Late last week, China filed a request with the World Trade Organization (WTO) Dispute Settlement Body (DSB) for authorization to “suspend concessions and related obligations” in the amount of $2.4 billion as recourse for the United States’ alleged failure to comply with a 2015 dispute settlement report. The disagreement stems from a dispute filed by China in May 2012 challenging certain aspects of 17 countervailing duty investigations by the United States, on a wide range of products, as conducted by the Department of Commerce (DS437). The decision reached by a WTO panel, as modified by the WTO Appellate Body and adopted by the DSB in January 2015, included a number of findings in favor of and against the United States. In particular, the WTO Appellate Body found that Commerce’s “rebuttable presumption” that Chinese state-owned enterprises are public bodies, and that Commerce’s rejection of Chinese private transaction prices as distorting the benchmark for the “provisions of goods or services for less than adequate remuneration” benefit analysis, were inconsistent with WTO rules.

In May 2016, China returned to the WTO to request consultations with the United States under Article 21.5 of the Dispute Settlement Understanding (DSU), which establishes procedures for when parties disagree about whether the losing party has implemented the DSB’s recommendations and rulings. Failed consultations led to the establishment of a compliance panel, which issued a decision in March 2018. Both China and the United States appealed to the WTO Appellate Body. In July 2019, the Appellate Body upheld the compliance panel’s determination that China failed to demonstrate the United States’ public bodies analysis was inconsistent with the DSB’s 2015 rulings and recommendations. The Appellate Body affirmed that “Article 1.1(a)(1) {of the WTO Subsidies and Countervailing Measures Agreement} does not prescribe a connection of a particular degree or nature that must necessarily be established between an identified government function and the particular financial contribution at issue” in order to consider the enterprise a public body. The Appellate Body also upheld the compliance panel’s finding that Commerce’s “public body determinations at issue were not based on an improper legal standard.” The Appellate Body, however, found against the United States on two issues. First, with respect to the benchmark issue, the Appellate Body upheld the compliance panel’s conclusion that the United States “failed to explain . . . how government intervention in the market resulted in domestic prices for the inputs at issue deviating from a market-determined price,” and that Commerce also “failed to consider price data on the record.” Second, with respect to certain de facto specificity findings, the Appellate Body upheld the compliance panel’s finding that Commerce’s revised specificity determinations did not comply with the Subsidies and Countervailing Measures Agreement’s requirement to “take account of the length of time during which the subsidy programme has been in operation.”

The Appellate Body’s compliance findings were adopted by the DSB at the latter’s August 15, 2019 meeting. In a statement at that meeting, the United States reiterated its substantive concerns with and objections to the case results and asserted that “China is using the WTO dispute settlement system to seek to evade the disciplines on subsidies that all WTO Members agreed to in the Subsidies Agreement. While the United States has been the responding Member in several disputes China has brought, China has been – and continues to be – the serial offender.”

Seizing on the compliance rulings in its favor, China now seeks compensation under Article 22 of the DSU, which allows a WTO member prevailing in a dispute to seek the temporary remedy of suspending concessions to the losing member in the event DSB recommendations and rulings are not implemented. To suspend concessions means to be relieved of the obligation to provide trade benefits under WTO rules to the other member. China’s specific request is to suspend concessions with respect to trade in goods, valued at $2.4 billion, on an annual basis.

Procedurally, the DSB will take up China’s request at its next meeting on October 28, 2019. Authorization is virtually automatic. The United States, however, may challenge the level of the remedy proposed by China, in which case an arbitration proceeding will determine “whether the level of such suspension is equivalent to the level of” China’s trade benefits nullified or impaired by the United States’ non-compliance. China’s move comes at the same time as the two governments separately reached a “Phase One” agreement intended to reduce trade tensions related to President Trump’s tariff actions under Section 301 of the Trade Act of 1974.