illegal (Article 3 of SCM). In parallel with export subsidies, a scheme can violate

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this provision either de jure (with an explicit contingency in a statute linking payment of a sum upon the use of local content), or de facto. Local content subsidies are illegal irrespective of the destination of the subsidized good. 3.7.2.1 Local Content and Production Subsidies Sykes (2005) has argued that there is an issue with the prohibition of local content subsidies. He pertinently asks why local content schemes should be outlawed when the same is not done with respect to production subsidies. The two schemes can have similar effects on the market.182 The only plausible explanation is that local content subsidies view exclusively the conferral of advantage to domestic production, whereas domestic subsidies could be bestowed for a variety of reasons. In practice, however, this is often highly debatable and, if at all, a “rule of reason” here would have been more appropriate than an outright per se prohibition. 3.7.2.2 Local Content in the GATT, and the SCM Agreement Recall that local content requirements are also punished in Article III.5 of GATT, and an issue that has emerged in case law concerns the dividing line between Article III.5 of GATT and Article 3 of SCM. In Canada–Renewable Energy, one of the claims before the panel and the AB was that the challenged measure was a prohibited subsidy since money would be paid to users of renewable energy that had utilized Canadian machinery to produce renewable energy (i.e., solar panels). The panel and the AB (§ 6.1) concurred that the Canadian measure was a local content requirement, and thus violated Article III.5 of GATT. The AB, as we saw earlier, also held that it did not possess sufficient evidence to conclude that benefit had indeed been bestowed on users of renewable energy, and thus the contested measure could not qualify as a subsidy. Consequently, the AB did not concur with the complainants’ claim that the Canadian measure was a prohibited subsidy (because it conditioned the payment of money upon the use of local content machinery). This case law has not addressed the key issue here: Where do we draw the line between Article III.5 of GATT, and Article 3 of SCM? Article 3 of SCM addresses only subsidies that are paid if local content requirements have been observed. Article III.5 of GATT is not explicit on its coverage. One way to ensure that both provisions have their own distinct coverage is to construe Article III.5 of GATT as a ban on regulatory (as opposed to financial) measures promoting local content. If for example, a payment is paid in order to incite consumers to buy national, then Article 3 of SCM would be applicable. If conversely, a measure would require the use of domestic steel in the production of cars, then Article III.5 of GATT would come into play.

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Remedies against Prohibited Subsidies

3.7.3.1 The Process Injured parties can impose CVDs to counteract the damage done by an illegal subsidy in their own market, request from a panel to ask the subsidizer to end the prohibited subsidy, or both. CVDs cannot of course address damage suffered in third countries’ markets as a result of the payment of subsidies. Panels that are asked to pronounce on this issue are requested, in contrast to their usual procedures, to reach a speedy judgment (i.e., within 90 days), as per Article 4.6 of SCM. Assuming that the complainant has prevailed, the panel, the AB, or both will recommend that the subsidy be withdrawn without delay (Article 4.7 of SCM).183 In case the author of the illegality refuses to implement the recommendation, the injured party can have recourse to appropriate countermeasures (Article 4.10 of SCM). A footnote to Article 4.10 of SCM explains that the term “appropriate” means not disproportionate.184 Recall that Article 7.9 of SCM provides that in case of actionable subsidies, commensurate countermeasures (that is, countermeasures commensurate with the degree and nature of the adverse effects determined to exist) may be authorized. The choice of words, prima facie at least, cannot be accidental. 3.7.3.2 “Appropriate” Countermeasures WTO adjudicating bodies have faced requests to quantify “appropriate” countermeasures. Their attitude in this respect has been inconsistent. They moved from using the amount of subsidy paid as a benchmark to a trade effects-test, where the benchmark is no more the amount of subsidy paid, but rather the damage suffered as a result of the payment. It is in Brazil–Aircraft (Article 22.6–Brazil), that the panel (Arbitrators)185 explained for the first time in comprehensive manner the relationship between Article 4.10 of SCM and Article 22.4 of DSU.186 Recall, that the latter provision provides for the generic standard of countermeasures applied in all disputes submitted to a Panel. Article 22.4 of DSU limits the amount of permissible countermeasures, in case a report has not been implemented, to suspension of concessions the level of which is substantially equivalent to the damage suffered. The question before the Panel on Brazil–Aircraft (Article 22.6–Brazil) was whether Article 4.10 of SCM should be construed so as to allow the same level of countermeasures (“substantially equivalent” to the damage suffered), or not. Brazil–Aircraft, as well as its “twin” dispute Canada–Aircraft, concerned the export subsidization by Canada and Brazil of their respective national aircraft producers. Embraer for Brazil and Bombardier for Canada, a duopoly producing regional (short- to medium-haul) jets, was in place, and both parties saw an interest in subsidizing their domestic producer. One might, of course, legitimately ask, if the market was a duopoly, why subsidize in the first place? Why not cartelize the market? A small detour into economics is warranted here, since the response to this question is quite relevant in order to understand what was

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really at stake in these two disputes. In some cases, assuming barriers to entry, a credible commitment to subsidize might act as a deterrent to market entry. Nonsubsidized operators might find it unprofitable to compete when they have the safe knowledge that a subsidy will be paid to their competitor, if they enter the market. Since the payment of the subsidy will have as consequence their impossibility to compete, they will not enter the market in the first place. That is, if only Brazil had made a credible commitment to subsidize Embraer, Bombardier would not have entered the market of regional jets. In this case, Embraer and Bombardier both had credible commitments from their respective governments (Brazil, Canada) that they would continue to receive subsidies, so they entered a subsidy war, which could only profit consumers of their products.187 Absent a “credible” commitment by both parties to stop subsidizing, the incentive of each market participant would be to continue subsidizing. This is what the SCM Agreement purports to do. Its role is akin to a commitment that no one will export subsidize. The credibility of the commitment depends of course, on various factors. At any rate, by outlawing some subsidies, the SCM Agreement aims to change the payoffs if subsidization occurs. Subsidizers know that they will be hit with countermeasures in case they export subsidize. Assuming that countermeasures will always be imposed (a very generous assumption but worth making for the purposes of this case) the credibility of countermeasures will depend on the level of countermeasures. This was, in essence, the issue that arbitrators had to face in this case and the other cases discussed in this subsection. The arbitrators first explained the difference they saw in the function of the remedy against a prohibited subsidy, as opposed to remedies that address any other nullification or impairment of WTO members’ rights (Article 22.4 of DSU). Important to their reasoning was the fact that they considered that the purpose of Article 4 of SCM is to achieve the withdrawal of the prohibited subsidy (§ 3.48): the purpose of Article 4 is to achieve the withdrawal of the prohibited subsidy. In this respect, we consider that the requirement to withdraw a prohibited subsidy is of a different nature than removal of the specific nullification or impairment caused to a Member by the measure. The former aims at removing a measure which is presumed under the WTO Agreement to cause negative trade effects, irrespective of who suffers those trade effects and to what extent. The latter aims at eliminating the effects of a measure on the trade of a given Member; the fact that nullification or impairment is established with respect to a measure does not necessarily mean that, in the presence of an obligation to withdraw that measure, the level of appropriate countermeasures should be based only on the level of nullification or impairment suffered by the Member requesting the authorisation to take countermeasures.188

Based on this analysis, the arbitrators went on to find that the level of countermeasures should be decided using the amount of subsidy as benchmark. In other words, the aggrieved party should be allowed to impose countermeasures not up to the amount necessary to recover the injury it had suffered, but up to the amount of the subsidy paid. In the panel’s

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view, the subsidy benchmark was not too onerous since, in all likelihood, Brazil gained much more from its subsidies than it had actually invested. The panel also rejected an argument to the effect that their benchmark amounted to punitive damages, since, in its view, the subsidy paid was illegal in the first place (§§ 3.54–55).189 The same logic was followed in the arbitrators’ report on US–FSC (Article 22.6–US). The arbitrators, extensively referring to public international law and the International Law Commission (ILC) reports on state responsibility,190 held that the EU (the complainant) should be authorized to adopt countermeasures up to US$4,043 million; that is, the amount of subsidies paid by the US to its national producers [beneficiaries under the Foreign Sales Corporation (FSC) scheme].191 The arbitrators also claimed that, had they used an injury standard (trade effects of subsidized sales on EU producers of the like product) as a benchmark, they would have ended up with a similar number anyway.192 The arbitrators also clarified that a trade effects test was not a priori ruled out.193 They simply took the view that Article 4.10 of SCM does not require it.194 The arbitrators in Canada–Aircraft Credits and Guarantees (Article 22.6–Canada) went a step further. They used the amount of the subsidy as the benchmark195 to calculate the amount of countermeasures at US$206,497,305.196 In their view, an upward adjustment of this amount was justified to induce compliance, in light of Canada’s statements before the panel that it did not intend to withdraw the subsidy.197 Therefore, the arbitrators added 20 percent to the level of the countermeasures to induce compliance.198 This is the only genuine case of “punitive damages” in the WTO jurisprudence so far. We use this term to denote a case where the amount of compensation is not linked to a statutory benchmark (the damage suffered; the amount of subsidy paid), but is decided independently of similar benchmarks, in order to provoke a change in the behavior of the culprit. A sea change with respect to the calculation of “appropriate countermeasures” occurred with the report on US–Upland Cotton (Article 22.6–US). The arbitrators in this case decided that it was appropriate to use trade effects and not the amount of subsidy paid as a benchmark to calculate appropriate countermeasures (§ 4.114): In conclusion, we have found that the terms “appropriate countermeasures,” as informed by footnote 9 of the SCM Agreement, entitle the complaining party to countermeasures that are suited to the circumstances of the case. This can lead to a countermeasure being authorized at a level that is within the range of the trade-distorting impact that can fairly be said to arise for the complaining Member from the failure to withdraw the illegal measure. We have also determined that footnote 9 further invites us to ensure that the countermeasures to be authorized are not excessive, having regard to the extent to which the trade of the complaining party has been affected, and taking into account also the prohibited nature of the subsidy. (italics in the original)

