On 16 July 2019, the Appellate Body of the World Trade Organization (WTO) Dispute Settlement Body (DSB) issued its report in United States – Countervailing Duty Measures on Certain Products from China (Recourse to Article 21.5 of the DSU by China) (DS437). This appeal concerned China’s recourse to Article 21.5 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU) concerning the consistency with the WTO Agreement on Subsidies and Countervailing Measures (SCM Agreement) of measures taken by the United States to comply with the recommendations and rulings of the DSB in the original proceedings in US – Countervailing Measures (China). The dispute concerned countervailing duties imposed by the United States on a range of products from China and the underlying investigations and determinations of the U.S. Department of Commerce (USDOC).

In the original proceedings, the Appellate Body found that the USDOC’s countervailing duty determinations were inconsistent with Articles 14(d) and 1.1(b) of the SCM Agreement because the use of in-country prices in China as “benefit benchmarks” had been improperly rejected. As a consequence, the Appellate Body found that these determinations were also inconsistent with Articles 10 and 32.1 of the SCM Agreement. In addition, the Appellate Body reversed a number of the original panel’s findings of consistency under Article 2.1 with respect to the USDOC’s failure to identify a “subsidy programme” or a “granting authority”, but found that it was unable to complete the analysis of these issues on the record of the evidence before it.

Following the original proceedings, the United States revised the WTO-inconsistent determinations but maintained the corresponding countervailing duties. China challenged these measures taken to comply as well as related measures generally relevant to the USDOC countervailing duty determinations.

In this appeal, Both the United States and China raised claims challenging the compliance Panel’s reasoning and findings on issues of law and legal interpretation, including: (i) the interpretation and application of the legal standard for “public body” determinations under Article 1.1(a)(1) of the SCM Agreement; (ii) the interpretation and application of Articles 1.1(b) and 14(d) of the SCM Agreement, including the circumstances warranting recourse to out-of-country prices for the purposes of selecting a benchmark to determine whether the remuneration paid for a government-provided good is “less than adequate” (e.g., when the government “effectively determines” the price of the goods in question); and (iii) the interpretation and application of the legal analysis to determine whether a subsidy is de facto specific under Article 2.1(c) of the SCM Agreement, including the requirement to properly identify the relevant subsidy programmes.

With respect to the issues under Article 1.1(a)(1) of the SCM Agreement, the Appellate Body upheld the compliance Panel’s findings that: (i) the legal standard for “public body” determinations under Article 1.1(a)(1) does not require a connection of a particular degree or nature to be established between an identified government function and the particular financial contribution at issue; and (ii) China had failed to demonstrate that the USDOC’s “public body” determinations in the challenged countervailing duty determinations were inconsistent with Article 1.1(a)(1) because they were based on an improper legal standard.

With respect to the issues under Article 14(d) and 1.1(b) of the SCM Agreement, the Appellate Body upheld the Panel’s finding that Article 14(d) does not limit an investigating authority’s recourse to out-of-country prices to circumstances in which the government has effectively determined the price at which the goods are sold. The Appellate Body found that the United States had not established that the Panel erred in its interpretation and application of Article 14(d) and upheld the Panel’s findings that the United States had acted inconsistently with Articles 14(d) and 1.1(b).

With respect to the issues under Article 2.1 of the SCM Agreement, the Appellate Body upheld the Panel’s finding that China had demonstrated that the United States had acted inconsistently with Article 2.1(c), noting that, for the purposes of determining whether a subsidy is de facto granted to certain enterprises pursuant to a “plan or scheme”, information that merely indicates “repeated transactions” does not necessarily demonstrate “systematic activity … regarding the existence of an unwritten subsidy programme”.

