The regular monthly meeting of the WTO’s Dispute Settlement Body (DSB) occurred on October 26, 2020. The agenda for the meeting contained the normal issues looking at surveillance of implementation of recommendations adopted by the DSB, a review of certain disputes, nominations for the indicative list of governmental and non-governmental panelists. It also contained review and adoption of the draft annual report of the DSB (2019/2020) and the renewed proposal to start the process for selecting Appellate Body members. See DSB, 26 October 2020, Proposed Agenda, WT/DSB/W/670 (22 October 2020). The agenda is embedded below.W672
Of particular interest are items 4 and 5 dealing with the WTO panel report on United States – Tariff Measures on certain goods from China, WT/DS/543/R and WT/DS/543/R/Add.1 and item 10 dealing with the long running proposal to start the process for filling vacant Appellate Body seats.
China’s dispute with the U.S. over the U.S. 301 investigation and resulting tariffs on Chinese goods
On October 26th, the U.S. filed an appeal from the panel decision in United States – Tariff Measures on certain goods from China, WT/DS/543/R and WT/DS/543/R/Add.1. See UNITED STATES – TARIFF MEASURES ON CERTAIN GOODS FROM CHINA, NOTIFICATION OF AN APPEAL BY THE UNITED STATES UNDER ARTICLE 16 OF THE UNDERSTANDING ON RULES AND PROCEDURES GOVERNING THE SETTLEMENT OF DISPUTES (“DSU”), WT/DSB543/10 (October 27, 2020). The U.S. notice of appeal is embedded below. The last paragraph states, “At this time, no division of the Appellate Body can be established to hear this appeal in accordance with DSU Article 17.1. The United States will confer with China so the parties may determine the way forward in this dispute.” This is consistent with the U.S. view that Members have many ways to resolve differences, and so a lack of immediate appeal options doesn’t mean a resolution isn’t possible.543-10
That the U.S. would file an appeal was widely expected and suggested in an earlier post. See September 16, 2020: WTO panel decision in United States – Tariff Measures on Certain Goods from China increases the need for comprehensive WTO reform, https://currentthoughtsontrade.com/2020/09/16/wto-panel-decision-in-united-states-tariff-measures-on-certain-goods-from-china-increases-the-need-for-comprehensive-wto-reform/.
Nonetheless, the panel decision was on the agenda of the DSB meeting (item 4). Below is the U.S. statement on agenda item 5 responding to China’s statement regarding the panel report. See Statements by the United States at the Meeting of the WTO Dispute Settlement Body, Geneva, October 26, 2020, pages 12-15,https://geneva.usmission.gov/wp-content/uploads/sites/290/Oct26.DSB_.Stmt_-2.pdf:
“STATEMENT BY CHINA REGARDING THE PANEL REPORT IN ‘UNITED STATES – TARIFF MEASURES ON CERTAIN GOODS FROM CHINA’
“ The findings in the report United States – Tariff Measures on Certain Goods from China are based on legal errors. The United States has notified an appeal of this report to the DSB. Accordingly, the panel report cannot be adopted today.
“ The United States would submit a notice of appeal and an appellant submission once a Division of the Appellate Body can be established to hear this appeal. China may file its own appeal of the panel report now or at that point of time.
“ The United States nonetheless wishes to address this panel report because it reflects a major, missed opportunity for the WTO to begin to address the most serious problem faced by every Member that seeks a balanced and fair world trading system: namely, aggressive, state policies that seek to dominate broad industrial sectors.
“ In prior DSB statements, the United States has elaborated upon China’s far-reaching efforts to unfairly take technology from other Members.1 And, as Member’s are aware, it was that action taken by the United States to combat these policies that led to the U.S. measures that China challenged in this dispute.
“ These unfair trade practices have cost U.S. innovators, workers, and businesses billions of dollars every year. Further, they harm every Member, and every industry in every Member, that relies on technology for maintaining competitiveness in world markets.