Paying only lip service to prior case law, this report introduced a trade effects test as a benchmark to calculate appropriate countermeasures (and, as a result, equated the level of appropriate countermeasures with that of commensurate countermeasures). To defend their decision, the arbitrators argued that otherwise, WTO members that could have suffered

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little injury would have been compensated as much as those who had suffered substantially more (§ 4.60). Reducing the effect of countermeasures provides subsidizers with more of an incentive to subsidize. The upshot, of course, is that subsidies (unless predatory) expand trade, not reduce it, in principle at least. 3.7.3.3 Benefit, Injury, and the Missing Incentives The report on US–Upland Cotton (Article 22.6–US) deserves some more discussion. The arbitrators wanted to avoid overcompensating injured parties, and this is why they moved to the remedy described previously. The emerging picture, thus, is as follows: • If a WTO member countervails, it will impose a duty up to the benefit bestowed on the recipient (we discuss this later in this chapter). • In the same scenario, it can impose duties of a lesser level, if this action suffices to remove the injury suffered.199 • If a WTO member complains before a panel, and it prevails, and the losing party takes action to address adverse effects, the benefit calculation offers an appropriate benchmark to this effect. • If, however, the losing party is recalcitrant, then the complainant can request authorization to impose countermeasures, which cannot exceed the level of adverse effects suffered, regardless of whether we are dealing with an actionable or a prohibited subsidy. The last point is what the arbitrators in US–Upland Cotton (Article 22.6–US) decided. From a pure legal perspective, it is difficult to accept the idea that the framers used two terms (“appropriate” and “commensurate”) in the same provision to describe the same concept. Be it as it may, though, this is the least of the concerns. The key point is that cooperative governments will pay up to the benefit paid, whereas uncooperative governments up to the amount of injury they have caused. There is no basis to believe, however, that the level of injury suffered is larger than the amount of benefit bestowed. Think of it this way. In an industry, there is at the outset an incumbent monopoly firm A, making the profit (R − F), where R is the net of revenue and variable costs and F is a fixed cost. A foreign firm B is the only possible competitor, and it has the same production technology as firm A. If B were to enter, there would be intense Bertrand price competition, driving variable profit down to zero. However, since firm B would have to pay an entry cost K in order to get into the market, it will not enter. It does not pay to invest K to get 0 back because of the intense price competition. Hence, firm B stays out, and firm A enjoys its monopoly profit R. Assume now that the foreign government (where B originates) institutes a subsidy scheme. If B were to enter, it receives the fixed amount S > K, with S < R. Entry now suddenly becomes profitable. As a result, either of two things might occur, and in either case, the injury to A would be the foregone profit R.

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One possibility is that both firms remain in the market. In this case, the benefit to B is S − K > 0, which is smaller than the contribution (benefit), which is S. Importantly, note that both these entities are smaller than the injury to A, which is R. The other possibility is that A exits the market. Assume that once this is done, it would have to incur the entry cost K to get back in. If so, entry will not be profitable and B will enjoy a monopoly position, making the net profit R − K + S. In this case, the benefit would be R − K + S (since B would make zero profit absent the subsidy), and the contribution would be S. The benefit would now be larger than the injury: R − K + S > R. The difference between the two scenarios is that in the first one, price competition is assumed to dissipate profits. The surplus hence goes to consumers. In the second case, it stays in the industry but is just shifted from A to B, and since B gets the subsidy S, it benefits more than A is harmed. This example points to the principle that it is more likely to get a benefit that is less than the injury if the subsidy triggers changes in behavior in the industry that outside interests benefit from. If we were to assume instead that the products are slightly differentiated, so that with entry, there is a small profit to be made for A from remaining in the industry, A will stay, and case 2 does not occur. In this case, injury is larger than the benefit. The terms “benefit” and “injury” are used here, of course, as contemplated in the SCM Agreement (that is, from producers’ perspective, not from a national perspective), since we do not factor consumer and taxpayer benefits/costs into the calculation. When benefit outweighs injury, then subsidizing WTO members have an incentive to behave in an uncooperative manner. In the opposite case, they can “drag their feet,” procrastinate (and keep injuring their competitors), since the reaction against them will be the same regardless of whether they behave cooperatively (but if they do not, they will have inflicted more damage on their competitors). These results are to a point mitigated by the incentive that affected WTO members might have to impose CVDs. As already argued earlier, this will be the case when a substantial amount of the injury suffered is in the domestic market. 3.8 3.8.1

CVDs: Substantive Requirements CVDs, if Subsidies Cause Injury

A WTO member wishing to impose CVDs has to demonstrate that a subsidy is causing injury to the domestic industry producing the like product. CVDs are similar to AD duties, the difference being that whereas the former address a government act, the latter aim to counteract private practice. It should come as no surprise, then, that case law has consistently held that interpretations of AD provisions give good guidance for the interpretation

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of similar provisions in the SCM Agreement, and vice versa. The panel report on US–Countervailing Duty Investigation on DRAMs is an appropriate illustration to this effect (§ 7.351): The non-attribution requirement in antidumping investigations has been addressed by the Appellate Body in several recent cases. Although it has not been specifically considered in a countervailing duty case, given that the relevant provisions in the two Agreements are identical, and in light of the “need for the consistent resolution of disputes arising from antidumping and countervailing duty measures” (Ministerial Declaration on Dispute Settlement Pursuant to the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 or Part V of the Agreement on Subsidies and Countervailing Measures), it is clear to us that the requirement is the same in the context of both antidumping and countervailing duty investigations.200

3.8.2

Calculating the Amount of Benefit That Subsidies Have Conferred

3.8.2.1 The Rule: CVDs Cannot Exceed the Amount of Subsidy Granted Article 19.4 of SCM reads: No countervailing duty shall be levied on any imported product in excess of the amount of the subsidy found to exist, calculated in terms of subsidization per unit of the subsidized and exported product.

3.8.2.2 Calculating the Amount of Subsidy in Terms of the Benefit Granted Recall the discussion of Article 14 of SCM earlier in this chapter. The calculation of benefit matters when calculating the maximum amount of CVDs. The amount of financial contribution is immaterial for the purposes of calculating the maximum amount of CVDs. 3.8.2.3 Investigated Exporters Article 19.3 of SCM reads: When a countervailing duty is imposed in respect of any product, such countervailing duty shall be levied, in the appropriate amounts in each case, on a non-discriminatory basis on imports of such product from all sources found to be subsidized and causing injury, except as to imports from those sources which have renounced any subsidies in question or from which undertakings under the terms of this Agreement have been accepted. Any exporter whose exports are subject to a definitive countervailing duty but who was not actually investigated for reasons other than a refusal to cooperate, shall be entitled to an expedited review in order that the investigating authorities promptly establish an individual countervailing duty rate for that exporter.

