On February 11, 2015, the United States filed a complaint before the World Trade Organization (WTO), alleging that certain actions by the national, regional and local governments of the People’s Republic of China are in violation of the WTO Agreement on Subsidies and Countervailing Measures (SCM), to which both the United States and the People’s Republic are signatories. At a press conference announcing the filing, the U.S. Trade Representative – who will be the official representative of the United States in the proceedings – was accompanied by seven Members of Congress, from both parties, and the largest delegation in support of the filing came from California. Because of the breadth of the complaint, the reach of the firm in both the United States and China, and the specific industries targeted, we are taking this opportunity to briefly explain this type of proceeding in general, and this case in particular.

The likely targeted product sectors The complaint identifies seven product sectors that received subsidies in contravention of the Agreement. They are:

  • Medical devices
  • Advanced materials and metals (including specialty steel, titanium and aluminum products)
  • Specialty chemicals
  • Agriculture
  • Textiles, apparel and footwear
  • Light industry
  • Hardware and building materials

The facts of this case This complaint1 alleges that certain national, regional and local government subsidy programs, given to “Common Service Platforms” or “Demonstration Bases” in the seven identified industries, are in violation of the SCM Agreement. A “Common Service Platform” is defined as a service that may be available to multiple companies in a designated industry, such as IT services, product development and employee training (e.g., training textile employees in multiple Demonstration Bases on the use of textile machinery). A “Demonstration Base” is a company designated by the government with a demonstrated export performance history. The combined subsidy payments are alleged to have caused damages in excess of $1 billion to U.S. businesses, and the U.S. Trade Representative’s Request for Consultation identifies in excess of 180 such programs benefitting 170-plus Demonstration Bases.

The Specific Violation Alleged Not all subsidies paid by a government to its businesses are actionable under the SCM. A subsidy is prohibited under the Agreement if it is conditioned on export performance or if it is conditioned on the use of domestic materials over imported materials. We understand that this complaint alleges that the programs were designed to increase export performance in violation of Article 3 of the SCM.

The WTO as a Forum for International Dispute Resolution The WTO has only two functions—to organize and conduct trade negotiations and to resolve trade disputes among the Member States. Certain trade agreements (known as “multilateral” agreements) must be accepted by the WTO Member States as a condition of Membership. Other agreements (known as “plurilateral” agreements) are optional. This proceeding, of course, invokes the Dispute Resolution competencies of the WTO. The SCM is a multilateral agreement.

The Dispute Resolution Process The dispute resolution process is in three phases and all phases must be completed within 15 months. The first phase is known as “consultation and mediation” and must be resolved within 60 days. Formal consultations were requested February 11, 2015. If a settlement cannot be resolved by consultations, then a Panel of three is appointed among the delegates from disinterested WTO Member States to hear the matter. The Dispute Settlement Understanding allows for two hearings at this stage—one to present the affirmative case and the defense; and the second to hear rebuttal arguments. The Panel must issue a Report within six months of its formation; it must distribute the Report to all Member States within three weeks; and the WTO must accept or reject the Panel Report within 60 days thereafter. The losing party may appeal to the Appellate Body, which must decide the appeal within 60 days of referral.

Acceptance, Rejection or Retaliation In the predecessor GATT system, the losing party had the right to reject the Panel Ruling, and the rejection effectively ended the matter. In the WTO system, the Ruling is adopted unless all of the Member States (including the complaining State) reject it. If the Panel rules that the conduct of the Member State is in violation of the Agreement, then the Member State must modify the conduct to conform to the decision of the Panel or face retaliation. If the offending Member State conforms its laws to the ruling of the Panel, the matter is deemed resolved. If the offending Member State refuses to do so, then the Complaining Member State is entitled to “retaliate” by denying or withdrawing trade concessions to the offending Member State equal to the damages found by the Panel. In the United States, the U.S. Trade Representative in the past has identified a target list of products for “possible retaliation” substantially larger than the value of the damages, so that as many interested parties as possible will encourage the offending Member State to conform its laws to the findings of the Panel. If the offending Member State declines to do so, then the prevailing Member State is free to retaliate.