“ The tariff measures the United States took in response to China’s practices led earlier this year to the historic Phase One Economic and Trade Agreement Between the United States and China.2 In this agreement, China committed to cease some – though not all – of its unfair and harmful technology transfer practices.3 The Phase One Agreement includes a strong enforcement mechanism, including China’s agreement that the United States may impose additional tariffs on goods of China upon a U.S. finding that China has failed to meet its obligations. Pursuant to the Phase One Agreement, China is making changes to its economic and trade practices that will benefit not just the United States, but also China, and all WTO Members.
“ China would not have agreed to the technology transfer provisions of the Phase One Agreement but for the additional U.S. tariffs that China chose to challenge in this dispute. Moreover, it cannot credibly be asserted that alternative tools were available to the United States, nor to any other Member, to address China’s unfair and harmful technology transfer policies.
“ Accordingly, the Panel’s findings against the U.S. tariff measures amount to an acknowledgement that the WTO system, as currently formulated, is an impediment to an improved world trading system. This is completely backwards. Rather, as stated in the preambles to the WTO Agreement and the Marrakesh Declaration, the WTO’s role should be to promote ‘reciprocal and mutually advantageous arrangements’;4 ‘an integrated, more viable and durable multilateral trading system’;5 and ‘open, market-oriented policies.6’
“ The Panel reached its institutionally-harmful findings by making fundamental legal errors in the evaluation of two defenses presented by the United States.
“ First, the Panel failed to conduct its own objective assessment of whether the facts on the record in the dispute established that China and the United States had both agreed that issues relating to the dispute were to be addressed outside the WTO system.
“ The United States established, and China did not dispute, that China had already adopted its own remedy by imposing retaliatory tariffs on more than half of all U.S. exports to China. And China did this openly as a response to the same tariff measures that China challenged in this dispute.7
“ Furthermore, in the Phase One Agreement, China agreed that the United States may impose additional tariff measures upon a U.S. finding that China was breaching its obligations under that agreement, including with respect to technology transfer.8
“ In short, the Parties’ actions demonstrated that they had agreed on bilateral mechanisms to address the issues related to the dispute. The Panel, however, took no account of the evidence. Rather, the Panel simply accepted China’s assertion to the contrary – an assertion made during the litigation and only for the purpose of seeking a finding that essentially would signal the WTO’s support for China’s technology theft.9
“ This erroneous result amounts to an approval for the cynical misuse of the WTO dispute settlement system. Even if adopted, the finding would not in any way promote the resolution of any dispute between China and the United States. At most, a Member that prevails in a WTO dispute can obtain the authority to suspend WTO concessions. But here, China had already taken the unilateral decision that the U.S. measures could not be justified, and China had already imposed tariff measures on U.S. goods.
“ Second, the Panel incorrectly rejected the U.S. defense that the measures were necessary to protect public morals under Article XX(a) of the GATT 1994.10 The United States provided extensive evidence and argumentation, showing:
“o the existence of China’s unfair and harmful technology transfer policies, as we summarized earlier in this statement;
“o that these policies were inconsistent with U.S. and international norms for moral conduct;
“o that the U.S. measures were taken for the explicit purpose of ending the unfair practices;
“o and that after years of unproductive negotiations and discussions in various fora, the United States had no other available tools to address this crucial issue.
“ The U.S. showings on these factual matters were largely undisputed by China. China did not even attempt to rebut the existence of the unfair technology transfer policies documented by the United States.
“ At the outset of its analysis, the Panel did correctly find that the norms against theft, misappropriation, and unfair competition underlying the U.S. tariff measures could fall within the scope of public morals as used in Article XX(a).11
“ However, the Panel used an unsupportable approach for evaluating whether the U.S. measures were ‘necessary’ within the meaning of Article XX(a).12 As a result, the Panel findings are legally unsound.