The SCM Agreement does not set forth an express obligation to calculate individual duties for each exporter, as Article 6.10 of AD does. Still, it appears that, as the amount of subsidization will be different for each exporter, an individual duty will normally be imposed. In EC–Countervailing Duty on DRAM Chips, for example, the IA calculated individual margins and ended up imposing duties on Hynix, but not on Samsung (recall

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from earlier in this chapter that Hynix and Samsung were the two Korean companies that had been subjected to investigation).201 3.8.2.4 Noninvestigated Exporters Article 19.3 of SCM allows WTO members to impose duties on an aggregate basis. All imports originating in a country found to be granting subsidies will be burdened with CVDs, regardless of whether all individual exporters have benefited from subsidies. Individual noninvestigated exporters have the right to request an expedited review to establish their rate of subsidies received (AB, US–Softwood Lumber IV, §§ 152–153). An application of duties on an aggregate basis does not imply that there is no longer a need to establish the basic conditions for the imposition of CVDs—that is, subsidy, injury to the domestic industry, and causation. In the case of subsidies to upstream producers, this implies that it must in any case first be established that the subsidy was passed through to the downstream producers (AB, US–Softwood Lumber IV, § 154). 3.8.3

Injury Analysis

The demonstration of injury is addressed in Article 15 of SCM. As in the AD context, the term “injury” is used to refer to a situation of “material injury,” “threat of material injury,” or “material retardation”202 in the establishment of an industry. Articles 15.1–15.6 of SCM deal with injury in general, while Articles 15.7 and 15.8 contain special additional obligations in cases of threat of injury. For injury to be shown, a WTO member must conduct an objective examination based on positive evidence regarding (Article 15.1 of SCM): the volume of the subsidized imports, their effect on prices in the domestic market for like products, as well as the subsequent impact of these imports on the domestic producers of such like products. Demonstration of injury is required irrespective of whether a WTO member is conducting an investigation in order to impose CVDs, or has submitted a complaint requesting withdrawal of a subsidy. In the former case, demonstration of injury is a procedural requirement. Injury must be shown, but once this is done, CVDs can be imposed up to the level of the financial contribution made. The lesser duty rule, as in the case of the AD Agreement, is recommended but not compelled. In the latter case, as we have seen already above, the extent of injury suffered circumscribes the level of countermeasures in case the defendant refuses to comply with the panel’s ruling. The standard of review applied by WTO adjudicating bodies is the same in both instances. 3.8.3.1 Statutory Indicators of Injury Article 15.4 of SCM requires that the examination of the impact of the subsidized imports on the domestic industry includes an evaluation of all relevant economic factors and indices with a bearing on the state of the industry, including actual and potential decline in output, sales, market share, profits, productivity, return on investment, or utilization of

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capacity; factors affecting domestic prices; and actual and potential negative effects on cash flow, inventories, employment, wages, growth, ability to raise capital or investments, and, in the case of agriculture, whether there has been an increased burden on government support programs.203 This list is not exhaustive, nor can one or several of these factors necessarily give decisive guidance. Case law, as in the case of case under the AD Agreement, has made it clear that all factors mentioned in the body of Article 15.4 of SCM, must be evaluated by the IA (§ 7.356 of the panel report on EC–Countervailing Measures on DRAM Chips). The obligation to evaluate imposed by this provision (Article 15.4 of SCM) is not confined to the listed factors, however, but extends to all relevant economic factors. Whether a factor is relevant depends, inter alia, on the nature of the industry being examined (§ 7.363 of the panel report on EC–Countervailing Measures on DRAM Chips). Alas, case law has not clarified the extent of inquiry that an IA should perform in order to honor this duty. The Panel on EC–Countervailing Measures on DRAM Chips has clarified a related issue. It stated that relevant economic factors are not to be confused with other causal factors, such as the general economic downturn or the export performance of the domestic industry, which are to be examined as part of the causation and nonattribution analysis of Article 15.5 of SCM (§ 7.365). 3.8.3.2 Injury to Competitors (Like Product Analysis) Injury (or threat of injury) must be caused to the domestic industry producing the like product. In perfect symmetry with the AD Agreement, the SCM Agreement provides that the term “domestic industry” refers to the domestic producers as a whole of the like product, or to those of them whose collective output of the products constitutes a “major proportion” of the total domestic production of those products. In cases where producers are “related” to the exporters or importers, or are themselves importers of the allegedly subsidized product or a like product from other countries, such producers may be excluded (Article 16.1 of SCM). The term “related” is explained in footnote 48 to Article 16.1 of SCM: producers shall be deemed to be related to exporters or importers only if (a) one of them directly or indirectly controls the other; or (b) both of them are directly or indirectly controlled by a third person; or (c) together they directly or indirectly control a third person, provided that there are grounds for believing or suspecting that the effect of the relationship is such as to cause the producer concerned to behave differently from non-related producers. For the purpose of this paragraph, one shall be deemed to control another when the former is legally or operationally in a position to exercise restraint or direction over the latter.

Exclusion of related producers increases the likelihood of an affirmative finding of injury of course, since the trade impact will now be concentrated on a smaller number of economic agents. It would be rather unlikely to establish that excluded related agents were

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injured, since they themselves arguably benefited from the subsidization. In any case, they would have no interest to claim that they had been injured, since they are related anyway to the subsidized agent. The term “like product” is defined in footnote 46 to the SCM Agreement: Throughout this Agreement the term “like product” (“produit similaire”) shall be interpreted to mean a product which is identical, i.e. alike in all respects to the product under consideration, or in the absence of such a product, another product which, although not alike in all respects, has characteristics closely resembling those of the product under consideration.

This definition is identical to that provided for in the AD Agreement and shows a statutory preference for a narrow definition of the term. Originally, GATT panels followed this approach. In US–Wine and Grape Products, for example, the panel held that since wine and grapes were separate products, CVDs on wine were unlawful if subsidies had been paid on grapes (§ 4.3). In a similar vein, the Panel on US–Canadian Pork held that the US could not lawfully impose CVDs on imports of fresh, chilled, and frozen pork originating in Canada because a subsidy had been given to producers of live swine (§ 2.1). It went so far as to reject the US argument that its producers would be helpless since Canada was not exporting live swine to the US. It exported only fresh, chilled, and frozen pork, which, before slaughtered and packaged had benefited from subsidies. The panel held firmly that, the argument by the US notwithstanding, it could not depart from the clear wording of Article VI.3 of GATT (§ 4.7). Similar arguments had also been raised in Australia–Glacé Cherries, which resulted in an unadopted report. In that case, subsidies had been paid on cherries, the input to glacé cherries, the final good that was being exported to Australia. This approach is, of course, at odds with the “pass through” discussion that came earlier in this chapter. At any rate, subsequent case law, to which we now turn, has opted for a more open-ended understanding of the term “like product.” The Panel on Indonesia–Autos departed from the tradition to construe the term “like product” in such narrow terms. It established a parallelism between Article III.2 of GATT, first sentence, and the SCM Agreement, and held that the following criteria should be pertinent in evaluating likeness (§ 14.173): In our view, the analysis as to which cars have “characteristics closely resembling” those of the Timor logically must include as an important element the physical characteristics of the cars in question. This is especially the case because many of the other possible criteria identified by the parties are closely related to the physical characteristics of the cars in question. Thus, factors such as brand loyalty, brand image/reputation, status and resale value reflect, at least in part, an assessment by purchasers of the physical characteristics of the cars being purchased. Although it is possible that products that are physically very different can be put to the same uses, differences in uses generally arise out of, and assist in assessing the importance of, different physical characteristics of products. Similarly, the extent to which products are substitutable may also be determined in substantial part by their physical characteristics. Price differences also may (but will not necessarily) reflect physical differences in products. An analysis of tariff classification principles may be useful

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because it provides guidance as to which physical distinctions between products were considered significant by Customs experts. However, we do not see that the SCM Agreement precludes us from looking at criteria other than physical characteristics, where relevant to the like product analysis. The term “characteristics closely resembling” in its ordinary meaning includes but is not limited to physical characteristics, and we see nothing in the context or object and purpose of the SCM Agreement that would dictate a different conclusion.

This panel went on to find that a kit car is a like product to a finished car (§ 14.197). It thus, understood the term “like product” as encompassing a wide category of goods competing in the same product market. This had not been the attitude of panels in the AD context, as we saw earlier. The AB confirmed this approach for the first time in EC and Certain Member States–Large Civil Aircraft, as we saw in the previous chapter. There, the AB adopted a wide understanding of the term “like product” encompassing substitutable goods. In a similar vein, in US–Large Civil Aircraft (Second Complaint), the AB decided that the market for large civil aircrafts could be subdivided into three categories: 100–200 seats, 200–300 seats, and 300–400 seats. In doing that, it echoed the approach often followed by antitrust authorities—that is, it paid attention to market forces when deciding on “likeness” instead of focusing on textualist interpretations of the term “like product.” Since these are later-in-time reports, and it is the AB deciding it, the approach followed here should be understood as the predominant approach to define “like products.” The reports cited in the preceding paragraphs do point towards a wide understanding of the term “like product”, but did not reverse the GATT case law suggesting that no CVDs can be imposed on final products if inputs had been subsidized. This is what the Panels on US–Softwood Lumber III and US–Softwood Lumber IV204 did. They acknowledged that subsidies to an input (upstream subsidies) can result in benefits for the final product (downstream benefits). As a result, an IA can lawfully impose CVDs on the final product, even though it is not a like product to the subsidized good. Thus, they clearly departed from the GATT case law cited earlier, where CVDs could not be paid on final goods if subsidies had been only on inputs. The rationale for the new approach is that subsidies can on occasion pass through and lead to injury, freeing the way for legitimate imposition of CVDs.205 Since the subsidized upstream good is not traded, it is the downstream (un)like good that will be hurt if CVDs were not to be imposed.206 The discussion above might sound quite straightforward, and yet it is far from that when it comes to applying the test discussed above to specific cases. If the subsidized and the injured company produce one good only, then the test will be easy to implement. The moment nonetheless the subsidized and/or the injured company produce more than one good, then both the quantification of the subsidy received, as well as the quantification of the damage, become difficult to measure. We have previously discussed the difficulties associated with allocating subsidies to specific assets of an economic operator. The same is true when it comes to the injury test.