Some points of interest in the reasoning provided by the majority of the Appellate Body Division include the following:

  • The absence of an express statutory delegation of governmental authority does not necessarily preclude a finding that an entity is a “public body” within the meaning of Article 1.1(a)(1) of the SCM Agreement. Instead, a public body determination must be conducted on a case by case basis, having due regard to: (a) evidence that an entity is, in fact, exercising governmental functions, especially where such evidence points to a sustained and systematic practice; (b) evidence regarding the scope and content of government policies relating to the relevant sector; (c) evidence that a government exercises meaningful control over an entity and its conduct; and (d) whether the conduct or functions of an entity are of a kind that are ordinarily classified as governmental in the legal order of the relevant Member.
  • Article 1.1(a)(1) does not prescribe a “connection” of a particular degree or nature that must be established between an identified government function and a financial contribution. Instead, an investigating authority must provide a reasoned and adequate explanation, based on a holistic assessment of the evidence on the investigation record.
  • Once it has been established that an entity is a public body, then the conduct of that entity shall be directly attributable to the Member concerned for purposes of Article 1.1(a)(1). While the conduct of an entity may constitute relevant evidence to assess its core characteristics, an investigating authority need not necessarily focus on every instance of conduct in which that relevant entity may engage, or on whether each such instance of conduct is connected to a specific “government function”.
  • Central to the inquiry under Article 14(d) in identifying an appropriate benefit benchmark is the question of whether in-country prices are distorted as a result of government intervention. An investigating authority may reject in-country prices on a finding of price distortion resulting from government intervention in the market, not the presence of government intervention itself.
  • In an Article 14(d) inquiry, there may be different ways to demonstrate that prices are actually distorted, including a quantitative assessment, price comparison methodology, a counterfactual, or a qualitative analysis. The determination of whether in-country prices are distorted must be made case by case, based on the relevant evidence in the particular investigation and taking into account the characteristics of the market being examined, and the nature, quantity, and quality of the information on the record.
  • Where an investigating authority makes a finding of de facto specificity under Article 2.1(c) based on an analysis of whether there has been “use of a subsidy programme by a limited number of certain enterprises”, consideration of the length of time during which the subsidy programme has been in operation pre-supposes that the relevant programme has been properly identified.
  • The mere grant of financial contributions is not necessarily enough to demonstrate the existence of a subsidy programme. An investigating authority may demonstrate the existence of a subsidy programme based on evidence of: (a) the existence of a subsidy within the meaning of Article 1.1; and (b) a plan or scheme pursuant to which this subsidy has been provided to certain enterprises.

In a dissenting opinion, one Division Member of the Appellate Body disagreed with the majority on a number of points, expressing the following views (among others):

  • The majority has repeated an unclear and inaccurate statement of the criteria for determining whether an entity is a “public body”, and a clearer articulation of the criteria is neither warranted nor necessary. Whether an entity is a public body must be determined on a case-by-case basis with due regard being had for the characteristics of the relevant entity, its relationship with the government, and the legal and economic environment prevailing in the country in which the entity operates. There is no requirement for an investigating authority to determine in each case whether the investigated entity “possesses, exercises or is vested with governmental authority”.
  • It is well settled that the requirement in Article 14(d) to determine the adequacy of remuneration “in relation to prevailing market conditions for the good or service in question in the country of provision” does not require a domestic authority to rely on in-country prices in all circumstances. However, by faulting the USDOC for not providing an “explanation of how government intervention actually results in price distortion”, the majority is effectively reading Article 14(d) as imposing an obligation on investigating authorities to always justify recourse to out-of-country prices through a quantitative analysis of in-country prices themselves, regardless of whether those prices have already been found to be distorted, including in cases where they have not even been placed on the record. There is no basis in Article 14(d) for this approach, and it is unclear what the majority considered the USDOC was required to do in order to establish that government intervention resulted in price distortion.
  • The majority has fundamentally misunderstood the role of Article 2.1 within the SCM Agreement, has given the term “subsidy programme” a meaning that is not supported by the text and that is unreasonable, and has ignored reasoning and analysis by the USDOC that was part of the case and should have been considered. The majority’s decision “is wrong in several important respects” and, if followed in the future, would enable circumvention of the disciplines of the SCM Agreement and even discourage the transparent management of subsidies.