“ Ironically, the Panel wrote that it was adopting a ‘holistic’ approach to the analysis of necessity.13 But the actual approach was anything but that; rather, it was myopic, addressed only to whether the public morals objective of the U.S. measure was sufficiently connected to the particular products subject to the U.S. tariffs.14
“ The Panel had no legal basis for adopting this single test to evaluate ‘necessity.’ As an initial matter, nothing in the text of Article XX(a) requires any particular level of connectedness. And even if this were a valid consideration, the Panel had no basis for assuming that it was even possible for any Member to tightly connect particular sets of imported products to far-ranging and non-transparent policies involving technology theft.
“ Nor did the Panel even address the U.S. showing that there were no possible alternative means for the United States to achieve the public morality goals recognized under Article XX(a).
“ In short, the Panel failed to conduct a holistic analysis, ignoring nearly all of the record evidence in the dispute. Instead, the Panel rejected the U.S. defense based only on the legally erroneous use of a narrow and unsupportable legal test.
“ In closing, the United States will turn to the real-world events involving China’s unfair technology transfer policies, and U.S. efforts to address them. As noted, China committed in the Phase One Agreement not to pursue some of the unfair technology transfer policies that led to the U.S. tariff measures. This is a positive step, and the United States is closely monitoring China’s compliance. The issuance of this report has no effect on the Parties’ ongoing implementation of the Phase One Agreement, which will benefit all of China’s trading partners.
“ The Panel avoided any meaningful findings by taking flawed legal shortcuts, instead of considering the extensive record evidence involving China’s harmful technology transfer policies and the past failed attempts to address these policies in other ways. In taking this approach, the panel report indicates that the WTO is incapable of handling these issues. The report thus serves as further confirmation that the U.S. tariff measures were the only available means to address the major problems to the world trading system resulting from China’s forced technology transfer policies.
“1 See WT/DSB/M/410, paras. 11.2-11.3 (March 27, 2018, meeting); WT/DSB/M/412, paras. 5.5-5.11 (April 27, 2018, meeting); WT/DSB/M/413, paras. 4.1-4.4 (May 28, 2018, meeting); WT/DSB/M/423, paras. 8.3-8.7 (December 18, 2018, meeting); see also Findings of the Investigation into China’s Acts, Policies and Practices Related to Technology Transfer, Intellectual Property, and Innovation under Section 301 of the Trade Act of 1974, https://ustr.gov/sites/default/files/Section%20301%20FINAL.PDF.
“2 Economic and Trade Agreement Between the Government of the United States and the Government of the People’s Republic of China (Phase One Agreement), https://ustr.gov/sites/default/files/files/agreements/phase%20one%20agreement/Economic_And_Trade_Agreement_Between_The_United_States_And_China_Text.pdf.
“3 Id., see Chapter 2 (“Technology Transfer”).
“4 Marrakesh Agreement Establishing the World Trade Agreement, preamble.
“6 Marrakesh Declaration of 15 April 1994, preamble.
“7 Panel Report, paras. 7.4-7.6.
“8 Phase One Agreement, Chapter 7.
“9 Panel Report, para., 7.22.
“10 Panel Report, paras., 7.236-7.238.
“11 Panel Report, para., 7.140.
“12 Panel Report, paras., 7.178 and 7.180.
“13 Panel Report, paras., 7.111, 7.152 -7.1533, and 7.238.
“14 Panel Report, para., 7.178.”
China’s statement at the DSB meeting is not presently up on China’s WTO Mission website. Press accounts indicate that “Beijing, meanwhile accuseed the United States of taking advantage of the non-functioning AB to avoid having to comply with the panel decision. China argued that the panel was correct in finding that Washington applied the tariffs in a discriminatory maner. The US decision to appeal the ruling is an abuse of WTO rules, China said.” Washington Trade Daily, October 27, 2020, US Appeals WTO Ruling on China Tariffs, https://files.constantcontact.com/ef5f8ffe501/344bb981-f669-41fb-8a47-4bdf16a9d1a0.pdf.