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Utilization rates, and other financial information usually concern the company as a whole, and not the production of a particular good by that company. Ahn and Spearot (2015) argue that elaborate statistical techniques can of help to this effect. They explore the possibilities offered by a method called “difference in differences,” where one tries to calculate the effects of a treatment on a “treatment group” (e.g., the group receiving the treatment) and compare them to the change in the “control group” (e.g.. a group that closely resembles the treatment group, but which is not receiving the treatment). The second sentence of Article 15.6 of SCM deals with an exceptional circumstance: If such separate identification of that production is not possible, the effects of the subsidized imports shall be assessed by the examination of the production of the narrowest group or range of products, which includes the like product, for which the necessary information can be provided.

The danger when having recourse to this method lies in that interested party might invoke this provision in order to provoke an injury finding that they could not ensure by sticking to the like product. On the other hand, for the reasons mentioned above, sometimes recourse to similar techniques might be warranted. Note though that contrary to the cases discussed in Ahn and Spearot (2015), this provision does not require that the wider analysis must concern products by one company only. Case law has not addressed this issue, so all we can do for now is highlight the potential for abuse. 3.8.3.3 Quantity Effects The previous analysis regarding adverse effects finds application here as well. Briefly, an evaluation of the volume of imports requires from an IA to consider whether there has been a significant increase in subsidized imports, either in absolute terms, or relative to production or consumption in the importing member. Article 15.2 of SCM includes three alternative ways in which an IA could comply with this provision, suggesting that it suffices for an IA to consider either an absolute increase, or an increase relative to production, or an increase relative to consumption.207 In EC–Countervailing Measures on DRAM Chips, the panel held that the ordinary meaning of the term “significant” encompasses “important,” “notable,” “major,” and “consequential,” all of which suggest something more than just a nominal or marginal movement (§ 7.307). It did not provide for a quantitative benchmark, though, leaving it to the imagination of future panels to decide whether movement has been nominal. The Panel on US–Countervailing Duty Investigation on DRAMs (§ 7.245) held that: “Article 15.2 does not require an investigating authority to demonstrate that all of the subject imports covered by the period of injury investigation are subsidized.” What matters, consequently, is that some of them are subsidized—to the extent, of course, that they satisfy one of the three conditions mentioned earlier. It is, further, irrelevant under Article 15.2 of SCM that subsidized imports decreased in relative terms compared to nonsubsidized imports, since the latter is not the focus of the determination

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under this provision (Panel on US–Countervailing Duty Investigation on DRAMs, at § 7.243). The term “subsidized imports” refers to all imports from a source found to have been subsidized above the de minimis level. The Panel on EC–Countervailing Measures on DRAM Chips approvingly referred to findings by panels and the AB in the AD context and, in particular, to § 113 of the AB report on EC–Bed Linen (Article 21.5–India), and held as much (§ 7.298 and footnote 227).208 Recall, finally, that the evaluation of the volume of subsidized imports is not, by itself, determinative in an injury determination, but it forms part of an overall assessment (§ 7.290 of the panel report on EC–Countervailing Measures on DRAM Chips).209 3.8.3.4 Price Effects210 Article 15.2 of SCM does not impose any particular methodology for analyzing prices. What matters is that the methodology chosen is reasonable and objective (§§ 7.334–336 of the panel report on EC–Countervailing Measures on DRAM Chips). Reasonableness is, of course, a standard that allows some considerable leeway to panels reviewing the record of IAs. 3.8.3.5 Cumulating Various Sources of Injury Article 15.3 of SCM provides that an injury analysis may be conducted on a cumulative basis under the following conditions: • Imports of a product from more than one country are simultaneously subject to CVD investigations. • The amount of subsidization established in relation to the imports from each country is more than de minimis, as defined in Article 11.9 of SCM. • The volume of imports from each country is not negligible. • A cumulative assessment of the effects of the imports is appropriate in light of the conditions of competition between the imported products and the conditions of competition between the imported products and the like domestic product. This provision is, thus, quite similar to Article 3.3 of AD. The amount of subsidy is considered de minimis if it is less than 1 percent ad valorem (Article 11.9 of SCM). When developing countries have subsidized, this threshold is set at 2 percent, and when least developed countries (LDCs) and so-called Annex VII countries have subsidized, it is 3 percent.211 Article 27.10 of SCM defines the term “negligible volume” for imports originating in developing countries only. If subsidized imports are less than 4 percent of total imports, they are negligible; if subsidized imports from developing countries whose individual shares represent less than 4 percent and collectively account for less than 9 percent of total imports, they are negligible as well.

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In parallel with the AD Agreement, there is no requirement to demonstrate that exporters in various WTO members being “cumulatively” investigated have been engaging in some sort of collusive behavior. In US–Carbon Steel (India), the issue of cross-cumulation arose: Section 1677(7)(G) of the US legislation obliges the IA to cross-cumulate injury assessment when, for example, an antidumping investigation and a countervailing investigation are initiated simultaneously. Arguably, this practice violates Article 3.5 of AD, for example, which requires that injury should be exclusively the outcome of dumping and not of other reasons. The AB found the US practice was inconsistent with the SCM Agreement. In its view, cumulative assessment of injury can occur only under the restrictive conditions of Article 15.3 of SCM, that is, when simultaneous CVD investigations occur (§§ 4.602ff.). This raises again the issue where the AD and the SCM Agreements should be construed in total isolation from each other, an issue that occupied the mind of the AB members in the US–Antidumping and Countervailing Duties (China). The AB has changed its mind on this issue, and whereas in the latter case it refused to drive a wedge between the AD and the SCM Agreements, in US–Carbon Steel (India) it did drive a wedge at least as far as the injury analysis is concerned. We signaled in the previous chapter that probably the AB aims to ensure that IAs avoid double dipping, e.g. that exporters are punished twice for the same sin. This conclusion holds here as well. 3.8.3.6 Injury Based on Positive Evidence A finding that injury has occurred must be based on positive evidence, following an objective examination by the IA. The Panel on US–Softwood Lumber VI dealt with the interpretation of the term “positive evidence”. It quoted verbatim § 114 of the AB report on EC–Bed Linen (Article 21.5–India), which dealt with an AD investigation, and held that this term obliges IAs to use evidence that is affirmative, objective,, verifiable and credible (§ 7.28). The term “objective examination” aims at a different aspect of the IAs’ determination, and relates to the way in which the evidence is gathered, and evaluated. The Panel on US-Softwood Lumber VI held that IAs, because of this obligation, must behave in good faith and guarantee procedural fairness (§ 7.28). The AB in subsequent case law insisted on the requirement for procedural fairness, and the obligation to avoid biased judgments.212 An IA, thus, cannot base its findings on speculative statements, as it cannot conduct an investigation without respecting basic due process requirements—notably, a requirement of evenhandedness toward the parties to the dispute.213 3.8.3.7 Threat of Injury If CVDs are imposed on “threat of injury,” the SCM Agreement requires that a demonstration that a threat of injury exists be based on facts and not merely on allegation, conjecture, or remote possibility. In addition, the change in circumstances, which would create a

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situation in which the subsidy would cause injury, must be clearly foreseen and imminent (Article 15.7 of SCM). In making a determination regarding the existence of a threat of material injury, the IA should consider, inter alia, factors such as (i) the nature of the subsidy or subsidies in question and the trade effects likely to arise therefrom; (ii) a significant rate of increase of subsidized imports into the domestic market, indicating the likelihood of substantially increased importation; (iii) sufficient freely disposable or imminent substantial increase in capacity of the exporter, indicating the likelihood of substantially increased subsidized exports to the importing WTO member’s market and taking into account the availability of other export markets to absorb any additional exports; (iv) whether imports are entering at prices that will have a significant depressing or suppressing effect on domestic prices and would likely increase demand for further imports; and (v) inventories of the product being investigated. The agreement adds that none of these factors by itself can necessarily give decisive guidance, but that the totality of the factors must lead to the conclusion that further subsidized exports are imminent and that, unless protective action is taken, material injury would occur. The application of CVDs must be considered and decided with “special care” (Article 15.8 of SCM). The Panel on US–Softwood Lumber VI,214 addressed this issue and concluded that, although it found it hard to define “special care,” it still believed that something more than mere violation of the agreement should be proved (§ 7.34): It is not clear to us what the parameters of such “special care” in the context of an objective evaluation based on positive evidence would be. In these circumstances, we consider it appropriate to consider alleged violations of Articles 3.8 and 15.8 only after consideration of the alleged violations of specific provisions. While we do not consider that a violation of the special care obligation could not be demonstrated in the absence of a violation of the more specific provision of the Agreements governing injury determinations, we believe such a demonstration would require additional or independent arguments concerning the asserted violation of the special care requirement beyond the arguments in support of the specific violations.

