CASE ANALYSIS

Dr. Boniface Chimpango | 08 October 2020.

UNITED STATES — TARIFF MEASURES ON CERTAIN GOODS FROM CHINA, WT/DS543/R.

Background

This dispute arose from the investigations by the United States carried out under section 301 of the Trade Act of 1974 of alleged China’s practices related to technology transfer, intellectual property, and innovation, which the United States considered to be unfair and distortive policies of “state-sanctioned theft”, misappropriation of US technology, intellectual property, and commercial secrets.

As a retaliation to the findings of the Section 301 investigations, the United States imposed additional duties on certain products from China as follows:

• 25% additional duties imposed in June 2018 on a first set of products with an approximate annual trade value of USD 34 billion; and
• additional duties on a second set of products with an approximate annual trade value of USD 200 billion, initially imposed in September 2018 at 10% and subsequently raised in May 2019 to 25%.

China complained against the imposition of additional duties by the United States.

China’s Complaint to the WTO

The WTO dispute started with China requesting a consultation with the United States on 04 April 2018 pursuant to Article 4 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) and Article XXIII of the General Agreement on Tariffs and Trade 1994 (GATT 1994.)

China argued that the tariff measures were inconsistent with the United States’ obligations under Article I:1 of the GATT 1994 because they failed to accord immediately and unconditionally to certain products originating in China and imported into the United States the advantage, favour, privilege or immunity granted by the United States, “[w]ith respect to customs duties and charges of any kind imposed on or in connection with” the importation of like products originating in the territories of other WTO Members. China further argued that the measures were inconsistent with the United States’ obligations under Article II:1(a) and (b) of the GATT 1994 because they imposed additional duties on certain imported products originating in China in excess of the United States’ bound rates set forth in its Schedule.

Article I:1 of the GATT 1994 provides for what is called the Most Favoured Nation (MFN) principle, which prohibits discrimination between like products originating in, or destined for, different countries. The principal purpose of the MFN treatment obligation under Article I:1 is to ensure all WTO Members equality of opportunity to import from, or to export to, other WTO Members (or any other country). On the other hand, Article II:1 of GATT 1994 seeks to protect negotiated tariff concessions or bindings for each WTO Member. Article II:1 (a) contains a general prohibition against according treatment less favourable to imports than that provided for in a Member’s Tariff Schedule while Article II:1 (b) prohibits the application of ordinary customs duties in excess of those provided for in the Schedule[1].

United State’s Defence

In its defence the United States, raised two points, one preliminary objection and one substantive defence as follows:

• As a preliminary point, the United States argued that as they had engaged in bilateral negotiations with China to address several trade concerns — including some matters covered by this dispute —  the parties had decided to settle their dispute outside the WTO, and thus reached a “settlement of the matter” within the meaning of the third sentence of Article 12.7 of the DSU and that, therefore, the Panel should confine its report to a brief statement of the facts and a notation that a settlement has been reached; and
• As a substantive defence to China’s complaint, the United States argued that the additional duties were justified under Article XX(a) of the GATT 1994, as measures necessary to protect US public morals. The United States argued that   China’s acts, policies, and practices addressed in the relevant Section 301 Report amounted to “state-sanctioned theft” and misappropriation of US technology, intellectual property, and commercial secrets, and this violated the public morals prevailing in the United States.

Article XX of the GATT 1994 provides for general exceptions to the non-discriminatory principle by allowing WTO members to adopt measures that would otherwise be discriminatory between countries where the same conditions prevail, or which may amount to a disguised restriction on international trade if the measures are ,inter alia, necessary to protect public morals.[2]

WTO Dispute Settlement Panel Findings

Upon hearing both sides, the panel made the following findings.

The United States’ Preliminary Point

With regards to the United States preliminary point, the Panel acknowledged that an ongoing bilateral process was taking place between China and the United States. However, the Panel observed that this bilateral process seemed to be parallel to the panel proceedings, and not intended, by China at least, to replace them. The Panel found that the parties had not reached a settlement of the matter within the meaning of the third sentence of Article 12.7 of the DSU. The Panel stated that when a WTO dispute settlement process has been initiated, a panel is required to discharge its adjudicative responsibilities under the DSU, unless the parties relinquish their rights under DSU by withdrawing the complaint or requesting suspension of the proceedings, which was not the case in this matter.[3]Whether the United States tariff measures were in breach of the MFN obligations under article I:1 of GATT 1994

Whether the United States tariff measures were in breach of the MFN obligations under article I:1 of GATT 1994

On whether the United States tariff measures were inconsistent with the non-discrimination obligation under article I:1 of GATT 1994, the Panel concluded that China had established a prima facie case that the measures were inconsistent with Article I:1 of GATT 1994, because  the United States’ additional duties applied only to products from China and therefore failed to accord to products originating in China an advantage granted to the like product originating in all other WTO Members. It was noted that the United States had failed to present to the Panel any refutation of China’s assertion that the measures are inconsistent with Article I:1[4].

Whether the United States tariff measures were inconsistent with Article II:1(a) and (b) of the GATT 1994.

The Panel concluded that China had established a prima facie case that the United States’ tariff measures were inconsistent with Article II:1(b), because the additional duties were ordinary customs duties applied in excess of the rates to which the United States bound itself in its Schedule.

The panel further concluded that China had also established a prima facie case that the measures were inconsistent with Article II:1(a), on the ground that the additional duties accorded imports from China “less favourable treatment” than that provided in the United States’ Schedule.