Bloomberg’s reported on October 26, 2020, U.S. appeals WTO ruling that Trump’s China tariffs were illegal, https://www.bloomberg.com/news/articles/2020-10-26/u-s-appeals-wto-ruling-that-trump-s-china-tariffs-were-illegal, “China criticized Washington’s decision to take advantage of appellate body’s state of limbo and touted the ruling as a victory for the multilateral trading system against unilateralism, according to prepared remarks obtained by Bloomberg.”
The EU was among other Members who commented on the dispute. The EU comments on item 5 are contained below. See EU Statements at the Regular DSB Meeting, 26 October 2020, https://eeas.europa.eu/delegations/world-trade-organization-wto/87549/eu-statements-regular-dsb-meeting-26-october-2020_en.
“AGENDA POINT 5: STATEMENT BY CHINA REGARDING THE PANEL REPORT IN ‘UNITED STATES – TARIFF MEASURES ON CERTAIN GOODS FROM CHINA’
“This is yet another dispute that illustrates the grave consequences of the blockage of Appellate Body appointments since 2017. That blockage frustrates the essential rights of Members that were agreed
multilaterally in the DSU.
“In that regard we refer to EU’s intervention under item 7 of the DSB meeting on 28 September 2020, where we elaborated on these consequences and on the possibility of appeals being adjudicated upon through appeal arbitration based on Article 25 of the DSU, consistently with the principles of the DSU. We will not repeat these points today.
“The EU takes note of US’ decision to appeal the panel report in this case. The panel report will therefore not be adopted by the DSB today.
“The EU intervened as third party in this case and will intervene before the AB once the proceedings can resume. We therefore reserve our position for the purposes of these appellate proceedings.
“This being said, we would like to offer some brief remarks on the substance of the report.
“The EU would like to recall, as expressed in its written submission, that it shares the concerns expressed by the US regarding the protection of intellectual property rights and discriminatory conditions applying to foreign licensors of intellectual property in China.
“However, we do welcome the general approach of the panel to the exception in Article XX(a) of the GATT.
“In our view, much as the text of Article XX itself, the panel’s approach strikes the right balance between the Members’ legitimate right to protect public morals and the need to ensure that exceptions are not used to
circumvent the Members’ obligations under the GATT.
“The EU’s appeal to the Appellate Body in DS494 must not be confused with ‘blocking the dispute resolution’ or appealing ‘into the void’.
“The EU attaches great importance to maintaining a functioning two-tier dispute settlement process. This is why we have actively supported all efforts to find a solution to the impasse over the Appellate Body appointments and this is also why the EU, together with other Members, has put in place the MPIA.
“However, if the other party is not willing to agree on such contingency measures while the impasse continues, the EU may have no choice but to appeal before the Appellate Body. Whether or not such appeal would be
processed is in the hands of the other party.
“In the DS494 dispute, the EU offered to Russia to agree on a means of having the appeal heard through appeal arbitration based on Article 25 of the DSU and that offer still stands.”
Continued Impasse on Appellate Body Vacancies
A large majority of WTO Members support starting the process of finding Appellate Body members to fill the current six vacancies. The U.S. continues to oppose moving forward with this process as it doesn’t feel that its concerns have been addressed. The U.S. statement at the October 26 meeting is copied below:
“APPELLATE BODY APPOINTMENTS: PROPOSAL BY SOME WTO MEMBERS (WT/DSB/W/609/REV.18)
“ As we have explained in prior meetings, we are not in a position to support the proposed decision. The systemic concerns that the United States has identified remain unaddressed. Instead, Members should consider how to achieve meaningful reform of the dispute settlement system.
“ The U.S. view across multiple U.S. Administrations has been clear and consistent: When the Appellate Body overreaches and itself breaks WTO rules, it undermines the rules-based trading system.