The same panel held that the authorities do not have to go so far as to specify one particular event that will cause injury in the future. Indicating a progression of circumstances by and large suffices to meet the requirements of the SCM Agreement in this respect (§ 7.60). This panel agreed with the views expressed by the Panel on Mexico–Corn Syrup that, in every case in which threat of injury has been found, it is necessary to proceed to an evaluation of the condition of the industry in light of the factors included in Article 15.4 of SCM to establish the background against which the impact of future dumped/ subsidized imports must be assessed, in addition to an assessment of the specific threat factors (§ 7.105). But the same panel added that this requirement should not be interpreted as though a second predictive injury analysis is required (§§ 7.105, 111). With regard to the factors that must be examined in order to show threat of injury (Article 15.7 of SCM), the Panel on US–Softwood Lumber VI found that an IA has an obligation to consider the factors mentioned in Article 15.4 of SCM but is not obliged to

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make a finding or determination with respect to the factors considered (§ 7.67). Moreover, the failure to consider a factor, or to adequately consider a particular factor, would not necessarily demonstrate a violation of this provision. The outcome in any given case will depend on the particular facts of the case, the totality of the factors considered, and the explanations given (§ 7.68). The Panel on US–Softwood Lumber VI (Article 21.5–Canada) discussed the applicable standard of review in cases involving threat of injury and held that it should be more deferential to the IA when examining a threat of injury determination compared to a material injury determination (§ 7.13): The possible range of reasonable predictions of the future that may be drawn based on the observed events of the period of investigation may be broader than the range of reasonable conclusions concerning the present that might be drawn based on those same facts. That is to say, while a determination of threat of material injury must be based on the facts, and not merely on allegation, conjecture, or remote possibility, predictions based on the observed facts may be less susceptible to being found, on review by a panel, to be outside the range of conclusions that might be reached by an unbiased and objective decision maker on the basis of the facts and in light of the explanations given.

There are two conflicting considerations. On the one hand, it is true that it is more difficult to interfere with predictions than with facts; on the other, in cases of threat of injury, injury has not yet happened and the measures taken are meant to protect an otherwise healthy domestic industry. The quoted panel report seems to pay more attention to the former rather than the latter consideration. The key question will be whether injury is really “imminent” or not. The SCM Agreement, like the AD Agreement, does not condition the imposition of CVDs (AD duties) upon failed prior attempts to address the emerging situation in other ways. 3.8.3.8 Public Interest Clauses The SCM Agreement contains a public interest clause. It is desirable that procedures be established that would allow IAs to take due account of representations made by domestic interested parties, including consumers, and industrial users of the imported product subject to investigation (Article 19.2 of SCM and footnote 50). The discussion in chapter 10 regarding this point will find application here as well. 3.8.4 The Causality Requirement Even if the domestic industry has been injured, no action can be taken to redress the situation in accordance with the SCM Agreement, unless if the injury has been caused by the subsidies bestowed to its competitors. The general requirement to establish a causal link between the subsidized imports and injury is expressed in Article 15.5 of SCM. In parallel with the AD context, it contains two obligations: first, an obligation to demonstrate that

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it is subsidized imports that are causing the injury (attribution); and second, an obligation not to attribute to subsidy injury caused by factors other than subsidized imports (nonattribution). In order to honor the requirement of nonattribution, an IA must compile a list of factors, the impact of which it will evaluate in order to decide whether subsidy caused injury. To avoid misunderstandings, at this stage we are discussing causal factors, and not factors indicating injury. The latter are reflected in Article 15.4 of SCM as we have previously seen. Article 15.5 of SCM requires from an IA to examine any “known factors” other than subsidized imports, which are injuring the domestic industry, and explicitly refers to some of them: Factors which may be relevant in this respect include, inter alia, the volumes and prices of nonsubsidized imports of the product in question, contraction in demand or changes in the patterns of consumption, trade restrictive practices of and competition between the foreign and domestic producers, developments in technology and the export performance and productivity of the domestic industry.215

Parties to the dispute will also bring forward factors, and IAs must inquire into their contribution even though they retain the right to disagree with the assessment of those submitting the information. We will return to this point later in this chapter, when we will also discuss the obligation of an IA to examine factors even beyond those mentioned in the body of this provision. Having examined causal factors other than subsidization, and ensured that it has not attributed injury to one of them, the IA must be in position to show a “genuine and substantial relationship” between cause (subsidies) and effect (injury), in parallel with everything we saw in the previous chapter. Panels and the AB have not specified what exactly this requirement entails. They have used it as some sort of qualitative benchmark. In China–GOES (§ 7.634), for example, the panel found that increase in domestic production and capacity was more than the increase in the volume of subject imports. In its view, this finding defeated the point advanced that the increase in domestic production was not a cause of injury. The Panel on EC–Countervailing Measures on DRAM Chips, echoing prior case law, held that mere assertions will not suffice to satisfy the genuine and substantial relationship-requirement (§§ 7.408, 413, 420, 427, 434). If we were to make a simplification on this score, we would say that the test looks like a “more probable than not” standard rather than a “beyond a reasonable doubt” standard. Panels have adopted a “reasonableness” standard without explicitly saying so. To conclude on this before we get on with a more detailed discussion, although how much should be done has not been (and probably cannot be) explained in precise terms, it is becoming increasingly clear what IAs cannot do. Finally, a proper evaluation of the impact of subsidized imports on the domestic industry is dynamic in nature and should take account of changes in the market that determine the

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current state of the industry (§ 7.372 of the Panel on EC–Countervailing Measures on DRAM Chips). 3.8.4.1 Nonattribution Recall from the discussion in the previous chapter that nonattribution is an onerous yet necessary requirement that IAs must observe. In § 357 of its report on US–Upland Cotton (Article 21.5–US), the AB acknowledged as much adding that the difficulty of the test was not an exonerating factor for an IA. Panels will, thus, often be confronted with elaborate econometric evidence that they would need to evaluate. Indeed, although the SCM Agreement (like the AD or the Safeguards (SG) Agreement that we examine in the next chapter) do not prejudge the methodology that IAs can use in order to honor the nonattribution requirement, it is hard to see how this can happen absent recourse to econometrics. Indeed, IAs will need to evaluate the contribution of various factors to the injury of the domestic industry. In case law the question has arisen: What should happen after the nonattribution analysis has taken place. Subsidized imports must, of course, still cause injury but how much? To put it differently, should subsidized imports be the only cause of injury, or can counteracting measures still be adopted even if subsidized imports are one of the various causes of injury? Nonattribution should ideally lead to some quantification of injury caused by the various factors. One should also keep in mind that precise quantification of the relative importance of contributions by various factors is a tough exercise. As the saying goes, “It is better to be roughly right than precisely wrong.” In US–Large Civil Aircraft (Second Complaint), the AB added that at the end of the day, it suffices that a subsidy has caused injury. It does not have to be the only cause of injury—indeed, it does not even have to be a “substantial cause” of injury. Attribution, however, must take place anyway so there is a finding that subsidies were at least a contributing factor to the overall injury (§ 914). We still do not know how important contribution, as a matter of principle, in this respect must be. Case law, thus, prefers to err in favor of the IA imposing duties: it suffices to show that subsidy was a cause of injury. Recall that quantification of injury caused by subsidized imports is decisive only in case a request has been submitted to a panel to find that subsidies have caused to injury, and the defendant refuses to implement the adverse to it conclusions of the panel. 3.8.4.2 Temporal Correlation between Imports and Injury Intuitively, one might think that imports and injury should coincide; otherwise, how could injury exist in the first place? Indeed, the passage of time in and of itself could be decisive, and the greater the wedge between the moment that subsidized imports entered a market and the demonstration of injury, the unlikelier that the latter is the effect and the former the cause.