Whether the measures are provisionally justified under Article XX of the GATT 1994

The  Panel observed that, according to WTO case law, in order to provisionally justify a challenged measure under one of the Article XX subparagraphs, a responding Member must establish that the challenged measure addresses the interest specified in that paragraph, and that there is “a sufficient nexus between the measure and the interest protected”[5].

With respect to the defence under Article XX (a) the Panel noted that there was a three-stage process in establishing the defence as follows[6]:

(i) determine whether the claimed policy is a “public morals” objective within the meaning of Article XX(a).

(ii) assessed whether the measure is “designed” to protect that public morals objective, and

(iii) consider whether the measures are “necessary” to protect public morals, which involves “weighing and balancing” of a series of factors and a comparison between the challenged measure and reasonably available WTO-consistent alternative measures.

Following a through discussion under the first stage, the Panel concluded that the “standards of right and wrong” invoked by the United States (including norms against theft, misappropriation and unfair competition) was covered, at least at a conceptual level, by the term “public morals” within the meaning of Article XX(a) of the GATT 1994[7].

With regards to whether the United States’ measures were designed to protect the public morals objective it had invoked, China argued that the measures were not designed to protect public morals, mainly because they were not designed to apply to goods that embody content or conduct offensive to public morals in the United States.[8] On its part the United States argued that in so far as its measures created a disincentive for China to continue its conduct, which were found to be morally objectionable, the measures met the minimal threshold of being “designed to” protect public morals for the purposes of Article XX(a).

The Panel first observed that the ‘design test’ is a preliminary step aimed at assisting and informing the further analysis of whether a measure is provisionally justified under subparagraph (a) of Article XX and that sometimes the application of this test at a general level may not necessarily provide useful information that informs such further analysis. The Panel concluded that, in the circumstances of this case, it found it difficult to assess at any general level whether the measures at issue are “designed” to protect public morals and that it was, therefore, not convinced that the intermediate step of such a design test was helpful for its analysis. It was the Panel’s view that the more detailed design aspects and consequential understanding of the United States’ measures could only become apparent once an analysis of the necessity of the measures was advanced further[9].

With regard to whether the measures were necessary, the Panel adopted the definition of “necessary” in the case of Korea – Various Measures on Beef where the Appellate Body explained that the term “necessary” refers to a range of degrees of necessity, with  one end of this continuum understood as “indispensable” and the other end understood as “making a contribution to”. The Appellate Body in that case considered that, in this continuum, a “necessary” measure is located significantly closer to the pole of “indispensable” than to the opposite pole of simply “making a contribution to”.[10]

Further, the panel stated that a consideration of whether WTO-inconsistent measures are justified under Articles XX(a), (b) or (d) requires “weighing and balancing”  of a series of factors including  (i) the relative importance of the pursued policy objective; (ii) the restrictive impact of the challenged measures on trade; and (iii) the contribution of these measures to the realization of the objective pursued, followed by an assessment of whether potential WTO-consistent or less trade-restrictive alternatives, suggested by the complainant, are reasonably available to the responding Member[11].

12. With regards to the imposition of additional duties on List 1 products, the Panel found that the United States had not provided an explanation demonstrating a genuine relationship of “ends and means” between the imposition of additional duties on these products and the public morals objective invoked by the United States. The Panel found, in particular, that the United States had not provided evidence in support of its assertion that the products on which it imposed additional duties benefitted from practices of China that the United States considered to be contrary to its public morals, nor evidence that would more generally demonstrate how the additional duties it applied to selected products otherwise contributed to its public morals objective[12].

With respect to the imposition of additional duties on List 2 products, the Panel found that the United States had not provided an explanation that would allow the Panel to understand an “ends and means” relationship between the additional duties on List 2 products and the public morals objective invoked by the United States[13].

The Panel, therefore, concluded that the United States had not provided an explanation demonstrating how the imposition of additional duties on the selected imported products in List 1 and List 2 was apt to contribute to the public morals objective invoked, and, following on from that, how they were necessary to protect public morals. The Panel found, accordingly, that the United States had not met its burden of demonstrating that the measures are provisionally justified under Article XX(a).

COMMENTS

The decision of the Panel has further entrenched the United States’ claims of bias on the part of WTO dispute settlement system towards the United States and WTO’s failure or unwillingness to ‘tame’ China with respect to what are seen as its inappropriate trade practices.

On the other hand, the complaints of United States against this outcome serves as an example of United States’ unmerited accusation of the WTO dispute settlement system. As the analysis above clearly shows, WTO Panel is simply adjudication the complaint by China within the established legal framework and the agreed terms of the WTO covered agreements. The WTO did not go out of its way to decide against the United States. However, its decision well-reasoned and triangulated within the dictates of WTO agreements.

The United States is likely to appeal against this outcome. However, if it is to do so, its appeal is supposed to be heard by the WTO’s Appellate Body, which is currently non-functional because the United States have refused to appoint judges to the Appellate Body.  Will the United States make a U-turn and appoint judges for the selfish reasons that they now want to use the services of the Appellate Court?

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[1] See, Argentina – Textiles and Apparel (1998).

[2] Article XX (a) of GATT 1994.

[3] Para. 7.19 of the Panel Report

[4] Para. 7.77 of the Panel Report

[5] Para. 7.109, making reference to the cases  EC – Seal Products and US – Gambling.

[6] Para. 7.110 of the Panel Report

[7] Para. 7.140

[8] Para. 7.143

[9] See paras 7:150 and 7:151.

[10] 7.157

[11] Para. 7.159

[12] Paras 7:212 and 7.213.

[13] Para. 7.227.