“ The Appellate Body’s abuse of the limited authority we Members gave it damages the interests of all WTO Members who care about a WTO in which the agreements are respected as they were negotiated and agreed.
“ Earlier this year, the Office of the U.S. Trade Representative published a Report on the Appellate Body of the World Trade Organization. The Report details how the Appellate Body has failed to apply WTO rules as agreed by WTO Members, imposing new obligations and violating Members’ rights.17 We appreciate the number of Members who have reviewed the Report and share the view that the Report identifies serious errors by the Appellate Body.
“ As the United States has explained repeatedly, the fundamental problem is that the Appellate Body has not respected the current, clear language of the DSU.
“ Members cannot find meaningful solutions to this problem without understanding how we arrived at this point. Without an accurate diagnosis, we cannot assess the likely effectiveness of any potential solution.
“ The United States has actively sought engagement from Members on these issues. Yet, some Members have remained unwilling to admit there is even a problem, much less engage in a deeper discussion of the Appellate Body’s failures.
“ And rather than seeking to understand why the Appellate Body has departed from what Members agreed, these Members and others have now redirected the focus and energies of the Membership to pursue an arrangement that would, at best, perpetuate the failings of the Appellate Body.18
“ Nevertheless, the United States is determined to bring about real WTO reform. We Members must ensure that the WTO dispute settlement system reinforces the WTO’s critical negotiating and monitoring functions, and does not undermine those functions by overreaching and gap-filling.
“ The central objective of the dispute settlement system is to assist the parties to find a solution to their dispute. As before, Members have many methods to resolve a dispute, including through bilateral engagement, alternative dispute procedures, and third-party adjudication.
“ Parties should redouble their efforts to find such a positive solution to their disputes.
“ The United States will continue to insist that WTO rules be followed by the WTO dispute settlement system. We will continue our efforts to seek a solution on these important issues.
“17 United States Trade Representative, Report on the Appellate Body of the World Trade Organization (February 2020), available at https://geneva.usmission.gov/wp-content/uploads/sites/290/AB-Report_02.11.20.pdf.
“18 See U.S. Statement at the June 29, 2020, Meeting of the Dispute Settlement Body (Item 13), available at: https://geneva.usmission.gov/wp-content/uploads/sites/290/Jun29.DSB_.Stmt_.as-deliv.fin_.public13218.pdf.
U.S. Statements at the October 26, 2020, DSB Meeting.”
The history of the efforts in 2019-2020 by Members to get the Appellate Body vacancies filled is chronicled in the Draft Annual Report of the DSB, WT/DSB/W/662 (16 October 2020) pages 2-6. The draft annual report is embedded below.W662
The dispute between China and the U.S. over the U.S. 301 investigation and imposition of duties on certain Chinese goods brings into stark relief the challenges for the WTO in regaining relevance. To the United States, the limitations of the WTO and the incompatibility of the Chinese economic system with WTO rules has led to building conflict over the last twenty years and to the U.S.’s search for a solution to render some of the distortive practices in China less problematic. The panel report raised significant concerns for the United States though embraced by China even though both Members have been engaged bilaterally outside of the WTO trying to address many of the concerns raised in the U.S. 301 investigation.
At the same time, the U.S. (and others) have had problems with the dispute settlement system that go back at least twenty years. These problems go to the Appellate Body in some cases creating obligations or rights not found in the Agreements from which disputes are filed, and to the increasing practice of the Appellate Body in ignoring the procedural and substantive limitations on the AB’s conduct contained in the Dispute Settlement Understanding. There are major differences in views on what is appropriate for the Appellate Body with the U.S. and Europe (and others) far apart. An overactive dispute settlement system which has created obligations that Members never agreed to has led many Members to pursue disputes instead of negotiating. Such action by Members has contributed to the nearly moribund negotiating function at the WTO.
The path forward on these critical issues is unclear and unlikely to be clarified in the near future. All of which means that the new Director-General when selected will face a WTO in a growing state of paralysis and diminished relevance.