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On the other hand, absolute temporal correlation between imports and injury is not necessary either, since the effect could be delayed. In this vein, the Panels on EC– Countervailing Measures on DRAM Chips (§ 7.320) and US–Countervailing Duty Investigation on DRAMs (§ 7.399) found that absence of temporal correlation between increased subsidized imports and injury does not necessarily break the causal link. According to the Panel on EC–Countervailing Measures on DRAM Chips (§ 7.399, footnote 277): “the absence of a temporal correlation certainly raises a flag, but it is not an absolute barrier to a finding of injury.” 3.8.4.3 Controlling for Factors Not Mentioned in the Agreement The Panel on US–Softwood Lumber VI faced the question under what conditions an IA should examine factors other than those mentioned in Article 15.5 of SCM. The panel condemned the fact that the IA had itself acknowledged the relevance of one “other factor” (future effects of subsidization on the domestic supplies of lumber) and yet failed to evaluate its impact. In the panel’s view, this failure was a “glaring omission” and constituted a breach of the obligation to respect nonattribution (§§ 7.135–137). The extent of the duty to investigate “other factors” is very much a point of debate in case law. As we will see in the next chapter, the duty of an IA, when it comes to imposing safeguards, is to be an “active IA” that will on its own initiative look for factors that have caused injury. In the AD and SCM contexts, what emerges from case law is that an IA must review factors brought to its attention, as well as factors otherwise explicitly acknowledged by it, without incurring the duty to go out and look for each and every factor that potentially could have a bearing on the outcome of the investigation. Rather, their resources should be invested in analyzing the facts gathered by the parties to the dispute, as well as factors that the IA itself has acknowledged for being relevant. This is where the requirement to examine facts in light of alternative explanations, which WTO panels and the AB have imposed on IAs, kicks in. The Panels on US–Countervailing Duty Investigation on DRAMs (§§ 7.3513) and EC–Countervailing Measures on DRAM Chips (§ 7.404) have delved into the quality of review of factors by IAs. According to the latter panel, an IA must do more than simply list other known factors and then dismiss their role with bare qualitative assertions such as “the factor did not contribute in any significant way to the injury.” In the panel’s view (§ 7.405): an investigating authority must make a better effort to quantify the impact of other known factors, relative to subsidized imports, preferably using elementary economic constructs or models.

3.8.5 The Types of CVDs There are three types of CVDs, namely, provisional, definitive, and price undertakings. There is thus, absolute parallel between the AD and SCM Agreements in this respect.

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3.8.5.1 Provisional CVDs Article 17 of SCM allows for the possibility of imposing provisional measures when an IA judges it necessary to prevent injury being caused during the investigation process. These measures may be imposed only after a preliminary affirmative determination has been made that a subsidy exists and that there is injury to a domestic industry already being caused by subsidized imports. The SCM Agreement provides that provisional measures are not to be applied earlier than 60 days from the date of initiation of the investigation (Article 17.3 of SCM). Duties can be lawfully imposed for a period not extending beyond four months (Article 17.4 of SCM). This four-month period does not mean the period during which cash deposits or bonds are paid, but the period during which the affected imports enter for consumption. The Panel on US–Softwood Lumber III faulted the US for having imposed provisional measures earlier than 60 days after initiation and for a period of more than four months (§ 7.101). 3.8.5.2 Definitive CVDs Definitive CVDs will be imposed in accordance with Article 19 of SCM. We return to this discussion later in this chapter. 3.8.5.3 Price Undertakings The SCM Agreement allows voluntary price undertakings (Article 18.1 of SCM). Article 18.4 of SCM provides that the investigation may be continued at the request of the exporting WTO member, or simply when the importing WTO member so decides, in spite of the acceptance of any voluntary undertakings, and the undertaking might lapse if it is established that no subsidization exists: If an undertaking is accepted, the investigation of subsidization and injury shall nevertheless be completed if the exporting Member so desires or the importing Member so decides. In such a case, if a negative determination of subsidization or injury is made, the undertaking shall automatically lapse, except in cases where such a determination is due in large part to the existence of an undertaking. In such cases, the authorities concerned may require that an undertaking be maintained for a reasonable period consistent with the provisions of this Agreement. In the event that an affirmative determination of subsidization and injury is made, the undertaking shall continue consistent with its terms and the provisions of this Agreement.

The initiative to propose an undertaking may originate in the exporting WTO member, which might undertake to eliminate or limit the subsidy or take other measures concerning its effects. It may also concern a commitment by one or more of the exporters under investigation to revise prices so that the IA is satisfied that the injurious effect of the subsidy has been eliminated. Undertakings proposed by an individual exporter require the prior consent of the exporting WTO member. Price increases shall not be more than necessary to eliminate the amount of the subsidy, and it is desirable that price increases be less than the amount of the subsidy if that would

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suffice to remove the injury to the domestic industry. Once accepted, compliance with an undertaking may be monitored, and any government or exporter who made an undertaking may be requested to periodically provide information relevant to its fulfilment and to permit verification of pertinent data. Article 18.6 of SCM provides that if an undertaking is violated, the authorities of the importing WTO member may take expeditious actions, such as immediate application of provisional measures using the best information available. In addition, definitive duties may be levied retroactively up to 90 days before the application of provisional measures, except that any retroactive assessment shall not apply to imports before the violation of the undertaking. Undertakings are completely voluntary, both when the initiative is that of the exporters or exporting WTO members and when it is that of the importing country’s authorities. Not offering or not agreeing to an undertaking cannot be held against the exporter, nor can the IA be forced to accept undertakings (Article 18.5 of SCM). For example, an IA may refuse to accept undertakings because of their impracticality, if the number of actual or potential exporters is too great, or for other reasons, including reasons of general policy. Where practicable, the IA should provide the reasons for rejecting an offered undertaking, and, to the extent possible, give the exporter an opportunity to comment (Article 18.3 of SCM). 3.8.6

Imposition and Collection of Definitive CVDs

3.8.6.1 CVDs up to the Amount of Benefit Conferred Article 19.2 of SCM provides that upon completion of an investigation, and where a final determination is made confirming the existence and amount of the subsidy causing injury, CVDs may be imposed. The maximum amount of CVDs is the amount of the subsidy that is found to exist, calculated in terms of subsidization per unit of the subsidized and exported product.216 3.8.6.2 Lesser Duty Rule The SCM Agreement also contains a “lesser duty rule,” providing that it is desirable that the duty be less than the total amount of the subsidy if a lesser duty would suffice to remove injury to the domestic industry (Article 19.2 of SCM). 3.8.6.3 Retroactive Application of Duties In principle, CVDs, whether provisional or final, may not be imposed retroactively. This means that where the final determination is negative, any provisional duties paid shall be refunded and any bonds will be released in an expeditious manner (Article 20.5 of SCM). However, there are two exceptions to this general principle (similar to the corresponding provisions in the AD context). First, definitive CVDs may be levied retroactively as of the date of application of provisional measures in the case of a finding of current material injury. The Panel on

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US–Softwood Lumber III underscored that the possibility to impose retroactive duties exists only with respect to definitive, not provisional, duties (§§ 7.93–94). Second, if a determination of threat of injury has been made, duties may be applied retroactively if it can be shown that provisional measures prevented the injury from materializing. Final duties may be applied retroactively in similar circumstances for the period for which provisional measures, if any, have been applied. Retroactivity is, therefore, limited to the period of application of provisional measures. Duties that have been retroactively imposed cannot exceed the amount of provisional duties. Indeed, the SCM Agreement provides that if the definitive CVDs are higher than the amount guaranteed by the cash deposit or bond, the difference shall not be collected (Article 20.3 of SCM). If the definitive duty is less than the amount guaranteed by the cash deposit, the excess amount shall be reimbursed or the bond will be released in an expeditious manner. It is clear, of course, that, if no provisional measures had been applied, definitive duties may not be applied retroactively (Article 20.2 of SCM). Article 20.6 of SCM allows retroactive application beyond the period of application of provisional measures in certain critical circumstances where the authorities find that injury that is difficult to repair is caused by massive imports in a relatively short period of time. When an IA deems it necessary, definitive CVDs may be assessed on imports entered for consumption up to 90 days prior to the date of application of provisional measures in order to preclude recurrence of injury. The SCM Agreement, unlike the AD Agreement, does not explicitly allow WTO members to take measures such as the withholding of appraisement or assessment. WTO members, nevertheless, have had recourse to similar measures de facto, and panels saw nothing wrong with that (US–Softwood Lumber III, § 7.95): We agree with the United States that a Member is allowed to take measures which are necessary to preserve the right to later apply definitive duties retroactively. In our view, an effective interpretation of the right to apply definitive duties retroactively requires that a Member be allowed to take such steps as are necessary to preserve the possibility of exercising that right. What kind of measures may thus be taken by the Member concerned will have to be determined on a caseby-case basis.217

3.8.7

Duties Imposed Prospectively, Retrospectively

As in the AD context, the SCM Agreement does not request from WTO members a particular manner of assessing CVDs. In practice, the overwhelming majority imposes duties prospectively, whereas the US practices in this context retrospective assessment of duties as well.218

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No Double Counting: CVDs or Countermeasures

CVDs are discussed in Part III of the SCM Agreement, and countermeasures in Part II. Footnote 35 to the SCM Agreement reads: The provisions of Part II or III may be invoked in parallel with the provisions of Part V; however, with regard to the effects of a particular subsidy in the domestic market of the importing Member, only one form of relief (either a countervailing duty, if the requirements of Part V are met, or a countermeasure under Articles 4 or 7) shall be available. The provisions of Parts III and V shall not be invoked regarding measures considered non-actionable in accordance with the provisions of Part IV. However, measures referred to in paragraph 1(a) of Article 8 may be investigated in order to determine whether or not they are specific within the meaning of Article 2. In addition, in the case of a subsidy referred to in paragraph 2 of Article 8 conferred pursuant to a programme which has not been notified in accordance with paragraph 3 of Article 8, the provisions of Part III or V may be invoked, but such subsidy shall be treated as non-actionable if it is found to conform to the standards set forth in paragraph 2 of Article 8.

It follows that a WTO member can initiate a CVD investigation and impose CVDs, and at the same time, request that a panel find that it has suffered adverse effects as a result of an actionable subsidy (or claim that a prohibited subsidy has been bestowed that must be removed with immediate effect). In that case, if the subsidizer refuses to withdraw the adverse effects or the prohibited subsidy, it might be authorized to impose countermeasures (assuming a request to this effect). When doing so, it must deduct the amount of CVDs already in place. In other words, the SCM Agreement does not allow double counting.219 3.9

CVDs: Procedural Requirements

Investigation concerns only the imposition of CVDs. A request to remove a subsidy, its adverse effects, or both should follow the disciplines established in the DSU (request for consultations, establishment of panel, etc.). 3.9.1

Duties Can Be Imposed Only Following an Investigation

According to Article 10 of SCM: Countervailing duties may only be imposed pursuant to investigations initiated and conducted in accordance with the provisions of this Agreement and the Agreement on Agriculture.

This should mean that, absent investigation, no duties can be lawfully imposed.220 The corresponding discussion in chapter 2 of this volume finds application here as well.

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Initiating an Investigation

3.9.2.1 Ex Officio Article 11.6 of SCM allows for the possibility to initiate an investigation ex officio. This provision clarifies that, in the case of ex officio initiation, an IA must possess sufficient evidence regarding subsidization, injury, and a causal link between the two, as is the case when the initiated investigation has been requested by the domestic industry. 3.9.2.2 Investigation upon Request Article 11.2 of SCM explains that an investigation can be launched by or on behalf of the domestic industry. In this case, which is the typical case in practice, standing requirements must be fulfilled and required information must be submitted. The Panel on US– Norwegian Salmon CVD held (§ 225) that there was no hierarchy between the two options (e.g., “by” or “on behalf of”). 3.9.3

Standing Requirements (Locus Standi)

3.9.3.1 The Rationale for Standing Requirements Article 11.4 of SCM states that standing requirements identical to those applicable in the AD context must be met when a request to launch an investigation is submitted. The rationale for standing requirements is the same across the two agreements, as explained in the panel and AB reports on US–Offset Act (Byrd Amendment), which dealt with both AD duties and CVDs.221 3.9.3.2 The Statutory Thresholds As stated earlier, Article 11.4 of SCM contains statutory thresholds identical to those included in the AD context. Hence, let’s recall the discussion in the previous chapter. 3.9.4 The Content of the Request Article 11.2 of SCM deals with the initiation of an investigation. A written application on behalf of the industry (Article 11.4 of SCM) must be filed, and it must contain “sufficient” evidence of the existence of a subsidy (and, if possible, its amount), an injury, and a causal link between the two. The application shall also contain information regarding the identity of the applicant, the allegedly subsidized product or products, etc. 3.9.5 The Decision to Initiate an Investigation 3.9.5.1 IAs Must Examine the Accuracy of Supplied Information If the evidence provided is judged sufficient, then an investigation will be launched (Article 11.3 of SCM). In the opposite case, it will be closed with immediate effect (Article 11.9 of SCM):

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An application under paragraph 1 shall be rejected and an investigation shall be terminated promptly as soon as the authorities concerned are satisfied that there is not sufficient evidence of either subsidization or of injury to justify proceeding with the case.

IAs are thus under a duty to investigate the accuracy of supplied information. 3.9.5.2 Consultation with the Exporting WTO Member A special feature of a CVD investigation is the requirement to enter into consultations with the exporting government (Article 13 of SCM). Consultations should be held as soon as possible after an application has been accepted and, in any event, before the initiation of any investigation. The aim is to clarify the situation as to the matters referred to in the application and to arrive at a mutually agreed solution, if possible. The agreement emphasizes that no affirmative determination, whether preliminary or final, may be made unless the investigating WTO member had first offered any interested parties a reasonable opportunity for consultation (Article 13.2 of SCM and footnote 44). The agreement adds that the provisions regarding consultations are not intended to prevent the authorities of a WTO member from proceeding expeditiously with regard to initiating the investigation, reaching preliminary or final determinations (whether affirmative or negative), or from applying provisional or final measures in accordance with the provisions of the agreement. 3.9.5.3 IAs Retain Discretion Article 11.3 of SCM reads: The authorities shall review the accuracy and adequacy of the evidence provided in the application to determine whether the evidence is sufficient to justify the initiation of an investigation.

It follows that an IA retains discretion to decide whether a request for initiation should be responded affirmatively or negatively. The decision to initiate an investigation lies solely with the competent IA.222 In China– GOES (§§ 7.54ff.), the panel held that the joint reading of Articles 11.2 and 11.3 of SCM leads to the conclusion that an IA must satisfy itself as to the adequacy of the evidence presented, which does not have to be conclusive. In making this determination, an IA is balancing two competing interests: namely, the interest of the domestic industry in securing the initiation of an investigation and the interest of respondents to ensure that investigations are not initiated on the basis of frivolous or unfounded suits. Thus, it must satisfy itself that supplied evidence relates to the financial contribution, benefit, and nature of the subsidy (e.g., its specificity) (§ 7.62). The exercise of discretion is justiciable, of course. In China–GOES, the panel found that the Chinese IA should not have initiated the investigation for several reasons: (i) the US subsidies to sponsors of healthcare plans were judged de jure unspecific (§ 7.62); (ii) 26 years had passed from the date of the subsidy to the date of the request to initiate the

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investigation, which was too long a period, and hence no reasonable IA could conclude that the submitted evidence was sufficient (§ 7.69); (iii) the law providing tax breaks that were being challenged for violating the SCM Agreement had been put in place 15 years before the request for initiation of investigation was submitted, which again was too long a period of time (§ 7.78).223 3.9.6 The Rights and Duties of IAs 3.9.6.1 The Right to Seek Information through Questionnaires An IA can send questionnaires and provide the addressees with at least 30 days to reply (Article 12.1.1 of SCM). The SCM Committee can review the content of the questionnaires (footnote 54 to the agreement). This is a very welcome innovation since “abusive” questionnaires could open the door wide to second-best sources of information. Annex VI explains that questionnaires can be explained to the addressees, if necessary. Sending out a questionnaire usually precedes chronologically on-the-spot verifications, which are meant to confirm the responses to questionnaires. 3.9.6.2 The Right to Conduct On-the-Spot Verifications An IA must satisfy itself as to the accuracy of the information supplied by interested members or interested parties upon which their findings are based. This may be done through on-the-spot verifications or through investigations on the premises of a company of its records if the company so agrees, and if the WTO member in question has been notified and does not object to it (Annex VI). The Panel on US–Countervailing Duty Investigation on DRAMs took the view that an interested WTO member cannot be considered to have objected to the verification if it simply expressed concerns about certain aspects of the conduct of the verification. The panel found that the right of objection cannot be extended to encompass the right to dictate the specific procedures to be followed during the investigation proceedings. The panel further disagreed that an outright refusal to allow a verification visit to take place leads inevitably to the application of the available facts: whether that is so will actually depend as much on the IA, and whether it has itself acted in a reasonable, objective, and impartial manner (§§ 7.404–407). 3.9.6.3 The Right to Draw Inferences In EC–Countervailing Measures on DRAM Chips, the panel took the view that an IA would be entitled to make adverse inferences from a refusal to cooperate with the authorities (§ 7.245). 3.9.6.4 The Obligation to Observe Due Process Article 12 of SCM almost verbatim reproduces the language of Article 6 of AD, with one noteworthy difference: the involvement of the subsidizing government. A CVD investigation does not simply relate to private parties’ behavior; it inevitably also involves an

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examination of the practices of another WTO member. This feature makes the investigation more politically sensitive. The quintessential requirement imposed on an IA is to ensure evenhandedness (due process) when performing its tasks. During the investigation process, different interests will be represented since both the foreign exporters and domestic consumers and the domestic industry will be presenting their views. As is the case with the corresponding provision in the AD Agreement, this duty is given further in a series of more detailed specifications. For example, an IA is required, by virtue of Article 15.1 of SCM, to perform an objective examination of the matter before it. Because of the almost identical wording between the AD and the SCM agreements in this respect, WTO panels and the AB have relied on case law under one agreement to interpret provisions of the other. In its report on EC–Countervailing Measures on DRAM Chips, the panel quoted approvingly (§§ 7.271–276) from a report issued in the area of antidumping. In US–Hot-Rolled Steel, the AB provided its understanding of the term “objective examination” (§ 193): The term “objective examination” aims at a different aspect of the investigating authorities’ determination. While the term “positive evidence” focuses on the facts underpinning and justifying the injury determination, the term “objective examination” is concerned with the investigative process itself. The word “examination” relates, in our view, to the way in which the evidence is gathered, inquired into and, subsequently, evaluated; that is, it relates to the conduct of the investigation generally. The word “objective,” which qualifies the word “examination,” indicates essentially that the “examination” process must conform to the dictates of the basic principles of good faith and fundamental fairness. In short, an “objective examination” requires that the domestic industry, and the effects of dumped imports, be investigated in an unbiased manner, without favoring the interests of any interested party, or group of interested parties, in the investigation. The duty of the investigating authorities to conduct an “objective examination” recognizes that the determination will be influenced by the objectivity, or any lack thereof, of the investigative process.

An IA must respect due process in numerous other instances reflected in various paragraphs and subparagraphs of Article 12 of SCM. Interested WTO members and all other interested parties (e.g., the exporter and the domestic industry) must be given notice of the information that the authorities require, as well as ample opportunity to present in writing all evidence that they consider relevant with respect to the investigation in question. Subject to the requirement to protect confidential information, evidence presented in writing by one party shall be made available promptly to the others. Interested WTO members and interested parties also shall have the right, upon justification, to present information orally. An IA shall, whenever practicable, provide timely opportunities for all interested WTO members and interested parties to see all information that is relevant to the presentation of their cases (provided that it is not confidential) and that is used by the authorities in a CVD investigation, and to prepare presentations on the basis of this information.

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3.9.6.5 The Obligation to Protect Confidential Information Any information that is by nature confidential (for example, because its disclosure would provide a competitor with significant competitive advantage, or because its disclosure would have a significantly adverse effect upon a person supplying the information or upon a person from whom the supplier acquired the information), or which is provided on confidential basis by parties to an investigation shall, upon “good cause” shown, be treated as such by the authorities (Article 12.4 of SCM). A nonconfidential summary of confidential information must be furnished, unless a summary is not possible (Article 12.4.1SCM).224 The Panel on China–GOES provided an excellent explanation of the obligation imposed on IAs with respect to the treatment of confidential information (§ 7.189): The obligations in Articles 12.4.1 of the SCM Agreement and 6.5.1 of the Anti-Dumping Agreement fall upon the investigating authorities. The Appellate Body agreed with this interpretation in EC– Fasteners (China). The Appellate Body found that in respect of information treated as confidential under Article 6.5, Article 6.5.1 imposes an obligation on the investigating authority to require that a non-confidential summary of the information be furnished. The Appellate Body noted that this accommodates the concerns of confidentiality, transparency and due process. Where “exceptional circumstances” exist, such that non-confidential information is not susceptible of summary, Article 6.5.1 requires that the party identify the exceptional circumstances and provide a statement explaining why summarization is not possible. The investigating authority must scrutinize such statements to determine whether they establish “exceptional circumstances.” (italics in the original)

Confidential information shall not be disclosed without the specific permission of the party submitting it. If the IA finds that a request for confidentiality is not warranted, and if the supplier of the information is either unwilling to make the information public or to authorize its disclosure in generalized or summary form, the IA may disregard such information unless it can be demonstrated to its satisfaction from appropriate sources that the information is correct (Article 12.4.2 of SCM). Requests for confidentiality should not be arbitrarily rejected. An IA may request the waiving of confidentiality only regarding information relevant to the proceedings. Panels will typically adopt specific procedures to deal with the provision and dissemination of business confidential information (BCI) in a particular case.225 Panels at the request of parties might adopt not only BCI, but also HSBI (Highly Sensitive Business Information). In EC and Certain Member States–Large Civil Aircraft, a similar request was tabled. The panel agreed to adopt HSBI procedures (Annex E to the panel report), the main characteristics of which were: • the nomination of “HSBI Approved Persons”, that is persons approved by parties that could have access to HSBI; • the selection of a “HSBI location”, that is a room located in the WTO headquarters where HSBI information would be stored, and which only HSBI Approved Persons could have access to.

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3.9.6.6 The Obligation to Ensure Transparency The authorities shall, before a final determination is made, inform all interested WTO members and interested parties of the essential facts under consideration, which form the basis for the decision about whether to apply definitive measures. The disclosure should take place in sufficient time for the parties to defend their interests (Article 12.8 of SCM). In China–GOES, the AB held that the obligation to disclose “essential facts” meant that an IA had to disclose whatever elements it considered significant in the process of reaching a decision on whether to apply CVDs (§ 240). It added (§ 247), that it did not suffice for an IA to state that prices had dropped, but it had to disclose price comparisons; otherwise, essential facts had not been revealed and, consequently, exporters could not know how prices had led to depression. It justified its approach by stating that the purpose of disclosing essential facts was to allow interested parties to eventually pursue judicial review of decisions against them, if they decided to do so (§ 258). 3.9.7

Rights and Obligations of Interested Parties

Article 12.9 defines “interested parties” as follows: an exporter or foreign producer or the importer of a product subject to investigation, or a trade or business association a majority of the members of which are producers, exporters or importers of such product; and a producer of the like product in the importing Member or a trade and business association a majority of the members of which produce the like product in the territory of the importing Member. This list shall not preclude Members from allowing domestic or foreign parties other than those mentioned above to be included as interested parties.

3.9.7.1 The Right to Access the File The right to access the file is the specification of the “due process” obligations incurred by IAs and has been included in Article 12.3 of SCM. 3.9.7.2 The Duty to Cooperate In EC–Countervailing Measures on DRAM Chips, the panel held, that an IA is entitled to expect a high degree of cooperation from interested parties (§ 7.245). 3.9.8

Balancing Rights and Duties: Recourse to BIA

Article 12.7 of SCM reads: In cases in which any interested Member or interested party refuses access to, or otherwise does not provide, necessary information within a reasonable period or significantly impedes the investigation, preliminary and final determinations, affirmative or negative, may be made on the basis of the facts available.

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Recourse to best information available (BIA) can take place only when in the presence of one of the three factual situations (namely, a WTO member or interested party refuses access to, or otherwise does not provide necessary information within a reasonable period of time, or significantly impedes the investigation). In EC–Countervailing Measures on DRAM Chips, the panel held that (§ 7.245): Article 12.7 thus allows an authority to make determinations on the basis of the facts available in case certain necessary information is not provided within a reasonable period, or if access to such information is refused, or in case an interested party or interested Member significantly impedes the investigation. Article 12.7 thus enables an authority to continue with the investigation and make determinations based on the facts that are available in case the information necessary to make such determinations is not provided by the interested parties, or, for example, verification of the accuracy of the information submitted is not allowed by an interested party, thereby significantly impeding the investigation. In other words, Article 12.7 identifies the circumstances in which investigating authorities may overcome a lack of information, in the response of the interested parties, by using “facts” which are otherwise “available” to the investigating authority.

Case law has sought to establish a parallelism between the two agreements, and recourse to BIA has been interpreted in a symmetric manner. The legal relevance of Annex II in the SCM context also was explicitly acknowledged in the AB report on US–Carbon Steel (India) (§ 4.423), as we note later in this chapter.226 Law and case law aim to strike a balance between the right to respond to uncooperative behavior on the one hand, and the need to avoid abuses when doing so on the other. To this effect, law makes it clear that recourse to BIA can take place only in the three factual situations described earlier, and case law has insisted on this score. On the other hand, the possibility to draw inferences through BIA has not been put into a straitjacket either. The AB report on US–Carbon Steel (India), for example, recognized that an IA does not need to male comparative evaluations of all available evidence and select the best possible information when having recourse to BIA. It established a reasonableness standard that IAs must observe, and asked that IAs operate within its bounds when replacing the missing information (§§ 4.434–435). 3.9.8.1 The Rationale for Recourse to BIA The SCM Agreement does not explicitly refer to the rationale for recourse to BIA. As is the case in the AD Agreement, absent similar provision the exporters could bring the negotiation to a halt simply because they would refuse to cooperate with IAs. On the other hand, of course, recourse to BIA should not provide IAs with carte blanche to do as they please, since they (might) have the incentive to overshoot the level of CVDs. This last point has been often underscored in case law. In China–GOES for example, the panel noted (§ 7.302) that the purpose is not to punish noncooperative parties that did not produce info. It is, rather, to facilitate the course of investigation without imposing undue hardship on noncooperating parties.

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3.9.8.2 Duty to Include Requested Information in the Questionnaire Article 12.7 of SCM reproduces the corresponding provision of the AD Agreement as we have seen previously, and case law has interpreted the key terms. In China–GOES, the panel held (§§ 7.446–447) that, by not including information that was required in its request, an IA could not have had legitimate recourse to BIA on the grounds that unrequested information could not be deemed to be “necessary” in the sense of Article 12.7 of SCM. In the same report, the panel held that generic questions, such as asking about information relating to value and volume of exports, do not meet the Article 12.7 of SCM threshold: recourse to BIA is legitimized only when information that is necessary and required has not been provided (§ 7.448).227 In EC–Countervailing Measures on DRAM Chips, the panel concluded that the IA was legitimized to have recourse to BIA since it had indicated in its request questions that remain unanswered (§ 7.266). 3.9.8.3 Refusal to Supply Necessary Information The AB has underscored that informati